Category: AM

Felix writes*

Economists have long defended the benefits of fair competition, explaining that it makes markets more efficient, increases innovation, and generates more benefits for consumers. It’s therefore surprising to see a lack of competition in academic economics, where the same few universities collect titles, honors and influence for their research.

How loyal are economists to their principles, when their professional interests are at stake?

Richard B. Freeman, Danxia Xie, Hanzhe Zhang & Hanzhang Zhou studied the concentration of award-winning academics across institutions, and concluded that across “18 major academic fields in the natural sciences, engineering, and social sciences,” economics was the only discipline that was evolving towards a more clustered knowledge and centralized institutional system, going against the other disciplines leaning towards decentralization.

Indeed, their study shows that prestigious awards such as the Nobel Prize are disproportionately given to academics linked or directly working with a few universities, including the University of Chicago, Harvard, or MIT.
The paper suggests that a reason for that could be the importance of prestige in the field of economics, where a debate between two points of view or theories is influenced by high status individuals and the reputation of their institutions. Most importantly, this concentration is problematic because it prevents diversity of thoughts, fosters “club mentality” and overall limits new challenging perspectives from emerging scholars (The Guardian, 2024).

In theory, academia should be a meritocracy where the best research rises to the top, pushed by its own quality. In practice, the structure of academic economics does not look like a fair market, it rather looks like a winner-takes-all market where power is concentrated among a few key players. The LSE Impact Blog argues that academics have internalized a hyper- competitive system where success is almost only defined by publication in a small set of high-impact journals, mostly controlled by scholars from elite institutions. This dynamic leads to an inefficient situation where many economists spend more time “playing the game” rather than engaging in genuine intellectual exploration.

This lack of genuine competition in an academic field encourages unethical behavior. A study discussed by the LSE on “scientific misbehavior in economics” found that many economists admit to engaging in “dishonest” behavior: manipulating journal rankings, favoring insiders in hiring and promotions, and even suppressing opposing research. Again, the main reason of that is the common and constant pressure to publish.

Moreover, a survey on academic ethics showed that nepotism, through publication bias, and exclusionary practices are widespread in economics. For instance, senior economists at high-ranked universities have significant control over publication decisions, invitations to conferences, and career opportunities (List et al., 2015).

Bottom line: The excessive clustering of awarded academics and the nepotist practices present in the economic discipline goes against the virtuous competition economists call for. It impoverishes the quality of academic research and increases pressure on economists to publish without integrity.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Hansika writes*

King’s Day is usually a cause for celebration across the Kingdom of the Netherlands yet for many Aruban locals, it signified a day to protest against the unregulated growth of hotels. Protestors marched on April 27th, 2024, to oppose Aruba’s mass tourism, which they argue was damaging the environment, the economy and their quality of life (Billy, 2024).

The problem: Hotel construction in Aruba has been vast, and each additional hotels adds to the burden on the island’s infrastructure and fragile environment. For example, high levels of pollution and sewage produced by the hotels leak into the surrounding areas, causing smog and contaminating fresh water sources nearby. Many of these hotels have also privatized beaches that were previously open to the public. Such hidden costs are not paid by the hotel nor the tourists that use their facilities, but local communities. A negative externality graph illustrates this problem.

As hotel expansion exceeds the socially optimal price (P_o) and quantity (Q_o), the marginal private cost (MPC) surpasses the marginal social cost (MSC). MPC refers to the direct costs to businesses such as utilities and labor, while MSC refers adds costs to society such as environmental harm and land loss. The blue triangle between MPC and MSC represents deadweight loss, i.e., the economic inefficiency caused by excess hotel construction, which falls on society.

Moreover, the majority of these hotels are all-inclusive, which encourages tourists to spend money on hotel activities, rather than local ones—a risky model in a country where tourism is the backbone of its economy. In Aruba, tourism accounts for more than 70% of its GDP, yet the economic benefits are limited, fostering dependency on hotel construction instead of local businesses (López, 2024). As tourism expands, external costs, such as those mentioned above, increase, and lead to the overconsumption of tourism-related goods and services. These costs fall on local communities while the benefits go to hotel developers.

