Econ 101: Anti-Trust and the Whole Foods/Wild Oats Merger

From the Oregonian, I learned of a federal appellate court ruling that sent a decision allowing the Whole Foods/Wild Oats merger back to district court. Here is a link to the LA Times as the Oregonian website is not letting me access it - big surprise.

I thought this is a good chance to discuss a few aspects of anti-trust oversight in the United States. The basics of anti-trust in such a case is pretty clear: when firms get too much market power (have too few competitors) the profit incentive causes them to raise price and lower output which causes a loss in social welfare. Fewer consumers get to consume and those that do consume at a higher price while the firm gets excess profits.

But determining market power is often quite difficult for the simple reason that 'markets' are very hard to define and therefore 'competitors' are hard to identify. Take Whole Foods, what exactly is their market? Is it organic, gourmet and overpriced groceries. Just gourmet? Groceries full stop? Whole Foods argued that in today's market there is no longer much distinction between them and major grocery chains like Safeway because the latter also is stocking more organic and gourmet foods. So Whole Foods wanted to define the market as groceries in general and thus all the major chains are competitors, so a merger with Wild Oats is not a concern - there is plenty of competition left over. The Federal Trade Commission wasn't so sure, they argued that Whole Foods serve a distinct market - gourmet and organic foods - and thus opposed the merger. [By the way, it is very rare that these things get to court, they are usually settled between the two parties]

So who is right? Well it is pretty hard to tell. The usual course is to look at the cross-price elasticity of demand. This measure, for example, the change in demand for Whole Foods goods when Safeway changes their prices. As you can imagine trying to isolate this effect in the world of supermarkets where prices are always and constantly in flux is almost impossible. Another thing that matters is the 'contestability' of the market - how easy would it be for a new competitor to enter the market. This limits firms' ability to exploit concentration by raising prices because it would encourage the entry of new competitors. I imagine that the current state of Safeway-type stores has a pretty minimal influence on Whole Foods demand, but that is would be very easy for Safeway-type stores to ramp up their offerings to compete. In general, I would not be that worried if I were the feds.

NB: It seems a little absurd in the land of New Seasons and other such stores, but when I lived in Denver, Whole Foods and Wild Oats were the entire organic market. I used to frequent Whole Foods until my local Safeway started stocking many more organic alternatives - which is why I am a bit sanguine about the merger.

Portland Housing Prices

The latest from Case-Shiller is here. I promised the kiddies a trip to the Zoo on the Max so I shall post them with little comment. Nationwide, the news is pretty dismal, but Portland is seeming to still escape the really bad stuff. In fact, we finally see the seasonal uptick in Portland, and Seattle is holding pretty good as well.  But we are still down quite a bit from a year ago.

Bad Bags

From the Rose City a proposal by the Mayor Elect (does one capitalize an informal title?) to implement a fee for anyone wishing to have their purchases at a grocery store placed in a plastic or paper bag.  Seattle too.  So what does economics have to say about this?  Well, it depends.  

But before I get to that, some preliminary details that are not at all clear this this observer:

Exactly what category of store does this apply?  And, why not all if there is some distinction?

Why the same fee for both paper and plastic bags?

To whom do these fees accrue?

What is the estimate of the cost of the bags to society?

These details are pretty important because if you are to make an economic argument for such a fee, it would be along the lines of Pigouvian taxes.  Which is to  say that if an economic activity yields a cost on others not directly involved in the transaction, taxing that activity the amount of this external cost will create an efficient market outcome.  So I would like to know to start, what is the cost of these bags to society?  Yes their manufacture is expensive, but that cost is born by the stores.  So I imagine that it is a combination of the carbon emissions from the manufacturing process, the cost of improperly disposed of bags on the municipality and, what else, the cost of the pollution in terms of despoiling habitat?  I don't really know all of the bad things that bags are supposed to have done to society so feel free to fill me in.  If these are serious and the fee is commensurate with these costs, then as an economist I have no problem with an appropriate tax.  

But as an aside, I often reuse my bags (I have a dog - I need say no more) and extras I bring back to the store to recycle - does this really help, or does the energy that is used in the recycling process mostly wipe out the gains?

