The Market Groupie

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Category: Uncategorized

It’s called free-riding…look around, it’s common.

Heritage Foundation Vice President David Addington, who first reported on the rule on his blog Tuesday evening, said there are two problems with the new fee. First, he said it’s likely the 15 percent fee will be passed on to consumers. Second, he said it’s inappropriate for the government to be putting its “thumb on the scale,” helping out the fresh-tree sellers and not the artificial-tree sellers.

“If it’s one thing I think the free market could handle, it’s letting people decide what kind of tree they want to buy for Christmas,” Addington told FoxNews.com.

Source: Fox News.

While it sounds ominous and like a (hide the children!)¬†tax increase,¬†this is simply a marketing program, like the Milk Board, producers of the ‘Got Milk?’ commercials, or any one of a number of other marketing boards. While Addington above is correct, in that tree producers could promote purchasing live trees by themselves, there is a strong incentive not to do so because of free-riding.

Imagine that there are two producers of live trees, Dasher’s and Dancer’s. Both firms believe that such a marketing campaign is beneficial, and therefore agree to start running commercials that promote live vs. synthetic trees. But Dancer realizes that he benefits from not only his own commercials, but Dasher’s as well. Therefore, if Dancer reduces spending by 10% on his own campaign, but the loss in sales is shared, Dancer is better off in reducing spending on the campaign, assuming that Dasher continues his campaign. Soon, Dasher will make the same realization, and probably also be quite angry at Dancer’s shirking, causing Dasher to reduce his marketing spending. The result is a spiral to zero.

Now, imagine that instead of only two firms, there are thousands, and the incentive to free-ride off the campaigns of others is even greater. That is why such marketing boards are created, they are a mechanism to force all firms to participate in activities with broad benefits.

 

 

 

 

Another two-handed economist post…

Producers of cotton, wheat flour and livestock feed are searching for ways to avoid losing U.S. Census Bureau reports critical to their industries that are slated to be discontinued due to budget cuts.

A coalition of agricultural trade associations met Wednesday with the top economist of the U.S Department of Agriculture to discuss attempts to save the reports. Time is running out to find a solution, as some will be stopped after next month.

source: Morningstar.

I agree that these reports are very important to the markets. I’ve long said that the abundance of USDA and Census information on agricultural production and consumption greatly levels the playing field between the largest traders and other participants in the markets. Because of these reports, and others that NASS is now having to reconsider, there is a huge amount of data available to even the lowliest, brokest, land-grant university-based analyst. Nevertheless, the major players still have more information.

But reading the article brings two thoughts to mind. First, if these reports truly are so important to such major actors in the industry, then how can they not be worth $80,000/year to an industry association as a whole? That is the cost of one secretary in their DC office. Alternatively, if these are so important, why doesn’t the United Soybean Board (who receives the national check-off for soybean sales, $82m in 2010) or a coalition of state wheat associations and/or marketing programs fund these?

More fundamentally, why is agriculture different? While I know that the Energy Information Administration provides copious amounts of data on oil and other energy markets, other commodity markets (base & precious metals) seem to function fine without the large investment in public data generation and dissemination. This is not to say that I’m opposed to these reports, or think that they are a bad idea. Just some questions and observations.

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