They don’t like diet drinks

09/08/2013 § 3 Comments

I have been discussing with colleagues a recent article in the American Journal of Agricultural Economics, Zhen, et al. on Predicting  the Effect of Sugar-Sweetened Beverage Taxes on Food and Beverage Demand in a Large Demand System. One issue we discussed was whether diet and sugar sodas were complements or substitutes. As a reminder, substitutes means that as one price goes up, people buy more of the other product. A complement means that that as one price goes up, people buy less of both goods.

Are they substitutes or complements? I would suggest that it’s an empirical question. Zhen, et al. mention research that finds that the two types of sodas are complements (Dharmasena and Capps, 2012, for those playing at home).

If someone is buying diet soda, I would not expect the prices to affect their decision within the ranges of price movements we usually see. Price may lead them to switch to other low-calorie drinks (water, tea) or other diet foods, but the significant calories in a sugar soda probably represent large dis-utility to the diet-conscious consumer. On the other hand, consumers of sugar drinks have already rejected the diet drinks and probably switch to other good-tasting drinks (energy drinks, flavoured milk).

Me, I can’t stand diet drinks and price won’t make me switch. I will drink water instead.

We could also think about the purchase scenario. When consumers buy soft drinks, perhaps they are buying them for a group: a family or a party. They buy both diet and sugar drinks to cater to the different tastes in the group. Higher and lower prices change the total amounts but have little effect on the ratio.

There are two methodological issues that can affect these sorts of estimates. First, there is significant correlation in the diet and sugar soft drink prices. Companies tend to price both types the same. That correlation would make it difficult (or perhaps impossible) to estimate cross-price elasticities (XPE). Secondly, a common assumption is that XPEs are symmetric. That is, the diet–> sugar XPE is the same as the sugar–> diet XPE. That may not be the case. A diet drinker may be reluctant to change, but a sugar drinker may be quite price sensitive. If we assume symmetry (which is common) then we won’t estimate the different XPEs.

Business strategies and employees

23/05/2012 Comments Off on Business strategies and employees

MED recently published some research I did for them with a few co-researchers. The work is a little old but it’s nice to see it on the MED website.

The research was part of a larger programme investigating the interaction between businesses’ strategies and their job vacancies. The programme was based on work by Geoff Mason in the UK on business growth, innovation, and employment.

Here is the blurb from the MED website:

This research explored the interaction between strategy and employees’ skills, and differences between high value-add (HVA) and medium value-add (MVA) firms, through interviews with firms and analysis of the 2008 New Zealand Business Operations Survey.

We were trying to understand how businesspeople thought about their business plans or strategies and link that to the success of their firms. A critical part of running a business — and implementing a plan — is having the people to do it. So, we focused in particular on key employees and skill gaps.

Two interesting findings:

  1. Most firms had trouble recruiting key employees. They reacted by recruiting from overseas, training an existing employee, relaxing the criteria, or simply leaving the position unfilled.
  2. MVA firms focused more on production methods, technical skills, and margins over costs. HVA firms focused more on the business skills of a few, professional core employees, as well as the marketing aspects of their products.

The first finding underlined that there are skill shortages in New Zealand. It may seem a trivial finding to economists, but it is important to remember the matching problem. Available workers may not match the available openings. In addition, most domestic firms are small, so a poor hiring decision can really hurt them. Throw in a bit of risk aversion, and firms are willing to let positions sit unfilled for years and work around the gap.

The second finding was, in a general sense, about the difference between cost-plus pricing and value pricing. MVA firms tended to be more cost-plus — they figured their cost of production and added a margin. As a result, they couldn’t really be high value-add firms unless they added a high margin, which they were loath to do. The HVA firms tended to work more on the basis of ‘value to customers’, and then charge accordingly. Of course, in a Walrasian equilibrium, cost-plus and value pricing would yield the same results. In the non-equilibrium world of actual firms, value pricing leads to higher value-add.

Always interesting to get out in the economy and talk to people in it, rather than just sitting at my desk teasing something out of the numbers.

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