However, this fee is not being talked about in these terms, but more in terms of "how much would it take to really get people to opt out of getting bags with their purchase?"  Which, as an economist with a bit of a libertarian streak, I find irritating.  Government has no business deciding how we should behave above an beyond these social costs.  Also, as I mentioned above, there should be no distinction between grocery stores and any other store if we are being honest and consistent.  A bag is a bag - let the patrons of all stores pay the true social cost!  (Let me venture to guess that more patrons of Victoria's Secret than of the Disney Store would opt to pay for the bag - but that is another economics lecture).  

So I think this talk of twenty cents is absurd.  This seems much too high for the Pigouvian tax - but I am ready to be shown otherwise.  Also, if we are serious about the 'right' tax, then paper and plastic should be different costs presumably.  So this really is about behavior not true social costs and, as such, a dangerous and very tricky path to tread for a mayor - social engineering.  There are lots of things we wish people would do - be nice to each other for example - but are we going to start charging for rudeness?   

Let me be absolutely clear.  These bags may be a serious problem (though I think we are really talking about the plastic ones not paper - though paper has its own issues) and as such, may be an entirely appropriate case for a fee, but before suggesting a random fee, be serious in thinking about the external costs and sell the fee as good economics.  I think it would be great if everyone used reusable bags, rode bikes everywhere and such, but there are many, many things that are in some way bad for us and the environment (e.g. beer) that once you start with the logic that government should start telling us what we should do, it is hard to stop.  This is really my point about must policy, there should be good economics behind it, not just good intentions.

A final side note, the accrual of these fees would presumably go to the municipality to offset the extra cost they impose, otherwise it would seem a bit pointless but so far I have failed to notice how this tax would be implemented.

Beeronomics: The Oregon Brewers Festival

Just a quick note about the Oregon Brewers Festival and economics.  If you are a brewery, what beer do you send?  Do you try and make a splash with a new concoction, or send a tried and true favorite?  The costs and benefits of both are pretty clear.  My first thoughts are that if you are an established brewery like, say, Rogue, the incentives are to try and make a new exciting brew and try and solidify a reputation for interesting beers.  But if you are small and relatively unknown like, say, Ninkasi, the incentives are probably to send a tried and true beer that people will encounter on tap and in stores and might just have again and again.   

Your thoughts? 

Incentives and Life

It is not without a certain level of embarrassment that I will admit that the house I owned in Corvallis was a new house in a new development that was almost 3000 square feet.  My wife and I never felt entirely comfortable there, neither of us really felt at home in a new neighborhood and we missed the character of older houses. Still, it was bought at a time when alternatives were very few and because we knew there was a reasonable chance we would make the move to Portland and it seemed a safe investment (it was).  Sure we have two kids, but we always felt the house was just too big for us.

Now, for a time, we are installed in a old 1000 square foot bungalow and the transition has been quite interesting for this economic naturalist.  You see, economics is all about how rational people respond to incentives, and in moving from 3000 to 1000 square feet, the incentives have sure changed.  In 3000 square feet there is no incentive to choose, to limit yourself, you never have to dispose, donate or never acquire in the first place.  This is especially true with the kids stuff.  Many old gifts that are now long forgotten and no longer played with remained stuffed all around the house.  Now, at 1000 square feet, every thing has to be carefully selected - so the toys have diminished considerably and guess what - the kids couldn't care less.  

So the cost of having stuff has gone way up and the incentive to have less stuff is now much stronger. Low and behold, it turns out we really don't need much stuff.  But I guess the real story is how just 2 years in a big house led to a massive increase in the amount of stuff - a fairly quick response to the lower cost of storage.  And we are not big consumers, its just that we never got rid of anything like infant clothes and supplies (e.g. a crib we hadn't used in a year).

So the point of all of this is that I don't think that your life determines what size house is right for you, I think its more that the house determines how you live.  Its the incentives once in a dwelling that kick in and define and guide your subsequent choices.  At 1000 square feet we are doing just fine and it is good to be reminded of what is really necessary and what is surplus to requirements. We haven't changed through the house changes and I thought that the big house would just remain pretty empty, but nope, the incentives were just too pervasive. Anyone in the market for old toys?...

