Friday, April 15, 2011

Predatory Pricing and Its Effect on Strategic Behavior of Toy Industry

Predatory Pricing on Identical Firms
To be engaged in predation, firms have to lower its price below its cost for long to drive out its rivals. That is, the firm incurs short run losses to gain long run profit. The incumbent firm has to convince its competitors to keep its price level far below cost for long to drive them out of business. But to keep prices far below cost for a long time is no easy task. In most of the cases, the firm has no ability to threat its rivals to set prices below its marginal cost and survive in the market. If the firm succeeds in driving out its potential entrants and then raises its price, new firms may again enter the market. So the dominant firm has to set its price again at lower level to drive them out. For the predation to be successful, new entrants must believe that it doesn’t pay for any potential entry due to incumbents pricing behavior.
A model of identical firms can help examine the price predation strategy (which is unlikely to become successful):
1) There are only two firms (an incumbent and entrant)
2) The two firms are identical
3) Both the firms have identical cost function
An incumbent firm has to suffer a significant loss compared to its potential new entrants during the period of predation. The predatory firm has to supply a greater output due to low prices. However, the rivals can reduce its supply to minimize its loss. As a result, the predatory firm is most unlikely to apply the strategy of predation.

Effect of Pricing on Major Toy Industries
The availability of data to assess predatory pricing effect on toy industry is very much limited. The frequency with which predation occurs in one country may be a poor indicator of its frequency elsewhere. The likelihood that a firm will attempt to predate should be influenced by legal rules and market conditions under which it operates, both of which can vary significantly. We can look at two major producers pricing strategies for their product to discuss the presence of such type of pricing (if any) in this industry.
 Compared to January, 2009, in January, 2010 U.S. retail sales for sporting goods, hobbies, books, and music stores (potential measure of toy demand) increased by 3.8%
 Mattel – first quarter, 2010 (compared to first quarter, 2009)
o Earned almost $25 million ($51 million loss in 2009)
o Sales improved due to several new product offerings and core brands, such as Barbie
 Hasbro – first quarter, 2010 (compared to first quarter, 2009)
o Sales neared $59 million (up from $19.7 million in 2009)
(Source: U.S. Department of Commerce Industry Report, 2010)

The characteristics of toy industry, and in particular the persistence of market power by dominant producers, make predatory practices a recurring possibility in this industry. As such, they are a legitimate concern for competition policy. Because the presence of low cost has such a dramatic effect on retail sales and profit level , predatory practices are especially likely to be targeted at new entrants in this industry. Although there remain threats from major producers to enter market, this industry is growing at a fast rate. The level of profit it (firm) generates is higher compared to other industry. Most often, threat of predatory pricing or non price predation can be viewed as non credible. As it is proved earlier through the help of a diagram, price predation is unlikely to generate profit for incumbent firm. The predatory firm has to suffer significant amount of loss compared to its potential new entrants. Thus, this strategy is not a profitable one for firms and little possibility to apply it in near future in toy industry.

Thursday, April 22, 2010

Development and Sustainability in the Context of Climate Change

Global warming poses a significant potential threat to future development activities and economic well being of large numbers of human beings. Climate change can be regarded as a potential effect of this global warming. The concept of climate change can be very well defined in the context of development and sustainability. These two key concepts are well established world-wide in the minds of both decision-makers and the general public. These issues are more explicitly related to climate change due to two reasons. First, there are scientific links between these issues and climate change phenomena. Second, such an analysis will add to the cogency of arguments to address climate change problems. Thus, it will help to underline essential point that climate change is a key element of the broader search for sustainable development paths.

A holistic approach is necessary because these broad themes overlap and are not easily separable. The concept of sustainable development (including its economic, social and environmental dimensions) provides a useful starting point. Therefore, the concept of sustainable development has evolved to encompass three major points of view: economic, social and environmental. Furthermore, there is increasing agreement that these three critical elements need to be treated in a balanced manner. Sustainability will depend on several factors including (1) climate change intensity (2) system vulnerability and (3) system resilience. Changes in the global climate (e.g., mean temperature, precipitation, etc.) could well threaten the stability of physical, ecological and social systems and subsystems. Existing international mechanisms and systems to deal with transnational and global problems are fragile, and unlikely to be able to cope with worsening climate change impacts. More attention may need to be paid to the vulnerability of social values and institutions which are already stressed due to rapid technological changes.

Historically, development of the industrialized world focused on material production.
Not surprisingly, most developing nations have pursued the economic goal of increasing output and growth during the twentieth century. The development paradigm shifted towards equitable growth, where social objectives were recognized as important as economic efficiency. Protection of the environment has now become the third major objective of development.

