Transcript Slides - Amine Ouazad

Prof. Amine Ouazad
LLM in International Business Law, March 28 2014
Microeconomics/Industry Analysis
Session #1: Competitive Markets
About Me
• Has been teaching core economics in the INSEAD MBA
program since 2008, 170+ students; and has about 30 PhD
students in Management.
• Research in microeconomics & finance.
• Recent work featured in the press: Washington Post,
France 24, Guardian, Daily Telegraph.
• Works/teaches in US, UK, France, Singapore.
This Workshop
Central unifying theme
How does market competition affect prices?
Why should you care?
•As a consumer/investor, understand price dynamics.
•As a lawyer, understand the economics impacts of limited
competition.
•Analysis of one of the largest antitrust cases in US history.
➥Forecast prices on a commodity market. (Session #1)
➥Detect & Deter collusion on that market. (Session #2)
Outline for this Session
1. Commodity Markets:
Demand and Supply Analysis
2. Minimum wage
3. Selling less to earn more
1. Commodity Markets:
Demand and Supply
April 8, 2012
Aluminium buckles under
weight of supply pressure
By Jack Farchy in London
Daniel Brebner, metals analyst at
Deutsche Bank, estimates that
the operating profit margin for a
marginal aluminium producer has
been 14 per cent over the past
“I don’t like aluminium.”
decade, compared with 43 per
That may seem an unlikely
cent for copper.
statement from the world’s sixthlargest producer of the metal. But “While copper has been
Marius Kloppers, chief executive exceptionally profitable,
aluminium has had an
of BHP Billiton, is putting his
money where his mouth is. BHP unremarkable performance
will from now on run its aluminium during one of the greatest
commodity boom periods in
division for cash, he announced
history in terms of demand,” he
in February.
says. “This is a condemnation of
After a decade of sub-par
the state of the industry that it
profitability, is it still worth
can’t generate super-normal
investing in aluminium?
returns in an environment of
super-normal demand.”
If Mr Kloppers is correct, the
future is bleaker still for producers
of the metal used in the
manufacture of everything from
drinks cans to cars and aircraft.
The argument underpinning his
pessimism is simple: years of
overcapacity have kept prices
subdued and led to a huge buildup of inventories – now estimated
at more than 12m tonnes, or
enough to build 180,000 Boeing
747s. And with the price of
energy, which accounts for as
much as half of aluminium
production costs, rising rapidly,
industry-wide profitability is flat at
best.
The most popular response
among rival aluminium executives
is to point to China which, as well
as being the world’s largest
aluminium consumer, is also the
top producer.
“If you are the average Chinese
producer you should probably
quit this business right now or a
few months ago,” says Oleg
Mukhamedshin, head of
corporate development at Rusal,
predicting that many Chinese
aluminium smelters will be forced
to shut down in the next few
months, pushing up global prices.
Built by 2013 students,
Used by commodity analysts
(ktpy)
Aluminum prices 2011-2013
Source: London Metal Exchange
Homogeneous good?
Commodity Market Analysis
Price ($/ton)
Consumer
surplus
“We are positioned
in the lower part of
the supply curve”
Cynthia Caroll
Supply curve
P*
Firms’ profit
$2000
Demand curve
Quantity (tons)
Q*
40Mt
2013
Demand Shock
Price ($/lb)
“But the company added that it expected a slight
pick-up in consumption in the fourth quarter thanks
to a recovery in China’s economic growth and
improvement in key sectors such as the US car
industry.”
FT article on Rusal
Supply curve
- Aluminum producers
P’
P*
Demand curve
Quantity (lb)
Q* Q’
Demand Shocks
In Business…
•“Demand for aluminum has started falling as construction
growth slows.” FT Oct 26, 2011.
•McDonald’s same-store sales increased by 2.6% year-to-year
in 2009.
… and in other aspects of life
•Demand for marijuana increased 8% in US states that
decriminalized most posession offenses.
•Demand for prostitution services increases around 4th July.
Supply Shock
Price ($/lb)
Supply curve
- Lysine producers
P*
P’
Demand curve
- Food producers
Quantity (lb)
Q* Q’
Supply Shocks are Everywhere
In business…
•Discovery of substantial new oil production capacity.
•Geopolitical events in the Middle East limiting supply of oil.
And in other aspects of life…
•Increases in drug punishment for dealers since 1985 rose the
price of cocaïne by 5 to 15% in the US.
