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Econoception 2014
Econoception Issue 19: 6
April 2014
Table of Contents
1. Foreword: A 13-week Economic Course
2. Oligopoly: A cooperative bunch.
3. Taxi pricing
4. The Chinese Economy


I am currently pursuing an undergraduate economics degree at the University of
Cambridge, but I have taken some time out to design a 13-week course for H2
Economics students (suitable for both JC1 and JC2), which I intend to conduct
in Singapore from June - September. The course will equip students with a solid
understanding of economic principles and concepts, and develop their ability to
think, respond to and evaluate issues using economic frameworks. Most
importantly, the course will help students become better learners and more
critical thinkers who will be able to take charge of their own learning.

The Econonoception

- Focus on performance, which drives results.
- The course will be broken up into five parts of 2-3 weeks each: DEFINE;
- Process oriented:
We are what we repeatedly do.
Excellence, then, is not an act, but a habit.
- Aristotle

- No more thinking "Is the first session or the first half an hour of each session
going to be a waste of time?" Pre-lesson material/work to be completed and
submitted for evaluation and feedback to ensure that each lesson begins
promptly and students are immediately engaged with the topics being covered.

- Personalised notes based on gaps in understanding uncovered in the pre-
lesson evaluation will help the student cover all ground and progress at a pace
he/she is comfortable with.
- Engaging and challenging discussion that revolves around real world issues,
especially current affairs will allow students to gain a wider perspective and
develop unique insight for popular examination topics.
- Up-to-date methods of writing that are popular with Cambridge examiners will
be taught to students to give them the best shot at the A-levels.

Self-coaching methods taught. Objective and specific feedback will allow
students to resolve any difficulties encountered early.

- What did I do really well today?
- What is one thing that I have learned from today?
- What will I do differently in future as a result of today?

To maximise value for students, the course will only be offered on a one-to-one
basis, and there are only 2 slots available (so that they can have my full
attention). I strongly recommend this course for anyone who is keen to master
economics at the H2 level. For more details please contact me via email.

Till next time, dream economics.

1. Cartels Just one more fix
The Economist Mar 29
2014 Print Edition

Content from H2 Economics being applied:
Collusion & Cartel

Collusive oligopoly
If you had any doubts at all about the severity of the punishment for collusion
and cartelisation, this article featured in last week's Economist magazine should
quell them all. Before we dive into the specifics, let us establish some basic facts
about cartels. Cartels are firms that group together to behave as a collective
entity in pricing or non-price decisions. Typically we see them appearing in
oligopolistic markets. As mentioned in the article, some conditions that have
traditionally favoured collusion among firms include limited scope for product
differentiation, the sale of products that do not inspire much brand loyalty and a
high joint market share. Cartels enable firms to charge a higher price than
marginal cost, limit innovation and other forms of non-price competition as well
as put up higher barriers to entry - all of which hurt consumers in both the short
run and long run. One way you can represent this on a diagram is to think of a
cartel as a monopoly that profit maximises by setting a price such that MC=MR.
Without collusion, prices will be much closer to marginal cost (there is still
excess capacity because of spending on advertising and product differentiation)
and hence by contrasting the two outcomes you can show that there is a
deadweight loss incurred by society after collusion has taken place. Although I
use the terms collusion and cartelisation interchangeably, depending on the
context, there may actually be some slight differences between the two.

Collusion is more frequently used to describe informal agreements whereas a
cartel describes formal associations.

Interested? Read on.
If you are only interested in knowing about the basics of cartels then it is fine to
stop reading here, but if you want to think about the issue a bit more deeply
(than what is required by H2 Economics), then feel free to read on.
Game Theory
We can model oligopoly behaviour using game theory. In fact, that was how my
economics tutor in JC1 first introduced the concept of oligopoly to my class. He
made us play a simple game. In this game, there are two players, who represent
two firms: A and B. There are two possible actions the firms can take: they can
either compete (charge a lower price) or collude (together charge a higher price).
Both firms make the decisions simultaneously, and the following are the payoffs
they face.
Firm B
Firm A
High Price Low Price
High Price (3, 3) (0, 5)
Low Price (5, 0) (1, 1)
For those of you vaguely familiar with game theory, you will recognise that this
game is none other than the classic Prisoner's Dilemma. Both firms do better if
they collude, but each will have an incentive to cheat and lower prices.
But wait a minute, if this is the case, then why do regulators still have to police
oligopolies and deal with all these collusive behaviour? One reason could be that
these firms benefit a lot more from collusion because of the factors listed in
paragraph one (i.e. homogenous products). Also, the simple game we played in
class was a one-period game; in real life, firms are playing a repeated game.
Most of these firms expect one another to stay in business for a long time and

