This week in research #141

This week I attended the 65th Congress of the European Regional Science Association in Sofia, Bulgaria. This is one of my favourite conferences each year, because of the quality and variety of papers that are presented. My own presentation was on the increasing trend towards natural population decrease (more deaths than births) across the territorial authorities and local boards in New Zealand, which will become an increasingly serious policy issue in the future. Here are some of the highlights I found from the conference:

• Ugo Fratesi (abstract 270, on page 2 of the abstract book) looked at regional resilience to positive shocks in China, flipping on its head the idea of resilience, which is usually only applied to negative shocks (and this generated a bit of discussion about whether resilience is the right word to use in that context)
• Elisabetta Ottoz (abstract 126, on page 8 of the abstract book) investigated businesses operating in the night-time economy in Italian cities, finding that those businesses were larger and more profitable than recreational businesses that operated during the daytime or evenings
• Peter Nijkamp gave a very detailed keynote that focused on wellbeing and introduced me to a variety of new terms drawn from disparate parts of the literature, including 'city love' (because love is more enduring than happiness), spatial comfort zones (where people are unwilling to move away, because they have everything they need within some close distance), prosilience (like resilience, but more about making the most out of a negative shock so that the area ends up better rather than simply returning to the previous state), and panarchy (adjustment behaviour is cyclical both temporally and spatially)
• In his discussion of Nijkamp's keynote, Kingsley Haynes laid down a challenge, noting that regional scientists had done a great job of analysing aggregate data, but not so much with individual-level data (which reminded me of at least two conversations I have had over the years about how difficult or impossible it is to apply spatial models to individual-level data)
• Zhiwu Wei (working paper here) looked at the relationship between local wealth inequality and protests in the Global South, finding that the positive inequality-protest relationship is very localised, and weakens substantially as you consider a broader definition of what is 'local'
• Alessandra Faggian (abstract 537, on page 93 of the abstract book) investigated the relationship between fertility and productivity in Italy, using historical wheat suitability as an instrument, and found that higher local productivity leads to significantly higher fertility rates (I'm not sure there is a policy prescription here, because raising productivity seems to be just as difficult as raising fertility!)
• Simone Piras (abstract 111, on page 130 of the abstract book) presented the results of a discrete choice experiment of Scottish residents’ willingness to move (or not) to places that differ in terms of various attributes, finding that residents would be more willing to move to places with good natural environment and digital connectivity and which are close to services and family, and that an intervention that provided information about Scotland's national policy on balancing the population had only small impacts

Aside from the conference, here's what caught my eye in research over the past week:

• Gans (open access) shows using a theoretical model that prompt injection to manipulate AI referees of journal article submissions can actually improve the peer review process under certain conditions (I'd want to see some empirical support for this before I believed it)
• Di Iasio and Wahba (open access) find that stronger anti-immigration attitudes significantly reduce migration inflows to EU destinations, with effects that are larger for intra-EU mobility than for migration from non-EU countries
• Wang and Liang find that city-level crime rates declined by a statistically significant 5.7 percent following Hukou reform in China, which freed up internal migration
• Ardito et al. (with ungated earlier version here) find that delayed retirement as a result of pension reform in Italy significantly increased sick leave due to occupational injuries, by 2.6 percent of the pre-reform mean

The unfair competition argument and the push for a 'Temu tax'

There are many arguments put forward for why trade should be restricted. In my ECONS102 class last week, as part of our topic on international trade and globalisation we covered five of the most common, each of which has a little story that goes along with it:

1. The jobs argument: Trade with other countries will lower prices for goods and services where our country has a comparative disadvantage. This will reduce the quantity that domestic firms produce, and the number of people that they employ.
2. The national security argument: Some goods and services are vital to national security. A conflict that disrupted trade in those goods and services would have serious negative impacts, so it may be better for our country to produce those goods and services itself, rather than relying on trade.
3. The infant industry argument: Some industries are likely to be important for the future growth prospects of our country, but right now our firms in those industries are small and can't compete with firms from other countries. It might be best to protect those industries now, giving them a chance to grow, and take advantage of learning curve effects and economies of scale.
4. The 'protection as a bargaining chip' argument: Our country often has to negotiate with other countries, and having trade restrictions in place now gives us something that we can offer up in order to get a better deal in those negotiations.
5. The unfair competition argument: Firms in different countries are subject to different laws and regulations (such as consumer protection laws, labour laws, and environmental laws), giving firms from relatively lightly regulated countries a cost advantage over firms from countries that are relatively more heavily regulated.

