“Why are our obsessions never the things we’re best at?”

By obsessing over that which we aren’t any good at, are we operating inside our individual PPFs? Or is our obsession beneficial in that it promotes an increase in productivity in that activity?
I know, the relevance to economics appears a bit far-fetched… But the article is brilliant!

http://m.bbc.com/news/magazine-29657506?print=true

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Nobel prize for Economics 2014 – Market Power and Regulation

Jean Tirole became the second Frenchman to receive a Nobel Prize this year, winning the Economic Sciences award for his research into curtailing the power of oligopolies.

Jean Tirole Awarded Nobel Prize in Economic Science – Video

Traditional economic theory does not deal with the case of the oligopoly, i.e. many markets dominated by a few firms that all influence prices, volumes and quality, instead it presupposes a single monopoly or what is known as perfect competition. Also, the regulatory authority lacks information about the firms’ costs and the quality of the goods and services they deliver. thus providing regulated firms with a natural advantage. Tirole has researched into the means of dealing with these issues regarding this market system.

http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/2014/popular-economicsciences2014.pdf

Read/Skim through this summary of Tirole’s work and then read FT’s Jean Tirole: 5 things to know about the Nobel Prize winner’s work… Maybe try and answer some of the questions yourself before reading the answers…

http://www.ft.com/cms/s/0/01bc3910-52ca-11e4-a236-00144feab7de.html

What were Mr Tirole’s most important contributions?

What were his crucial findings on regulating oligopolies?

What about competition policy?

Within what context has Mr Tirole won the prize?

Would you buy an Huawei?

The potential answers to the above question, once explained are revealing.  Why would you prefer an Apple or Samsung phone or are you more cost sensitive?  Huawei has successfully broken into the oligopolist smart phone market based on a low price strategy.  But it is not just phones that Huawei produce: a third of the population of the world indirectly use an Huawei product.  But just as a strong brand acts as a barrier to entry, can a country ‘brand’ prevent a company developing a strong brand identity? China has long been associated with low cost and poor quality products.  If money was not an issue would you really buy a Huawei phone? Innovation in processes and products can lead to significant average cost reductions leading to increased competitiveness and market share.  Chinese firms are now the third largest owners of patents behind the US and Japan.  Has China unleashed ‘the gales of creative destruction’?  Below is a podcast from the BBC’s Business Daily that explores the change occurring in China with its focus on Huawei.  Plenty of chances to practise your chains of analysis and diagrams.

China’s Unproductive Production

Economic growth is the increase in the total production of goods and services within an economy (real GDP), and China seems to know all about it. In 2013, it produced “$9.5 trillion worth of goods and services, nearly 3 times more than that of 2007”. But how significant is this growth?

Growth in output can occur in two forms: through an increase in the total inputs, and/or an increase in productivity. When studying economic growth, it is important to consider this; therefore, we use the Total Factor Productivity (TFP) to measure the efficiency with which labor and capital are being employed. If a nation is simply increasing its output by increasing the total number of labor and capital it employs, it may not necessarily suggest economically efficient growth i.e the workers and machines are not being fully utilized. “As long as the amount by which labor and capital grow outpaces any fall in productivity, GDP will still increase.”

This type of growth cannot survive in the long run, especially in a world where factors of production are becoming more scare. For example, would countries during the mid-twentieth century really have cared about how efficiently they were using oil after major deposits had been discovered in the Middle East? Probably not, since they would be aiming to extract as much oil as possible versus efficiently employing the oil. However, today, firms are trying to utilize oil (and its products) more efficiently due to its increasing scarcity. Essentially, “in the long run, improving the productivity with which they (factors of production) are used is the magic ingredient for any economy, the only path to sustainable growth.” Moreover, this growth may not necessarily reflect an increase in living standards. If GDP grows at the same rate as employment, real wage rates (or income per capita) may not necessarily also grow.

Hence the concerns about China. A series of estimates published this year have all suggested that productivity is flagging. This may be even more detrimental to China’s future, as it could be signalling an end to it’s “catching up” rates of growth. “Catching up” is a phenomenon which allows countries like China to grow by 10% oer annum whilst the UK barely manages 1%. By transferring workers from low productivity sectors (eg. agriculture) to higher productivity manufacturing and service sectors, economic growth will substantially increase as the value of goods being produced per worker is greater. If a worker can produce $500 per year in output as a farmer, but $1000 working in a factory, then the act of transferring that worker from agriculture to industry will raise the growth of the economy tremendously. If China is entering a stage in its economic life where productivity cannot increase by transferring workers anymore, it could finally expose inefficiencies within the economy.

