Merger/Acquisition Pricing Quantified in America

This week as I was browsing through the news, I came across an opinion piece that had a catching title, "Big Business Is Overcharging You $5,000 a Year". Intrigued, I read the article, which puts topics we've gone over in class in the real world. Thomas Philippon, a Frenchman, said when he first moved to America 20 years ago, he was surprised at how inexpensive things were compared to France and Europe. Now, comparing prices he pays to what his parents and the European public pay, he realized American prices are now higher! Philippon came to the US to pursue a graduate degree, went on to complete a Ph.D. in Economics at MIT, and is now a professor at NYU. As an economist, he wanted to answer the question of why prices in the US are now higher than they once were relative to Europe. The main cause he found was mergers and acquisitions; like the example in class with the train industry, companies are averse to actually competing because they risk losing. Having the government fix prices or restrict entry into the business's market or similar markets is preferred, as it extends the amount of time a business can enjoy an economic profit. Businesses could look to lower prices, but doing so would cause others to react, causing the industry to be less profitable.

This article reinforces Capture Theory and the group size discussions of Olson and Peltzman we went over in class. Many of the large firms that are driving up the price of living in the US were and are behaving rationally, as were the legislators that allowed the mergers. An example from the article is the Whirlpool and Maytag merger. The merger was justified by the companies as a way to lower costs and compete with foreign appliance manufacturers. Lawmakers, faced with the decision of potentially causing unemployment for thousands of voters if the domestic brands fail versus allowing two companies to "be more competitive", have an easy choice. Once the merger was completed, lobbying efforts to impose tariffs on foreign appliance manufacturers were successful, leading to higher prices for American consumers in the long run. Without the merger, Maytag and Whirlpool would have had more difficulty coordinating lobbying to keep out foreign producers; together they achieved the most durable form of rent, entry restrictions. According to Philippon's new book, these mergers and acquisitions have ended up costing Americans ~$5,000 a year.

Incentive Structures in our Morning Commute

When living at home, I used to drop off my little brother at school before heading to my own classes. This was generally fine, but there was no task I hated more than waking up at 5:30 to shovel and defrost my car in the freezing cold per my parents' worries about safety. When I returned home from my first semester of college after being spoiled with mild Virginia winters, I refused to partake in this miserable chore. So, on the first morning upon my return, my teenage brother woke up before dawn and shoveled out the car for me. My parents were stunned. Jason, an autonomous agent, doing a favor for his sister out of the kindness of his own heart? Of course not! I had obviously set up an incentive structure.
On our daily route, we passed a Dunkin' Donuts maybe a half a mile from the school. I promised Jason that if he cleaned and defrosted my car, I would stop and buy him a donut. Not only did he get a ride and a donut, but he got the added benefit of looking like an angel to our oblivious parents. This is an example of observational equivalence, because they could not tell just through observation what was driving Jason's behavior. They wrongly attributed it to his kindness, when really he was reaping rewards. Of course, I was sure to include a sanction as well (because I wanted an effective incentive structure and definitely not because cold mornings make me grouchy). Jason decided to sleep in one especially cold morning, so when I stopped by Dunkin' and got myself a nice hot coffee, I opened the car door and told him to get out. This seemed to be an effective punishment (albeit a little cruel), because he started my car every morning for the remainder of break. One might say siblings should not have such a transactional relationship, but it has worked for the past two winters and neither of us has shown any intent to change it.

Byproduct Theory and Student Activism

For the past two years, I have served as the Treasurer of the University Democrats. This involvement has been one of the most meaningful of my college experience, as I take great pride in fulfilling the organization's primary mission of "inform[ing] students and the community about the values of the Democratic Party." Upon reading Olson's piece on interest groups, however, I have started to question whether we are truly being honest about our stated goal.

Similar to the interest groups mentioned in Olson's book, UDems hopes to mobilize its members, who share a common interest in electing Democrats. Unfortunately, we are also subject to the free-rider problem, as the benefits that come from our canvassing, phone-banking, and voter registration efforts are non-rival and non-excludable to the many students on Grounds who support progressive candidates. In fact, these students could be considered part of a "latent" group, since there are thousands of them, yet very few have a large enough personal incentive to fund lots of political activity on their own. Thus, there is potential for us to be taken advantage of by smaller advocacy organizations at UVA that are better able to police free-riding and raise money.

