Archive for the ‘Competition’ Category

Retail legislation only an economist would love

Sunday, January 18th, 2009

j0424464Oregon HB 2388 is an economists dream. It requires a city or county to obtain and review a “comprehensive economic impact study” before approving or disapproving an application to construct a retail facility larger than 75,000 square feet. It also requires that the store pay a fee of $40,000 up-front to pay for the study.

Why would an economist like that?

It means people like me, who have done numerous retail economic impact studies would have a huge increase in work.  And, we would be guaranteed to get paid!  Figure the local government will skim 25 percent for “administration and overhead,” and that leaves about $30,000 for the study.  That’s a nice chunk of change, but not enough for a rigorous study of all the things the legislation thinks should go into a “comprehensive” study.

What do they want in the study?

The study must include each of the following elements.

  • The share of sales the proposed store would attract from existing stores
  • The supply and demand for retail space
  • The number and location of existing retail establishments in which there is overlap
  • of goods and services offered
  • Employment, including projected net job creation or loss
  • Retail wages and benefits
  • Sales revenue retained or reinvested in the market area
  • The public tax revenues and other income generated as a result of construction and operation the store
  • The number of trips to be generated by the large-scale retail development;
  • The number of trip miles generated; and
  • An estimate of carbon dioxide emissions
  • The amount of public subsidies, including tax increment financing, required by the store
  • The costs of public services and public facilities required as a result of the construction and operation of the store

How big is 65,000 square feet?

The bill is aimed at Walmart and other big boxes with stores that are well over 100,000 square feet.

Smaller stores, however, also will be subject to the legislation:  Costco, Fred Meyer, and some Safeway’s would need the comprehensive study.

What about competition?

The legislation mandates that the economic impact study examine the impact on other stores in which there is an “overlap” of goods or services offered.  Add to this the mandatory public comment period and existing stores will have a virtual veto over potential competitors.

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Europe frees the market for ugly fruits and vegetables

Wednesday, November 12th, 2008

The BBC reports that the European Commission has scrapped rules that prevent oddly-sized or misshapen fruit and vegetables being sold in Europe. The EU’s agriculture commissioner called it “a new dawn for the curvy cucumber and the knobbly carrot.”

Proponents of the scrapped rules say they were introduced to ensure common EU standards.  Critics decried the rules as examples of Euro-madness.  If the rules were madness, then surely everyone would have voted to scrap the rules.  Instead, the BBC’s blog notes that that 16 countries–mainly the big fruit and vegetable producers–voted against scrapping the rules.

If the rules were such Euro-madness, why would 16 countries vote to continue the madness?

Economists know that there was a method to the madness: the rules were designed to increase food prices and, in turn, producers’ profits.

How can beautiful fruits and vegetables increase food prices?

Adam Smith noted that meetings of people in the same industry usually result in “some contrivance to raise prices.” The contrivance is usually some agreement to restrict output, thereby force consumers up their demand curves to pay higher prices.

In an article published by the Journal of Law and Economics, Eric Fruits and his co-authors show that many agricultural cartels in the U.S. raise the prices for their crops by imposing quality restrictions on output. Produce that is too small or misshapen is not allowed to be marketed by cartel members.  Such rules raise prices in two ways:

  1. Higher quality produce is more desirable to consumers. Consumers are willing to pay more for a larger beautiful melon than for a small ugly one.
  2. Because some produce does not “make the grade,” quality restrictions reduce the amount available for sale.  If only “large” melons can be marketed, then the total number of melons for sale shrinks. The reduced supply of produce results in higher prices.

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Taking hostages can be good for business

Monday, July 2nd, 2007

Does your employer want to be held hostage? Do your customers want to be held hostage?

Eric Fruits writes in Oregon Business magazine that sometimes it’s optimal to hold your customers hostage or to be held hostage by your employees. Unique skills benefit a business because the company’s competitors can’t duplicate the products or services it provides the market. Just as an employee with unique skills has leverage over his employer, a firm with unique products or services has leverage over the market. This leverage produces more sales or lower costs. Either way, it improves the bottom line.

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U.S. Supreme Court hears oral arguments in a predatory buying case

Tuesday, November 28th, 2006

Today, the U.S. Supreme Court will hear oral arguments in Weyerhaeuser Company v. Ross-Simmons Hardwood Lumber Co., Inc.

The question in this case is whether a plaintiff alleging predatory buying may establish liability by persuading a jury that the defendant purchased more inputs “than it needed” or paid a higher price for those inputs “than necessary” or whether the plaintiff instead must satisfy a standard (known as the Brooke Group standard) requiring a showing that the defendant (1) paid so much for raw materials that the price at which it sold its products did not cover its costs and (2) had a dangerous probability of recouping its losses.

See also today’s Seattle Times story.

UPDATE: Transcript of of oral arguments are available at the U.S. Supreme Court website.

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Black Friday spending – boost or bust?

Saturday, November 25th, 2006

Yesterday is what has gradually become known among some as Black Friday. To most people, however, it will always be known as the Day After Thanksgiving. For those who aren’t watching parades or football it is one of the biggest shopping days of the year. So big in fact, that retailers that have been in the red all year hope that the day will help them finish the year in the black.