Furthermore, the Dutch Caribbean islands do not represent themselves on international platforms as The Netherlands is supposed to speak on behalf of the whole Kingdom. This has caused relations between the two to deteriorate as climate priorities have diverged. For example, an NGO in Bonaire has sued the Dutch government for the latter’s perceived failure to protect the island from climate change (Holzhausen, 2024).

Bottom line: Demonstrations across the Dutch Caribbean islands emphasize how the local population are fighting not only for the environmental integrity of their islands, but also for their economic sovereignty.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Sarah writes*

Although Trump has once again pulled the U.S. out of the Paris Climate Agreement, American firms still face consequences in EU markets. Numerous countries are still committed to non-legally binding climate targets, but the EU demands full adherence to its Green Deal policies. Non-compliance could bring legal and financial repercussions. Thus, businesses within the EU must evolve their models to align with environmental and social regulations. If national authorities fail to guide them through the transition, many may crash. Yet, many member states are lagging behind, requiring grassroots approaches to drive faster change.

One of those grassroot initiatives is the True Price Institute, a Public Benefit Organisation, that promotes the reflection of negative externalities in price mechanisms (True Price, n.d.). From April to June in 2023, they held an experiment at three different Albert Heijn (AH) supermarkets spread throughout the Netherlands (True Price & AH To Go, 2023). Customers received the following two options: to pay the price of coffee that they were used to, or a few cents extra. By increasing the price, the institute included the social and environmental costs of milk and coffee, which are both linked to exhaustive production processes. But did it really work? And how did customers respond?

Based on online survey responses and data analysis from the experiment, we might observe a gap between words and actions. While 36% of respondents expressed willingness to pay a few extra cents, only 15% of actual customers did pay more (True Price & AH To Go, 2023). Although the drop may reflect the difference between survey respondents and actual shoppers, the result also makes logical sense. The Dutch are known for being “gierig” (frugal). Plus, even when made aware of negative externalities, it may still be difficult for individuals to grasp the impact of their personal choices.

Although the report is optimistic about these results, it is clear that consumer choice alone will not drive sufficient change. Implementing a true pricing mechanism requires top-down support. To create strong incentives for sustainable transformation, companies must shift their perspectives. If they do not comply with the EU Green Deal, they will eventually be forced to internalize social and environmental costs at a much higher price. Instead, businesses should facilitate a smoother transition now to prevent economic shocks later. And that assumes we have more time — which we don’t.

For example, large companies will be required to report on non-financial directives starting in 2024 under the CSRD regulation (European Commission, n.d.). Previously, companies only had to report on their financial activities. However, to monitor alignment with social and environmental directives, the EU is demanding early accountability. (“Early” means relative to 2050 rather than in terms of climate action.)

True Price et al., 2014 have modeled how market shares might change as firms internalize those external costs:

According to their report, true pricing will strengthen innovation, reputation, and risk management — all of which offer comparative advantages on firms.

Once the EU has built its labor force for the sustainable transition, where will the U.S. stand? If the EU becomes more expensive, will it gradually reduce trade with the U.S. to improve its own market efficiency? And what if other major economies, such as China, follow suit?

Bottom line: Time will tell, but one thing’s for sure: Pay now or pay more later.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Demir writes*

In microeconomics, economies of scale occur when firms reduce average costs per unit as production expands. Graph 1 illustrates this through the long-run average cost curve (LRAC), which declines as output increases from Q to Q₂, showing cost efficiency gains from reduced labour costs, improving efficiency and overall technological advantages one might have (Wikipedia).

By moving from Q to Q₂, the firm lowers per-unit costs from C to C₁, which allows it to better compete on price. When economies of scale are so extensive that a single firm can serve the entire market at a lower cost than multiple competitors, a natural monopoly may form. This typically occurs in industries with high fixed costs and significant cost reductions from increased output, allowing one dominant firm to outcompete smaller rivals (Wikipedia). This situation might occur if Q₂ is close to total quantity demanded in the market, which means that smaller competitors will not be able to enter the market and compete on cost.

Amazon leverages its economies of scale in automation, bulk purchasing, and logistics to lower prices and dominate markets. But how did Amazon achieve such market domination?

