Adding more vehicles would cause a holdup. Source:Wikimedia Commons
Airlines carry two types of passengers – the leisure and the business passenger. Both passengers have several characteristic features which makes passenger segmentation and price discrimination possible. Some of them are that business travelers value travel time higher than leisure travelers and they often book flights close to the time of departure. Therefore, airlines tend to charge business travelers a higher fare than leisure passengers. Also, business travelers are more insensitive to high ticket prices than leisure passengers but have greater awareness of flights, airlines and are more informed on air travel.
During the holidays, based on your time valuations, you could fall into either the leisure or business traveler class.
Airlines can make use of the differences in time valuation between passenger classes to charge different prices. This is called third-degree price discrimination. The graphic below illustrates demand and supply curves for two market segments – business and leisure. It could be seen that monopoly airlines charge higher for business than leisure travel based on the different time valuations of these two segments, and the quantity demanded for leisure travel is higher than for business passengers.
Third-degree price discrimination for a monopoly airline.Source: Econ 150 Economic Principles and Problems – Micro. Labels have been changed.
Monopoly power and the ability to price discriminate increases welfare loss. The problem is further compounded during the holidays when there is congestion costs factored in. For example, if the demand for air travel by leisure travellers increases during the holidays, airlines might suppress or push up the price for leisure travel based on time valuations by leisure travelers. On the other hand, the increase in travel by leisure passengers creates congestion or delays to business passengers. Recall that business passengers place a higher value on time than the leisure passengers, therefore this externality, congestion costs, increases the actual price of a plane ticket for business travellers. This results in a fall in demand for business travel. This two interdependent effects can be referred to as a network externality. The loss to society, or welfare loss, is of concern to both policy makers and consumers.
Is it possible then to price discriminate in the face of congestion externality and still reduce welfare loss?
According to Achim I. Czerny and Anming Zhang, in a recent paper titled: Third-degree Price Discrimination in the Presence of Congestion Externality, the answer is YES. Provided the monopoly carrier can appropriately segment the market based on time valuations, a third-degree price discrimination would reduce total possible passengers on its flights and hence reduce congestion costs. When compared to the fact that without price discrimination prices overall will rise due to the pressure put on ticket fares by congestion costs during the holidays, price discrimination is better for everyone than the alternative.
Now, you no longer have to wonder why many transporters price discriminate during the holidays.
Profits wake up French union cats. Christina Robinson
It is of no question that unions do push for higher wages, or wage premiums, for union members in unionized firms. If a union can establish a monopoly in labor supply to a particular trade or industry, if they have strong bargaining power or even if the costs of unionization are low, the wage premiums for unionization could be higher. Yet, countries like France still record low wage premiums of about 2 – 3 %. Why is the wage premium associated with French unions so low, and what could it be attributed to?
Most studies believe the average wage premiums or increases in wage rates due to unionization are at the 10 – 20 % gap. Union bargaining power, ability to extract the rents or profits earned by firms due to increased productivity, legal barriers, lobbying for quotas or tariffs, and legal costs of unionization are some factors that impact on the level of union wage premiums. But union power has been attributed to its ability to influence labor demand and supply. With the advent of service-oriented economies in France and many developed economies, reduced dependence on manufacturing industries, the “old economy”, has further reduced union power.
Wage premiums still exists but is low. French unions are reputed to be strong but decentralized. French firms are known to operate an open shop. Non-union workers do not bind themselves to wages bargained by unions. Union density is low; at about 8%. The national minimum wage in France is high and binding, therefore, it creates no extra room for unions to exercise bargaining power. Therefore, the possibility that unions can organize and negotiate high wage premiums for union workers is remote. So, with weak union powers, what can the wage premium be attributed to? On what does unions in French firms base their bargaining power?
Thomas Breda of the Paris School of Economics suggests the French union wage premiums are associated with rent extraction through bargaining for higher wages in firms that are productive and profitable. As the rents available to firms increases, unions push for higher wages. High productivity and increasing profits is the key to the bargaining power of French unions and not competitive stimulus like labor demand and supply and quotas or tariffs as can be obtained in other countries.
Policies aimed at increasing household consumption, capital investment and labor employment in the U.S could also be encouraging…excessive financial risk-taking. This heat map looks at signs of financial risk taking from three angles: valuation, issuance trends, and redemption risks. Conclusion: financial risk taking in corporate debt markets is rising and markets have begun to overvalue many assets. The IMF believes this is a wake-up call to not only U.S financial regulators to respond to rising financial stability risks, but the rest of the world.
