BMA5001 Managerial Economics Semester II, 2023-2024

NUS Business School JO Seung-gyu

Managerial Economics

CASE PACK

Case No TOPICS

Case 1 Mr. Bus King Story

Economics of Gifts &

Case 2
Free SMRT

Case 3 Pakistan's Soccer Ball Industry Dynamics

Economics of Personal Seat Licenses &

Case 4
Miscellaneous Pricing Strategies

Game Theory Behind

Case 5
Big Tire Blowout & Engagement Rings
 Case Titles/Topics and Learning Objectives
Titles and Topics
Mr. Bus King Story
Economics of Gifts and Free SMRT
Pakistan's Soccer Ball Industry
Economics of Personal Seat Licenses &
Miscellaneous Pricing Strategies
Game Theory Behind Big Tire Blowout &
Engagement Rings
Learning Objectives
• Applying the concepts of various elasticities in short
run/long run
• Revenue maximization vs profit maximization, short
run decisions vs long run decisions
• Managerial aspects of elasticities and demand/cost
control
• Applying consumer behavior and deadweight loss
issue
• Utility-optimization objective vs sentimental value
• How to get around the deadweight loss issue from
gift giving/receiving
• Applying behavioral economics
• Loss aversion and public policy, miscellaneous
behavioral initiatives
• Comparative study for Singapore and other global
cities
• Applying cost function and optimal managerial
choices
• External shocks and market adjustments under
competitive market structure
• Analyzing inter-firm vs market dynamics
• Reality update on the industry
• Applying sophisticated pricing strategies under
market power
• Two Part Pricing and other miscellaneous pricing
policy issues
• Reality check on sophisticated pricing strategies
across the globe
• Applying game theory – static and dynamic settings
• Prisoners’ dilemma, chicken game, asymmetric
information, adverse selection /moral hazard,
signaling/screening and mechanism design
• Strategic moves to get around the strategic situations
BMA5001 Managerial Economics
NUS Business School Prof. JO Seung-gyu

CASE 1

Mr. Bus King Story

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BMS5110 Managerial Economics By Seung-gyu Jo
NUS Business School

Case 1: Mr. Bus King Story

Mr. BUS KING STORY

(NOTE: The case has been designed only to serve your intellectual curiosity and
does not pretend to relate to any actual situation.)

Instruction: To do the case, you would need to read, understand and apply ‘I. A
Casual Model to Predict Market Equilibrium’ from the separately posted file ‘Appendix
to Lecture Notes 2’

Mr. Bus King is the general manager of a Singapore-based bus company that runs a
route across the national border between the city of Johor Bahru in Malaysia and the
NUS (National University of Singapore) campus in Singapore.

It is a breezy sunny afternoon but King feels gloomy in his mind. Projected revenues
were $67.45 million below the projected costs for next year. Malaysia government
had indicated that no financial help would be forthcoming. Sources in Singapore
government hinted that some big fund might be authorized but the Treasury
Department was concerned that they would be dumping money in yet another
inefficient sinkhole. But thankfully, Mr. King learned that one-shot subsidy of $20
million would be forthcoming for sure. Even after the money from the Singapore
government materialized, however, King would still be $47.45 million short.

Another possibility for funds would be from the NUS and the city of Johor Bara.
NUS, however, has budget troubles of its own. The city of Johor Bahru resented the
NUS’s recent decision (which increased tuition for foreigners) and also regarded the
bus system as primarily serving Singapore residents – particularly the Singaporian
students attending NUS - and not Johor Bahru.

The students – their parents to be more rigorous – from the both countries think they
contribute more money to the country of Singapore than they receive back in the
form of public service and welfare. Plus, the importance of NUS is so critical to the
future of Singapore and is in fact widely believed to be an economic engine which
helps the country look promising to the eyes of MNCs. These, however, are longer
term points to make. King has a more immediate problem: How to solve his pending
budget crisis?

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A recent issue of Strait Times lies on King’s table. He picks it up and absent-
mindedly thumbs through it as his mind races through possibilities to balance his
budget. Suddenly, an article catches his eyes: ‘The Journey to NUS’. As he studies
the article, he notes a table describing the fare elasticities of demand for the bus
service around the region as follows:

Short Run Fare Elasticity: – 0.3

Long Run Fare Elasticity: – 1.1

King knows that his current daily ridership is 0.8 million riders at the current fare of
$1.50 per ride (regardless of the traveling distance). He also feels that a linear
approximation of the demand curve for his bus services would not be unreasonable.
The costs which are variable with ridership - for instance, gasoline efficiency
decreases with the number of the customers per trip - would change slightly as
ridership changes but the variable/operational parts of the costs are trivial and thus,
in the short run, most cost would be fixed, i.e. not vary with ridership.

King picks up his hot line phone and within moments Ms. Darn Smart, King’s
personal advisor who is armed with Managerial Economics from her MBA training at
NUS, is in the room. King says, “Ms. Smart, what does this study by Strait Times tell
us about the demand for our services? And can we use the information in there to
help us balance our budget?”

Upon investigation, Mr. King finds that a more advanced study has been done by
Asian Wall Street Journal, which also gives an elasticity relationship with respect to
King’s bus travel time as below:

Short run travel time elasticity: –0.7

Long run travel time elasticity: –1.6.

(For simplicity, assume that we can ignore additional costs that might be
caused to institute a fare increase or to lower travel time.)

The more advanced study by NUS Business School economists also indicates that
Malaysia and Singapore residents differ from each other in the above fare and time
elasticities: the Malaysia residents have greater elasticities with respect to both fare
and travel time than the Singapore residents.

The study also shows, in addition, that the income elasticity of demand for the bus
services is negative for the both resident groups.

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DISCUSSION QUESTIONS

1. Help Ms. Smart out. First, derive the short run and long run daily
demand curves for King’s bus services given the Strait Times’
information and the other information available to the company? (For
this part, ‘A Casual Model to Predict Market Equilibrium’ in the Appendix to
Lecture Note 2, will be helpful. For the long run demand curve, in case you
wonder, assume that you can ignore the slight changes in cost associated
with changes in ridership.)

2. What short run pricing strategy would you derive for Mr. King to at least
break even, given the above short run demand curve and the pending
budget needs of King’s bus company? (It is not required but, if you are
keen and capable, you may want to take a step further to suggest a better
price that would give Mr. King maximum revenue.)

Would the same type of strategy work in the long run? Why or why
not? What would you recommend Mr. King to do? (As mentioned, the
Singapore government manages to provide a one-shot $20 million subsidy.
Assume also that, for simplicity, each of the year’s 365 days has the same
demand curve. You may want to take a step further to suggest a better price
to maximize the revenue.)