With this in mind, I have now come to realize that UDems' primary activity is not political activism but providing separate and selective incentives (like shirts and access to social events) to dues-paying members. Political activism is simply just a byproduct that we are able to fund using dues raised from the provision of these incentives.

Though this realization is a little unsettling, I am at least reassured that we are able to use our size as an organization to (hopefully) make a meaningful difference in local and state politics, rather than letting it become a detriment to our effectiveness. Still, one thing that has interested me throughout my run as Treasurer is the number of people who pay dues yet never pick up their shirt or go to UDems parties. Perhaps these individuals do not pay to receive selective incentives but are happy to donate to political groups because of altruistic or warm glow feelings.

It's Free Rider Season

The list of things that Millennials have "killed" has become a borrowed, yet popular, writing topic for uninspired bloggers in recent years. From forgoing casual dining chains for local spots or renting instead of buying homes, Millennials appear to be the essence of everything wrong with America (at least according to some Boomers). Nevertheless, Millennials have introduced a tradition unlike any other in the last five years: Friendsgiving. Across the country, young professionals and college students alike are celebrating Turkey Day a week early amongst their friends. Yours truly is proudly one of those people (Not sure I actually count as a Millennial but I'll roll with it for this blog). And I have a confession to make; I will be free-riding this year. 

Since first year, my friend group of around 15 people has put on a Friendsgiving event to enjoy each other's company before heading back home. Each year, I have dutifully put my name in the google doc, right next to a food item to bring to our feast. Year after year, I spend both my time and resources preparing a not-so-great version of my mom's mac & cheese for the group to share. What I am now realizing, however, is that the other guys in the group haven't put in quite the same effort. In fact, most of them never bring anything. Yet they all enjoy in the same meal as I do. Truthfully, there never seems to be a shortage of food (shoutout to the girls). The group size is simply too large for anyone to notice the effort, or lack there of, from each friend. So I wonder, why should I waste my time and money when I could still enjoy Friendsgiving? With this in consideration, and in true free-rider fashion, I've been incentivized to not contribute this year either.

The google doc was just sent into our group message, and I am standing firm in my decision. Will there be a suboptimal production of food? Probably. Will it be enough to keep me or anyone else from getting there full? Probably not. Should the group develop an enforcement mechanism to solve this free-rider problem, perhaps in the form of a private club tied to contribution? For my sake, I sure hope not. 

Quadratic Voting

As discussed in class, ranked-choice voting is beginning to spread across the country. But there is an also an emerging alternative theory of voting that may actually lead to more efficient outcomes. In the theory of quadratic voting, a voter would be given a set number of "voice credits" (say, 400, as the authors propose) that they may allocate as they wish. "Voice credits" would apply to a wide array of topics, which can include anything from a local referendum to a national election. In any given election, the voter can submit as many votes as their budget allows, but the price of each marginal vote in any singular election is the square of the number of votes cast. In other words, consider the recent election for Albemarle County Sheriff. If a voter has 400 voice credits, they may cast 1 vote for their preferred candidate at a cost of 1 voice credit. Casting 2 votes costs 4 voice credits. 3 votes costs 9, etc. If a voter cared only about the Albemarle County Sheriff's election, they may cast 20 votes for their preferred candidate, but would not be allowed to vote in any other elections during the election cycle. Theoretically, this allows individuals to reveal true preferences, particularly in situations where populists threaten to oppress a minority group.

Of course, it seems unlikely that this would ever be implemented on a large-scale level. But in the Colorado state legislature, quadratic voting was actually implemented after the 2018 election. With the Democratic party taking control of both houses of the legislature, the party needed to figure out what legislation to prioritize for funding. In order to reveal the true preferences of its legislators, they held a quadratic vote, hoping that the costs attached to each vote would force members to truly vote their preference, as opposed to simply voting for their own bills. They gave 100 voice credits to each member and allowed them to distribute their votes among the proposed bills as they saw fit. The winner was S.B. 85, the Equal Pay for Equal Work Act. As a result, the Democrats of Colorado put this bill on the top of their agenda, and in May of this year, Governor Jared Polis signed the bill into law. It will go in effect on January 1, 2021.