From warehouse robotics to dynamic pricing algorithms, Amazon automates key operations, reducing labour costs and improving efficiency. These systems optimise pricing in real-time, allowing Amazon to offer the most competitive prices. Amazon’s purchasing power allows it to buy goods at lower prices than competitors. Suppliers, reliant on Amazon’s vast customer base, offer significant discounts that smaller retailers cannot access. Third-party sellers can use Fulfillment by Amazon (FBA) for logistics, thereby reinforcing economies of scale in speed, price and reach.

While its e-commerce business operates on thin margins, profits from Amazon Web Services (AWS) subsidizes retail operations. Amazon’s 200 million-plus Prime members spend twice as much as non-members, further reinforcing economies of scale. Amazon’s logistics dominance raises concerns about natural monopoly status. Its cost advantages make it nearly impossible for competitors to match its efficiency. Many retailers now depend on Amazon’s distribution network instead of building their own. While this benefits consumers through low prices, it also risks future price increases if competition erodes. Governments are beginning to scrutinise Amazon’s market power, raising questions about potential regulatory intervention (Shah & St John 2021).

Bottom Line: Amazon’s ability to offer low prices, fast delivery, and an extensive product range is a direct result of economies of scale. Its bulk purchasing, automation, logistics network, and AWS revenue create an unbeatable cost advantage. As Amazon continues expanding, the debate over its influence will shape the future of e-commerce regulation.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Anna writes*

Stereotypically, the Italian mafia is associated with drugs, gambling, prostitution, and violence. But is organized crime only dealing with illicit activities? Unfortunately, not. In the last decades, the line between illegal organizations and legal business has blurred due to organized criminals’ increasing involvement with business owners, within and beyond Italian borders. In 2007, for example, mafia affiliates took over FirstPlus Financial Group, a Texas company. Illegal and extortive means were used to loot legitimate business profits.

Organized criminals are profit-maximizing actors. However, mafiosi are not ordinary entrepreneurs. Rather, they are providers of the trust and protection “commodities.” These criminals have the ability to transform their connections with economically and politically legitimate actors – social capital – into economic resources in exchange for service provision. Namely, the mafia can provide the essential trust and protection to enable commercial transactions in contexts with weak formal institutions and high entrance barriers to the credit market. Therefore, the mafia becomes a form of social insurance and economic stabilizer, especially in the most vulnerable territories. For instance, after the 2008 financial crisis, the Italian provinces with a comparatively higher presence of organized crime experienced the lowest decline in the number of new enterprises. Mafia control ensured that local economic exchanges could continue. It also ensured that the mafia were paid post-crisis, as they delivered both the demand for protection — and its supply.

Small business owners need protection from the mafia’s threats and the ensuing economic uncertainty. They passively suffer from extortion and pressure to pay pizzo — either in money or obligation (such as protecting or employing a mafia ally). The mafia has diversified personalized relations that vary with the type of entrepreneur. Some businesspeople preemptively seek protection, which they perceive as an unavoidable cost of doing business. Entrepreneurs in a stronger positions get access to illicit finance and protection in exchange for their pizzo.

Evidence shows that the pizzo-profits ratio shrinks as business size increases, falling from 40% of profits for small firms to 2% for the largest enterprises. This parallel taxation system finances other mafia activities. Threats of violence enforce compliance. Among its dire negative externalities, this system hinders the economic development, since smaller firms pay for protection instead of growth. Larger firms, on the other hand, actively cooperate with the mafia to negotiate reciprocal advantages, further supporting the criminals and weakening development.

Bottom line: The mafia is a profit-maximizing actor who pursues its self-interest by extorting rather than adding value as a business. This entrepreneur-criminal nexus operates in the “grey area” between legal and illegal activities and hampers local economic development.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Monica writes*

In January 2021, GameStop (GME), a struggling video game retailer, saw its stock price go from $20 to nearly $500 in just a few weeks. Before the surge, hedge funds had shorted GME’s stock—borrowing shares and selling them, anticipating that prices would fall and that they would be able to buy the shares back and profit from the difference. Against their short-selling expectations, users on Reddit’s forum r/WallStreetBets began buying shares en masse, causing a “short squeeze” as the stock soared. Hedge funds were forced to buy shares back at significantly higher prices to close out their positions.

While many retail investors aimed to profit from the speculative frenzy, some viewed the movement as a social rebellion against Wall Street insiders and a call for more accessible financial markets. Regardless of motivation, the event reflects a broader shift in power dynamics between retail traders and hedge funds, as individual investors coordinated through online platforms to challenge traditional financial institutions.

