What is the relevant cost of keeping a store open?

Macy's Fix for Department Store Woes: Fewer Stores
by: Suzanne Kapner
Aug 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: Macy's said it would close 100 stores, admitting that some locations were worth more as real estate than retail outlets as shoppers continue to spend more online and at discount chains.

CLASSROOM APPLICATION: Students can examine Macy's rationale for closing stores, the effect of the closings on Macy's share prices. They can also characterize the opportunity cost of locating Macy's in mall retail space.

QUESTIONS: 
1. (Advanced) What would Macy's announcement that the company is closing stores result in higher share prices? Why would the announcement result in higher share prices of competitors?

2. (Advanced) Does the following statement speak to the opportunity cost of locating Macy's department stores in retail spaces? Does the statement imply that the Macy's being closed are unprofitable in an accounting sense? "Most of these stores are underperformers or in weak locations" but the company also will close a few locations because "desirability as a redevelopment opportunity exceeds their value to us as a retail store," Macy's finance chief, Karen Hoguet, told analysts Thursday.

3. (Introductory) Why is Macy's closing stores? What is the effect of the opportunity to purchase clothes online on the demand for clothes sold at brick and mortar stores?

Reviewed By: James Dearden, Lehigh University

More moral hazard in health care

Big Driver of Medicare Spending: Doctors Doing More Tests in Their Offices

by: Christopher Weaver and Coulter Jones
Aug 10, 2016
Click here to view the full article on WSJ.com

TOPICS: Health Economics, Moral Hazard

SUMMARY: New medical devices allow doctors to test patients themselves, leading to fast-growing Medicare payouts, according to the latest data.

CLASSROOM APPLICATION: Instructors can use the article as a case of moral hazard with hidden information. One issue to analyze is whether the financial incentives offered by Medicare cause excessive use in the sense of economic efficiency of medical treatments.

QUESTIONS: 
1. (Advanced) Define moral hazard. What is moral hazard with hidden information? Would a physician profiting from ordering medical tests for patients create an environment of moral hazard with hidden information?

2. (Introductory) Does the article offer anecdotal evidence that changes in Medicare sets up payments for new services causes inefficiently excessive use of the services?

3. (Advanced) Does a physician's exceptional use of a medical test or treatment in which the physician owns the necessary equipment indicate that the physician is responding to financial incentives? What other factors could explain the physician's exceptional use? How could economists determine whether the financial incentives motivate the physician?

Reviewed By: James Dearden, Lehigh University

Limitations of the Rational Actor Paradigm?

https://www.washingtonpost.com/news/wonk/wp/2016/03/15/why-we-should-give-up-trying-to-make-people-less-sexist/ dicusses how biases exist and how the difficulty in removing them. It talks about problems and solutions when making employment decisions and during negotiations.

What determines salaries?

Why There is No Science in Your Salary
by: Lauren Weber
Aug 03, 2016
Click here to view the full article on WSJ.com

TOPICS: Labor Economics

SUMMARY: An improving labor market and fair-pay laws are prompting companies to rethink the way they set salaries and, in some cases, implement a formal compensation structure or philosophy to guide their decisions. Related article 1: The ad hoc process of making salary decisions based on factors like a candidate's competing offer or the budget handed down by a distant finance team is looking less tenable to a lot of human-resources executives. Related article 2: Questions about pay equity may be moving into the boardroom. Among nonemployee corporate directors, women and minorities make less than their nondiverse counterparts, according to latest research.

CLASSROOM APPLICATION: Instructors can use the articles to introduce important practical issues in salary determination, paying particular attention to pay equity. One point is that pay is determined as a function of job and market data and managerial discretion. Pay inequities can creep into salary determination mostly through the use of managerial discretion.

QUESTIONS: 
1. (Advanced) How should prior salaries be used in determining salaries of new employees?

2. (Introductory) Why did female hires at Google in 2015 receive a 30% bigger raise over their prior salary than male new hires?