The unfair competition argument has been playing out in New Zealand recently, in relation to local retailers having to compete with foreign producers such as Temu. As the New Zealand Herald reported back in April:

Carolyn Young, chief executive at Retail NZ, said New Zealand could look at what France and South Africa had done, as models of how a tax or levy could be applied to help local retail.

France is implementing an environmental fee on ultra-fast fashion brands, which will rise to €10 ($20) per item by 2030.

“When you think about a business in New Zealand, they pay New Zealand staffing rates. They comply with the health and safety regulations in New Zealand and their products do as well.

“They have to comply to the Fair Trading Act and the Consumer Guarantees Act. There’s always costs involved in those areas. And anything you get in from offshore, you have no idea what their labour environment is like or what they’re paying their people. The product doesn’t have to meet any health and safety standards and they’re not compliant with New Zealand regulations around fair trading and consumer guarantees.”

She said the Government should impose stronger measures to help level the playing field, such as a levy paid by shoppers.

“If you were buying from offshore, what we would want to see is that there would be a levy that would be applied to that, that would be at a level that would be some sort of equaliser between what New Zealand businesses have to do and comply with.

Notice that is almost exactly the unfair competition argument I outlined earlier. Young also points to the jobs argument as well, saying:

“Will everybody come back from shopping with them? I don’t know, but we have to try because that’s just going to make it much more difficult because as soon as you shop offshore, the money goes offshore.

“It doesn’t stay in New Zealand, doesn’t create jobs in New Zealand, doesn’t, you know, keep businesses open. And at some point, that’s going to really matter.”

She said if everyone would shop in New Zealand, it would help the economy significantly.

The 'help the economy significantly' statement needs some pushback. A tax on products that consumers buy from Temu will mean that the prices consumers pay will be higher. They would pay higher prices on goods they buy from Temu. And because the 'Temu price' that domestic retailers have to compete with would be higher, domestic retailers would face less downward pressure on their prices and consumers would therefore likely be paying a higher price when buying locally as well. When Young says that a 'Temu tax' would "help the economy significantly", what that means is that it would help domestic retailers, who could charge a higher price, and would sell more products to domestic consumers, if the cost of buying from Temu were higher because of the 'Temu tax'. The government would benefit somewhat from the additional revenue from the tax. But those gains to retailers and the government need to be balanced against the losses for domestic consumers.

Each of the arguments against free trade also has one or more counterarguments. In the case of the unfair competition argument, consumers who care about differences in labour standards, environmental protection, or consumer rights can already choose to buy from domestic retailers. To some extent, the fact that many do not suggests that they value the lower prices available from overseas retailers more highly than the additional protections that domestic regulation provides. Of course, that counterargument is weaker if consumers lack information about where or how goods are produced, or when the regulations are addressing external costs that consumers do not themselves bear.

Overall, in the absence of some market failure that the 'Temu tax' is correcting, the gains to domestic retailers (increased 'producer surplus') and the government (increased tax revenue) need to be weighed against the losses to domestic consumers (decreased 'consumer surplus'). In the standard tariff case, those losses tend to outweigh the gains, resulting in lower total welfare overall (see this post, which explains the welfare changes in detail). A 'Temu tax' might be a good idea politically, but it is unlikely to be a good idea economically. It certainly isn't the case that it would "help the economy significantly", unless you mostly ignore the costs it would impose on domestic consumers.

The economics of pricing AFL Finals tickets

In my ECONS101 class, we have a topic that is devoted to understanding pricing and business strategies that deviate from the ideal 'marginal revenue equal to marginal cost' approach to pricing for firms with market power. In particular, I focus part of the topic on firms that price below the short-run profit-maximising price for strategic reasons.

One example is the NFL, which prices tickets for the Super Bowl too low. This is a surprising example to students, because the face value for the cheapest ticket for Super Bowl LX this year was $950. However, we know that this price is too low because the cheapest tickets on the secondary market were selling for around $6,400. That suggests that the NFL is leaving money on the table - they could earn much more if they set the ticket prices higher. Why would the NFL set the price lower than the short-run profit-maximising price for the Super Bowl? One reason may be that they want to maintain a long-term relationship with NFL fans. They want going to the Super Bowl to be an achievable aspiration for fans. Most fans won't be able to pay US$4,000 (plus the travel and accommodation costs) to attend every year, but at that price it is reasonable for fans to believe that they can attend once during their lifetime. If Super Bowl tickets cost over US$10,000, then that aspiration becomes much less achievable. This long-term strategy is also visible through the allocation of Super Bowl tickets. Each team gets an allocation of tickets, 35% of which must go to fans, and that allotment is typically given to the team's season ticket holders (see here).

