Friday, February 29, 2008

Pricing to Province: A Saab Example

For years I have taken advantage of the fact that Ontario's LCBO sells wine cheaper than the NSLC in Nova Scotia. Aside from this I have not found many other worthwhile arbitrage opportunities between provinces that I could take advantage of in my travels. That is, until now!

If you go to the Saab website and click on the ad on the main screen, you arrive at a map of Canada . Now most of us would just click our province of residence, but us economists pause, shake our head and say "why the hell do I need to choose a province?" And then we clue in: They are pricing to market in Canada. Amazing. As of today (29 Feb 2008), Saab (a GM company) is selling the same 2008 Saab 9-3 Sport Sedan (a nice car) for different prices across the country. Why are they doing this? Well, we know that each province has different economic conditions and access to the US market (where manufacturers' suggested retail prices or MSRPs are much lower). So, manufacturers can take advantage of this by pricing to market. By doing so, they can grab more consumer surplus . And yes, another way to think of this is: price discrimination.

How different?
In Nova Scotia, the cash purchase price is: $35,850. In Ontario, the same car costs $34,450, and in Alberta $37,450. The lease prices are also different. And for the other advertised models, such as the Saab 9-5 Sedan, some provinces have different prices. In the USA, the same Saab 9-3 Sport Sedan starts at $28,825. (Did you notice how the Saab Canada ads says "Your dollar goes further with Saab" - yeah right.)

Do other car companies do this? Not as far as I know; the rest have one MSRP for the country.

If you are thinking of buying the new Saab, you should print the Ontario price and take to your nearest dealership and demand a better deal. This is crazy. Or better yet, bring in the US price and ask "What the hell?".

Appendix: Walmart: A Master at Price Discrimination
We all know that Walmart has done this in Canada for years. From what I understand each Walmart tracks inventory in each story very closely: in fact, they record each sale and use the information to tell the store manager when to "roll-back-prices". They can plot the demand curve with this technology (O'boy I would love to see that data!), which means they can forecast how many pencils will sell in the next week if they drop the price by 10 cents. Wild.

Sunday, February 24, 2008

Teaching Update: New feedback, new inputs, the same output.

I am now two months into my second teaching experience. I am teaching the same second year macroeconomics class and I have a few more students this time. In response to the students feedback I received last winter, I entered the term enthusiastic! I thought I could motivate my students by delivering better lectures and by creating an new evaluation structure that will motivate them to work harder. To improve classroom attendance, and to provide more frequent feedback (to them and me), I have added 10 in class mini-tests (1% of their final mark for each); they don't get a mark for answering correctly, just for attempting the question. This is like giving points for attendance, but it forces them to think, write, and it gives me insight into their learning. I provide each student an exam booklet to answer the questions, I provide the answers in class, and provide them with specific feedback in their booklets. The costs: 33 exam booklets, 100 classroom minutes (10 minutes per question), and 20 hours of marking (~2 hours each). The Benefits: much harder to measure, but higher midterm marks would be a good start.

After the first five tests and one midterm exam, my experiment has failed to produce the desired results: midterm scores remain very low and attendance is only marginally higher. Why the unexpected result?

(1) With respect to attendance, I guess I was over optimistic with respect to the size of the carrot: 1% per in class test is not big enough to get people to come. (2) The feedback has not provided a strong enough signal to students about their comprehension. Because I do not penalize them for an incorrect answer, I can only assess that they pay little or no attention to the outcome and place little weight on the signal. Now, I know that we can "lead a horse to water, but can't make it drink", but I believe that there must be some incentive structure that will motivate these students to study.

In the short-term, I am going to ask more difficult questions in class and grade them as if it was a test. Because it would be unfair to revise the evaluation method at this point, I can only try to increase the signal that tells them that they are "on track" or that they have "fallen off the train". The next exam is in a few weeks, and I hope to see a strong performance. I remain optimistic.

I hope to use the reading week to research more on "Generation Y" to educate myself more about how to reach today's university students. I will report back with my findings.

Appendix: An Incentive Structure that Works?
After several conversations with the faculty member teaching the same class, we agreed that in class tests based on the textbook assignments or randomly marking one of the assignment question might be the way to go. It is a work in progress. Comments/suggestions welcome.

Friday, February 15, 2008

Does Energy Efficiency Save Energy?

Back on November 27th, Jeff Rubin and Benjamin Tal (two respected CIBC economists) released a report that tries to answer the question: "Does Energy Efficiency Save Energy?" The release can be found on the CIBC website here .

The Question: "Much is being banked on the notion that improvements in energy efficiency will be the answer to both oil depletion and greenhouse gas emissions. But is it a realistic economic premise that technological change can reduce energy usage, and by implication, its carbon trail?"

The Answer: "The road to hell is paved with good intentions."

The Economic Logic: "As improvements in energy efficiency lower the effective cost of energy relative to what otherwise would have prevailed, the resulting substitution and income effects that flow from any price change result in more of the good being consumed." Take an(over simplified) example: a switch energy efficient cars (such as hybrids) provide an initial drop in the amount of gasoline beginning consumed. Now, we can drive more for less. The energy efficient cars could result in higher consumption of gasoline. This has been referred to the Jevons Paradox .