The surge was so extreme that brokerage platforms like Robinhood and TD Ameritrade imposed trading restrictions, preventing users from buying more shares while hedge funds remained trading freely. These restrictions sparked accusations of market manipulation in favor of institutional investors, leading to congressional hearings in the House Financial Services Committee (C-SPAN, 2021).

Eventually, GME’s stock price collapsed. Early investors who sold at peak prices made large profits, while late buyers suffered losses. Meanwhile, hedge funds—particularly Melvin Capital—incurred billions in losses, requiring a $2.75 billion bailout before shutting down in 2022 (NYT, 2022).

According to the Efficient Market Hypothesis (EMH), stock prices reflect all available information, so a change in market prices is only caused by new information. Under the assumption that all participants possess the same information, it is almost impossible to beat the market through speculation as stocks are traded at a fair price.

While hedge funds possessed the same information as retail investors (if not more), the latter overpowered the former through coordinated action driven by collective sentiment and momentum rather than individual rational analysis. In this manner, the GME surge was a market inefficiency. However, the price eventually collapsed, suggesting that speculative frenzies are a temporary anomaly and prices align with real market value in the long-term. Overall, the GameStop short squeeze highlights the limitations of the EMH: The market might be efficient over the long run, but short-term inefficiencies can be expensive — and exploited.

Bottom Line: GameStop’s short squeeze was a Reddit-driven speculative frenzy that caused massive losses to Wall Street hedge funds, underscoring the growing power of retail investors organizing online to reshape financial markets.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Dominika writes*

The well-known British retailer Marks & Spencer (M&S) sells clothing, home products and luxury food. Although it has always been a British retail giant, elsewhere in the world it has been overshadowed by bigger and better performing firms.

M&S was on the path to domination up until the end of the 20th century when it ran into trouble (Alon, 2006). There were multiple reasons for the firm’s failures, one of them was the emergence of other more trendy competitors that offered better prices, many of them were international retailers entering the UK (Mellahi et al. 2002). M&S’s strategy of “buying British” to ensure high quality ended up being very costly when other firms were sourcing from China (Mellahi et al. 2002). Internally the brand also had issues that required better management. Rather than advertising, M&S relied on its reputation for high quality goods (Alon, 2006). Unable or unwilling to change with the times, M&S lost touch with their clients as well as younger generations (Mellahi et al. 2002). Although M&S managed to survive the worst of their troubles, it continued to fall behind “trendier” brands  (Choudhary and Lo Piparo, 2019).

Bottom line: As of 2024 Marks & Spencer claims that its brand is coming back and financial results are improving, but it’s still not clear if the firm will recover from its lack of client-friendly innovation.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Lotta writes*

Few artists have earned a nickname as bold as ‘the music industry’, but Taylor Swift has. And that was a decade before the current heights of her fame. Her level of success isn’t only based on musical talent, but a strategically built economic ecosystem where fans are not just consumers, but active participants, marketers, and investors. This fan-driven engine generates extraordinary demand, leveraging inelasticity and exclusivity, to transform cultural excitement into record-breaking profits.

Fans form the core of Swift’s economic success, with their strong, inelastic demand. Her devoted fanbase views purchases not only as transactions but as investments in their own identity and sense of belonging driven by emotional attachment to Swift’s art. Fans don’t just buy products; they buy into a shared identity. This makes them less price-sensitive: they will continue to buy despite high costs. Ticket sales for her tour demonstrate this: Concerts sold out effortlessly despite resale prices soaring into the thousands. The Eras Tour was the highest-grossing tour in history. Swifties’ emotional loyalty and perception of the concert’s value as a unique cultural experience resulted in inelastic demand for tickets.

Exclusivity further fuels demand: Swift strategically employs scarcity, releasing limited-edition album variants and merchandise. This creates a sense of urgency and fans are eager to purchase out of fear of missing out. Moreover, by offering products perceived as rare, Swift leverages status signaling, where ownership becomes a symbol of cultural capital. Furthermore, by making her products exclusive, Swift leverages fans’ willingness to pay higher prices. This allows her to capture a greater portion of consumer surplus, the extra value fans place on her products, and convert it into revenue.