3. Why would the fare short run and long run elasticities differ? Why
would the travel time elasticities differ between the two resident
groups? Would the above differences in elasticities between the two
resident groups, together with the negative income elasticity, have any
implication to Mr. King’s strategy in the short?
(Assume that King’s bus company has some degree of market power for the
services on the route. Don’t bother to think in terms of numbers. What we
need is a logical yet imaginative idea that will help Mr. King out!! So try to
discuss within your team for some managerial breakthrough. Even if you feel
short of a cool idea, don’t panic. We will come back to the issue in a few
weeks. )

4. Develop a longer term strategy to counteract or get over the basic

problem of Mr. King’s bus company that you uncovered through your
elasticity discussions of this case. What would you recommend Mr.
King to do if nothing worked in the long run? (Think like an economist! Be
imaginative.)

End of Case 1

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5
BMA5001 Managerial Economics Designed by Seung-gyu Jo
NUS Business School

CASE 2

Economics of Gifts and Free SMRT

 Case 2-A: Economics of Gifts

 Case 2-B: Free SMRT

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Case 2-A: Economics of Gifts

Scroogenomics
Give gold, not myrrh
The Economist, Dec 21st 2009

Ban presents. Give money instead.

DECEMBER dismays Joel Waldfogel, an economist at the

University of Pennsylvania's Wharton School and the author
of a new book called “Scroogenomics”. Mr Waldfogel objects
to the ritualised frenzy of shopping for gifts that precedes the
enormous meals and awkward family reunions that are the
other hallmarks of Christmas in the Western world.

Such complaints are hardly new. Harriet Beecher Stowe, an

American abolitionist, grumbled in 1850 about “worlds of
money wasted, at this time of year, in getting things that
nobody wants and nobody cares for after they are got”. But unlike most criticisms of
festive wastefulness, Mr Waldfogel's objections are based on economic theory rather
than morality or taste. When people buy something for themselves, they believe that
their purchase is worth at least the price paid. But most gift-givers are only dimly
aware of the desires and tastes of the beneficiaries of their largesse. As a result, they
often give people presents that are worth far less to the person getting them than the
gift-giver paid for them.

The result of all these inappropriate presents—ranging from the sweaters that people
will never wear to games they will never play—is what Mr Waldfogel calls a
“deadweight loss” from Yuletide generosity. This is the difference between the
satisfaction a person gets when she spends a dollar on herself and when a well-
meaning benefactor spends that dollar on a present for her. Over a period of time, a
series of surveys have led him to conclude that the average deadweight loss from
gift-giving is around 18%. Given his estimate that Americans spent $66 billion on
Christmas presents in 2007, this amounts to a whopping $12 billion of lost value.
Where others see generosity, Mr Waldfogel sees an orgy of value destruction.

Of course, not all presents are such bad value for money. What matters is how good
people are at anticipating what others want. People who are in close contact with
recipients usually do a very good job when it comes to choosing presents. Gifts from

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siblings, Mr Waldfogel's research has found, create only a tiny deadweight loss, creating
$0.99 in satisfaction for every dollar spent. Partners are excellent gift-givers; parents,
reassuringly, do better than average. Unfortunately, aunts and uncles (like others who are
only in occasional contact with the beneficiaries of their festive largesse) tend to give gifts
that create only about 75-86 cents in satisfaction per dollar spent.

So what should people, especially those obliged to bestow holiday gifts on those whose
tastes they do not know well, do? Since the best a gift-giver can do is give the recipient
exactly what he wants, economic theory has a simple solution: give cold, hard cash.
However, social norms make it a bit awkward to give money to all but a small subset of
(usually much younger) relations in most societies.

But there may yet be hope. Gift vouchers are close to cash in that they leave the choice of
exactly what to buy in the hands of the recipient, and have increased in popularity in recent
years. Unfortunately (except for the retailer), human forgetfulness and the propensity to
procrastinate mean that about 10% of such vouchers are never actually redeemed.

So is there no escape from the wanton wastefulness of Christmas spending? Mr Waldfogel

offers a proposal of his own—gift vouchers that are designed to expire after a set period of
time, with unused balances going to a charity of the giver's choice. People would give more
to charity if they could afford to and it were made easier, he argues. His proposal also
chimes well with the spirit of Christmas. Whether Scrooge would have approved of it is less
clear.

 Notes from Jo:

For the first work which initiated the whole debate, see ‘The Deadweight Loss of Christmas’
authored by Joel Waldfogel published in The American Economic Review (vol 83, no 5, pp.
1328-1336) two decades ago. The issue has become a never-ending debate as another
paper published in the same journal a few years later challenged Waldfogel’s assertion: ‘The
Deadweight Loss of Christmas: Reply’ by Sara J. Solnick and David Hemenway,The
American Economic Review (vol. 88, No. 5, pp. 1356-1357).

Also, refer to the interview with Professor Waldfogel from the following youtube site:
https://thenewdaily.com.au/finance/your-budget/2016/12/23/give-cash-christmas/

You may find the following speech interesting, which Professor Waldfogel gave after his
book ‘Scroogenomics’ was published.
http://www.youtube.com/watch?v=6HqM8hIP0G0.

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Supplementary Reading to Case 2-A

Is Christmas Inefficient?
by Jeffrey Tucker, Editor

The Free Market, Volume 15, Number 12

After hundreds of years of attacks on Christmas, economists have finally gotten into
the act. Yale University's Joel Waldfogel, writing in the American Economic Review,
condemns what he calls "The Deadweight Loss of Christmas." Once you cut through
the calculus and graphs, his conclusion is clear: though Christmas generates a $50
billion gift-giving industry, a tenth to a third of that is sheer loss. Why? Because the
recipient doesn't always get what he wants. Given the chance, the recipient would
have purchased something else.

All of this follows directly from his underlying theory. In neoclassical economics, the
consumer is best off when he chooses, within his means, the highest-rank good or
service on his "utility" scale. If he can afford a steak, and he has to settle for a hot dog
because the restaurant is out of t-bone, he experiences dead-weight loss. It's even
worse if he has to pay the price of steak and gets a wiener instead.

So it is with gifts. They generate a net loss, this theory says, unless the recipient would
have otherwise purchased, with his own cash, precisely what he unwraps. Of course,
this is rarely the case. To provide empirical meat to his theory, Professor Waldfogel
interviewed students. The students received an average of $438 in gifts, for which
these kids reported they would have paid only $313 if they had done the shopping
themselves. The gap narrows when the gift is from a friend, and widens when it's from
the family.

Imagine Mr. Waldfogel attending your next Christmas gathering. Aunt Janie gives her
nephews soap-on-a-rope, and they all praise her for her generosity and
thoughtfulness. The economist then prods the youngsters to 'fess up that soap-on-a-
rope isn't so great after all, and with the $9.95, they would have bought the newest
Spice Girls tape. He declares the gathering a waste and encourages the party to break
up in the interest of everyone's economic welfare.

Professor Waldfogel proposes that we could eliminate these losses, which could be as
high as $13 billion per year, by giving money instead of gifts, and letting the recipient
spend it as he chooses. But then why not take matters one step further? What is the
point of all this shuffling around of cash in the first place? According to neoclassical
theory, it would be far better if everyone just clung to his own bank account and spent
his own money as he saw fit. Indeed, we'd all be better off economically if Christmas
were merely abolished--heck, maybe the Congress should do it--until such time as we
all have perfect knowledge of each other's preferences and are willing to act on them.