Applying Spatial Location to the Amphitheater Food Trucks

Often, I find myself on weekdays craving the “Got Dumplings” cart near the McIntire Amphitheater. However, the dumpling cart is not the only food truck that sets up there; the “Yum Yum Xpress” truck, the “El Tako Nako” truck, and “The Pie Guy” truck also set up at the same location. Like rival chicken restaurants gravitating toward each other to attract each other’s customers, these food trucks are arguably performing similar firm behavior. This is an application, albeit a very loose application, of Hotelling’s spatial location theory of firm behavior—I say “loose” since, among other reasons, the four food trucks do not supply identical goods. However, assuming some customers’ preferences permit them to choose between more than one food truck, the fact that all four food trucks are mobile provides some line of comparison, for competing, profit-maximizing firms with “wheels” are capable of moving to wherever their competitors are in order to feed off their customers. This is somewhat sensible as there have been times when I have walked to the Amphitheater determined to buy dumplings before deciding at the last minute to get quesadillas at the “El Tako Nako” truck.

(Image Source)

(Also, notice the wheels on the food trucks!)

Moreover, another departure from Hotelling’s model in this case is the distribution of college student foot traffic. The lane that the four food trucks occupy consistently garners higher volumes of foot traffic relative to most other alternative locations, especially during midday hours. This is because the Amphitheater serves as a mass intersection of multiple walking routes to and from academic buildings, so potential customer foot traffic is not uniformly distributed. Yet another wrinkle is the lack of the one-dimensional assumption that Hotelling’s and Downs’ models share—the food trucks choose to set up shop on a two-dimensional plane, that is each truck can move north, south, east, or west on a map. However, assuming UVA Dining has no overriding discretion over where the food trucks are placed, there are no interests pulling each food truck toward or away from the Amphitheater. In other words, like Hotelling’s model and unlike Downs’ model, there are no spatial limitations placed on each firm’s mobility, so firms can “leap” each other if they so wish. As a result, it makes sense for each food truck to simply go where foot traffic volume and opportunities to attract other carts’ customers are maximized. Though this example may fall short of providing an ideal example of Hotelling’s model such as the “hot dog stands at the beach” scenario, applying Hotelling’s and Downs’ models is nonetheless useful in understanding the possible implications of economic theory underpinning a regular on-Grounds occurrence.

Free Riding On A 5k

This past Sunday my sorority hosted our first philanthropy 5k which benefitted March of Dimes and prematurity awareness. We had been working hard all fall to sell race tickets to our friends, family, UVA students, and people in the Charlottesville community. Tickets were around $11 and included a T-shirt. The race started at 10:00am by Nameless fields and ended at the Rotunda. We had Bodos, coffee, and fruit set up on the lawn for runners when they finished the race. I arrived at Nameless to check in runners and distribute running bibs, then headed to the Rotunda to make sure I could cheer on runners as they crossed the finish line.

However, I saw a few people run through the finish line that did not have a running bib on. One of my friends remarked that they must have ran without registering or paying. One of the individuals actually heard her comment this and responded with “sorry.” I watched them help themselves to some Bodos, starving after their free and uncharitable run. I couldn’t believe that these runners free rode on a philanthropy 5k which benefits babies! I was a bit horrified. Of course, we couldn’t restrict them from running throughout Grounds on the sidewalks and streets, since they are public goods and UVA is a public university. But, races benefiting charity usually require registration fees or small donations so that contributors can feel altruistic. People have an opportunity to feel a “warm glow” knowing that they’re redistributing their income in a small but beneficial way to individuals who need the financial support (in this case, financially aiding families with premature babies). Instead, these individuals chose to free ride on our philanthropy race route as well as the snacks afterwards. I doubt that their marginal benefit of running the race was as large as the marginal benefit of runners who registered and paid, since they did not experience the "warm glow” altruistic feeling that other runners experienced.

Pickup Dilemma

When playing 21 basketball at the AFC or Dell Courts, I often find that myself and the other defender at any given time tend to sag off the offensive player to hunt for the rebound if he/she misses, which often leads to open shots and points for the offensive player. Although our lackluster defense could be attributed to laziness and subpar physical endurance, I like to believe that public choice offers a reason why we end up continually making this bad strategic decision on the court. This situation is essentially a prisoner’s dilemma.

            Some assumptions need to be made for this analysis to work. If Player A has the ball, defensive Players B and C are actors in a prisoner’s dilemma. In this analysis, any points for a player can be represented as negative points for the other players, who both experience the cost of the score.   

