Japan's population decline is both a crisis and an opportunity

New Zealand's Population Conference is on in Auckland this week, so population issues have been on my mind. In the past, I've written about population decline in Japan. Things have escalated since that earlier post, as the Guardian reported last month:

Every one of Japan’s 47 prefectures posted a population drop in 2022, while the total number of Japanese people fell by nearly 800,000. The figures released by the Japan’s internal affairs ministry mark two new unwelcome records for a nation sailing into uncharted demographic territory, but on a course many other countries are set to follow.

Japan’s prime minister has called the trend a crisis and vowed to tackle the situation. But national policies have so far failed to dent population decline, though concerted efforts by a sprinkling of small towns have had some effect.

Wednesday’s new data showed deaths hit a record high of more than 1.56 million while there were just 771,000 births in Japan in 2022, the first time the number of newborns has fallen below 800,000 since records began.

Even an all-time high increase in foreign residents of more than 10%, to 2.99 million, couldn’t halt a slide in the total population, which has declined for 14 years in a row to 122.42 million in 2022.

The decline in Japan's population is intimately linked with population ageing. An older population has fewer births and a greater number of deaths. When deaths exceed births, demographers refer to this as natural decline. If natural decline is not offset by net migration, then the population will decline, and this has become the experience of many of Japan's prefectures (in others, net outward migration is a driver, with or without natural decline as well).

Pervasive population decline has impacts across society. Some impacts are clearly negative. However, in every crisis there is an opportunity, and as the population ages new or expanding business opportunities are arising. As the Guardian article notes:

Japan’s ageing population is already affecting nearly every aspect of society. More than half of all municipalities are designated as depopulated districts, schools are closing and more than 1.2 million small businesses have owners aged about 70 with no successor.

Programmes on the Broadcast Satellite (BS) channels are geared to an older audience, with the commercials a procession of offerings for funeral services, supplements to relieve aching joints and incontinence pads.

Japan’s underworld has not escaped unscathed either: a majority of yakuza are over 50 and there are now more gangsters in their 70s than in their 20s. Meanwhile, senior porn is a growing niche, populated by a handful of silver stars in their 60s, 70s and even 80s.

Japan is in the vanguard of population ageing and population decline globally. Many European countries are not far behind. New Zealand may have a younger population overall, and relatively higher levels of net international migration, but will not be immune to these effects either. New Zealand's outlying regions are ageing rapidly, as Natalie Jackson and I pointed out in a 2017 article in the Journal of Population Ageing (ungated earlier version here). I expect to write a lot more on this topic in the near future.

In the meantime though, business owners should really be thinking about how they can market to an older (and still ageing) population. There are opportunities there that seem to be under-exploited right now (and not just in the aged care sector).

Read more:

• Forget 'zombie towns', there's entire 'zombie districts' coming to a rural area near you
• Winners and losers in population growth
• Newsflash! Population growth will be highest on the fringes of fast-growing urban areas
• The Maxim Institute on dealing with population decline
• The relative (un)certainty of subnational population decline
• Japan will be able to teach New Zealand about dealing with rural population decline
  

Peter Siminski on making economics (and economists) better

Earlier this month, Peter Siminski (University of Technology Sydney) wrote an interesting article in The Conversation entitled "6 reasons Australians don’t trust economists, and how we could do better". Briefly, those six reasons are:

1. Weak diversity and reflexivity;
2. The media and conflicts of interest;
3. Efficiency preferred to equity;
4. A heavy international focus;
5. Declining economics training; and
6. Overconfidence.

Most often, economists face critiques like this from people outside of the discipline, but this time it is from an insider, so we should at least pay a little bit more attention. And I agree with all of his points, which sadly apply to the discipline in New Zealand as well. I encourage you to read the whole article. However, I just want to add to a couple of his points with a New Zealand perspective.