Many national policy decisions taken today could well affect future climate change prospects significantly. Economic analysis has a special role in contemporary national policymaking. Mainstream economics has often ignored many crucial aspects of the environmental and social dimensions of sustainable development. However, there is a small but growing body of economic analysis and an application which seeks to address such shortcomings. At the same time, national policymakers routinely make many key macro-level decisions. For example, many macroeconomic policies seek to induce rapid growth, which in turn could potentially result increase vulnerability to the future impacts of climate change. It could have an impact on both climate change mitigation and adaptation. These pervasive and powerful measures are aimed at addressing economic development, environmental sustainability issues. It should invariably have much higher priority in national agendas, than climate change. The strategies of climate change consistent with other national development measures are more likely to be effective than isolated technological or policy options. In sum, the highest priority needs to be given to finding win-win policies which enhance climate change adaptation and mitigation efforts.

Tuesday, April 13, 2010

Justice and Equity in climate change: A Developing Country Perspective

Global warming poses a significant potential threat to future development activities and the economic well being of human beings. Climate change could also undermine social welfare and equity in an unprecedented manner. In particular, both intra- and inter-generational equity are likely to be worsened. Existing evidence clearly demonstrates that poorer nations are especially vulnerable to disasters. Climate change is likely to result in inequities due to the uneven distribution of the costs of damage, as well as of necessary adaptation and mitigation efforts. Developing countries are the most vulnerable to climate change impacts because they have fewer resources to adapt: socially, technologically and financially. Climate change is anticipated to have far reaching effects on the sustainable development of developing countries. Many developing countries’ governments have given adaptation action a high, even urgent, priority.

The current per capita emissions and historical contribution of developing countries to in the atmosphere is very small compared to the industrialized nations. It is argued however that the rapidly rising emissions from developing countries shall reverse this position in a few decades. The emissions from developing countries are growing at a higher rate than those for developed countries. It is likely that some developing countries may reach the emissions level of developed countries before the end of the next century. Yet, the per capita emissions in most developing countries shall remain far below those in industrialized countries. While the income gap is expected to narrow, the per capita incomes in developing countries shall remain a fraction of developed country incomes throughout the next century.

Climate change negotiations essentially ignore a key principle of climate change negotiation frameworks for a number of years. Industrialized nations have emitted far more greenhouse gas emissions compared to developing nations. The biggest responsibility and burden for action to address climate change should be taken by the developed world. Also, Rich countries therefore must support developing nations through financing and technology transfer to meet up the upcoming challenge. However, this notion of climate justice is typically ignored by many rich nations. The rich countries owe a carbon debt because they have already used more than their fair quota of emissions. Yet, by 2050 when certain emission reductions are needed by, their reduced emissions will still add up to be go over their fair share. Industrialized nations can certainly help pay off their carbon debt by truly helping emerging countries as a form of technology transfer, finance, and capacity building. So far, rich nations have done very little within the Kyoto protocol to reduce emissions by any meaningful amount. Meanwhile, they are negotiating a follow on treaty that brings more pressure to developing countries to agree to emissions targets.

A principal objective of the global climate change regime is to decide the norms for using
the atmosphere, a global common. This perspective has treated the climate change problem merely as a search for a globally efficient mitigation regime. The focus of mitigation debate is restricted to minimizing the size of the burden. The market equalization of marginal costs across nations has thus emerged as the sole means of deciding the participation of each nation in mitigation. The choice of efficient market instruments has been made the principle agenda for the global negotiations. This perspective, which justifies ignoring equity altogether, suits well the interests of industrialized nations in the climate change problem.