Far from being one man's opinion, this thesis is becoming a classic "extra credit"
question on microeconomics tests. Waldfogel is only distinguished for having
formalized the model and tested it against his own students' experience. The
conclusion allows economists to presume they are smarter than the mass of the
buying public, which persists in the irrational habit of buying things for each other
instead of sending money or, even better, just spending it on themselves.

So, what's wrong with the theory? Plenty. It equates personal utility with dollars spent,
the classic conflation of value and price. In fact, a gift is a special kind of good with its

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own value. For example, we value the soap from the Aunt precisely because of its tie-
in with familial affection. Even if the recipient would never have bought it, his personal
utility is enhanced by the knowledge that his extended family is thinking about him and
cares enough to give.

The source matters. If soap were given by a classmate who complains that you are
odoriferously challenged, the "gift" is an insult in disguise. It has negative value. "Rich
gifts wax poor when the givers prove unkind," writes Shakespeare, who seemed to
have a more complete view of economics than Professor Waldfogel. Neither is the
person who receives a gift purchased under duress likely to be grateful. People on
long-term welfare, for example, tend to think of taxpayers as suckers.

A comment later published in the same journal picked up on this. The authors (one
from Harvard, one from the University of Miami) also did an empirical test. They used a
different method (asking students about prices of specific gifts, not whole bundles), a
larger sample of students (209 instead of 78), and asked more detailed questions. The
results were the opposite of Waldfogel's. The authors showed that more than half
valued the gift above its retail price, suggesting that Christmas giving actually
represents a gain in social welfare.

Moreover, these authors found that gifts asked for were less valued than gifts that
were not. This fits with experience: we're pleased to get what we want, but especially
appreciative when we like something we had not expected. Indeed, good gift shoppers
think about this ahead of time. They buy someone a tie he would never buy for himself.
They buy items the receiver might be too modest or frugal to purchase himself, even if
he had the resources.

Some items are just gifts and nothing more: fancy soaps, paisley boxer shorts,
blankets with school logos, coffee cups printed with witty slogans, and the like. That's
why there can be such things as "gift shops" as distinguished from regular stores. Gifts
have a different value because they are altogether different goods. They embody not
only themselves but also their meaning. Imagine if someone came to dinner, and
instead of bringing a bottle of wine, gave you $15 and told you to spend it on anything
you wanted. It's just not the same.

For his part, Waldfogel responds by accusing the authors of biasing their results. The
very nature of their survey questions encouraged students to report "sentimental
value" instead of pure "material value." Going back to the drawing board, and
correcting for this and other supposed errors, Waldfogel surveyed another group of
students--455 this time--and still found a dead-weight loss, less than before, but a
substantial one nonetheless. Christmas is inefficient: that's his story and he's sticking
to it.

Of course there is no way to decouple one kind of value from another kind of value,
since all economic value is ultimately subjective. Surveys can't reveal what people
value; only action in the marketplace does that. What's deeply odd about this
wrangling is that everyone seems to agree that only the value to the recipient should
matter. That leaves out the really crucial point of gift giving: that it benefits the giver as
well as the receiver.

People feel good in being generous, especially towards family and friends. Giving is an
act of charity and liberality, virtues people practice because they're good for the soul.
And even if they aren't, economists should follow the rule of "demonstrated
preference": if a person gives a gift, it is because he preferred giving the gift to keeping
his own money. The action is "utility enhancing" on its own terms. Why? Because it, as
opposed to something else, took place. Value is revealed in the preferences people

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demonstrate voluntarily. A well-chosen gift also reveals something about ourselves: we
care enough to make our affections known in a personal way.

Again, the problem of the welfare state presents itself. In its form of "charity," people
do not give voluntarily. So resistant are people to dumping billions of dollars on millions
of freeloaders, that the government has to threaten them with fines and jail terms
(that's what taxation is) to get them to fork over this "gift." No one demonstrates a
preference for the welfare state (voting doesn't count since people are not using their
own resources to purchase the services for which they vote). This degree of
redistribution has to be imposed. Taxation, in contrast to Christmas, is a clear example
of a utility-reducing activity.

But economists of the neoclassical school have rarely bothered with such distinctions.
Their theories leave little room for reflection on property rights, individual choice, and
the distinction between market exchange and forced redistribution. For them, a
mathematically determined standard of efficiency is the only test that matters. Not
even an absurd conclusion--for instance, that giving gifts is inefficient--causes them to
rethink their core theory.

Economists are hardly alone in this. Skeptics and opponents of the market economy
have long had a beef with the idea of giving and charity, especially as it occurs at
Christmas.

Perhaps the socialists have long understood something about Christmas that others,
even advocates of the market, have overlooked. In the institution of the gift, we find a
strong rationale for the establishment and protection of private property and the
capitalist economy. In order to give, we must first produce, acquire, own.

G.K. Chesterton, a great defender of Christmas against English Puritans who regarded
it as corrupt and pagan, observed that collective ownership would mean the end of
voluntary giving. Moreover, he clarified, "giving is not the same as sharing: giving is the
opposite of sharing. Sharing is based on the idea that there is no property, or at least
no personal property. But giving a thing to another man is as much based on personal
property as keeping it to yourself."

And contrary to the complaints of materialism at Christmas, meaningful gifts can be as

elaborate as gold, frankincense, and myrrh, or as humble as two fish and five loaves.

It's no wonder, then, that history's dreariest socialists have denounced Christmas. The
economic core of its gift giving centers on private property, while its ethical core belies
the claim that private property institutionalizes greed.

"There is the greatest pleasure in doing a kindness or service to friends or guests or

companions," wrote Aristotle in The Politics, "which can only be rendered when a man
has private property. These advantages are lost by excessive unification of the state....
No one, when men have all things in common, will any longer set an example of
liberality or do any liberal action; for liberality consists in the use which is made of
property."

As for intellectuals--economists no less--who have failed to understand this simple

truth, it's staggering to think of the dead-weight loss their ideas have imposed on
society.

________________________________________

Jeffrey Tucker is editor of The Free Market

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Case 2-B: Free SMRT

From 24 June 2013, the Land Transport Authority (LTA) of Singapore launched a
one‐year trial to provide free MRT rides to commuters, if they exit from one of the 16
(expanded to 18 at the end of 2013) stations in the city center area before 7:45am on
a workday. For those who exit between 7:45am and 8:00am, they would receive a 50
cents discount. More details are described in the LTA’s new releases as attached
below.

Reading1

TRAVEL EARLY, TRAVEL FREE ON THE MRT

News Releases
16 Apr 2013
Source:
http://app.lta.gov.sg/apps/news/page.aspx?c=2&id=c3983784-2949-4f8d-9be7-
d095e6663632

One-year trial to provide free travel on rail into the city area before 7.45am
to spread out morning peak hour crowds

1. The Land Transport Authority (LTA) will embark on a one-year trial from 24 June
2013 to provide free travel on the rail network for commuters who end their journey
before 7.45am on weekdays at 16 designated MRT stations in the city area. In
addition, commuters who exit at these stations between 7.45am and 8am will be
given a discount of up to 50 cents off their train fare. The Government will be funding
this one-year trial.