Efficiency is as much important as innovation in productivity growth. Oregon and New Mexico are highest ranked in U.S when it comes to innovation, but when it comes to efficiency, how effective firms and states are able to combine the innovative advantage with the factor inputs they own, Oregon and New Mexico fare differently. This score sheet has implications for policy – better educational attainment, more schooling, more research and development (R&D) and a bigger financial sector.
Excessive risks from banks can damage the economy but the right policies can help reduce bank’s risky behavior. Some policies that bankers should consider to reduce excessive risk are: aligning compensation practices with long-term performance such as paying bonuses with restricted stock; and should establish risk committees; boards should represent both the shareholders and creditors. The staff at the bottom of the ladder should be made to be responsible and understand the bank’s core values.
Pursuing export diversification and export-product quality upgrading is a gateway to growth for low-income countries. Diversification could be into new product lines or the development of a more balanced mix of existing products. These economies can take advantage of globalization and rapidly expanding markets in Asia – China in particular – and the sub-Saharan Africa.
Intimidation with a different face. Flickr/Nathan Siemers
I teach Mathematics, Basic Science and Basic Technology in a middle secondary school. On a daily basis, I encounter adolescents a lot much more often than the average reader of this blog. I have had several class episodes demonstrating Coase Theorem at work. In class, there are two exceptionally intelligent students. During the class participation sessions, they tend to outshine other students. They raise their hands much more often than other students. They answer questions, even answering questions meant for other students, in assertive manners. This practice has been irksome to the rest of the students.One day, while reading an article on Coase Theorem and an airline flight squabble due to reclined seats, I thought I also had a story.
Coase Theorem
The level of output and the corresponding external costs remain the same whether polluters are bribed to reduce pollution or whether they are charged for marginal damages. The “carrot” and the “stick” respectively yield the same result. The difference is in who bears the cost.
In my classroom case, this pair are the polluters. Their irksome behavior prevents others the satisfaction of having a full share in the class participation sessions. Many of the students have complained about this polluting practice. The costs to the students have been low self-esteem, thinking they were not prepared, being asked to take the back seat when they wanted a front one, class discomfort, delays during sessions due to conflicts, distractions and irritability.
As the teacher in the class, I thought it would be wrong to ask them to stop raising up their hands for every question (it’d be against principle; they were entitled to that behavior), rather I’d have to ask them to use their initiative and give others the chance to shine. Maybe the rest of the class might have to bribe them to stop answering questions. Or maybe like in the flight example above, gang up on them.
Unfortunately, the two students decided to offer the bribe, interestingly, to the other students so they could continue polluting the participation sessions - by encouraging cheating. To continue polluting and outshining others during the participation sessions, they’d have to seat with one of the class leaders. They’d then have to show the answers to test questions to their classmates through clever ways as appeasement money.
I thought it was a case of Coase Theorem at work. The two intelligent students wanted to bear the cost of the pollution. The costs still remain the same - the opportunity to assertively outshine other students.
I decided to change seating arrangements and watch out for class intimidation.
She’s my daughter – your sister. Flickr, Steve Evans
Is a girl an inferior good? In other words, do the rich hate having girls for fear of losing their wealth when marriage beckons? Rich households might educate their children equally, whatever the gender, but what about the poor? The propensity for a girl born into poverty to drop out of primary school is high, and higher than that for boys. The terrain was always rough for the girl child!
Many studies have confirmed the age old suspicious – the traditional aptitude towards the female gender from birth to education has been not so good. The sex ratio is skewed in favor of boys. Feticide is carried out in a higher proportion against girls, especially in the urban areas where the technology can be cheap to find. To make matters worse, developing countries depend much on patriarchal social structures, male dominated traditional systems, which discriminate against women. What might be new is research that suggests that the girl child might be an inferior good in India (pdf). An inferior good is one you tend to discard when your income is increasing. At marriage, the girl will bear the name of the husband. Whatever she inherits goes to the husband’s family; she ceases to belong to the family. Research has confirmed it that the incentive for female feticide is higher when wealth and inheritance are at stake.
In a related and recently published survey carried out in Nigeria, another developing economy, it was suggested that education, especially at the primary school level, was skewed in favor of the boy child. Girls marry early, the reasoning goes. A woman’s place is in the kitchen (pdf) and not behind a black board. Women empowerment is a goal for countries committed to the Millennium Development Goals (MDG). Increased women participation in national developmental programs like education can help reduce the situation.
What is needed is a commitment to educating children; no matter the gender. Women equate to healthier children – gender notwithstanding. Women education equate to higher per capita income. Women education makes intergenerational education assured and secured.
We could help our girls become better women and help ourselves be a more secure nation. Please, the girl in your home is not an inferior good. Ignore what the research might suggest.
