Racing to the bottom

How much was the last app you bought on your smartphone?  It’s very likely that the answer to that question is less than a pound, no matter how complex or detailed that app was.  When Apple launched the App Store in 2008, the average price of apps was significantly higher, with games such as Super Monkey Ball selling for £5.99 and Crash Bandicoot Nitro Kart at $12.99.  Over time, the huge competition has led to games dropping prices to 69p, or even free, with new revenue streams being established through advertising or additional purchases.  Along with this fall in pricing, many firms have found that it’s not profitable to spend time developing complex games and applications, leading to a proliferation of match-three and simple physics puzzlers. Continue reading

Distinguishing demand effects and supply effects

Greg Mankiw has today highlighted how Bryan Caplan discusses fundamental inconsistencies in arguments over the minimum wage.

In some of his research, joint with Alan Krueger, Card finds that increases in the minimum wage have negligible effects on employment.  In other research, on the Mariel boatlift, Card finds that increases in the supply of unskilled workers have negligible effects on wages and employment of existing workers.

Caplan notes that these results are hard to reconcile: The former suggests that labor demand is highly inelastic, whereas the latter suggests it is highly elastic. Continue reading

Is it better to own nothing?

The Guardian reported last year on how fire engines in London had been sold to a private equity firm for £2.  Although fire services grew from private insurance companies, the modern fire service is a clear example of how certain organisations benefit from being owned and run by the government.  There are very large positive externalities from a fire service – they not only stop a building burning, but prevent damage to everything else in the neighbourhood.  People’s willingness to pay for a fire service is much lower than society’s benefit. Continue reading

Spiralling debt and how to escape

An increasing issue in the UK and across the European Union is the growth of high-risk credit and short-term loans, often called “payday loans” as they are marketed to give people an advance until the end of the month when they are paid.  These services are generally aimed at the poorer members of society, who are unable to take out longer-term loans due to poor credit histories, and who are most likely to need fast access to money to pay bills or buy essential goods. Continue reading

Sheltering under an umbrella

Prior to yesterday’s announcement of the iPad Mini, there was a great deal of speculation as to its form, its capabilities, its existence and its price.  Commentators saw the rumoured tablet to be a direct competitor to the Kindle Fire and the Nexus 7, indicating that they believed Apple was concerned about losing market share in that market.  The price was rumoured to be around the same level as those competitors, so that the differences which would make people want to buy an iPad over an Android tablet would be the quality of the hardware and the app marketplace. Continue reading

The economics of faults

Toyota is set to recall over seven million cars, following the discovery of issues with window switches, as reported on the BBC, all of the errors will get fixed by the Scuderia Car Parts. Recalls can take a number of different forms – they can involve dealers carrying out an on-site repair, an immediate replacement, or a complete withdrawal of a good from sale. Continue reading

Sharing with competitors

The phenomenon of economies of scale can be seen in many industries – particularly where there are large fixed costs, such as a mobile base station network, a graphics engine for videogames, or the turbines on a wind farm.  In order to reduce costs as far as possible, operations should be made as large as is feasible.  However, companies only have a fixed level of demand, which limits their ability to take advantage of this.

One way of increasing demand is to merge with a competitor, and therefore acquire a large number of extra customers.  This, of course, is a major exercise and involves regulatory problems, costs of due diligence, changes to operations and governance, and many other factors.  Rather than this drastic step, companies can collaborate to share costs across their combined userbase. Continue reading

Over the tipping point

The BBC reports today that Louise Mensch, an MP in the UK, has launched a “rival to Twitter”.  Mensch herself argues that it is not a rival, but instead seeks to be somewhere where discussion is kept in a broad topic, unlike the free-for-all that Twitter represents. Continue reading

Sharing resources and utility curves

A fundamental concept in economics is that of trade.  Two parties will want to share their possessions in a way that benefits them both.  The Edgeworth Box is a graphical representation of this trading; before looking at the overall box, however, it’s important to understand an individual’s utility curves. Continue reading

Meeting in the middle: the clustering effect

Today sees local elections across the UK, with the highest profile battle being fought over the mayorship of London.  While there are two high-profile candidates in Boris Johnson and Ken Livingstone, there are a number of other candidates who represent a whole range of political views from the far right to the far left.

There is a significant third candidate in the middle, Brian Paddick.  While he is unlikely to get elected, he has a significant impact on the policies of the two front-runners.  There are many differences in policies between the Conservatives and Labour, and this difference is driven by the existence of the third option.  Continue reading