Let’s assume Player A is shooting a 2-point jump shot that goes in 33% of the time when undefended and 10% of the time when defended. Therefore, an undefended shot for Player A will grant them an average of .67 points, and -.67 points for both Players B and C. A defended shot for Player A grants them an average of .2 points and -.2 points for Players B and C. Also, possession of the ball gives 1 point per possession for the average player. Therefore, a rebound is worth 1 point and -1 point for the non-rebounding players.

The Prisoner’s Dilemma looks like this:

B, C	B defends the shot	B sags off and hunts for the rebound
C defends the shot	-.2, -.2	.8, -1.2
C sags off and hunt for the rebound	-1.2, .8	-.67, -.67

            If Players B and C are fighting for the rebound on equal ground (either they both defended the shot or both sagged off to hunt for the rebound), the 50% rebound chance cancels out and grants them an additional 0 points. However, if Player B defends the shot and Player C sags off and hunts for the rebound, either Player A makes the defended shot or Player C definitely gets the rebound, which is the worst possible outcome for Player B (-1.2 average points). Therefore, both players are incentivized to sag off and hunt for the rebound to avoid this outcome, leading to a Pareto-Inefficient Equilibrium of -.67 points from the undefended Player A jump shot.

An enforcer would be necessary to compel the defenders to both defend the shot to achieve the Pareto-Efficient Equilibrium of -.2 points from a defended Player A jump shot. One enforcer could be trash talk from Player A: pickup basketball players love taunting “you shouldn’t have left me open!” when they make undefended shots, causing enough humiliation to incentivize Player B and Player C to make the Pareto-Efficient Move and both defend the shot.

The Business Roundtable and The Principle-Agent Problem

This fall, The Business Roundtable, a group of chief executive officers from major US corporations, reimagined the “purpose of a corporation” in a statement they issued on August 19^th.  The new statement abandons the traditional idea that corporations are primarily responsible for maximizing shareholder value, stating that corporations now should try to meet the needs of a broader range of stakeholders by “investing in employees, delivering value to customers, dealing ethically with suppliers, and supporting outside communities.”

When I first read this statement, I thought this was a great idea.  But, now thinking about the principle-agent problem, I feel differently.  When corporations are tasked only with maximizing shareholder value, it makes it clear to managers and employees that their goal should be to deliver a return for the owners of the company of which they are only the caretakers.  This creates a simple scorecard that can be used to make sure managers, the agents, are making decisions to meet the needs of the business’s owners, the principles, and not their own. Extending the role of corporations to include more stakeholders distracts managers from this scorecard and gives them more room to act in their own interests, increasing the potential for the principle-agent problem.  For big and complex corporations like those who signed the Business Roundtable’s new statement, asymmetric information means that the principle-agent problem is an even bigger issue than it would be for a smaller firm.  In the context of the principle-agent problem, I’m not so sure I think the new statement on the “purpose of a corporation” is a good idea.

If Everyone Picked Up a Piece of Trash

I was reading a New York Times piece answering frequently asked questions about climate change when I thought to myself about how many people, myself included, will pass trash on the sidewalk and just keep going.

Why don’t more people pick up trash on the street? It’s relatively easy to do, and you don’t even have to go out of your way – you’re likely to pass a trashcan wherever you’re headed. I thought maybe I could apply the Prisoner’s Dilemma theory to explain why someone wouldn’t.

If Person A and Person B both pick up the trash, they receive a payoff of 5 each. The world looks nicer and is cleaner because of their actions.

If one person picks up trash off the street, and the other one doesn’t, the person picking up the trash receives a payoff of 2, and the one who leaves the trash gets a payoff of 6. The reasoning here requires a bit of an assumption. The picker-upper receives a lower payoff because they are the one picking up trash in the world, but because they are doing so alone, there is still trash around. The picker-upper becomes frustrated despite his good action. The one who doesn’t pick up the trash benefits from seeing a partially cleaner world without having to do anything.

Finally, if neither person picks up the trash, they both receive a payoff of 3 because the world may not be as clean, but neither person is committing time to cleaning up the trash. Neither person loses anything from their inaction – except a damaged Earth.

Based on their payoffs, both players end up in the bottom-right square of 3,3 instead of the mutually superior square of 5,5. Litter laws sometimes prevent people from adding to trash on the street, but no one is at blame if they avoid picking up trash already in the environment. In order to get both Player A and Player B to pick up trash, some incentive would have to be made to force them to make a Pareto-optimal move to the top-left square.