This short video tour of the Aalsmeer Flower Auction (the largest flower auction in the world) shows Dutch auctions in action. Descending prices are displayed to bidders on a giant clock, and the first bidder to place a bid wins the auction lot and pays the amount displayed on the clock when they placed the bid. This allows the Aalsmeer Flower Auction to process vast quantities of flowers very efficiently.
While more traditional auction websites, like Ebay, may be the most well-known, there are many smaller auction sites that use novel auction types in order to attract customers. This article from The Sydney Morning Herald discusses one such site which uses a bidding fee auction in which participants bid for seemingly drastically discounted goods. The catch? Every bid costs $1. Now, for the bidder, $1 per bid might seem like a small price to pay for the right to bid on a $32.66 return flight to Fiji, but each dollar adds up to a healthy return for the vendor.
Furthermore, unlike an Ebay auction, many less orthodox auction websites extend the auction time for every bid, so the bidding war goes on, and on, and on, until the right price is reached. This makes bid-sniping a futile strategy, meaning those $1 bids keep rolling in.
Tim discussed in class how economics, and in particular game theory, has something to say about soccer penalty kicks. Game theory looks at situations like the one the kicker and the goal-keeper find themselves in.
Penalty kicks are dismissed by some as luck. Not so by Ignacio Palacios-Huerta, currently a professor at the London School of Economics. His 2003 paper, Professionals play Minimax, examined the behaviour both goalkeepers and penalty kickers in football matches and analysed the results to see if they matched the game theoretical predictions.
A great article in The Telegraph explains the scientific approach to the perfect penalty using Palacios-Huerta’s (2003) research:
“Palacios-Huerta calculated the optimal mixed-strategy choices for each player. To maximise his chances, an imaginary penalty-taker would have to hit 61.5 per cent of his kicks to his natural side, and 38.5 per cent to the other side. In reality, the penalty-takers Palacios-Huerta observed got close to this: they hit 60 per cent to their natural side.
A keeper’s best strategy (if he insists on diving rather than standing still) was to dive to the kicker’s natural side 58 per cent of the time and to the other side 42 per cent of the time. The actual figures, Palacios-Huerta found, were scarily close: 57.7 per cent and 42.3 per cent.”
John Nash (as in the Nash equilibrium), the american mathematician whose work with game theory earned him the Nobel prize in Economics, was the subject of the Oscar winning movie A Beautiful Mind (and was portrayed by none other than our very own Russel Crowe). The movie focuses both on his remarkable advances in mathematics and his struggle with paranoid schizophrenia.
A short clip from the movie: a trip to the pub can lead to a revolutionary 28 page doctoral dissertation:
As promised, the link to the article in the financial pages of The New Yorker discussing lobster prices:
‘In 2005, Maine lobster was selling for almost six dollars a pound wholesale. By 2009, it cost just half that, and, in the past couple of summers, huge lobster harvests, believed by some to be a result of global warming, have glutted the market, sending prices tumbling further. This month, lobster off the boat is selling for as low as $2.20 a pound.’
In class we discussed the market structure in the case of fishermen selling lobster as well as the restaurants selling lobster dishes. In particular we paid attention to the assumptions that underlie the different kinds of competition.
Bitcoins came up again in last Thursday’s tutorial (for those of you not present a quick 1 minute overview below).
There has been a lot of discussion in the news this year around Bitcoins (see for instance this article in The New York Times and this on in the Sydney Morning Herald).
Can we classify Bitcoins as money? We defined “money” in class as having 3 functions: as a medium of exchange, as a unit of account, and as a store of value. Bitcoins satisfy the medium of exchange function, which is to say people will accept Bitcoins as payment, in a very limited number of markets. Bitcoins might help if you want to buy something on Silk Road. But try buying your groceries at Woolworths with a Bitcoin. Bitcoins are really not that good as a medium of exchange, at least at the moment, because they are accepted by only a tiny fraction of people and businesses in the economy.
In terms of serving the unit of account function, Bitcoins could in principle serve this function quite well, as indeed can any numeraire (i.e., a standard by which values are measured). In the past, societies have used shells and cows as money, so Bitcoins can fulfill this function as well as any other.
The main problem with Bitcoins, as I see it, is that it doesn’t perform the last function of money very well – it is not a very good store of value. The fact that Bitcoins have fluctuated widely in value over the last few weeks (from $27 to $230, according to bitcoincharts.com) gives you an idea of the problem. (In fact just today, April 16, 2013, the value of Bitcoins has fallen from $80 to $60.) Would you hold your wealth in an asset that fluctuates that widely in value? It would be very risky. Of course Bitcoins can increase in value as well (and make you a tidy profit if you time the market right). But the point is, people hold money because they know the amount of goods and services it will buy from one day to the next. Something that fluctuates widely in value does not serve this function very well – one day a Bitcoin might buy you a mean at a fancy restaurant (assuming you could find one that would accept it for payment), another day you might be lucky to buy a loaf of bread with it. I suspect most people would prefer to store their wealth in Australian dollars (or other major currency) because they know what the currency will buy them from one month to the next. In all, Bitcoins don’t serve the store of value finction very well.