Beyond functioning as participants, Swifties essentially act as ‘investors’, committing both emotionally and financially to her success, seeing purchases as part of their identity and community. This investment mindset explains Swift’s album sales dominance in the streaming era. After Adele, a fellow sales giant, failed to debut with a million copies in 2021, the industry widely believed that the era of one million debuts was over, signaling a perceived decrease in demand for non-streaming formats. Yet, Swift has achieved three separate million-debuts since. Much of this is owed to the loyalty-driven investment behavior of her fanbase. Fans want Swift to break records, viewing purchases as contributing to her cultural significance. Physical albums hold symbolic value, and limited-editions are seen as collectible assets, enhancing their perceived value. The willingness to buy multiple album variants, despite cheaper streaming alternatives, highlights how Swifties view consumption also as symbolic ownership and cultural capital.

Furthermore, fans act as an unpaid marketing army, boosting her brand through user-generated content and social media engagement. Unlike traditional paid marketing campaigns, Swifties generate organic demand. The Eras Tour is a prime example of this: each show became a social media event, with fans livestreaming performances and dissecting every detail. The constant online buzz intensified the sense of cultural relevance, attracting wider attention. This translates directly into higher streaming numbers and sales as her audience grows. This demonstrates the power of network effects: as fan engagement grows, the perceived value of being part of the community increases, leading to even greater participation and spending.

Bottom Line: Taylor Swift’s fan economy is a self-reinforcing cycle of high demand. Through participation, strategic exclusivity, and investment-minded dedication, she has captured an audience that not only consumes but actively fuels her success. Taylor Swift has given us a masterclass in turning consumer loyalty into profit.

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* Please help my Applied microeconomics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂

Mayte writes*

Mexico City is renowned for its vibrant street food. Nothing beats tacos with pico de gallo and salsa after a night out. But recently, I’ve noticed that some of my favorite taquerias have turned down the heat in their salsas. After some chats with friends and a quick Google search, I realized that I am not alone in this feeling and that the culprit seems to be gentrification.

Since the COVID-19 pandemic, Mexico City has become a popular spot for digital nomads, according to their rankings. Specifically, the neighborhoods of Condesa and Roma in the historic center of the City have become increasingly popular (Brooks,2022). Given that the salaries of these nomads are in USD, they have larger purchasing power compared to locals, ultimately increasing rent prices and living costs in these neighborhoods. For traditional taquerías and street stalls, this has resulted in increasing competition with artisanal coffee shops, upscale brunch spots, and international fusion restaurants. This influx of wealthier consumers brings a change in preferences, leading to a shift in the market equilibrium—where milder salsa flavors become more profitable, as shown in the figure below.

Local vendors are faced with an economic trade-off: they can either cater to a broader less spice-tolerant customer base and lose traditional recipes or risk losing business in an increasingly competitive market. Many choose to meet this new demand curve, reducing the spiciness of their salsa to adapt to the preferences of these new customers. For local consumers, less spicy means less utility when it comes to late night recoveries and fewer pesos in your pocket.

Gentrification has also increased the opportunity cost of maintaining traditional salsa recipes. Adjusting spice levels can be seen as a rational response to market incentives, appealing to the preferences of higher-income consumers, who have greater purchasing power and influence on market trends. However, in reality, not all vendors have adopted this market strategy. Some taquerias have chosen to present their salsas with tiered spice levels allowing consumers to self-select according to their tolerance to spice allowing vendors to maximize their profits without alienating local customers (Wagner, 2024).

As gentrification continues to reshape Mexico City, street vendors are challenged to navigate shifting demand, rising costs, and fiercer competition, even as they try to hold on to tradition.

While this post mostly focused on the culinary consequences of gentrification, I want to note that these shifts are just one reflection of a larger, more troubling problem. The economic pressures tied to gentrification have led to the displacement of long-time residents due to skyrocketing rental prices, pushing locals out of neighborhoods they’ve built over generations (Brooks, 2022; Narcia, 2024).

Bottom Line: Gentrification in Mexico City has altered the flavor of traditional salsas and the livelihoods of the communities that serve them. This raises important questions s on how to grapple with economic growth and its impacts on culture and local communities.

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* Please help my Applied Economics students by commenting on unclear analysis, alternative perspectives, better data sources, or maybe just saying something nice 🙂