•The supply of prostitution increases in response to the demand
for prostitution services (4th July).
2. Minimum wage
Scrap the Minimum Wage
Forbes Magazine
Art Carden
Raising hourly wages seemed like
a good idea, but it has only
destroyed jobs.
• “Do you want to get serious about expanding employment?
Then it's time to realize that spending on jobs programs is
the wrong approach. It would be much better to eliminate
hurdles for people who want to find work. One of those
hurdles is the minimum wage.”
His predictions:
1. “Minimum wages create unemployment. At above market
prices people want to supply more labor than employers
wish to hire.”
2. “Repealing the minimum wage would would create job
opportunities.”
September 2010 edition
Really??
The Forbes’ columnist says this
Hourly wage ($)
Supply curve
- Unskilled workers
Minimum wage
w*
This is the
wage that
would
prevail
without a
minimum
wage law.
Demand curve
- Employers
q*
Number of
hours worked
Supply
of work
Hours worked
Forbes’ Carden says:
1.“Minimum wages create unemployment. At above
market prices people want to supply more labor than
employers wish to hire.”
In other words : supply of work > demand.
Should we believe the Forbes’ columnist ??
Alan Krueger
Chairman of the Council of Economic Advisers
Since September 2011
& Prof. of Economics at Princeton
Myth and Measurement:
The New Economics of the Minimum Wage.
His statements:
1.“the minimum wage at levels observed
in the United States has had little or no
effect on employment.”
2. “increases in the minimum wage lead to
increases in pay, but no loss in jobs.”
How can this make sense??
“1992: New Jersey implements a
state-level minimum wage above
the Pennsylvania minimum wage.”
➥ “Employment did not change.”
What about a very steep demand curve?
Hourly wage
Supply curve
- Unskilled workers
Alan Krueger says:
2.“increases in the
minimum wage lead to
increases in pay, but
no loss in jobs.”
Minimum
wage
w*
Demand curve
- Employers
Why a very steep demand
curve?
Hours
q*
Employers willing to hire
workers at hourly wages far
above $5.
Hours
worked
with
minimum
wage. Little
change!
This is the
level of
employment
without a
minimum
wage law.
Main Lessons from Minimum Wage Example
Commodity markets are everywhere
A minimum wage above the market wage may lead to lower employment
and higher unemployment.
But if the demand curve for unskilled work is very steep,
the impact on employment is small, and it raises the wages of employed workers
For thought: Does this mean we should have very high minimum wages??
3. Selling less to Earn More
Earning more by selling less?
Price ($/ton)
Consumer
surplus
Supply curve
In a commodity market,
suppliers do not control the
price… but they could gain
by selling less at a higher
price.
Pc
P*
Firms’ profit
Demand curve
Quantity (ton)
Qc
Q*
Earning more by selling less? Inelastic Demand
Price ($/ton)
Consumer
surplus
Supply curve
In a commodity market,
suppliers do not control the
price… but they could gain
by selling less at a higher
price… especially if demand
is very steep.
Pc
P*
Firms’ profit
Demand curve
Quantity (ton)
Q*
Elastic and Inelastic Products
In commodity or commoditized markets…
“Heroin demand is inelastic”
Steve Levitt
“We think gold and platinum are an
outright buy at present levels as both
metals have very low supply elasticity
and are key beneficiaries of loose
monetary policy” UBS Gold Outlook
2013
…and in other markets.
“We’ve done price
elasticity studies”
Jeff Bezos
-- HBR Interview,
September 2012
"We feel quite confident with
the response we've seen to our
pricing actions," Rosenfeld
said. Price "elasticity has been
essentially where we expected
it to be.”
-- Irene Rosenfeld, Kraft CEO
(now Chairman), 2011
Take Aways
•On a commodity market, use demand and supply analysis to forecast prices.
• Upward demand shocks lead to higher prices and to higher production.
• Upward supply shocks lead to lower prices and to higher production.
•Commodity markets are everywhere: unskilled work, drugs, food.
•Firms may have an incentive to agree on a higher price,
selling less to earn more…
➥ This is particularly true when demand is inelastic. An inelastic demand is a
demand that does not change much when the price increases.
Example: drugs.
•Setting a higher price is hard on a commodity market.
Pork food additive: Lysine
In a commodity market,
suppliers do not control the
price… but they could gain
by selling less at a higher
price.