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

All or Nothing

Robert Griffin III and the Sunk Cost Fallacy

This opinion from the NYT argues that the Redskins may be falling prey to the sunk cost fallacy. 

Occupational Licensing

This opinion in the WSJ argues that one barrier to upward mobility is overly restrictive occupational licensing requirements imposed by state and local governments. The writer thinks that governments should eliminate requirements when its cost to benefit ratio is greater than one.  

SUMMARY: Cost-benefit analysis and 'lookbacks' could lift the unnecessary burdens of occupational licensing. "A widely overlooked part of Paul Ryan's antipoverty plan draws attention to the problem of occupational licensing, and it rightly calls on states and local governments "to begin to dismantle these barriers to upward mobility." But how? The answer, we think, lies in the adoption of a rigorous cost-benefit test. That test would impose new discipline on what state and local governments do-and it would eliminate unjustified barriers to job creation and economic growth."

CLASSROOM APPLICATION: Students can examine the effect of state and local regulations on entry, competition, prices, and economic efficiency of industries. Students can examine occupational licensing for example.

QUESTIONS: 
1. What are "regulatory lookbacks"?

2.When considering whether to implement new regulations, is it important for legislators and regulators to examine the economic consequences of doing so? What are the relevant economic consequences? Why is cost-benefit analysis an appropriate methodology for evaluating government regulations?

3. Who suffers the most from occupational licensing requirements?

Reviewed By: James Dearden, Lehigh University

4. Who benefits the most from occupational licensing requirements?

Wednesday, January 30, 2013

Regulations and Rent Seeking

CNNMoney posted this article. It is a nice list of regulations that prevent entry and competition. It could be a nice way to introduce a discussion of the government's role in regulating market inefficiencies and the danger that government regulation becomes rent seeking. The example about taxicabs could also spur discussion about the entry and exit decisions and what determines the price of medallions.

Monday, January 21, 2013

Ice Cream Wars

Clip here for an NPR story on Ice Cream Trucks in Chicago. It touches on vertical relationships, rent seeking, incremental analysis, and collusion.

Friday, January 18, 2013

What can we learn about pricing from Lucy Ricardo?

Click here to view a clip from I Love Lucy on how (not) to set price. It is a good introduction for Bertrand pricing in an undifferentiated duopoly, strategy, whether a marginal sale is profitable, and the shut-down decision.

The efficiency of social pressure

This article from the WSJ discusses the importance of social pressure in motivating behavior that reduces energy consumption. It points out that the bounded rationality of consumers makes the cost-benefit analysis difficult; they often fail to calculate accurately the future cost savings. It states that social pressure matters and can be an effective way to create intrinsic rewards for "good" behavior. Financial incentives also matter: the article has a good example of how customers responded to a message telling them that they would get lower rates if they shifted consumption to off-peak hours and "Plenty of shifting happened." 

The article asks, "Why would a landlord spend money on energy improvements if the benefit flows only to the renter paying the utility bill?" Could the landlord capture the saving accruing to the renter when the renter's utility bills decrease? If so, how?