2. The objective of the trial is to encourage commuters who are able and willing to
make changes to their travel schedule, to travel earlier into the city area before the
peak hour. This would help spread out the morning peak hour crowds to the pre-peak

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period, and ease the crowding situation on city-bound stretches of the MRT network1.
It is part of the Government’s effort to try to alleviate the morning peak hour crowding
situation on trains in the short term, even as rail capacity is aggressively being
increased through new lines, additional trains, as well as higher train frequencies in
the longer term.

3. The free travel trial will be a significant enhancement to the existing SMRT Early
Travel Discount scheme, which offers up to 50 cents discount for travel on SMRT
lines into 14 SMRT stations in the city area before 7.45am. It will also entail a wider
coverage compared to the current scheme as it will include SBST’s North East Line
(NEL) and Sengkang and Punggol LRTs (SPLRT) i.e. commuters who enter at
stations on NEL and SPLRT and exit at the designated city area stations will be
eligible for the discount. In addition, the two NEL stations in the city area – Clarke
Quay and Chinatown – will be included in the scheme, bringing the total number of
designated city stations from 14 to 16, or essentially every MRT station in the city
area.

Free travel before 7.45am

4. Commuters must exit at any of the 16 designated stations in the city area by
7.45am on Mondays to Fridays (excluding public holidays) for the train portion of their
journey to be free. The train journey must not begin at any of these 16 designated
stations.

5. The 16 designated stations are Bugis, Chinatown, City Hall, Clarke Quay, Dhoby
Ghaut, Lavender, Orchard, Outram Park, Raffles Place, Somerset, Tanjong Pagar,
Bayfront, Bras Basah, Esplanade, Marina Bay and Promenade.

Up to 50 cents discount from 7.45am to 8am

6. To encourage even more people to make the effort to travel early, commuters who
exit at the 16 designated stations between 7.45am and 8am, on Mondays to Fridays
(excluding public holidays), will receive up to 50 cents off their train fare. Currently,
there is no discount offered during this period. This will also allow commuters who
miss the cut-off timing for free travel by a few minutes to enjoy some discount.

Injecting additional pre-peak train capacity

7. To cater to the expected shift in ridership, more train trips will be injected during
the pre-peak morning period to provide additional capacity. LTA will work with the
train operators to continually monitor and further adjust the injection of additional
capacity as necessary. Refer to the Annex for more details.

Employer support for off-peak travel

8. LTA is working with employers to facilitate their employees to travel pre-peak to

take advantage of the free travel should they wish to do so. A two-year consultancy
pilot, Travel Smart, was launched in October 2012.

9. To date, three of the 12 organisations under the Travel Smart pilot have obtained
management approval to implement action plans recommended by the consultant to

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facilitate off-peak and sustainable travel. These Action Plans include putting in place
flexi-work arrangements such as staggering working hours, and measures to
facilitate these arrangements, such as introducing IT facilities to enable employees to
work remotely and even providing shower and locker facilities to encourage active
travel.

10. The organisations participating in Travel Smart include Rajah and Tann and BP
Singapore, with over 600 employees each. They are starting to implement the
recommended Action Plans. The remaining organisations are working with the Travel
Smart consultant, AECOM, to develop their Action Plans.

11. LTA will be monitoring the progress of the implementation of these practices in all
pilot organisations and will consider rolling out workplace-based travel planning
beyond these pilot organisations after reviewing the results.

Other off-peak rail travel incentives

12. Commuters travelling off-peak can also accumulate points for rewards under the
‘Incentives for Singapore’s Commuters’, or INSINC scheme2. The number of INSINC
participants now stands at more than 85,000, up from 35,000 last October.

13. LTA is also exploring customised travel incentive pilot programmes for
employees and students. This will support the efforts of employers and Institutes of
Higher Learning that are prepared to put in place flexible arrangements for their
employees and students to travel off-peak. More details will be provided when ready.

1
There are about one-and-a-half to two times as many commuters traveling on the
MRT into the city area in the half hour after 7.45am compared to the half hour
before.
2
INSINC was launched in January 2012. INSINC participants accumulate points for
rewards when they travel on the rail network on weekdays. Commuters who start
their journey during the shoulder-peak hours of 6.30am-7.30am and 8.30am-9.30am
on weekdays will accumulate more points for rewards.

3. For the links to Annex A and Annex B, please refer to the above-specified URL.

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Reading 2

PILOT PROGRAMME TO SMOOTHEN PEAK HOUR TRAVEL

News Releases
2 Oct 2012
Source:
http://app.lta.gov.sg/apps/news/page.aspx?c=2&id=add9c932-28f7-42e7-a3be-
1e9d0b6e2847

‘Travel Smart’ ropes in employers to shift commuting patterns

1. Land Transport Authority (LTA) has launched the ‘Travel Smart’ pilot programme,
a new programme that promotes a more even distribution of travel demand during
the busiest times of the day. The trial is supported by the inter-Ministerial workgroup
on travel demand management co-chaired by the Minister of State for Finance and
Transport, Mrs Josephine Teo, and the Minister of State for Health and Manpower,
Dr Amy Khor.
2 The workgroup is making a push for a smoother distribution of travel demand
during peak hours to improve commuters’ travel experience. This is even as the
Government aggressively increases public transport capacity through new rail lines,
additional trains and buses, as well as improved train and bus frequencies.

3 The workgroup has noted that there are 2-3 times more commuters traveling on the
MRT into the CBD during the first half of the peak hour from 7.45 to 8.45 am than the
half hour before. There are also 20-40% more commuters in the second half of the
peak hour compared to the half hour after. Said Mrs Teo, “We are getting more train
and buses which will improve services. But it will be better if we can spread out the
load during peak hours. Even a shift of 10-15% out of the peak-of-peaks will make
the commuting experience more pleasant.”

4 Incentives were first introduced in 1997 to encourage off-peak travel on the MRT.
The ‘Incentives for Singapore’s Commuters’ (INSINC) study was also launched in
January 2012, providing rewards to commuters who shift their travel away from the
peak period. In June this year, Minister for Transport, Mr Lui Tuck Yew, announced
the enhancement of SMRT’s Early Travel Discount to up to 50 cents starting in
August.

5 The LTA points out that both the Early Travel Discount and INSINC have
encouraged some commuters to shift travel behavior, suggesting that these

10
measures have the potential to be effective. But it has also received feedback from
commuters that their travel choices are largely determined by workplace practices
such as official hours and the availability of flexi-hours. “We want to see more
commuters choosing to travel earlier, later or not at all. A lot of it will depend on
employer attitudes and workplace practices. So the important first step is to work with
employers to identify opportunities for further intervention,” said Mrs Teo.