3. (Advanced) Should employers use data from the labor market when setting salaries? Should employers respond to offers made by other firms to attract star employees?

4. (Advanced) Is setting salaries an art or a science? What does it mean for an economic process to be an art?

Reviewed By: James Dearden, Lehigh University

RELATED ARTICLES: 
What is the Best Way to Pay Workers?
by Lauren Weber
Aug 03, 2016
Page: B6

Pay Inequality Poses a Concern in Boardrooms, Too
by Rachel Feintzeig
Aug 03, 2016
Page: B6

An example of backward integration

Easily Integrate These Wall Street Journal Articles in Your Class

advertisement Special Student Rates! Your students are eligible for the lowest rates - 75% off! They'll receive full digital access on their laptops, smartphones and tablets, plus the print edition 6 days a week. They can subscribe at WSJ.com/studentoffer. Be sure to share this information with your students. THIS WEEK'S ARTICLES Google Profits Surge on Strong Ad Demand How Mobile Games Rake In Billions Telecoms Consider Fee Hikes, as Fierce Price War Plays Out Inside Verizon's Gamble on Digital Media Why There is No Science in Your Salary Google Profits Surge on Strong Ad Demand by: Jack Nicas Jul 29, 2016 Click here to view the full article on WSJ.com TOPICS: Advertising SUMMARY: Google parent Alphabet said quarterly profit soared 24%, the second internet giant in two days to report blockbuster earnings driven by consumers' rapid shift to mobile devices. CLASSROOM APPLICATION: Students can evaluate the effect of the rise in smartphones on Google's revenues from click ads. The increase in the use of smartphones has increased the demand for click ads, which in turn has increased Google's revenues from click ads. Instructors can emphasize the point that a new technology, smartphones, has increased the demand for a product, click advertising. QUESTIONS:  1. (Advanced) What is the effect of the rise of smartphones on internet use? What is the effect of the rise in internet use on click advertising? 2. (Introductory) Why are companies increasingly willing to advertise on smartphones? 3. (Advanced) Why has Google in particular benefited from the rise of smartphones? Reviewed By: James Dearden, Lehigh University How Mobile Games Rake In Billions by: Sarah E. Needleman Jul 29, 2016 Click here to view the full article on WSJ.com Click here to view the video on WSJ.com  TOPICS: Price Discrimination SUMMARY: Behind a pair of recent multibillion-dollar deals in the mobile videogame industry is an expertly crafted weapon: virtual goods sold inside apps for as little as 99 cents a pop. In-app purchases let players spend real money to bypass ads, acquire skills or grow powerful quickly. CLASSROOM APPLICATION: Students can evaluate the evolution of mechanisms within mobile videogames to increase the likelihood that players purchase in-game tools to improve the playing experience. One interesting class of mechanisms involves behavior-based price discrimination: "Data on players' behavior also are used to strategically tweak prices for virtual goods in real time." QUESTIONS:  1. (Introductory) Is the use of a countdown clock within a game a tool used by game developers to price discriminate? 2. (Advanced) What is "behavior-based price discrimination"? What are examples of behavior-based price discrimination noted in the article? 3. (Advanced) Evaluate the statement, "Developers have gotten savvier about giving players more free things to do to keep them hooked until they start spending." Does getting hooked on a game imply that the player's demand for continued and faster play is more price inelastic? Does the higher price inelasticity imply that the player is more willing to pay to play a game without imposed delays? Reviewed By: James Dearden, Lehigh University Telecoms Consider Fee Hikes, as Fierce Price War Plays Out by: Thomas Gryta Aug 01, 2006 Click here to view the full article on WSJ.com TOPICS: Competition, Pricing SUMMARY: Big U.S. wireless carriers have reported second-quarter results that suggest prices have stabilized, and some are even talking about possible increases. CLASSROOM APPLICATION: Students can evaluate factors that have causes wireless providers to contemplate price increases. In particular, students can examine whether the maturing of the wireless market leads firms to increase prices. In the analysis, if all subscribers of a particular plan offered by a firm, Verizon Wireless for example, pay the same price, then if Verizon lowers its price to attract new customers, it lowers its price for existing customers as well. Because the probability of attracting a customer that is new to the market could be greater than the probability of attracting a competitor's customer, Verizon may be more willing to lower its price to attract new customers. Therefore, as the number of new customers falls, the company may raise prices. QUESTIONS:  1. (Advanced) Why would wireless carriers set lower prices to attract new customers who have entered their market, and set higher prices in the competition to steal one another's customers? 2. (Advanced) In simple economic models with one product and one time period, does price equal revenue per unit sold? The article notes average revenue per user (per month). Why do wireless carriers use average revenue per user as a metric to measure their performance? Why do wireless carriers distinguish average revenue per user from plan prices? 3. (Introductory) Why would the coming new iPhone spark a fresh round of promotions? Reviewed By: James Dearden, Lehigh University Inside Verizon's Gamble on Digital Media  by: Ryan Knutson, Ben Fritz, and Mike Shields Aug 02, 2016 Click here to view the full article on WSJ.com TOPICS: Mergers, Vertical Integration SUMMARY: Verizon's purchase of Yahoo is the latest move by the telecom to expand into Hollywood and Silicon Valley. The plan is to own and distribute online content and use data collected from mobile phones to target advertising to tens of millions of users. CLASSROOM APPLICATION: Students can examine Verizon's rationale in acquiring Yahoo, and instructors can use this case as an example of vertical integration. QUESTIONS:  1. (Advanced) What is "vertical integration"? Is Verizon's acquisition of Yahoo an example of vertical integration? Is Verizon's move into online media an example of vertical integration? 2. (Advanced) How would Verizon generate revenue from distributing online content? 3. (Introductory) What is the effect of the increased competition for Hollywood content on the price of the content?

