Do Airplanes Signal When They Merge?

It was reported today that Southwest Airlines is set to purchase its competitor AirTran for $1.4 billion.  Southwest is paying a 69% premium over the stock price of AirTran in the deal, which drove up the stock prices of both companies immensely when the merger was announced.

This type of merger is called a "Horizontal Merger," defined as the joining of two competing firms.  There's also two other kinds of mergers: Vertical (a company buys one of its suppliers, like Dell buying Intel) and Conglomerate (a business buys a company completely unrelated, such as Ford buying Coke-a-Cola).

The reason that such a horizontal merger may work is if there are economies of scale to be realized and if economic efficiency will increase.  Economies of scale means that the marginal cost of running one larger company would be cheaper than running two separate companies.  Think of it as having to pay only one CEO instead of two, they could by less airplanes, etc.

Economic efficiency refers to the merger's effect on society as a whole.  Because the two companies are coming together to form one larger firm, there will be one less company in the industry and the new firm will be that much closer to being a monopoly.  This will give it a little more control over prices and quantities, but not total control because there are still many other large airlines out there. Lets look at this amazing graph: (btw, this graph is just an illustration and does not represent gains or losses from this airline merger)

The area marked "A" is an income transfer from consumers to the new firm and doesn't matter very much.  The area we're interested in is are "B," which shows us the reduction in cost the new company will see due to the economies of scale. If the reduction in cost is larger than the dead-weight loss created by the merger, then creating the larger firm is better for society and increases economic efficiency. You can see here that area B is clearly larger than the dead-weight loss, so this merger is good for the economy.

Is the Southwest/TranAir merger good for the economy? I have no idea, that would take a lot of research and access to data only their upper-level management would have access to. But I make this promise: if an Eta Sigma Alpha student finds the right answer, you'll get 10 HSA points.

Here's a good article about the merger if you want to read more about the actual acquisition: http://bit.ly/cFjhrT

Economies of Scope

Car/Dog Wash Edition

FaceFone?

Here's an interesting rumor spreading through the internets: Facebook is reportedly working on making a "highly-integrated" cellphone that would carry the Facebook name.  Similar to Google's G1 cellphone, Facebook would write the software for the device and contract a third party to construct the gadget.

This is an interesting example of Economies of Scope.  Economies of scope basically means that as a company becomes adept at making one product, it can use the technologies and resources it has developed to make that one product to expand into different industries.  Facebook is good at writing social networking programs, so it can easily use this know-how to program a cell phone that will allow people to poke their buddies, strangers, and stalk their old high school friends anywhere, anytime.

I've asked many college students what they think about the FaceFone, as I like to call it.  So far, no one has said they would be interested in the least bit in buying the phone. "I've already got a Facebook app on my phone, why do I need a whole new cellphone?" is the common response.  Maybe Facebook will be able to differentiate this phone from the way the applications work enough to attract buyers, maybe not. Only the market will tell.

-Brandon

Recycling is Good, Right?

No, not always.

Ideas Have Sex, Good Things Happen

HT to Knowledge Problem

Incentives

"Most of economics can be summarized in four words: 'people respond to incentives'. The rest is commentary." - Steven Landsburg

Many times the two best words you can hear when you are apartment hunting (especially if you are a broke college student) are "utilities included". I can say from personal experience that it is awesome. People in New York City do too, but having utilities included in the rent may cause some unintended consequences.

Also, I found the quote above here amoung some great quotes about economics and government. Some of those quotes are from my new favorite POTUS.

Good Economists, Bad Economists and Walmart...

is the title of this pretty good article.

Inconsistency

The big issue in the news recently is the ruling from an California court striking down Proposition 8. The issue of the government's role in regulating marriage is a divisive issue and people from all dimensions of the political spectrum make their case with different reasoning. Many who favor the current ruling talk of individual rights and how Americans ought to be free to enter into the voluntary contract of marriage with whoever they want. What seems inconsistent to me is when some of those same people advocate restrictions on economic freedom which are supported by the same logic and arguements. The inconsistency problem also runs the other way. How can you support economic freedom based on individual rights and not support personal freedoms, in my eyes they come from the same logic. I think that the real problem in the marriage debate is the presence of government at all, it seems to only cause problems and conflicts of interest. Everyone feel free to post their own thoughts in the comments.

Supply and Demand-BP Edition

A new story on CNNMoney.com claims that BP stations may soon offer cheaper gas. Basic supply and demand from any ECON 101 class can help us understand why. Some people are boycotting BP gas stations, even though that measure is misguided since the actual gas station owners will be the ones taking the biggest hit from any such campaign. Regardless, sentiments such as a boycott will lower demand. Lower demand leads to lower prices if you hold everything else equal. It is easy to find everyday examples of economic principles.

Great Tattoo Ideas

Economists love graphs.  I like to graph how many times Dr. Scafidi says "Write that down!" in one of his classes.  But if you want an actual useful graph, and want a new one every day, then this website will supply you with enough colors and lines and current events that you may actually learn something.

http://bit.ly/17gsGk

(Tip of the hat to The Economist)

-Brandon