The Times seems to specialize in stories that use lots of economics but still miss the important points. Two examples from today: Stories about Uber, and about the dispute between Amazon and Hachette.
UBER: The article describes Uber’s using price changes to measure elasticity of demand, and more or less gets it right. But it goes on to discuss the competition between Uber and Lyft with taxi companies. However, what is not mentioned is that taxis are greatly handicapped in this fight because of their own sins. They have lobbied for price fixing and supply limitation, thus creating the very market that Uber is entering. It is quite plausible that if the taxi market were a free entry free price market there would be no demand for firms such as Uber. Interesting to see how Uber does in cities such as Washington D.C. with relatively free entry into the taxi market, compared with New York city with highly restrictive rules.
The article also misses another point. It discusses an agreement recently signed by Uber that limits “surge” pricing in times of disasters. But what is not mentioned is the effect of this restriction in reducing supply and increasing demand during the very times when transportation services are most needed. While we economists have won some public relations battles, we have not weaned the public away from its hatred of “price gouging.”
AMAZON: The story about the Amazon-Hachette dispute is interesting. But again, some of the key economics is missing.
Traditional publishers serve two purposes: They organize the physical publishing of books, and they certify quality. Neither of these functions is needed any more an a world of ebooks. For ebooks, there is no need of physical publishing, and reader comments are a good substitute for quality certification, at least for fiction. Amazon provides other services to help inform consumers about books that might be of interest.
Moreover, authors should have a natural affinity with ebook publishers. For physical books, there is a conflict between authors and publishers. Authors are paid a royalty based on dollar volume, so they want a price that maximizes revenue. All of the author’s costs are fixed costs. Publishers have the marginal cost of actually printing and distributing the book, so their goal is to maximize profit, revenue minus cost. When costs are positive, the profit maximizing price (MR=MC) is greater than the revenue maximizing price (MR=0), so authors traditionally think that publishers have overpriced their books. This conflict does not exist for ebooks (marginal cost is zero) so Amazon and authors both want the revenue maximizing price. As a result, I predict that in the long term Amazon will win because it will have a comparative advantage in dealing with authors.