Monday, April 5, 2010

Decision of land-use change : Proximate versus Underlying Causes

There are lots of factor influenced in making land-use decisions and environmental and social factors interact to influence these decisions mostly. Land use decisions are made and influenced by environmental and social factors across a wide range of spatial scales, from household level decisions that influence local land use practices, to policies and economic forces that can alter land use regionally and even globally.
The causes of land-use change can be divided into two categories: proximate (direct or local) and underlying (indirect or root). The proximate causes of land-use change explain how and why local land cover and ecosystem processes are modified directly by humans. The underlying causes explain the broader context and fundamental forces underpinning these local actions. In general, proximate causes operate at the local level (individual farms, households, or communities). And, underlying causes originate from regional (districts, provinces, or country) or even global levels. However, complex interplays between these levels of organization are common. As a result, underlying causes also tend to be complex, formed by interactions of social, political, economic, demographic, technological, cultural, and biophysical variables. Some local-scale factors are endogenous to decision makers and are therefore under local control. However, underlying causes are usually exogenous (originate externally) to the local communities managing land and are thus uncontrollable by these communities. In general, underlying causes tend to operate more diffusely (i.e., from a distance), often by altering one or more proximate causes.
Interaction of Causes
Land-use change is always caused by multiple interacting factors. The mix of driving forces of varies in time and space according to specific human-environment conditions. Biophysical drivers of land use change, such as droughts induced by climate change or loss of soil fertility by erosion may be as important as human drivers. It also includes economics and policy. As a result, biophysical factors tend to define the natural capacity or predisposing conditions for land-use change among localities and regions. Both biophysical (a drought or hurricane) and socioeconomic (a war or economic crisis) factors are responsible for land-use changes.
Crop choice decision also affects the decision to change in land use pattern. Land use change and crop choice decisions are determined simultaneously. Changing crop choices may lead to different profitability of farming operations, which may then influence land conversion themselves.
Other factors that have been found to influence land use change include land quality, land rents, population density, growth rates of population, per capita income, transportation, and accessibility to urban centers, demographic characteristics such as age and education, and policy. Land use rents are also considered as important land use change determinants.
Therefore, land-use changes tend to be driven by a combination of factors that work gradually and factors that happen intermittently.

Wednesday, March 31, 2010

An Assessment of Water Quality Benefits on Our Environment

In agricultural production practices, knowledge of benefits and costs to water users is required for any complete assessment of resources. An understanding of cost benefits also help to estimate incentives for water quality improving changes. Estimating the economic effects of changes in water quality on water users is complicated by the lack of organizes markets for environmental quality. This blog helps improve our understanding of the benefits of water quality on our environments and society in the long run.

Various conservation practices like field and buffer practices affect the amount of soil and nutrients leaving the field. The amounts of soil and nutrients actually leaving the field or watershed are estimated rather than the amounts mobilized. These provide a better indicator of resource benefits that accrue in neighboring waters or adjoining lands.
There are no observed prices with which to measure value. Instead, the economic effects are measured through observed changes in the behavior of water users. The types of water uses affected by changes in water quality include recreation, commercial fisheries, navigation, municipal water treatment and use, and reservoirs. Different programs will affect these components of social welfare to different degrees. In what follows, we consider both the components of social welfare and the techniques by which they can be measured. For example, pesticide regulation may increase consumer surplus(say, by permitting larger fish populations) at the expense of produce surplus, while cost- sharing of best management practices could enhance both producer and consumer surpluses, excluding consideration of government budgets.
Conservation reserve program (CRP) is designed to safeguard the natural resources and protect millions of acres of topsoil from erosion. CRP protects groundwater and helps improve the condition of lakes, rivers, ponds, and streams by reducing water runoff and sedimentation. CRP is considered as a major contributor to increased wildlife populations.

The benefits of improved water quality due to CRP are not only limited to increased agricultural productivity from replenished soils, but also include the well-being that enhanced wildlife habitat. This benefit also has an indirect effect on improved air quality, and carbon sequestration. Accurate and meaningful measures of changes in water quality are necessary if the CRP is to provide considerable environmental benefits. These measures provide an indication of the benefits due to enhanced water quality and increased carbon sequestration. Additionally, the economic impacts on commodity markets, government payments, and rural economies are taken into consideration to estimate the benefits of enhanced water quality. Indicators such as total acres enrolled and field-level erosion reductions certainly contribute to an argument that enhanced water quality benefits are very real and potentially large. Yet, they offer limited insight in terms of just how large because they cannot account for the fact that some fields may be better than others in terms of wildlife habitat provision. The absence of reliable indicators that would better convey the full spectrum of benefits presents a dilemma when assessing effectiveness and attempting to make refinements of water qualities. Consideration of water resource benefits on a national scale has also been frustrated by limited data and understanding of modeling capabilities.

Tuesday, March 23, 2010

Relationship between Soil erosion and Offsite Damage and its effect on water quality

Materials generated from agricultural activities can be carried into waterways by runoff and thus can negatively affect the watershed health. Also, sediment washing off crop land can fill reservoirs, harm aquatic plant life and degrade recreational resources. Moreover, suspended sediment and nutrients generated from farming are considered as most damaging sources to the environment. The conservation reserve program is designed to assist operators of agricultural land in conserving and improving the soil and water resources of their ranch. It is therefore expected that CRP will generate significant level of offsite water quality benefits.
To investigate the water quality benefits, we first need to analyze the costs of soil erosion on its environment. The affect of soil erosion is widespread in surrounding communities. In this blog, I try to investigate the relationship between soil degradation and its effect on water quality and water uses.