On the first point, I've written before about the lack of diversity in New Zealand economics (specifically gender diversity - see here and here). It's worth updating that data though. As of today, there are 76 economists in the New Zealand top 25% ranking on RePEc, of which only ten are women (#27 Suzi Kerr; #40 Hatice Ozer Balli; #44 Trinh Le; #49 Susan Olivia; #54 Anna Strutt; #62 Gail Pacheco; #68 Isabelle Sin; #71 Elodie Blanc; #73 Sholeh Maani; and #76 Paula Lorgelly). We're trending in the right direction at least, going from less than 8 percent women in this ranking in 2017 to around 13 percent now. It's still going to take a long time to achieve anything approaching real parity though.

On the decline in economics training, Siminski notes that at the high school level, "In New South Wales at least, economics has been mostly replaced by “business studies”". We have observed something very similar in New Zealand - a gradual replacement of economics (and accounting) with business studies. Where a decade or more ago about two-thirds of my introductory economics class would have studied at least one year of economics at high school, that is now down to less than a quarter. It's just as well that we don't assume any prior formal economics knowledge when we teach our introductory papers, because in the main it doesn't exist. Although that doesn't mean that students don't know any economics - see this 2014 article by Steven Lim and myself (ungated earlier version here). And, many of our best economics students didn't study economics at high school. I didn't study economics at high school (in fact, I didn't study any economics at all until I returned to university as a mature student). Nevertheless, we do face issues with non-economics students distrusting economics (and that may become an even bigger issue next year, when ECONS101 becomes compulsory for all business students at Waikato). However, in my experience, even a little exposure to real economic thinking can be enough to make students 'see the light' (or at least, to realise that economics is not something to fear or avoid).

Overall, in my view what really makes people distrust economists, and is a point that Siminski is too timid in presenting (as part of his discussion of overconfidence), is arrogance. Economists simply think we know more than other people (including subject experts) about any number of subjects, and we aren't shy about expressing this. I'm as guilty as any of my fellow economists of this (and this blog may be Exhibit A in the evidence of that). We could do with toning ourselves down a bit. Siminski is right in concluding that:

A large dose of humility would help, and it would help build trust.

Might that be too much to hope for? 

The price of beer in Abu Dhabi and Sharjah

In my ECONS102 class, we discuss the difference between a market where the sale and purchase of a good is illegal, and a market where the sale and purchase of the same good is legal. One surprising result is that it is not certain that the good will be more expensive in the market where it is illegal.

Consider the example of the market for beer in Abu Dhabi and Sharjah (two of the United Arab Emirates). Alcohol sale and consumption is legal in Abu Dhabi (although public intoxication is not), whereas alcohol sale and consumption are illegal in Sharjah (see here or here). Now consider the difference in the price of beer between the two markets. We can demonstrate this with a supply and demand diagram, as shown below. Demand for beer will be lower in Sharjah (DS) than in Abu Dhabi (DA), because consumers must consider the risk of punishment for consuming alcohol in Sharjah, whereas there is less risk in Abu Dhabi (unless the consumer is drunk in public). Similarly, the supply of beer will be lower in Sharjah (SS) than in Abu Dhabi (SA), because sellers face higher costs in Sharjah, due to the costs associated with the punishment of being caught.

Now compare the equilibrium price and quantity in each emirate. The quantity of beer traded (adjusted for population differences) is higher in Abu Dhabi (QA) than in Sharjah (QS). However, the equilibrium price of beer is lower in Sharjah (PS) than in Abu Dhabi (PA). How can this be? Notice that the difference in demand between the two countries is larger than the difference in supply. A lower supply increases the equilibrium price, while a lower demand decreases the equilibrium price. The two effects offset each other, so when the demand difference is larger, the net effect is a lower price. If, instead, the difference in supply was larger than the difference in demand, then the price would have been higher in Sharjah than in Abu Dhabi. And if the differences in supply and demand were exactly the same, then the price would have been the same in both emirates. In other words, while the difference in quantity is clear, the difference in equilibrium price is ambiguous - the price could be higher, lower, or the same in Sharjah as in Abu Dhabi, depending on the relative difference in supply and demand.

That the price may be lower where a good is illegal is quite counter-intuitive. The reason why this result is counter-intuitive is because most people jump immediately to what they think the price difference should be, and try to work backwards from that. However, economists know that you should never reason backwards from a price change. Instead, economists use a model (in this case, supply and demand) and work out the difference in price as the last step in the process (not the first step).