The Oregon Housing Market: My Field Experiment

This graphic from the New York Times indicates the fall-out of the Fannie and Freddie troubles.  It also indicates a general tightening of credit markets, just when were are looking for signs of life from housing markets.  My house in Corvallis is sold - and there was not a single hiccup, but here in Portland I am hearing more and more of deals facing financing troubles and falling through.  Anecdotally, the market appears definitely to be softening, even in the close in east-side neighborhoods that I am looking in.  Lots of unsold homes, "price reduced" stickers on signs and houses going under contract and then reappearing on the market.  This is all good for me as a potential buyer, but the rising interest rates are not helping my bottom line.  Still they are low by historical standards.  

Add to this news of a surge in bankruptcies and more shedding of jobs in Oregon and things might get quite a bit worse before they get better.  For my part, I am back to renting after 12 years of ownership and am in no great hurry to purchase.  I anticipate even ore choices and better deals soon.  

So the field experiment continues...

Eco-nomics: Partial and General Equilibrium

Economics is often taught using partial equilibrium - studying one market and assuming away any spillover effects.  Think of the classic example of the market for orange juice - teachers may (and usually do) ask about the effect on the OJ market from something like a hurricane that wipes out half of Florida's orange crop.  When you say that input costs will increase, shifting the supply curve to the NW and thus price will rise and the quantity sold will decrease you are ignoring any other effects - like perhaps that, without a crop to pick, there will be a flood of labor supply to OJ factories lowering costs for producers.  This last example is an example of general equilibrium - trying to trace the effects of some change through all effected markets.  We don't emphasize it much in undergraduate classes because it is HARD.  It is like trying to figure out global weather - there are so many interconnections, coming up with a good model is very difficult.

I mention this because this is one reason it is very hard to say what effect the push for biofuels will have on the prices of other crops and on overall welfare.  If there is increasing demand and thus price of corn, what will happen to the price of other crops in the short and long term?  Well it depends on what is being planted and where, the magnitude of the cross-price elasticity of demand for other crops - even how new fuels will effect transportation costs.  As you can see, blaming biofuels for rapid commodities price escalation (or defending them) is dangerous business.   It is also true, however, that general equilibrium effects are often not thought about very much in casual discussions of environmental economics.  

For example, I wonder what the effect would be if there was mass consumption of Priuses (Pri'i?). On the one hand this would reduce gas consumption dramatically, but it would also put pressure on the production of all the junk that goes into the batteries.  How much energy does it take to get the stuff?  How much pollution does this create?  What about waste?  I don't know the answers to these questions, but many good ideas, when considered in mass amounts, often become questionable. 

This, apparently, is true of biodiesel.  Now that many people have converted to biodiesel the supply of used cooking oil is not keeping up with demand (despite my appetite for fish and chips).  So now what? - the economic rationale has changed, does biodiesel still make sense?  I don't know.  But I do get grumpy when good ideas in isolation are not thought about in a general context - in the general equilibrium.

One final example.  My wife and my mother were talking very admiringly about the freecycle movement and the idea that one could help the world by not buying new stuff.  Hmmm...  OK, so I am an economist and not helping my rep by taking this on - but I see a few problems with this.  First, there is a market for this stuff, from people who can't afford new.  If middle class people started gobbling this stuff up, that would just either increase the demand for Wal-Mart style cheap stuff from China of further impoverish people who are already impoverished by driving the price of used stuff up beyond their means.  To put it plainly, you are not decreasing the demand for the stuff, just shifting who buys old and who buys new.  Also, why s consumption of new stuff such a bad thing?  This adds income and thus growth to the world.  If you care about poverty, this should be reason for pause.  

This did not go over well with the wife and mother.

My apologies for the slow blogging - life has been a bit crazy.

Econ Major

There are many reasons to choose a major and at my undergraduate institution marketability and earning potential were definitely not considered good reasons.  Nevertheless, the economics major appears to endow students with a set of skills that the market values highly.  What I like about economics is the variety of things you can do with it.  It is not an easy major - when I was at the U of Colorado, economics and physics classes had the lowest grade point averages - but the effort is well worth it.

Internet is back!

Safely installed in Sellwood, broadband internet connection working, life slowly returning to normal.

Regular blogging to return soon...

The Oregon Self-Service Gas Petition!

Do you support allowing self-service gas in Oregon?  Let me know by signing the on-line petition which, if successful, I hope to send to state representatives in Salem.

To support this effort, go to the petition, it is simple and direct.

Gasp!....no....internet...connection....

I am on vacation and have almost no access to the internet.  I had plans to continue blogging during this time but circumstances will not allow.  I shall resume next week.

Apologies.