But Bitcoins are also fundamentally flawed in a macroeconomic sense – Bitcoins have programmed in deflation. The reason is simple: the supply of Bitcoins is set to decrease over time. This means they will become more expensive (due to market forces) over time, which is another way of saying that the goods and services a Bitcoin can buy will become cheaper over time. As we discussed in class, an economy in which prices are continually falling is one in which everybody puts off buying until tomorrow when the prices are lower. This means that an economy with Bitcoins operating as the money supply will suffer from continual deflation and as a result suffer from recessions, falling incomes and rising unemployment.
A related issue is who (or what?) is the central bank for Bitcoins? The current design of the Bitcoin currency hardly has the same level of credibility or transparency that, for example, the Reserve Bank of Australia has built up over many, many years. How do we know that the Bitcoin system won’t suddenly increase the supply of the currency (perhaps to ward off the deflation mentioned above)? If that happened, the Bitcoin would instantly become worthless and Bitcoin-denominated wealth would be destroyed. History tells us we can trust that the RBA won’t suddenly inflate. Do we have that level of trust in the Bitcoin system? Not at the moment and I suspect it will take a long time to establish.
[Thanks Tim!]
Australia has consistently ranked as one of the most expensive destinations for international students, both in terms of annual fees and the associated costs of living (see the Sydney Morning Herald article on university fees and living costs in Australia compared to other international education hotspots).
This has been the result of both strong economic growth in Australia over the last two decades fuelling a rise in price of goods and services, and the strong Australian dollar raising the costs of living for international students. It may be surprising to see Australia beating the US to the top spot, but considering that the US has a much more diverse and saturated market, the average annual tuition is lower than in Australia. Even though the Australian Dollar has depreciated in the last year, Australia still remains the most expensive place to study.
In 2010, the American Economic Review published a paper by two Harvard economists, Kenneth Rogoff and Carmen Reinhart titled ‘Growth in a Time of Debt’. This paper examined economic data from a number of countries around the world, and found a strong link between high levels of public debt and declining economic growth.
Coming right after the Global Financial Crisis and right in the middle of the European Sovereign Debt Crisis, this paper became the rallying point for political and academic supporters of austerity, who insisted that austerity was the right answer for countries like Greece, Spain and Italy, who were burdened by extremely high levels of public debt as proportion of GDP.
There was a small problem, however. When other researchers attempted to replicate the results of the Rogoff-Reinhart paper, they were unable to do so. Eventually, in 2013, Rogoff and Reinhart released the dataset they used in their research.
Three economists from the University of Massachusetts, Thomas Herndon, Michael Ash and Robert Pollin found serious problems with the research – firstly some data that contradicted the findings was omitted (such as growth figures in countries like Australia and New Zealand); and there were coding errors in their statistical analysis.
What followed was a torrent of criticism from a number of authors, such as Paul Krugman of the New York Times (Op-Ed piece available here). But the austerity policies were already implemented, and at this point they are unlikely to be reversed.
We discussed in class how economics, and in particular game theory, has something to say about soccer penalty kicks. Game theory looks at situations like the one the kicker and the goal-keeper find themselves in.
Penalty kicks are dismissed by some as luck. Not so by Ignacio Palacios-Huerta, currently a professor at the London School of Economics. His 2003 paper, Professionals play Minimax, examined the behaviour both goalkeepers and penalty kickers in football matches and analysed the results to see if they matched the game theoretical predictions.
A great article in The Telegraph explains the scientific approach to the perfect penalty using Palacios-Huerta’s (2003) research:
“Palacios-Huerta calculated the optimal mixed-strategy choices for each player. To maximise his chances, an imaginary penalty-taker would have to hit 61.5 per cent of his kicks to his natural side, and 38.5 per cent to the other side. In reality, the penalty-takers Palacios-Huerta observed got close to this: they hit 60 per cent to their natural side.
A keeper’s best strategy (if he insists on diving rather than standing still) was to dive to the kicker’s natural side 58 per cent of the time and to the other side 42 per cent of the time. The actual figures, Palacios-Huerta found, were scarily close: 57.7 per cent and 42.3 per cent.”
John Nash, the american mathematician whose work with game theory earned him the Nobel prize in Economics, was the subject of the Oscar winning movie A Beautiful Mind (and was portrayed by none other than our very own Russel Crowe). The movie focuses both on his remarkable advances in mathematics and his struggle with paranoid schizophrenia.
A short clip from the movie: a trip to the pub can lead to a revolutionary 28 page doctoral dissertation:
Firms, Markets and Business Management 