The result is counter-intuitive, but is it realistic? According to the website Expatistan, the price of a beer at a neighbourhood pub in Abu Dhabi is 40 Dirham, while the price of the same beer in Sharjah is 31 Dirham. [*] So, it may be realistic. Surprising as it may be, a good sold in a place where it is illegal may not be more expensive than the same good sold in a place where it is legal.

*****

[*] I have no idea how they gathered the price data for Sharjah. It is apparently based on seven observations as of June 2022, so I'm taking it at face value.

Movie ticket prices revisited

I've written a few times about prices at the movies (see here and here). One of the puzzling questions about movie ticket prices is why they are the same for all movies, whether they are blockbusters that will sell out the theatre, or low-rated B-movies that struggle to sell any tickets. That is the question that this recent article in The Conversation by Peter Martin (Australian National University) looks at. Martin puts the answer down to two things. First:

Queues for restaurants (or in 2023, long queues and sold out sessions, as crowds were turned away from Barbie) are all signals other consumers want to get in.

This would make queues especially valuable to the providers of such goods, even if the queues meant they didn’t get as much as they could from the customers who got in. The “buzz” such queues create produces a supply of future customers persuaded that what was on offer must be worth trying.

That makes sense for restaurants, where the queue to get in is quite visible to passing would-be diners. The queue acts to reduce customer uncertainty about the quality of the product. However, it is much less plausible that this effect works for movies. Even if there is a queue for tickets, there is no certainty which movie the customers in the queue are waiting to get tickets for. So, the queue doesn't really provide any information about quality for would-be consumers.

Second, and more plausibly, Martin notes:

Another is the way cinemas make their money. They have to pay the distributor a share of what they get from ticket sales (typically 35-40%). But they don’t have to pay a share of what they make from high-margin snacks.

This means it can make sense for some cinemas to charge less than what the market will bear – because they’ll sell more snacks – even if it means less money for the distributor.

This is a point that I have made before. Since movie theatres are constrained in their ability to profit from ticket sales due to agreements with the movie distributors, it is much better for them to keep the ticket prices low, and instead make money from selling complementary goods (like popcorn and drinks). This could even be an application of loss leading - selling the movie tickets at a loss, in order to increase the number of movie ticket sales, and make even more profits from the complementary goods.

One new aspect of movie ticket pricing that Martin didn't consider is movie theatres charging different prices depending on where the moviegoer sits. As the New York Times reported earlier this year:

Some middle seats at AMC movie theaters will be more expensive than others as part of the company’s new ticket-pricing strategy, announced this week.

AMC Entertainment, the world’s largest cinema chain, said in a news release on Monday that this new pricing system, known as Sightline at AMC, would be in place at all of its United States theaters by the end of the year.

The seats in the front row of the theater will be the least expensive and seats in the middle of the theater will be the most expensive, the company said. However, new prices will not affect showings before 4 p.m. or tickets sold at a special discount on Tuesdays, AMC said.

Notice that this is similar to how tickets to concerts are priced, and is an application of price discrimination. Some moviegoers highly value the seats in the centre of the movie theatre, as they have the best view of the screen. Some moviegoers are willing to pay a premium for those seats (I know I would be). The other seats have less valuable views, and would appeal to more price-sensitive moviegoers. The optimal price is lower for more price-sensitive customers, so charging a relatively lower price for less-preferred seats (and a relatively higher price for the centre seats) makes a lot of sense.

It will be interesting to see whether AMC's new pricing system works (or not). Regal Cinemas' trial of dynamic pricing for movie tickets (which I discussed in this post) was abandoned soon after it was announced (see here). So, we never really got to see if dynamic pricing worked or not. If the AMC system works, we can expect to see it rolled out at other cinema groups in due time. As I note in my ECONS101 class, in a Darwinian sense, the pricing strategies that we see persisting in the real world tend to be those that are working well (and contribute to higher profits for the sellers).

Read more:

• Pricing at movie theatres still defies logic. Or does it?
• Regal Cinemas to introduce dynamic pricing for movies
• The $8 bucket of movie theatre popcorn