6 Travel Smart is designed to help employers understand the travel needs of their
employees. This will provide insights on measures that can be implemented to
influence travel behaviour change, for example, flexible work arrangements,
travelling during off-peak periods and switching to other modes of travel such as
walking and cycling.

7 For a start, 7 organisations with a combined staff strength of more than 10,000 are
participating in the programme. These employers have workplaces in different parts
of Singapore and staff with a variety of travel profiles. They are:

• BP Singapore
• CapitaLand
• Ernst & Young
• Public Service Division
• LTA
• Rajah & Tann
• SPRING Singapore

8 The workgroup expects Travel Smart to deliver the following benefits:

• Participating organisations can benefit from expert advice on understanding

employees’ concerns and opportunities with regard to more flexible work
arrangements, reducing unnecessary business commuting, enabling flexibility
for employees and realising potential productivity gains, and improving their
overall transport efficiency.

• For employees, the benefits can include reduced journey time and/or travel
costs, and better work-life balance.

• At the national level, Travel Smart can highlight opportunities to relieve public
transport and road network pressures during the peak-of-peaks travel hours.

9 However, Mrs Teo emphasised that measures like Travel Smart do not replace the
fundamental focus of the Government on capacity expansion. “The basic strategy to
improving public transport is to enhance capacity. At the same time, we should have
a complementary strategy to smoothen travel demand during peak hours. We should
see this as both a challenge and an opportunity,” she said.

11
Reading 3

FREE PRE-PEAK TRAVEL EXTENDED UNTIL 30 JUNE 2016

26 May 2015

1. The Land Transport Authority (LTA) is extending Free Pre-Peak Travel on the rail
network by another year to 30 June 2016. Commuters who end their journey before
7.45am on weekdays at 18 designated MRT stations[1] in the city area will continue to
enjoy free travel on the rail network. Commuters who exit at these stations between
7.45am and 8am will also continue to enjoy a discount of up to 50 cents off their train
fare.

Sustained reduction of peak hour ridership with Free Pre-peak Travel

2. Since the introduction of Free Pre-Peak Travel in June 2013, there has been a
sustained reduction of 7 to 8% in the number of commuters during the morning peak
period. The ratio of morning peak (8am to 9am) to pre-peak (7am to 8am) travel
(based on commuters exiting from the designated stations) has fallen from 2.7 and
stabilised at 2.1, resulting in a more evenly distributed morning rail ridership.

3. Senior Minister of State, Ministry of Finance and Ministry of Transport Mrs

Josephine Teo said, “The proportion of commuters who have shifted their travel
patterns due to the Free Pre-peak Travel scheme is significant and has stabilised
after two years. The scheme is an important foundation on which we can build on for
our other travel demand management efforts, which includes our Travel Smart
Programme, Travel Smart Rewards and the new Off-Peak Pass[2] that we are
introducing in July this year. We hope that more people, who are able and willing to
shift their travelling times, will benefit.”

4. To enable more commuters to benefit from flexi-travel and shift to off-peak travel,
LTA had also launched the Travel Smart Network in July 2014 to encourage more
companies to create supportive environments for their employees. There has been
strong support from organisations so far, with more than 50 organisations, employing
more than 120,000 employees, enrolled in the Travel Smart Network[3]. More details
will be shared at Travel Smart Day in July this year.

12
 The 18 designated stations are Bayfront, Bras Basah, Bugis, Chinatown, City Hall,
[1]

Clarke Quay, Dhoby Ghaut, Downtown, Esplanade, Lavender, Marina Bay, Orchard,
Outram Park, Promenade, Raffles Place, Somerset, Tanjong Pagar and Telok Ayer.
[2]
With the Off-Peak Pass, commuters can enjoy unlimited rides on the public
transport network every day, except the peak hours of 6.30am – 9am and 5pm –
7.30pm on weekdays. Monthly passes for adult Singapore citizens and Permanent
Residents are at $120, while those for Persons with Disabilities and senior citizens
are at $60.

Companies who are interested to join the Travel Smart Network can visit
[3]

www.lta.gov.sg/travelsmart or email LTA-TravelSmart@lta.gov.sg for more details.

13
DISCUSSION QUESTIONS:

Case 2-A: Economics of Gifts

1. Provide a brief summary of the case and present and discuss the arguments
and criticisms.

2. The premise of the original article by Joel Waldfogel in AER is that Christmas
gift-giving can be inefficient. And your job is to show both logically and
graphically under which conditions this premise would make sense. You can
take your own line of analysis but, unless you hate, you can follow the
following thinking lines:

Assume that there are two goods in the economy: sweaters and music
CDs. Suppose the price for CDs is $10 and the price for sweaters is $20.
Assume also that a consumer has $100 to be spent on the two goods
after her seasonal shopping plan.

Then, draw the relevant budget line for this consumer. And then show
(and explain) how each of the following events affects her budget line:

i. The consumer's seasonal income increases by $40

ii. A well-intentioned aunt gave our consumer two sweaters.

Now, add the consumer’s indifference curves (of generic shape) and show
that the gift receiver could be better off if the gift were not two sweaters
but rather $40. What properties should the consumer's taste satisfy,
respectively for this premise to be true and not to be true? (Answer
graphically and also give economic interpretations.) What are some other
examples where ‘gifts-giving’ is still justifiable and recommendable even
when the receivers might prefer cash?

3. Make comments – focusing on why it might serve to the overall welfare

improvements of the society – on Waldfogel’s new solution to reduce the
deadweight loss through ‘gift vouchers that are designed to expire after a set
period of time, with unused balances going to a charity of the giver's choice’.
What would be your own position about his suggestions?

4. Please add any of your thoughts regarding the case topic.

(Here goes another additional reference in case you want, not that it is
required. : ‘Gift Cards’, J. P. Offenberg, Journal of Economic Perspectives, vol
21, 2007, pp. 227-238.)

14
Case 2-B: Free SMRT

1. Give a brief executive summary of the case.

2. How effective do you think the fare adjustments would be in reallocating the commuters
from the peak time hours to off-peak hours?
(To get intuitions, you can refer to the following research for the case of
Melbourne by Professor Graham Currie: ‘Exploring the Impact of the ‘Free
Before 7’ Campaign on Reducing Overcrowding on Melbourne Trains’. Two
versions are available:

• PPT version:: http://www.cmnzl.co.nz/assets/sm/4653/61/1100B-CurrieG.pdf

• Working Paper version:
http://www.atrf.info/papers/2009/2009_Currie.pdf )

3. With the apparent goal of smoothing peak time traffic and enhancing travel
comfort, it is not the first time that the LTA adjusted the fare mechanism on the
MRT system. For example, back in 1997, a smaller discount of 10 cents was
offered to commuters who travel early and exit from several of city area stations.
Gradually, the discount has been increased to 30 cents, 50 cents, and eventually
100%.
Employ the conventional demand and supply curve tools to justify the LTA’s
initiatives for, firstly, the usual surcharges/discounts and, secondly, the free peak
hour fare. (Hint: You can analyze through two separate Demand-Supply
frameworks during peak and off-peak hours, respectively, by incorporating the
simultaneous effects across the two hour zones.)
Note: When discussion, please incorporate your learning through behavioral economics
issues. (For example, among others, how would you compare a peak
time surcharge and an off-peak time discount in their effectiveness?)