these expectations favour cooperation/collusion. Longevity encourages firms to
think long term and forgo possible short-term gains from cheating. From the
regulator point of view, this is a problem, but not an unsolvable one. In order to
reduce the likelihood of collusive behaviour, regulators will need to reduce the
relative benefit of collusion. As described in the article, they do just that: the
benefit of collusion is lowered through harsh penalties, fines and even jail terms
for offenders; the benefit of cheating/competition is increased by offering
incentives for those firms in a cartel that choose to confess before their rivals do.
However, the article also mentions that the measures currently in place are not
significant enough to deter collusion. But exactly how much is enough can be a
tricky question because if lawmakers over punish firms, the affected firms may
go out of business and overall competition in the industry will fall, thereby
undermining the original intent of the policy.

1. Free Exchange Pricing the surge
The Economist Mar 29
2014 Print Edition

Content from H2 Economics being applied:
Price Discrimination

One of the ways in which I hope the Econoception newsletter will bring value to
its readers is through its analysis of articles such as this one. I often think of The
Economist as a gold mine that requires quite a bit of digging before one can
reach the treasure. Unfortunately, this is not something H2 Economics students
are well prepared enough to do. Frequently, the gold nuggets are hidden in plain
sight - this article on the taxi market serves as a classic example.

Market Structure
"Taxi markets often end up suspiciously clubby, with cabs in short supply
and fat profits for the vehicle owners."
The second paragraph of the article describes the nature of the taxi market. The
industry is typically dominated by a few firms because of licensing restrictions
and other barriers to entry. This is not a good outcome for consumers because
firms can abuse their market power to charge prices above marginal costs.
However, I would disagree with the assertion that "In theory, entry should be
easy - all that is needed is a car and a driving license..." In fact economic theory
would suggest the complete opposite. Without proper licensing and regulation
by a central agency, the market is likely to suffer from adverse selection and
moral hazard problems. Adverse selection: drivers may have poor knowledge of
the streets but passengers will have no way of finding out about that information

beforehand. Moral hazard: drivers have no incentives to choose shorter routes.
Therefore, the entire market may function inefficiently or even cease to exist
without proper regulation.

Familiar concept, different way of thinking.
Uber, the new entrant into the market, provides a matching service, playing the
role of the middle man between drivers and passengers. By filtering out poorly
informed and untrustworthy drivers by imposing some minimum level of checks
for them, the firm ensures the market functions properly. It charges a 20%
commission for this service. One way you can think of this situation is to imagine
a perfectly competitive market, with price and quantity being determined by pure
market forces. Now imagine the government imposing an ad-valorem tax of
20% on producers and think about how that will affect the equilibrium price and
quantity. Then, replace the government with Uber and you will end up with
Uber's business model. The revenue it earns is equal to the 'tax revenue' that
would have been generated.
"By charging drivers a flat monthly fee Uber would generate revenue
without creating a price wedge that gets in the way of matches."
But as you learn in H2 economics, indirect taxes have distortionary effects on
markets, and generate a deadweight loss to society. The same problem exists
here. Suppose instead of charging an ad-valorem tax, Uber charges a lump sum
tax on producers and allows the market to equilibrate without the tax. In theory,
there will no longer be any distortionary effects and the recovered deadweight
loss can be redistributed to producers, consumers and Uber, thus benefiting
everyone involved. However, this situation seems overly idealistic. In reality, few
drivers will willingly commit to paying for a license upfront. It may well be the
case that much of the supply comes from a large pool of drivers who each only
picks up a few passengers per month. By imposing a fixed fee, most of these
drivers may no longer wish to participate in the market. This is just one of the

many issues that Uber has to deal with if it decides to switch to a lump-sum fee

Market dynamics, not price discrimination.
Implicit in a system that is based on a model of perfect competition is that prices
can vary significantly depending on demand and supply conditions. These can
change rapidly and even multiple times throughout a single day. For instance,
supply is likely to become price inelastic in the wee hours of the morning
because most drivers will be asleep and will require a higher compensation for
their service. The same can be said for holidays like New Year's Eve when most
people would prefer to spend time with their loved ones than to fetch
passengers in a car. Assuming Uber uses a reliable algorithm to generate prices
based on demand and supply in real time, prices in these situations are likely to
be higher than usual due to higher demand and lower supply. The article calls
this price discrimination, but I think that is inaccurate because cost conditions
are NOT the same. I prefer to think of it as simple market dynamics at work to
ensure that markets clear and efficiency is achieved. Personally, I find this
innovation in the taxi market pretty neat and would love to see it being
implemented in Singapore.