Their bottom line: "In the past, the efficiency paradox has been used as an argument against efforts to promote greater energy efficiency and conservation. That is not our intention here. On the contrary, for a world facing the twin challenges of oil depletion and global climate change, there has never been a more urgent need for both. But in order for total efficiency to actually curb total energy usage, as opposed to energy intensity, consumers must be kept from reaping the benefits of those initiatives in ever-greater energy consumption. Otherwise, energy usage will be the beneficiary of our best efforts towards greater energy efficiency."

My two cents: Yes! We are all concerned that any savings in energy costs will lead to more energy consumption. In general, savings in one area of the budget is not going to lead to less aggregate consumption but more. What can we do? To start, we need to increase the price of gasoline to reflect the social cost by taxing it and by setting a price floor on gasoline prices. Flow the tax revenue into helping lower income individuals and into research and development. (as I said before) .

Economic History
The article also given a wonderful throw-back to Jevons! "Jevons observed that after the huge efficiency gains following the advent of James Watt’s steam engine, coal consumption, after dropping initially, rose by tenfold between 1830 and 1860."

Saturday, February 9, 2008

Why can't this beautiful woman find an $500K+ man?

A real posting on Craig's List - it is now been widely circulated, but I had to share it.

"What am I doing wrong?"

Okay, I’m tired of beating around the bush. I’m a beautiful(spectacularly beautiful) 25 year old girl. I’m articulate and classy. I’m not from New York. I’m looking to get married to a guy who makes at least half a million a year. I know how that sounds, but keep in mind that a million a year is middle class in New York City, so I don’t think I’m overreaching at all.
Are there any guys who make 500K or more on this board? Any wives? Could you send me some tips? I dated a business man who makes average around 200 - 250. But that’s where I seem to hit a roadblock. 250,000 won’t get me to central park west. I know a woman in my yoga class who was married to an investment banker and lives in Tribeca, and she’s not as pretty as I am, nor is she a great genius. So what is she doing right? How do I get to her level? Here are my questions specifically:
- Where do you single rich men hang out? Give me specifics- bars, restaurants, gyms
-What are you looking for in a mate? Be honest guys, you won’t hurt my feelings
-Is there an age range I should be targeting (I’m 25)?
- Why are some of the women living lavish lifestyles on the upper east side so plain? I’ve seen really ‘plain jane’ boring types who have nothing to offer married to incredibly wealthy guys. I’ve seen drop dead gorgeous girls in singles bars in the east village. What’s the story there?
- Jobs I should look out for? Everyone knows - lawyer, investment
banker, doctor. How much do those guys really make? And where do they hang out? Where do the hedge fund guys hang out?
- How you decide marriage vs. just a girlfriend? I am looking for MARRIAGE ONLY
Please hold your insults - I’m putting myself out there in an honest way. Most beautiful women are superficial; at least I’m being up front about it. I wouldn’t be searching for these kind of guys if I wasn’t able to match them - in looks, culture, sophistication, and keeping a nice home and hearth.
PostingID: 432279810"

And a great response:
"Dear Pers-431649184:
I read your posting with great interest and have thought meaningfully about your dilemma. I offer the following analysis of your predicament.
Firstly, I’m not wasting your time, I qualify as a guy who fits your bill; that is I make more than $500K per year. That said here’s how I see it.
Your offer, from the prospective of a guy like me, is plain and simple a crappy business deal. Here’s why. Cutting through all the B.S., what you suggest is a simple trade: you bring your looks to the party and I bring my money. Fine, simple. But here’s the rub, your looks will fade and my money will likely continue into perpetuity…in fact, it is very likely that my income increases but it is an absolute certainty that you won’t be getting any more beautiful!
So, in economic terms you are a depreciating asset and I am an earning asset. Not only are you a depreciating asset, your depreciation accelerates! Let me explain, you’re 25 now and will likely stay pretty hot for the next 5 years, but less so each year. Then the fade begins in earnest. By 35 stick a fork in you!
So in Wall Street terms, we would call you a trading position, not a buy and hold…hence the rub…marriage. It doesn’t make good business sense to “buy you” (which is what you’re asking) so I’d rather lease. In case you think I’m being cruel, I would say the following. If my money were to go away, so would you, so when your beauty fades I need an out. It’s as simple as that. So a deal that makes sense is dating, not marriage.
Separately, I was taught early in my career about efficient markets. So, I wonder why a girl as “articulate, classy and spectacularly beautiful” as you has been unable to find your sugar daddy. I find it hard to believe that if you are as gorgeous as you say you are that the $500K hasn’t found you, if not only for a tryout.
By the way, you could always find a way to make your own money and then we wouldn’t need to have this difficult conversation.
With all that said, I must say you’re going about it the right way. Classic “pump and dump.” I hope this is helpful, and if you want to enter into some sort of lease, let me know."

Monday, February 4, 2008

Back in blog (soon)

Dear Reader(s),

I have not forgotten you. It has been too long.

Over the last few months, the economics landscape has been changing rapidly. Many interesting stories and economic tales have filled my "to be posted" file.

"The Manley Report", "GDP Growth and Energy Consumption", and "Back at the Chalk and Talk" are a few postings I am working on.

Be right back ...