4. What other ideas – like a pilot program such as flexible work hours – would you
recommend for a more effective outcome?

END OF CASE 2

15
16
BMA5001 Managerial Economics Designed by Seung-gyu Jo
NUS Business School

CASE 3

Pakistan’s Soccer Ball Industry:

20 Years of Industry Dynamics

After Children Labor Elimination

1
Case 3: Pakistan’s Soccer-Ball Industry Dynamics
_____________________________________

Reading 1

Sports, Asia, Pacific

Pakistani Footballs to Shine Again in 2018 World Cup

By Aamir Latif
Karachi, Pakistan

03. 02. 2018

Workers in country’s northeastern Sialkot city are

busy manufacturing footballs for mega event

When millions of football lovers cheer on their favorite teams in 2018 FIFA World Cup to be
held in Russia this summer, Pakistanis will have a special reason to rejoice, although the
198th-ranked football nation will not be participating in the mega event.
Pakistan's famous soccer balls will be used in the World Cup matches, making over 200
million Pakistanis feel their presence in the event.
Russian Ambassador to Pakistan Alexey Dedov confirmed earlier in the week that his
country was going to use Pakistan-made footballs for the World Cup matches.
Located on the outskirts of northeastern Sialkot city, workers at a local sports company --
which is a contracting manufacturer of global sports brand Adidas -- are working extra
hours to ensure on-time delivery of the footballs.
The city, which borders India, has been famous for producing finest quality sports goods,
and has been supplying footballs for mega events for a long time.
Forward Sports, which also makes footballs for German Bundesliga, French league and
the Champions League, was the official footballs provider of 2014 World Cup in Brazil as
well.
"This is an honor for us that we are going to provide footballs for the world cup once again.
We are very excited to meet this challenge," Khawaja Masood, the chairman of the
company, told Anadolu Agency.

2
Refusing to give the exact numbers of footballs the company is going to supply for the
World cup alone due to restrictions from Adidas, Khawaja said his firm produced a total of
700,000 footballs per month.
The soccer ball to be used in the forthcoming tournament is technically termed as "thermo
bonded", which was first introduced in 2014 World Cup.
Before that, Pakistan had supplied hand-stitched soccer balls for almost all the world cups
from 1990s to 2010.
Other types of soccer balls produced by Sialkot are "glued", and "hand-stitched".
Thermo-bonded balls are made by attaching the panels through heat -- the latest
technology adopted by Adidas and transferred to Forward Sports in 2013.
"Although Pakistan football team will not be participating in the forthcoming World Cup, its
presence will be felt in all the matches [because of the balls]", Khawaja told Anadolu
Agency.
According to Husnain Cheema, president of Pakistan Sports Goods Association, the
country will export around 10 million footballs across the world this year.

Child labor allegations

Pakistan annually earns $1 billion from sports goods exports, which includes $350-$500
million from footballs alone, Cheema added.
The country's thriving football industry first came under international scrutiny in the late '90s
when it was accused of using children for handstitching footballs in some of the factories in
Sialkot.
Famous sports company Nike had cancelled its orders of hand-stitched soccer balls in
2006 to one of its contracting manufacturers after it was accused of promoting child labor.
However, the local manufacturers claim the child labor issue was spiced up with
exaggeration.
"There were complaints about child labor. Some small factories, mostly set up at homes,
had employed children for handstitching footballs," Shaikh Jhangir Iqbal, chief executive of
Silver Sports company -- a contracting manufacturer of Nike -- told Anadolu Agency.
"These home-based factories no longer exist now," Iqbal said adding that the international
labor rights groups had been monitoring Sialkot's sports goods industry.
"There has been no major complaint vis-à-vis use of child labor [in sports industry] since
2006," he said.

Value addition

Local manufacturers observe that the country’s sports goods industry has a potential to
triple the existing earnings from exports.
"We are going to introduce football kits and other accessories apart from exporting
footballs," Ijaz Khokhar, head of Pakistan Readymade Garments Manufacturers and
Exporters Association, told Anadolu Agency.
He said his association had a plan to set up a technical training institute in Sialkot to create
trained manpower for production of other accessories, which could earn much more for
Pakistan compared to exports of footballs and other sports goods.

3
"Huge football production business is being transferred from China to Pakistan because of
the quality we are providing to the world," Khokhar said, adding that Pakistan had to makes
use of this opportunity.
Iqbal defended Khokhar's view saying China was producing machine-stitched footballs,
which were only used as "toys".
"These footballs cannot be used in professional matches. Our quality standards are way
better than China's football production," he said
_____________

Reading 2

Globalization in Pakistan

The Football Stitchers of Sialkot

03/16/2010 03:06 PM
By Hasnain Kazim in Sialkot, Pakistan

The city of Sialkot in Pakistan produces as many as 60 million hand-stitched

footballs in a World Cup year. The firms here are running out of new workers since
child labor was abolished. Western buyers may have a clear conscience, but the
children of Sialkot now toil in the local brickworks instead.

The village is surrounded by lush green fields. A few red chimneys from brick factories,
their tips blackened with soot, jut into the sky. Flat, crumbling buildings are dotted around
with windows like arrow slots. They appear to be barns or grain stores.

In one of these houses in Sambrial, a few kilometers outside Sialkot on Pakistan's border
with India, Shaukat is sitting on a short-legged chair next to 20 other men. He has taken off
his sandals and put them next to his chair. In March, it's warm enough to work barefoot.
Shaukat is a strong, 20-year-old man. He has been working for this independent stitching

4
factory, Danayal, for eight years. Danayal produces handmade footballs for professional
leagues.

At one end of the room there's an old television set showing a football match, but the men
aren't paying any attention to it. They're sewing and talking to each other. They find cricket
far more interesting. Most of them have never played football. But Shaukat is glad that
millions of people around the world like football -- maybe not in Pakistan and not really in
the entire region of South Asia, but in the rest of the world. That global love of the beautiful
game has given him an income for years.

At the entrance to the factory there's a notice board showing the current rates of pay.
Depending on the model, his employer pays between 55 and 63 Pakistan rupees per ball
($0.65 to $0.75, €0.48 to €0.55). "On a good day I manage six balls," says Shaukat. That's
eight hours work. "That's not a lot of money," he says as he pushes a needle through the
thick synthetic leather and stitches together two patches. His boss is standing close by so
he quickly adds: "But it's not little either." He gets paid every Saturday and has to feed a
family of six with his wages.

Beneficiaries of Globalization
On average the people of Sialkot earn €1,000 euros ($1,370) a year, twice the national
average, thanks to the sports goods industry. Manufacturers of surgical instruments,
leather goods and musical instruments also contribute to the city's prosperity. All balls and
surgical knives manufactured here are exported. Politicians and executives scrutinized
foreign markets and adopted the standards of their Western partners. Some 500,000
people live here -- 3 million if you include the commuter belt -- and most of them are proud
of themselves and their city. The streets are better and the cars newer than in other
regions of Pakistan. Sialkot has profited from globalization.