For those of you who are interested to find out more about the Chinese
economy, you are in for a treat. The Economist published a well researched
article on China last week. Look out for the ten paradoxes of the Chinese
economy. This is the link:
Sitong has also written an expressive piece on the Chinese economy that will
hopefully give you a sense of some of the issues China has to deal with.
by Ding Sitong
Having just been to China last week, I see no reason why the whole world does
not revere her. If China were a woman, then she would be the girl who
impassionates you with her mystique and paralyses you with her stealth. She is
that girl who always remains the most familiar stranger to you. She is that girl
whom you just can't seem to see through.
And I'm falling in love with this girl.
Enter the Hutong, a district filled with narrow alleys and derelict hubs, and you
will be welcome by a fresh breeze of moist wind that is not contaminated with
the corrosive city buzz. This is a place that houses the modern monopolistic
competitive markets - small shops are embedded within each opening and
corners of the alleys - each selling their own specialities such as shadow
puppets, milk teas, Chinese calligraphy works etc. Their owners, the residents of
the Hutong, belong to a society where income inequality is scarce. Nobody
knows who has more market power, because tourists sometimes bargain with
shop owners and offer only what they are willing to pay. Concepts of efficiency,
productivity and equity figure in the non-cash-machine-hand-to-hand
transactions of a few dollars.

Five minutes.
That is the time it takes to go from the Hutong District to the adjacent metropolis
station. Step out and you will be greeted by an array of skyscrapers housing
state-of-the-art trading systems and populated by a diverse pool of talent, many
of whom have come to China after the American Dream turned into a nightmare
in 2008. You will almost forget that just five minutes ago you were walking
around a derelict hub. Standing in the middle of Tian An Men Square (where
Mao and many previous emperors had graced lavished parades), and looking
beyond the overarching buildings and into the horizon, you struggle with not just
the hashtag to use for this sight, but also with the very concept of beauty you
have grown so used to over the years.
China is akin to a Russian girl who makes your heart beat faster with her
mandarin - she always surprises you with a unique blend of Yin and Yang. That
is her charisma. I'm been intoxicated by her beauty, because she's not only a
modern emblem of phenomenal economic forces demonstrating the
heterogenous nature of market outcomes but also the symbol of
incompleteness - an embryo, a work in progress - which evokes a bittersweet
sense of continuity.
The same incredible growth that propelled Shanghai from a merchant town to a
first-world trading hub, has also left 600 million people behind in staggering
poverty. Despite all the public outcry against air pollution and political illegitimacy
thereof, China is still bent on spending US$22 Trillion on natural gas investments
by 2022 so as to hedge against US's energy independence and prevent the
White House from gaining unprecedented power over the world. For all the
measures China has taken to appreciate its Renminbi and rebalance World
Trade, her recent move to widen the currency trading band from 1% to 2%
seems to be a bit too bold as it essentially doubles volatility in the market
: and
significantly diminishes certainty in the short term. China is also secretive about


the state of her financial markets, including the development of the infamous
shadow banking system that is rumoured to be crippling the economy by
overriding prospects of state solvency.
These are by far and large some controversial matters that often take priority in
the public dissertations among leading academics, policy makers and online
pundits who defend the merits accordingly to their own private interests. Only
recently, China came under the spotlight for her back-to-back disappointing PMI
statistics and how she is advancing slowly towards a Minsky Moment (more on
this in the next post perhaps).
But most of these dissertations, while they heighten public awareness (assuming
that they have been filtered of academic technicalities), seldom change the way
private enterprises work. Also when viewed in isolation and compared with other
countries, many neglect the fact that the Chinese context is a hugely unique one
and the Chinese economic model is also undergoing a transformation that may
result in certain opinions becoming obsolete.
As a student and thinker of the Chinese economy, I still have much more to
learn and unlearn before I can pass judgment on its policies and indicators. So,
for now, I shall take a seat and admire the little dissonances of colour on this
giant painting depicting the ancient trading activities back in the Qing Dynasty,
while taking occasional glimpses of that mysterious lady standing by the water