Google profits from switch to mobile devices

Google Profits Surge on Strong Ad Demand
by: Jack Nicas
Jul 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Advertising

SUMMARY: Google parent Alphabet said quarterly profit soared 24%, the second internet giant in two days to report blockbuster earnings driven by consumers' rapid shift to mobile devices.

CLASSROOM APPLICATION: Students can evaluate the effect of the rise in smartphones on Google's revenues from click ads. The increase in the use of smartphones has increased the demand for click ads, which in turn has increased Google's revenues from click ads. Instructors can emphasize the point that a new technology, smartphones, has increased the demand for a product, click advertising.

QUESTIONS: 
1. (Advanced) What is the effect of the rise of smartphones on internet use? What is the effect of the rise in internet use on click advertising?

2. (Introductory) Why are companies increasingly willing to advertise on smartphones?

3. (Advanced) Why has Google in particular benefited from the rise of smartphones?

Price discrimination in the mobile game industry

How Mobile Games Rake In Billions
by: Sarah E. Needleman
Jul 29, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Price Discrimination

SUMMARY: Behind a pair of recent multibillion-dollar deals in the mobile videogame industry is an expertly crafted weapon: virtual goods sold inside apps for as little as 99 cents a pop. In-app purchases let players spend real money to bypass ads, acquire skills or grow powerful quickly.

CLASSROOM APPLICATION: Students can evaluate the evolution of mechanisms within mobile videogames to increase the likelihood that players purchase in-game tools to improve the playing experience. One interesting class of mechanisms involves behavior-based price discrimination: "Data on players' behavior also are used to strategically tweak prices for virtual goods in real time."

QUESTIONS: 
1. (Introductory) Is the use of a countdown clock within a game a tool used by game developers to price discriminate?

2. (Advanced) What is "behavior-based price discrimination"? What are examples of behavior-based price discrimination noted in the article?

3. (Advanced) Evaluate the statement, "Developers have gotten savvier about giving players more free things to do to keep them hooked until they start spending." Does getting hooked on a game imply that the player's demand for continued and faster play is more price inelastic? Does the higher price inelasticity imply that the player is more willing to pay to play a game without imposed delays?

Reviewed By: James Dearden, Lehigh University