The Super Bowl is recognisable to my students. However, thanks to this article in The Conversation by Paul Crosby (Macquarie University), I now have another example that is somewhat closer to home (albeit not necessarily more recognisable than the Super Bowl):

It’s AFL finals time – and in a season on track for record attendance, the league’s decision to freeze the price of entry-level finals tickets for an 11th straight year is smart economics...

So why are entry-level footy tickets staying cheap? It’s all about investing in the future – especially when there’s a lifetime of spending at stake...

Finals matches routinely sell out, so standard economics would suggest raising prices.

Instead, entry-level tickets for the AFL’s qualifying, elimination and semi finals, as well as this weekend’s wildcard round, have been frozen at A$35. Entry-level preliminary finals tickets will be $65, unchanged since 2016.

Crosby explains this pricing strategy as arising from fairness and goodwill towards fans, then notes that:

Cheap tickets can be an investment. A full stadium creates value beyond ticket revenue. Crowds generate the atmosphere that makes live sport attractive to television audiences and, in turn, valuable to broadcasters and sponsors.

An AFL supporter will often remain attached to the same club for decades, buying memberships and merchandise, watching broadcasts and eventually bringing their children along. A fan won over by a $35 ticket is worth far more than the profit on that ticket.

Keeping tickets affordable, and occasionally letting kids in free, helps recruit that next generation.

By keeping the price of finals tickets low, the AFL is foregoing short-run profit maximisation in favour of a long-term strategy that keeps fans engaged, keeps them attending games, and may lead to greater revenue and profits overall in the long run.

Crosby compares the AFL's pricing strategy with the approach adopted by music acts, who are increasingly using 'dynamic pricing' to maximise short-run profits from every concert. However, the situations are different in a meaningful way. The AFL can afford to have a long-term focus because it has a revolving cast of star players, while the teams endure. AFL fans typically follow a team, rather than particular players. In contrast, not every musical act is going to be The Rolling Stones, still touring after 60-plus years. For the most part, a musical act is not a revolving cast of musicians (especially for solo acts). A musical act's window for profiting from their talent is much shorter than the AFL, so we might expect to see short-run profit-maximising behaviour from musical acts than for the AFL. It is all about maximising profits over the appropriate time horizon. For the AFL or the NFL, a price that looks too low for today's ALF finals game or Super Bowl may be exactly the right price for maximising profits over the lifetime of a fan.

Book review: Economics for Dummies

Since I recently read Econometrics for Dummies (which I reviewed here), it seemed fitting that I follow up with Economics for Dummies, by Sean Flynn. I read the second edition (published in 2011), but I see that there is a third edition now (published in 2019). While my impression was that the econometrics book would be a good companion to a 'traditional' textbook on econometrics, Economics for Dummies is very much a textbook treatment of microeconomics and macroeconomics, which would not be out of place as the required textbook for an undergraduate course in the principles of economics. While Flynn does a good job of keeping things light, as you might expect from a book in Wiley's 'Dummies' series, this is not really a 'pop economics' book.

That disappointed me a little, because I wasn't expecting to read a textbook. Having said that, Flynn does take a refreshing approach to some parts. I really liked the way that he builds up the demand curve from a starting point of marginal utility. I hadn't seen it done that way before. And there were several parts of the macroeconomics section, including a more complete circular flow of income that we often see in textbooks, and a surprisingly thorough discussion of Keynesian economics, that I appreciated. If I was teaching the macroeconomics section of my ECONS101 class, I would certainly be drawing on this book to assist with those aspects.

The book does have several surprising blind spots though. It covers asymmetric information and adverse selection, but never discusses the roles of signalling or screening as solutions to adverse selection problems. It also contains a few errors, including explaining that supply curves slope upwards because of increasing costs (it should be increasing marginal costs), and referring the government spending as part of monetary policy (it is part of fiscal policy). Possibly those bits got fixed up in the more recent edition. I sure hope so.

Overall, I wouldn't strongly recommend this book, but only because there are a generous number of economics principles textbooks around. This book, unfortunately, doesn't really stand out from the crowd. If you had to read it as a textbook, it would be fine, but I wouldn't prefer it over any of the other mainstream options.