Wednesday, November 30, 2016

The Poultry Price Paradox - Why Are Turkeys Cheaper During Thanksgiving?

Guest Post
by David Williamson

Over the holiday, Catherine Rampell wrote a piece for the New York Times that raised an interesting question. Why are turkeys cheaper during Thanksgiving when demand is higher? Rampell offers two possible explanations, but I am not totally convinced by either of them. So, I will spell out my concerns with each of Rampell's explanations below and offer a third explanation of my own. Rampell's comments are in block quotes and mine are not.

Explanation #1 (Rampell) - Turkeys are "Loss Leaders"

The most intuitive and popular explanation for a high-demand price dip is that retailers are selling 'loss leaders.' Stores advertise very low prices — sometimes even lower than they paid their wholesalers — for big-ticket, attention-grabbing products in order to get people in the door, in the hope that they buy lots of other stuff. You might get your turkey for a song, but then you also buy potatoes, cranberries and pies at the same supermarket — all at regular (or higher) markups.
This is certainly the most popular explanation, but I worry that it ignores the consequences of competition. The way your store makes money selling turkeys at a loss is by attracting new customers that would normally buy potatoes, cranberries, and pies from your competitors' stores. But why would your competitors allow you to steal their customers? Wouldn't they lower the price of their turkeys in response? If so, wouldn't this cancel your effort to attract new customers and just leave you losing money on turkeys? Also, as an empirical matter, do stores really charge the same or higher prices for potatoes, cranberries, and pies during Thanksgiving? I can't find any systematic data to answer this question, but Kroger (America's largest traditional grocery store) had sales on all these items before Thanksgiving and not just turkeys.

Explanation #2 (Rampell) - Grocery Stores Are Price Discriminating
[P]lenty of economists...argue that it’s actually demand-side forces — changing consumer preferences — that drive these price drops. Consumers might get more price-sensitive during periods of peak demand and do more comparison-shopping, so stores have to drop their prices if they want to capture sales.
This explanation seems more theoretically consistent to me, but I think it rests on three shaky empirical assumptions. First, a grocery store needs market power to price discriminate. However, even after years of growing concentration, this industry is still pretty competitive (the top four firms account for less than 40% of sales). Second, to preserve its pricing strategy, a price discriminating grocery store needs to prevent others from buying in the cheap market (the Thanksgiving season) and selling in the expensive market (the rest of the year). But how do you stop anyone with a freezer from doing just that? Third, for charging consumers less in November to make sense, it must be that they are more price sensitive during the holidays. But is that true? Rampell gives some good reasons for why it might be true, but I can also see why they might not. Specifically, people tend to be more price sensitive when there are more close substitutes available. I am personally very sensitive to the price of Coke because there are always close substitutes (e.g. Pepsi). But it seems like there are very few substitutes for turkey during Thanksgiving. Would Thanksgiving be the same at your home if you served chicken instead?

Explanation #3 (Me) - The Costs of Stocking Turkey are Lower

My preferred explanation is that because grocery stores are competitive, they must charge prices that reflect the marginal costs of the products they sell. Therefore, if the price of turkeys is higher in July than November, it must be because each turkey is more costly to sell. The tough part is figuring out why. One reason turkeys might be more expensive for grocers to sell in July is that they don't sell very quickly that time of year (i.e. they have low "turnover"). Low turnover means higher costs for grocery stores because every day a product sits unsold on your shelf, you are giving up money you could have earned by stocking something that would sell more quickly. When turkeys start flying off the shelves in November, the cost of stocking each turkeys drops and that is reflected in the price. An advantage of this explanation is that it also implies that we would expect the price of cranberry sauce and pumpkin pie to be lower during Thanksgiving, which I think is the case.

What do you all think? Am I missing something important about Rampell's argument? Am I wrong that higher turnover means lower marginal costs? Are there other reasons why turkeys might cost less to sell and product in November? Your comments are much appreciated. Happy Holidays!

Friday, November 18, 2016

Nudging the Nudgers with Better Regulatory Policy

by Levi Russell

A recent law blog post by Brian Mannix (hat tip to David Henderson for the link) discusses the significance of the Congressional Review Act (CRA) during a presidential transition period. In a nutshell, the CRA allows congress to overturn a regulation written by an agency in the executive branch with a bare majority in each house until the 60th day after it is issued. Of course, like a bill, the president can veto, in which case congress must come up with a 2/3 majority to override the veto. Given that most presidents wouldn't want to stop their own branch of government from implementing regulations, the CRA doesn't often come into play. However, since Republicans control both houses and the incoming president is a Republican, there are some interesting things that could happen given the Republicans' ostensible preference for less regulation. Mannix has some interesting examples in his post so I suggest reading it.

