Sunday, April 29, 2007

Milk in Bags

I've recently become accustomed to buying my milk in plastic bags instead of cardboard cartons. This mainly is because of the price. Two litres in bags runs me $3.19, while two litres in carton is $4.79 at the Loblaws down the street. Obviously, the packaging can't account for that kinda price differential.

Presumably, milk in cartons is a superior product (if only slightly) to milk in bags. From my personal experience, the latter is more prone to spillage, requires extra work (placing it in jugs), and bags are less sturdy than cartons.

My initial thought would be price discrimination. People who don't pay close attention to their grocery budgets hit up the milk in cartons, with the supermarkets and dairy producers collecting the surplus.

However, as any student of economics would tell you, market power is a necessary condition for price discrimination (of the third degree.) Given the reach of the Competition Bureau and whatnot, there can't be a cartel or a monopoly in the milk industry?

Well, I suspect there is. In Newfoundland, there are only two producers of milk. In Ottawa, there seem to be three. Not only that, but the government has a quota system for milk. Anyone who wants to produce needs to purchase a license from an established producer.

Bam, barriers to entry. Bam, oligopoly. Tossing in the fact that transport costs for milk are high (heavy, can't be compressed, refrigerated) and all the prerequisites are in place.

I'm not saying dairy companies are unethical. It's just they've got one excellent position, brought upon my prehistoric laws, which they use to full advantage.

Sunday, April 22, 2007

Everyday Economics

I do apologize that I've missed so much time -finals and a cross-country move will do that. Let me compensate by linking a column that anyone who reads these pages should find quite entertaining:

Everyday Economics

Friday, April 6, 2007

Dynamic Time Inconsistency and Exams

Exams are an oft-used example in economics. (Or at least they were in my monetary theory course). Especially with regard to the game-theoretic aspects of monetary policy.

Suppose we have a policymaker running a university. Suppose further their objective function is to maximize the knowledge recieved by students. This does not seem ridiculous.

The first attempt would be to simply devote all classes to teaching - exams are a waste of time, since spending a class writing down what you know does not actually increase your level of knowledge. Plus, there's a loss involving the time spent in correction.

However, this is likely to fail since there is now little incentive for a student to go home and study, if they're going to pass just by attending class. (And as
Steven Levitt likes to say, economics is all about incentives.)

So the policymaker imposes an exam. This will probably result in people doing a lot more work, and thus learning more. But our policymaker in question is quite crafty: Just when our students show up for the exam, they find out it's been cancelled.

This is obviously the optimal strategy: All the benefit of the studying, but none of the waste involved in writing the actual exam.

We refer to this sort of situation as a dynamic time inconsistency: The optimal strategy changes, despite the fact that no new information has surfaced in our game.

Of course, eventually, successive vintages of students will catch on to this madness, and not study, producing an inferior outcome. The implication is that shamelessly believing the lies ad infinitum would be the Pareto superior outcome.

We have similar implications for monetary theory. If the central bank could repeatedly lie to the public and have that dissemblance accepted, we could theoretically observe a superior economic outcome.

I'll concede the chances are nil. Though I do think it's worth remarking on how rationality is actually producing a detrimental outcome.

Monday, April 2, 2007

Bank Mergers

Talking about bank mergers in Canada these days is kinda like going to a party in a disco suit. It's just not done anymore - despite the fact that it wasn't all that long ago that people really, really liked that suit.

We can't blame the bankers. They tried for almost a decade before throwing up their hands in frustration and starting to grow their empires outside the country.

Anyway you cut it, Canada's bank regulation is ancient. It wasn't that long ago one required an act of Parliament to found a bank, which really takes the cake as a barrier to entry. And unnecessary barriers to entry are usually quite detrimental.

Canada has also lovingly maintained other ancient legislation about banks, all of which basically boils down to a domestic industry that's flush with cash - hard to compete given the law - and nothing to do with it. To me, this sounds like an easy recipe for stagnation.

Where's the incentive? TD could not make a management decision for five years and still be turning a profit after that time. Mergers are an easy solution. If Canadian banks can become less of bit players on the international scene, that keeps them focused on growth as they compete elsewhere.

Furthermore, mergers would permit the safe opening of our financial markets to foreign institutions, providing the benefits of competition. Heck, it could even end the current stupid debate over the regulation of ATM fees.

The fact that Canada's top banker - David Dodge - is still agitating for mergers only emphasizes the possible gains here. The Tories are supposed to be pro-business, but every governing body should be for gains where there are few losses.

It's well past time for mergers. Start now.