We’ll have to wait some time before we get the official results on Black Friday. My informal survey suggests that Black Friday may be a disappointment for retailers. My informal survey involves trying to visit as many stores before noon. First, I found close-to-the-door parking at every store. Second, I faced check out times of less than 10 minutes at every store.

Some reasons why Black Friday may not be so big this year:

  1. Consumer spending is slowing: even though consumer confidence remains high it is beginning to slip, fewer mortgage refis mean less cash for consumer goods; also uncertainty about federal and state taxes also can make the retail champagne taste flat;
  2. No good deals, no big products: In past years a thumb through the Black Friday ads would always offer up a must-have product or too-good-to-pass offer, but not this year; The PlayStation 3 and the Wii are the hot products this year, but mumblings suggest that retail margins on the PS 3 are pretty small and consumer hype has dashed hopes that any Wiis would have been available on Black Friday.
  3. Competition, competition, competition: Day-After-Thanksgiving sales are now recognized as the starting pistol for the Christmas shopping season; every national retailer participates and they are chasing after the same set of “door buster” customers.

Remember, the survey is informal and consumers can offer surprises. Here are some of the bigger retailers to pay attention to: Wal-Mart, Home Depot, Kroger, Target, Costco, Sears, Best Buy, Gap, and Federated Dept. Stores.

Sometime I’ll discuss why “door buster” sales are like college early-acceptance programs …

UPDATE: Wal-Mart sounded a cautious note by announcing a decrease in same-store sales in November. (Reuters). On the other hand, an executive of Federated suggested that this may be the best Black Friday in years (Reuters).  According to ShopperTrak RCT Corp., which tracks total sales at more than 45,000 mall-based retail outlets, total sales rose 6 percent to $8.96 billion on Friday (AP).

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Competition and residential real estate agents

Friday, November 24th, 2006

Residential real estate agents are paid a commission of 5-6 percent of a property’s selling price, paid by the seller to his or her agent. The commission is then split roughly 50-50 between the seller’s agent and the buyer’s agent.

Because residential real estate agent compensation is closely correlated with housing prices, unexpected or rapid increases in housing prices can confer an income windfall on agents. During a housing boom, agents reap a windfall as property prices (and their commissions) rapidly increase. In addition, because properties turn over so quickly on their own, agents spend much less time and effort promoting their client’s properties.

Income windfalls don’t pass unnoticed. And with low barriers to entry, new agents quickly entered the market. The figure below on the left shows that nearly half of the increase in real estate payrolls was because of new agents entering the occupation. Contrast real estate agents with all sales occupations (below on the right). In the broader occupation, employment increases accounted for a little more than a quarter of payroll increases.

Real Estate and All Sales Occupations - Wages and Employment
The simple economics story: Windfalls cannot persist in face of competition.

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NAR, MLS, and FTC and what it means to home buyers and home sellers

Wednesday, November 22nd, 2006

If you’ve ever been in the market for a home, chances are you’ve used the Multiple Listing Service. The MLS is a bulletin board maintained by the National Association of Realtors or its local operators governed by rules promulgated by the NAR. Official policy of the NAR is that that MLSs must make all types of listings available to the websites of participating brokers. However, a revised policy past last week at the NAR’s annual convention allows individual brokers or their firms to exclude certain listings in the MLS from their own websites.

Recently, the Federal Trade Commission has been scrutinizing MLSs that have excluded certain kinds of listings on brokers’ sites and national sites, such as Realtor.com. The FTC’s scrutiny has generated awareness of Realtor’s exclusionary practices, but will have little economic impact on the prices paid for housing or the commissions paid to brokers.

The revised policy was a response to the FTC’s scrutiny. Under the revised policy, brokers must use “objective criteria” to exclude a listing. Listings by “discount” brokers can be excluded under the “objective criteria” rule, if the brokers provide fewer or limited services in exchange for lower fees.

Discount brokers and consumer advocates argue that any exclusion is anticompetitive and harms consumer choice. Exclusion is anticompetitive because small brokers and discount brokers cannot display their listings. Consumer choice is harmed because some sellers’ properties wouldn’t be displayed and buyers can’t see all listed properties.

Full service brokers counter that creating an attractive and useful website can be a costly and time-consuming exercise. Forcing full service brokers to display the listing of those who cannot or will not develop their own websites provides a “free ride” to discount brokers that is subsidized by full service brokers.

For home sellers, the revised policy has more “sound bite” impact than actual impact. Excluding a listing would entail identifying the listing broker and determining the broker’s commission and service levels. As such, it is more difficult and costly to exclude a specific listing than to simply serve all available listings. Thus, it is unlikely that widespread site-by-site exclusion would actually occur. Ultimately, the revised policy will have little economic impact on the display of listings.

That said, buyers should ensure that their agents investigate all available sources of listings. With the growth of listings on Craigslist, eBay, and for-sale-by-owner (FSBO) sites, buyers may miss out on buying their optimal property if such sites are ignored.

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