What interested me was a specific line in the post:
Note that the CRA mechanism is distinct from the proposed REINS Act mechanism.  Under REINS, Congress would need to approve of major regulations before they become effective; under the CRA rules become effective if Congress refrains from disapproving.
This got me thinking about behavioral economics and the idea of "nudges." An example of a nudge is a change to the rules that makes the "best" option the default. Often nudges are suggested as part of government policy, but that's not always the case. An oft-repeated example is to make 401k enrollment with your employer the default option while still providing an "opt out" opportunity for those who don't want to contribute to a 401k.

Looking again at the last sentence in the quoted text above, the REINS Act strikes me as a great example of "nudging the nudgers." That is, imposing a rule on those in the executive branch who are in charge of making and enforcing rules based on legislation. Specifically, the REINS Act would make the default position "no new regulations" and only those that passed additional scrutiny by elected representatives would actually be issued. I argue that, at least potentially, the REINS Act would lead to better regulation for a couple of reasons:

1) There would be more oversight by elected representatives of the regulatory process than there is currently.

2) Massive regulations like those written based on Dodd-Frank or the Affordable Care Act would probably be issued more slowly since the regulations would have to be approved by Congress. This would give us a chance to see how the initial regulations actually play out rather than relying on speculative cost/benefit analysis (side note - most regulations aren't subjected to cost/benefit analysis anyway).

Additionally, the REINS Act could reduce the problem of passing on more authority to the executive branch than it was designed to have. This problem arises when Congress passes a very general bill (which is more likely to garner enough votes to pass than a very narrowly-written bill) empowering the executive branch's bureaucracy to write regulations that are less likely to be in line with the will of the people.

The REINS Act was passed in the House last year and is currently sitting in the Senate. It would be great to see more discussion of this bill, but perhaps I just missed it. I'd love to read your thoughts in the comments below!

Bonus: Here's a great article on "nudging the nudgers."

Note that the CRA mechanism is distinct from the proposed REINS Act mechanism.  Under REINS, Congress would need to approve of major regulations before they become effective; under the CRA rules become effective if Congress refrains from disapproving. - See more at: http://www.libertylawsite.org/2016/11/17/midnight-mulligan-the-congressional-review-act-rides-again/#sthash.dJwa6OFY.dpuf

Tuesday, November 15, 2016

Ignoring Positive Externalities

by Levi Russell

Recently ag economist Jayson Lusk visited UGA to speak on the future of food and the "food movement." One great point he made is that food is quite abundant now relative to any time in the past, and yet there is a very lucrative book and movie industry built around concerns with our food supply. Certainly our food system is far from perfect, but absolute poverty on a global scale has been curtailed dramatically.

A question from the audience particularly interested me: what about externalities related to our current food production methods such as pollution? Lusk's answer was very good. He acknowledged the existence of both negative and positive externalities in food production. He went on to state that both should be considered when designing policy. It certainly seems to me that a lot of attention is paid to the negative externalities associated with food production in the policy world and in the economics profession; relatively little attention is paid to measuring the positive externalities such as the fact that on average Americans spend only about 10% of their disposable income on food and are free to pursue all sorts of other interests.

This discussion reminded me of a paper I read awhile back. It's ungated, and I encourage you to read it if you're interested in this stuff. Here's the abstract:
This paper criticizes the treatment of externalities presented in modern undergraduate economic textbooks. Despite a tremendous scholarly push-back since 1920 to Pigou’s path-breaking writings, modern textbook authors fail to synthesize important critiques and extensions of externality theory and policy, especially those spawned by Coase. The typical textbook treatment: 1) makes no distinction between pecuniary and technological externalities; 2) is silent about the invisible hand’s unintended and emergent consequences as a positive externality; 3) overemphasizes negative externalities over positive ones; 4) ignores Coase’s critique of Pigouvian tax “solutions;” and 5) ignores the potential relevance of inframarginal external benefits in discussions of policy “solutions” to negative externalities. Aside from presentations of “The Coase Theorem” excerpted from only 4 pages of Coase’s voluminous writings, it is as though the typical textbook author slept through nearly a century of scholarly critique of Pigou.