Take a look at the Economist’s article on China’s Unproductive Production. Ask yourself these questions:

Why is falling productivity harmful to China’s economy?

What limitations are there to measuring total factor productivity (TFP)?

How does the “catching up” phenomenon distort the TFP figures, if at all? What could this suggest will happen to China’s economy in the future?

What can China do to improve its productivity?

-Krish

Coal is not the only monopoly India wants to break up…

Apparently, a lot is being split or broken up… As Mashiat posted earlier, the state run monopoly Coal India is being broken up, but that is not the only vital industry being broken up, – The Indian government, acting on Air Force demands, has offered to spend $12 billion to encourage private firms to establish an aircraft manufacturing facility — a move that would break Hindustan Aeronautics Limited’s (HAL) monopoly on aircraft manufacturing.

The reason for this potential break are years of delays on several essential projects, possibly due to the diversification. HAL is involved in the design of fighters, transports, trainers and helicopters, avionics and engines, which meant a decline in focus, decrease in efficiency and a delay in projects.

Many experts have expressed their views on the issue, eluding to various concepts we have discussed in class. See if you can figure out what these concepts and terms are…


“It is absolutely essential to set up an additional military aircraft facility here, as HAL is overloaded for the next 10 years and has become too unwieldy,” defense acquisition expert Miral Suman said.

Vivek Rae, former director general (acquisition) in the MoD, said, “India sorely needs aircraft manufacturing capability in the private sector. We cannot afford to put all eggs in the HAL basket.”

Subhash Bhojwani, retired Air Force air marshal, agreed an additional manufacturing facility is needed, but said HAL should be made more commercial.

“HAL is into the design and contemporary manufacture of fighters, transports, trainers and helicopters, as well as avionics and engines,” he said. “It is possibly the only company in the world to be so diversified. However, while this may sound good in a book of world records, it isn’t good as a commercial model.”

Defense analyst Amit Cowshish, a retired Defence Ministry bureaucrat, said the objective should be “not to create an entity that could compete with HAL but to have additional capability in India to manufacture aircraft so that the requirement, both of the military and civil sectors, could be met in a more cost-effective manner and in shorter time frames. Of course, competition would help in improving HAL’s efficiency.”

Sujith Haridas, deputy director general of India’s industry lobbying agency, the Confederation of Indian Industry, said, “It is very much desired to have an additional manufacturing facility, but one should not ignore that it takes several decades of consistent investment and efforts to create a mammoth system integrator like HAL.”

The continued break up of Indian monopolies

 

Breaking up for good

Mining for coal? Not any more. The Indian government  is currently looking to abolish the state run monopoly Coal India. Now this action is not just to increase the competition within the coal industry,  but to also ensure that the Indian society , especially in the rural areas has access to coal derived power. The major causes for this disintegration are the fact that Coal India has to import expensive coal due to the scarcity of local coal,the coal mines are leased to companies in the cement and steel industries and that the government has to subsidise kerosene to areas with no power. By breaking up Coal India, the government is planning to reduce its trade deficit, increase innovation and efficiency amongst firms, lower power prices to customers, lower price inflation and ensure accessible reliable power  to remote rural areas. Although it seems like this is a win win situation , let us remind ourselves that by breaking up a natural monopoly, the firms will face very high start up costs that can lead them  becoming  insolvent. Moreover, there seems to be a lot of corruption regarding the accessibility of power and the government has to take careful measures to ensure that rural power becomes a reality. Check out this interesting article and try to come up with your own evaluations.

The break up of Indian Coal

-Mashiat

HP Splitting into two

The illustrious Hewlett-Packard technology firm is going to split into two different companies – one specialized in its computer and printer manufacture, and the other producing its corporate hardware and services. However, is this split completely advantageous? Although the split is aimed at improving HP’s adaptability to the market, the company will lose significant economies of scale and scope. Moreover, the loss of thousands of jobs threatens a major social cost in an economy which seems to have begun recuperating from the 2008 recession.

See if you can identify the different economies of scales and scopes lost, and any other costs. Try and come up with your own evaluation on whether HP should split.

Hewlett-Packard to split into to companies

HP to split

Bigger isn’t better (including other company’s who have split)

– Krish