Links between soil erosion and offsite damage:
To evaluate the offsite benefits of CRP, we must need to understand the links between soil erosion and damage.

1. Loss of soil and nutrients
Rainfall erosivity
Soil characteristics
Crop management
Conservation practices
2. Movement of pollutants from Field to waterways
Watershed vegetation
3. Physical and biological effects on water quality
Dissolved oxygen
Sediment load
Nutrient concentrations
Fish populations
Algae levels
4. Use of water resources
Commercial fishing
Water storage
Drinking supplies
Industrial supplies
5. Value changes
Consumer surplus
Treatment costs
Avoidance costs

The relationship between soil erosion and offsite damage is complex in nature. In Figure 1, the first link mainly discuss about soil loss which is considered to be a function of rainfall erosivity, soil characteristics, crop management, conservation practices. Nutrients and pesticides are also carried off a field along with soil.
The second link signifies the amounts of sediment and chemicals that reach a waterway depend on distance, slope, and watershed vegetation of the watershed.

Physical measures of water quality include dissolved oxygen, temperature, sediment load, nutrient concentrations, fish populations, algae levels are categorized under third link. It mainly highlights the agricultural pollutants discharge into waterways and water quality.

The use of water resources is affected by the change in water quality. Water resources can be used as recreation, commercial fishing, navigation, water storage, drinking supplies, industrial supplies and irrigation.
Economic relationship between water quality changes and human activity can be expressed as changes in recreation demand, profit among water using industries.
To gauge the importance of the effects of soil loss on water quality, one needs to measure the benefits and costs to society of programs and policies designed to improve environmental quality. These measures are properly expressed in terms of changes in social welfare, defined as net changes in consumer and producer surpluses. Benefits or costs of water quality changes are measured through changes in economic welfare, represented by consumers and producers surpluses. A number of methods exist for deriving these measures, including revealed preferences, contingent valuation and averting behavior for consumer surplus and changes in production costs for producer surplus. Each of these methods can be applied properly to measure water quality benefits if related data sets are available.

Wednesday, March 17, 2010

Environmental Effect of Agricultural Land Use in Lower Bad River Watershed

The landscape amenities offered by some types of agricultural land use furnish open spaces and visual prospects that are increasingly valued by growing suburban populations (American Farmland Trust, 1997). Because such a large proportion of the U.S. population resides near agricultural land and because agriculture significantly affects the environment, the way agricultural land is managed is likely to affect human health, recreational activities, and general well-being.
The challenge of designing an environmental targeting mechanism that brings the greatest benefits relative to costs is not merely to identify agricultural land uses causing the largest ecological impacts, but also to consider how important these impacts are to the American public. This blog will mainly demonstrate the environmental effect on land use pattern in lower Bad River watershed.

No direct relationship is evident between the instability in the subwatersheds and a particular land use. The entire subwatersheds of Bad River contained both cropland and rangeland. The cropland areas are usually within the uplands landform. The uplands are less susceptible to bank erosion compared to the breaks landform which would typically be rangeland. This is contrary to what would be expected if land uses are a primary factor affecting stability. Cropland generally would produce higher volume, higher intensity runoff events compared to rangeland. This is not to say that conversion from rangeland to cropland in modern times has had no effect on some of the watersheds; but an analysis of such a scenario is beyond the scope of this analysis.
In lower watershed, bank erosion is a predominant feature on unstable channels. The pattern of stream types indicates these unstable channels are the result of the watersheds being in an active down cutting phase which began at the mouth of the watersheds and has progressed upstream. Channel erosion is the largest source of sediment and is comprised of erosion from the following channel sources:
- Stream bank erosion along the main channel of the River
- Stream bank erosion from areas identified in the field inventory as having active bank erosion
- Geologic erosion from those channels identified during the field inventory

The erosion channel sources can be controlled by implementing the cost effective range management practices. Environmental targeting refers to the practice of directing program resources to lands where specific environmental goals are achieved for the least cost. The best cost versus sediment reduction benefits in the lower watersheds are primarily range management practices. However, the practices which increased vegetative cover and improved hydrologic condition showed the greatest benefit on channel types. In addition, these practices have the largest effect on sediment reduction to Lake Sharpe. The broad extent of management practices leads to widespread environmental effects on surface- and ground-water quality, air quality, fish and wildlife habitats, species diversity, and land characteristics. It can also generate ecosystem health and many outdoor activities, such as water-based recreation, hunting, and nature viewing. In practice, environmental targeting helped us calculate the benefits derived from environmental improvements in the lower watershed.