Friday, November 11, 2016

Have GMOs Benefited Us?

by Levi Russell

A recent NY Times article claimed that GMO crops are not delivering the originally-promised benefits of higher yields and lower pesticide application rates. The article is short, so I recommend reading all of it, but here's how it starts:
About 20 years ago, the United States and Canada began introducing genetic modifications in agriculture. Europe did not embrace the technology, yet it achieved increases in yield and decreases in pesticide use on a par with, or even better than, the United States, where genetically modified crops are widely grown.
I later read a couple of articles that provided very detailed responses to the original. One is written by Andrew Kniss, a weed scientist, and the other by Jayson Lusk, an economist. Kniss uses more detailed versions of the data used in the NYT article and discusses the role of toxicity in pesticides. Lusk makes some great points about revealed preference. Both certainly worth a read.

Tuesday, November 8, 2016

Public Choice, Candidates, and the Stock Market

by Levi Russell

This article by Caroline Baum, which makes the case that downward stock market moves are not due to "uncertainty" but to pessimism, makes a strong case and the article is certainly worth a read. Uncertainty (i.e. the things we don't know that we don't know) is always with us, but pessimism ebbs and flows. Baum notes that the VIX or index of stock market price volatility has risen or fallen along with Trump's chances of winning the election. On the other hand, I think other theories about the effects of uncertainty on businesses and the economy make a lot of sense and are backed by strong empirical evidence.

Reading Baum's article reminded me of a piece by Andrea Hamaui on the Stigler Center's blog breaking down recent moves in the stock market by industry. Hamaui notes that the recent Clinton bump was due largely to gains in the healthcare and finance industries. Instead of making broad statements like "candidate X is good for the economy because the stock market rose when his/her odds of winning increased," looking at the industry breakdown allows us to analyze this from a Public Choice standpoint. The recent surge in finance and healthcare stock prices is likely due to the expectation that Clinton's policies would favor the firms currently operating in those industries. Continuation of current policies that make entry into these industries more and more costly increase the market power of incumbent firms. Stock market indices don't measure the value of firms that don't exist, or more precisely, the firms that weren't formed due to high policy barriers to entry.

Friday, November 4, 2016

Potpourri

by Levi Russell

Here I want to highlight a couple of conversations I think are interesting.

In response to this article on GMOs, Jayson Lusk (economist, Ok State) and Andrew Kniss (weed scientist, U Wyo) provide some deeper analysis on the effects of GMOs on yield and input usage.

A recent Council of Economic Advisors report (summarized here in the WSJ) alleges that monopsony power (market power wielded by buyers) is a driving force in labor markets these days. David Henderson provides an in-depth critique in, so far, 3 posts here, here, and here. I'll update when the rest of the posts come out.

Thursday, October 27, 2016

Can Plows Create Mountain Ranges?

by Levi Russell

According to the EPA, the Clean Water Act does not require a permit for normal agricultural practices including the following:
Normal farming, silviculture, and ranching practices. Those activities include plowing, seeding, cultivating, minor drainage, and harvesting for production of food, fiber, and forest products.

Upland soil and water conservation practices.

Agricultural stormwater discharges.

Return flows from irrigated agriculture.

Construction and maintenance of farm or stock ponds or irrigation ditches on dry land.

Maintenance of drainage ditches.

Construction or maintenance of farm, forest, and temporary mining roads.
That sounds pretty comprehensive to me, but the EPA and US Army Corps of Engineers has apparently decided to circumvent their own rule. A report released by the Majority Staff of the Senate Committee on Environmental and Public Works claims that
Landowners will not be able to rely on current statutory exemptions or the new regulatory exemptions because the agencies have narrowed the exemptions in practice and simply regulate under another name.  For example, if activity takes place on land that is wet: 
- plowing to shallow depths is not exempt when the Corps calls the soil between furrows “mini mountain ranges,” “uplands,” and “dry land;”
- discing is regulated even though it is a type of plowing;
- changing from one agricultural commodity constitutes a new use that eliminates the exemption; and 
- puddles, tire ruts, sheet flow, and standing water all can be renamed “disturbed wetlands” and regulated. 
This expansion of jurisdiction is apparently not what the EPA previously claimed it would be. If farmers are required to get permits to cultivate the soil, I'd bet on a couple of things:
1) the average farm size will grow dramatically as smaller farmers go out of business very quickly;
2) food prices will rise, or will fall more slowly than they otherwise would.

I doubt the average person looking at this situation would call those outcomes "good" but they're highly likely in my opinion. As Public Choice theory indicates, the EPA is not a residual claimant with regard to its policies, so its incentives are not as well-aligned as are the owner of the typical non-monopoly firm. Further, the EPA has plenty of incentive to increase the quantity of work for its employees and lawyers. This question remains: Will the farm lobby be able to keep their exemptions?