There's a hill of white footballs piled up in the room next door. The material -- per ball, 20
hexagonal patches and 12 pentagons of synthetical leather plus the bladder and thread --
is supplied by the company Forward Sports. Every evening a truck comes to collect the
finished balls. At present, Forward Sports is the biggest manufacturer of handmade
footballs in Sialkot. It outsources to more than 100 stitching centers like Danayal. It sells
the balls to German sports company Adidas for between €5 and €10 per ball, no one here
wants to state the exact price. Adidas has supply contracts with other companies in Sialkot
in addition to Forward Sports.

It's a long route from the stitching rooms of Sialkot to the professional football pitches of
Europe and America. First you get the sub-subcontractors -- the stitching centers, the
backroom workshops, the one-man businesses. Add to that the subcontractors, the
transport firms, the customs offices, the sports equipment giants, the advertising industry,
the sports good retailers and the department stores. The chain converts a 63-rupee ball
into a product costing more than €100. Everyone wants a cut. And someone has to come
up with the millions of euros for the football stars, the expensive advertising icons of the
sports brands.

5
Up to 60 Million Footballs a Year
Demand for footballs is enormous, especially in years when there's a World Cup. Since the
mid-1980s, Sialkot has had its own customs office, which means the manufacturers don't
have to transport their goods to the port of Karachi. They call the freight center their "dry
port." Last year the city opened a modern airport to allow the gentlemen from Adidas, Nike,
Puma and Co to fly straight to Sialkot and to receive particularly urgently needed supplies
per air freight.

Recently, however, hardly any Western executives have dared to travel to Pakistan, even
though there haven't been any terrorist attacks in Sialkot. The sports giants are so afraid of
terrorism that they haven't even built up a distribution network in the country, even though
most of their products are manufactured here. Pakistani business people have trouble
getting visas for the United States or for Europe. But business is still going well, they say.
The factories of Sialkot supply 40 million footballs a year, and that number rises to 60
million in European Championship or World Cup years. That's an estimated 70 percent of
the global production of hand-sewed footballs. According to legend, the success story of
Sialkot as world capital of football production started with a man who repaired a leather ball
for British colonial military officers about a century ago, and then began making his own
balls. He was called Syed Sahib, and the city has named a street after him.

Child Labor

The Pakistani suppliers have had a good reputation among global sports firms ever since
child labor was officially banned here. Children as young as 10 years old used to stitch
footballs until there was an international outcry about it. The sports companies,
accustomed to nurturing their image with huge sums of money, got worried about their
reputation. So they sided with human rights campaigners and exerted pressure. In 1997,
Pakistani suppliers and representatives of Unicef and the International Labor Organization
signed the Atlanta Agreement in which the industry agreed to stop the use of child labor.

Thousands of children lost their jobs overnight. To make it easier for the sports groups to
control the ban, the big domestic manufacturers prohibited people from working at home
and built stitching centers instead. Pakistan now has the Independent Monitoring
Association for Child Labor (IMAC), which regularly visits factories and checks the workers'
papers. In order to preclude bribery, a computer determines at random the time and
location of factory inspections. It's odd that IMAC is financed by local manufacturers. But
several small firms don't take part in the system. "It could well be that they are still
employing children," says one IMAC controller.

"Child labor is a sensitive issue," says Aziz-ur Rehman, the head of Adidas in Pakistan. He
says Adidas has developed its own monitoring system. In addition, its subcontractor
Forward Sports sends people into the stitching factories to make sure there are no children
there.

The case of Saga Sports is a cautionary tale of what can happen when a child is caught
stitching footballs these days. Nike cancelled its contract with the company in 2006
because of it and Saga, once one of the city's biggest employers, is virtually bankrupt

6
today. The managers of Forward Sports, Comet Sports, Capital Sports and the smaller
manufacturers in the city paid close attention to the fate of their competitor.

Children Now Work in Brickworks Instead

Parents now send their children to the brickworks and into metalworking companies where
no one is worried about corporate image. The families need the money to survive. The
local sports companies are aware of what's happened but they want to fulfil the wishes of
their Western customers. After all, the people who spend a lot of money on footballs want
to do so with a clear conscience. The customer in a sports retail outlet doesn't realize that
young girls are now hauling bricks right next door to Danayal, the stitching factory.
"Ten or 12-year-olds were well off here," says one manager who asked not to be named.
"They learned a trade here that secured them an income for life. Now we're having trouble
finding new stitchers."
Muhammad Ishaq Butt is convinced that Sialkot will cope with the labor shortage. He's
sitting in his wood-panelled office in the city center wearing a blue blazer with gold buttons,
a closely cropped grey beard and horn-rimmed spectacles. Butt, president of the Sialkot
Chamber of Commerce, looks like a Hanseatic entrepreneur. "We're currently building a
factory where balls will be glued by machine," he says. It's a joint venture project between
the city and private investors. In Thailand and China balls have for a long time been
exclusively produced by machine -- to such a high standard that the 2006 World Cup in
Germany for the first time didn't use a football made in Pakistan, but in Thailand. The
Adidas model "Jabulani" for the 2010 World Cup in South Africa is manufactured in China.

Ball From Pakistan in Champions League Final

A lot is going to change for the stitchers of Sialkot in future. "That's how society works,"
says Butt. "The people will learn to operate machines." However, demand for hand-stitched
balls remains very high and the quality is still better than balls glued or stitched by
machines, he adds.

In the big companies of Sialkot, men in white coats are working to make the handmade
balls even better. They're using computers to measure whether the product is perfectly
round. Machines check how much water a ball absorbs in the rain, how resilient the
material is and whether the surface is too slippery. The work is paying off, the researchers
say. A ball made in Sialkot will be used in the Champions League final in Madrid on May 22.
So no one in Sialkot should be worried, says Butt.

Besides, firms here have learned how to offset market share lost to the competition in the
Far East, he adds. "We're increasingly making other products here." Sports clothing and
bags, for example. And he proudly declares that his city has made it to the top in other
industry: The city now produces more gloves than any other region in the world.

______________

7
Reading 3

After the children went to school

The Economist
Apr 6th 2000 | SIALKOT, PAKISTAN
From The Economist print edition

Ending child labour can have unexpected consequences

WERE it not for Indian guns that sometimes fire shells into villages near the Kashmir
border, the Sialkot district would be one of Pakistan’s most desirable. Unemployment is low,
literacy high and people are rich: income per head is about $1,000, nearly twice the
national average. In a country known for exporting cheap textiles and expensive narcotics,
Sialkot prospers by making musical and surgical instruments, leather goods and, above all,
sporting equipment. Daska Road is the heart of the world’s soccer-ball industry.

