Matt Nolan

Collusion, multiple equilibrium, and petrol prices

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Conjecture is rife regarding why petrol prices have risen so strongly. There are a number of common explanations:

  1. Rising demand for oil,
  2. The weak US dollar, increasing the US$ price,
  3. Peak Oil (Infometrics article requires a subscription),
  4. Negative real interest rates in the US (as not mining the oil is the same as investing in inventories),
  5. and speculation.

All these factors are playing a part in the saga of ever rising oil prices. However, Calculated Risk has suggested another, highly interesting way that fuel prices could have risen – a backward bending supply curve and multiple equilibrium.

This idea is pretty cool – so I thought I would spend a little bit of time explaining how it could work.

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Matt Nolan

What was that about tacit collusion?

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Yesterday when discussing why supermarkets may discount Nurofen during cold season I put to the side the possibility that it was the result of a collapse in tacit collusion between Nurofen providers. My reason for ignoring this explanation was purely selfish – I was tired and that explanation required more thought than I had capacity for 🙂 . However, today I will attempt to shed some light on the tacit collusion explanation, even though my capacity is still extremely limited 😉 .

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Matt Nolan

Why do supermarkets cut the price of medicine when people are getting ill?

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When I was at the supermarket I grabbed some Nurofen for my partner who has a head cold. I seemed to be in luck when I was at the supermarket as there was a half-price special on Nurofen – how convenient.

Then I realised that almost everyone I knew had a cold, and most of these people were likely to take Nurofen so they could keep working through the cold. In this case the demand for Nurofen would increase, and the demand curve is likely to be inelastic at the previous price – as a result, why were they slashing the price of Nurofen?

Here are a couple of possible explanations:

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Matt Nolan

The economics of entertainment books

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In Australasia we have this thing called an entertainment book (the Wellington example is here). The book costs $55 dollars and you get also sorts of deals on restaurants, hotels, and other entertainment options in the local area.

Even when I was a student this book paid for itself by making my Burger King cheaper and saving me money when I took my girlfriend out for a date. As a result, I am confident that there are a large number of consumers who will be happy to use this sort of book and I will abstract from the (interesting) issue of consumer demand.

In fact, if you are interested in a Wellington entertainment book, contact me at matt@infometrics.co.nz – my hockey club is selling them in order to raise funds 😉

Instead I am going to look at some of the reasons why the firms in the book are willing to be in the book.

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Matt Nolan

Prostitutes versus easy sex

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I don’t know why I was reading both the About Town blog and the Times, but I was and now I have to write about it.

Mrs Saunders raises an interesting question, namely:

If, as most people seem to be saying, New Zealand women are a bunch of sex predators who will do anything for a double vodka and almost anything for a mocha latte, how is it that prostitution is still a viable business?

This is a fair question, as she says:

After all, a double vodka costs $7.50 but full sex with a street walker costs $50 – $60 (cheaper in Papatoetoe and deals of 2 for $60 are available if you know where to look). And a mocha latte costs around $3.50 whereas the cheapest sex option, similar to the one on this vibrator panties guide, costs $20.

However, I think this is a question that we should be able to answer fairly easily with our economist hats on.

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Matt Nolan

Banning supermarket bags?

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Supposedly there is a plastic bag ban in China, and plans to introduce one in Australia. Now the reason these places want to ban plastic bags has to do with externalities associated with plastic bags (Aussie), both as a pollutant and in terms of the aesthetic appeal (China).

I’m not generally a fan of banning things that are currently not banned, especially in a situation where a pricing mechanism is easy to apply. Now I was pleased to see that the Green Party feels the same way, with Jeanette Fitzsimons stating that she was not in favour of an all-out ban and would support compulsory payment for bags.

If too many plastic bags are being consumed, we should make people pay for them. If we then set the price such that the benefit to the individual of a plastic bag equals the cost to society everything is fine.

However, then I realised that this was all too easy. If everyone already agrees with your point of view why say anything! So I’ve decided to try and make a case for why banning bags may be better than placing a price on them.

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