Daniel Ludwinski

My one time colleague (Evan Lawrence-Hurt) posted the following:

In Colombia I was able to purchase an iPhone SIM card for 7 pesos (~$5), got great reception and data that lasted a week with no contract and I could refill it whenever and wherever I wanted. Here in the U.S. I pay Verizon >$100 per month for the same service on a 2 year contract. Discuss.

Since I’m not teaching this semester, I’ve really missed the fun, illustrative graphs that can get at the heart of a question. First, the set of disclaimers. I have no special expertise in the complicated field of cell phones. This is a gross simplification, and probably wrong in a bunch of ways. I did not spend the time to actually look at data points such as regulations, market concentration, comparative consumer buying power, etc.

In the cell phone market, the biggest cost are no doubt fixed. The fixed cost of laying down physical communication lines, building towers, buying/leasing wireless spectrum cost a lot more than the marginal, per-user/megabyte cost, which in small quantities is near zero. Also, irrespective of the regulation regime, it is very difficult to have a very competitive market. Cellular providers are close to what is called a natural monopoly. This means that once fixed cost are covered, the price that is charged is determined mainly by two things: the composition of the demand curve and the ability of the telecom companies to price discriminate.

So, if we 1) assume that the market is similar to a simple monopoly (and ignore price discrimination), 2) realize that because American’s have more disposable income they have a higher willingness to pay, we can draw the simple monopoly set up for each country:

I apologize for the crudeness of these charts and this analysis, but I think it actually gets pretty far. We  start with the two demand curves. The higher disposable income in the US is reflected by the higher demand curve (willing to pay more at any quantity). We then put in the marginal cost curves, which for simplicity I’ve kept low, constant and the same across the two countries. The marginal revenue curve is the extra revenue the monopolist sees by lowering the price and selling another plan. Because the monopolists are not price discriminating in this example, it is a simple downward sloping curve.

A profit maximizing monopolist will sell at the point where MR=MC. While the quantity that this happens at is not very different across the countries (looks to be near 40% in this totally made up example), due to the different in the demand curves the price that reaches the profit maximizing quantity is actually very different.

So what this very simple analysis tells us, is ignoring any differences in regulations, market structure, population density, etc, a lot of the variation in prices could potentially be explained simply by the differences in consumer disposable income across countries.

My time constraints mean this needs to be brief, but I think one of the strongest arguments for a strong social safety net comes directly from free-market economics. Let me explain.

In last night’s snoozer of a presidential foreign policy both candidates argued that they would be better able to project American jobs from foreign competition. Obama in particular pointed to tire tariffs on China as a major success. But these tariffs are an economic disaster that the American consumer is paying for (see http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/10/23/how-obamas-tire-tariffs-have-hurt-consumers/). A very conservative estimate says that each job has cost consumers nearly $100,000 a year.

There is no unified lobby for the American consumer. When we all take small hits, it gets ignored.

Instead of pursuing really bad economic trade policy that cost the American consumer loads of money to save a couple of jobs, we would be much better off pursuing free trade, helping the world specialize and grow. By lowering the cost of job loss, a strong social safety net can free us up to pursue good policies at a cheaper end cost to consumers. There is a true pareto improvement to be had here.

Sadly, this is a case of the all-to-often true: when the political parties agree, they usually are both wrong. George W pursued similar policies in the steal industry, with will documented massive cost to the American consumer and economy.

Yesterday, for the first time, I spent more than $50 to fill my tank of gas. I do not have a particularly big car (it’s a Subaru Legacy), but a combination of a very empty tank and more expensive gas than usual (was $0.13 cheaper this morning, burn!) caused my to set the record.

The president and Detroit recently agreed to raise the fuel economy standards. Eduardo Porter has a great piece in the New York Times demonstrating why this is a poor strategy. If we want less of something (gas usage) we need to make that more expensive (tax it).

in Britain, where gas and diesel are taxed at $3.95 a gallon, the American automaker Ford sells a compact Fiesta model that will go nearly 72 miles on a gallon. In the United States, where gas taxes average 49 cents, Ford’s Fiestas will carry you only 33 miles on a gallon of gas.

 

I’ve updated the charts below to include the results from the just completely London 2012 games.

This was a very good Olympics for the USA. Ignoring the boycotted games of 1984, and the barely attended games of 1904, this was the most Olympic gold metals the United States had ever brought home. This is significant achievement in an era where the global economy is (happily) starting to catch up. In 1999, the US hit a post-1970 peak of 28.4% of world GDP and by 2011 this had fallen steadily to a post-1970 low of 25.5% (post 1970 because the easiest data source, USDA, only went back that far). FYI, those 46 gold medals only represent 15% of the total 302 gold medals awarded, so maybe we’re punching below our weight in terms of GDP.

While much has been made of the achievements of the British team (which I do not want to diminish), their leap from 2004 to 2008 was actually more significant. Team GB went from 9 gold medals in Athens to 19 in Beijing – more than double. They added another 10 this year, for 19 total, but that was just over a 50% increase – substantial, but not as dramatic as four years ago.

After a lot of early disappointment, Russia actually improved their gold medal haul over Beijing. After a slight improvement in Beijing, Germany hit a new post-boycott  low.

China dropped off significantly from when they hosted, showing more evidence of a home-field advantage effect. NPR had an interesting piece discussing how this effect comes into play (thanks to my brother-in-law for pointing me to that). Ignoring last year’s bump, China’s trend line shows a pretty steady climb. This sets up a pretty good battle for supremacy in Rio four years from now. However, regardless of who is expected to win, I think we all will be rooting for NBC to broadcast the games live this time!

I put this chart together because after reading this BBC article I was interested in seeing the visual. Apart from the well known and discussed rise in China, and the fall in both Russia and Germany, what strikes me is the truly remark consistency of the US gold medal count. Aside from the 1996 Atlanta Olympics (with the home field advantage boost), since 1988 the US has received either 36 or 37 medals. Going back further, in 76 and 72 Team US had 34 and 33 medals respectively (I skipped 1984 and 1980 due to the boycotts).

And here are the actual numbers:

Notes: Germany includes both East and West. Russia includes the unified team for 1992.

UPDATE: I took a look at the full historical medal counts for the US. This consistency is not new! While there are obvious outliers – 1896 first olympics, 1904 the US was the only team in half the events, 1980/1984 boycotts (which I excluded in the trend) – it is extraordinary how much in the world has changed over the 112 years, yet Team USA pulls in about 36 golds in the summer games. Also, the outliers balance themselves out: average including them 36.58, average excluding them 35.41.