The end of an era for a public good - and economics textbooks?

Friday, January 29, 2010

For years, lighthouses have been given as a classic example of a public good – their beaming lights are non-rival, as one ship benefitting from them doesn’t diminish their usefulness to all other shipping, and non-excludable, as their benefits cannot be reserved only for those who have contributed to paying their costs. It would be almost impossible to avoid the free-rider problem (although enterprising students often try to come with suggestions for this). And it would be very difficult to charge each beneficiary for their use of the light, so there is little possibility of running them at a profit.

Many economics textbooks have illustrations to demonstrate this, some with delightful photographs of lighthouses and others with diagrams illustrating the non-rival and non-excludable nature of the beam of light. They have therefore been very useful to economists as well as to shipping, as good examples of pure public goods are very hard to find – but they are about to disappear.

Walmart and Amazon Price War - Hyper Efficiency and the Consumer

Friday, October 23, 2009

by Geoff Riley

A well publicised price war has broken out in the United States between Walmart and Amazon. Wal-Mart’s $10 promotion applies to the top 10 books coming out in November but the company is also selling 200 best-sellers for 50% of their list price. In a move that has sent shock-waves through the book industry, Wal-Mart has announced it will be selling 10 forthcoming books for just $10 each including Sarah Palin’s autobiography. As is often the case when an aggressive price war breaks out in an oligopolistic market, online bookseller Amazon matched the price cut within hours causing Wal-Mart to cut again to $9. Amazon returned the favour and Walmart has sinced shaved one cent to $8.99! The FT reports that Walmart’s website, the second busiest in the US after Amazon, has also cut prices by 50 per cent on 200 best-sellers.

The battle comes at a time when both Walmart and Amazon are under pressure from Google who are rolling out an online site capable of delivering e-books to any device with a Web browser, with an initial library of about half a million titles.

How long the price war will last is open to question. The October-December season is a hugely important time for all booksellers - the festive period is the peak time for sales and the intense battle for market share comes at a time of great change in the industry - not least the rapid growth of e-readers and online libraries. Some book publishers fear a price anchoring effect on their industry - namely that Walmart slashing prices and rivals following suit will lead book-buyers to expect new titles to cost $10, a low prices that would force the publishing industry to re-scale its entire business, including the advances paid to writers and ultimately affect the range of titles on offer.

For the giants of the book retailing industry, the economies of scale and drive for hyper efficiency in getting products to the market are simply a way of reinforcing their market dominance.

But what about the impact on smaller independent booksellers most of whom can never hope to compete on price but who provide light and shade in the book selling industry.

It is a reminder that there are different types of efficiency. Allocative, productive, dynamic and social. The latter two may be damaged if the price war escalates and many smaller booksellers go under. This BBC world service news interview focuses on some of the cultural issues of the rise of the giant retailers. Chris Doeblin from the independent Book Culture shop in New York City accepts that supermarkets will bring the price of books down - as they have with food prices - but at a (social) cost to many of us.

Guardian: US bookshops urge regulator to investigate online price war

Rated: (5/5), based on 3 reviews

Posted to A2 Micro • AS Micro • Business Economics • Economies of Scale • Oligopoly • Market Equilibrium and Price • Nature of Demand • Price Mechanism in Action • Teaching of Economics • US Economy
Tags: supermarkets, prices, food, retailers, economies of scale, amazon, price war, allocative efficiency, walmart, dynamic efficiency
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Revision - Market Structure and Innovation

Thursday, May 28, 2009

by Geoff Riley

Which market conditions are optimal for effective and sustained innovation to occur? This is a question that has vexed economists and business academics for many years. High levels of research and development spending are frequently observed in oligopolistic markets, although this does not always translate itself into a fast pace of innovation.

Dynamic Efficiency and Innovation

Tuesday, January 29, 2008

by Geoff Riley

Our AS micro teaching topic today was that of dynamic efficiency in markets and the link to the power of innovation. It seems to me that dynamic efficiency is an increasingly important aspect when we consider the welfare consequences of market structures. I regard dynamic efficiency as form of efficiency that occurs over time in the sense that a market should meet our changing needs and wants as time progresses. Naturally we expect to pay a premium price for innovative products that enhance the ‘customer experience’ or which deliver something else better than the ‘industry standard.’ But at the heart of this is the impact of process and product innovation by suppliers in the market place.

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