In the mid-1990s, Sialkot’s soccer-ball magnates were under attack. It was then that the
western press discovered that they were employing children and threatened to bury them
8
in a landslide of bad publicity. “No amount of preparation could have lessened the shock
and revulsion I felt on entering a sporting-goods factory in the town of Sialkot,” wrote one
journalist, who in 1996 described children toiling 80 hours a week to make soccer balls in
near darkness. The industry hastily made changes. In February 1997 Sialkot’s chamber of
commerce signed the “Atlanta Agreement”, under which manufacturers volunteered to stop
child labour and let international monitors check up on them. Various agencies teamed up
to shepherd the liberated youngsters into schools.

Three years on, child labour in Sialkot’s football industry is mostly history. The chamber of
commerce says that 66 manufacturers, representing 90% of the district’s exports, have
submitted to inspection by the International Labour Organisation. “A Child
Employed is a Future Destroyed” reads a sticker pasted up at the
chamber of commerce building, and manufacturers seem to believe it.
Even where the ILO is not monitoring, says Amena Hasan, project
manager for Save the Children, a charity, there is “almost zero child
labour.”

That has meant changes far beyond replacing little hands with big ones, and not all of them
for the better. Until Atlanta, making soccer balls was largely a cottage industry. Much of the
work—cutting and printing laminates that make the shell of the ball—was done in factories,
but stitching, the most labour-intensive process, was usually outsourced to families in
villages around Sialkot. Families could earn about 25 rupees (50 cents) for each ball.

But the ILO cannot inspect every house. So manufacturers have had to shift stitching into
centres—often, little more than sheds on a rutted village road—that the ILO’s 14 monitors
know about and can visit at will. Pay is still by the piece, but the industry’s informal
character is gone. The effects have been double-edged. Almost all firms have seen costs
go up. Capital Sports, a biggish manufacturer, has invested some 3.6m rupees ($67,000)
to build three stitching centres. On top of that, extra expenses, such as transporting
workers to and from the centres, have raised the cost of stitching one ball from 25 rupees
to 40 rupees or more, reckons the firm’s boss, Khawaja Zakauddin. Other firms say their
costs have risen more.

That adds relatively little to the cost of making top-quality balls, which manufacturers sell to
brand-name companies such as Adidas and Puma for $10 or so. But at the low end of the
market, which includes $2 “promotional” (free publicity) balls, the extra costs hurt. This is
where competitors such as China, which makes machine-stitched balls, and India have
gained ground at Sialkot’s expense. Pakistan’s share of the American soccer-ball market
by volume dropped from 65% to 45% between 1996 and 1998. Machine stitching is
becoming good enough to produce better-quality balls, threatening Pakistan’s industry at
its strongest point.

Many manufacturers are being squeezed between higher costs and penny-pinching
customers. Zia Urrahman Choudhry, chief executive of Fox & Associates, a medium-sized
manufacturer, says buyers of his promotional balls want certification of their adult-only
workmanship but are unwilling to pay extra for it. Capital Sports has resisted pressure from
customers to cut prices, and seen sales drop from more than 1m balls in 1998, a World
Cup year, to 400,000 last year.

Atlanta has been a spur as well as a brake, helping some manufacturers become more
competitive. Because kits are now distributed to fewer centres and every ball is coded (so
that inspectors can trace strays), manufacturers have better control of production. Before
Atlanta, Fox got information once a week on which balls were in which stages of
production; now it comes every second day. That has enabled it to reduce its stocks. Its
record of on-time delivery to customers has improved from 50% to 70-80%.
9
The biggest manufacturers seem to revel in the child-free regime. Saga Sports, which
makes 4m-5m balls a year for Nike and other brands, pampers its 9,000 employees and
their families with free medical care and subsidised shopping. Its lavish Daska Road
headquarters, Saga City, has a tiny football ground and a giant one for cricket, which is far
more popular. Although part-timers help out during peak periods, the bulk of Saga’s
stitching is done by full-timers, paid a salary rather than by the piece.

High fixed costs should be a handicap in an industry with sharp fluctuations in demand, but
Saga is unworried. It reckons that its big stitching centres have the double virtue of
impressing ethically anxious customers and ensuring quality. Saga’s Faiz Shah says that it
has cut by half the time needed to produce a ball. Saga’s research and development
laboratory invents new designs and materials, helping to keep prices up. Saga barely
noticed last year’s slump in demand.

Saga has nonetheless started a (child-free) operation in China to take advantage of better
transport. The fate of other firms depends on a host of factors besides child labour, from
the level of world demand to the strength of the rupee. India’s recent move to a monitoring
programme may raise competitors’ costs, though too late for some firms. According to the
local chamber of commerce, some of the smallest producers have already gone out of
business.

Has all this upheaval made Sialkoters better off? Maybe. Some 6,000 children are in
schools run by “partner” charities in the Atlanta programme; local state schools are being
upgraded. But many families have paid a high price. Many have lost the wages not only of
their children but of their women, who are constrained by custom and religion from working
at stitching centres. Though some people are stitching more regularly in the centres,
overall family incomes have fallen by roughly 20%.

To anyone who thinks of child labour as an unmitigated evil, this price looks worth paying.
Others are less categorical. Save the Children, which supports Atlanta, makes a distinction
between child labour and “child work”, which can give children income, skills and self-
confidence without damaging their schooling. In the soccer-ball industry, two-thirds of child
workers were part-timers working at home, and 80-90% of those went to school, says Miss
Hasan. The satanic conditions described by shocked journalists are far more prevalent in
hazardous industries like brick making and surgical instruments.

Even the pillars of Atlanta agree that the soccer-ball industry’s glamour, more than its sins,
made it the target of reformers, and that reform “started in a rush,” as Jacques van der Pols,
the ILO’s chief technical adviser in Sialkot, puts it. They are correcting their earlier mistakes.
To lure women back into the workforce, the ILO now monitors mini-centres where as few
as three women work, restoring some of the industry’s cottage character. Another group
makes small-business loans to affected families.

Atlanta supporters argue that the programme’s main benefit will be to serve as a “gateway”
to improving conditions in lower-profile, more hazardous industries throughout Pakistan. A
move is afoot to extend monitoring to all industries in Sialkot. The ILO would also like
stitching centres to introduce a minimum wage and amenities such as toilets. The big firms,
many of which have already upgraded their facilities, will welcome higher standards.
Harder-pressed firms will resist. Like soccer itself, getting rid of child labour is not a win-win
game.

10
Reading 4

International Labor Rights Forum

Missed the Goal for Workers: the Reality of Soccer Ball Stitchers
in Pakistan, India, China and Thailand
Date of publication: June 7, 2010
Source: International Labor Rights Forum

This report presents the key findings of the International Labor Rights Forum’s research in
the four largest soccer balls producing countries: Pakistan, India, China and Thailand. This
report also highlights the current missteps of typical corporate social responsibility
initiatives such as fair trade certification and factory monitoring where wages and
temporary work must be transformed in order for labor rights to be realized by the many
soccer ball production workers.

The report highlights that:

• More than half of the 218 surveyed workers in Pakistan reported that they
did not make the legal minimum wage per month.

• In one Pakistani manufacturer, ILRF researchers found that all interviewed

stitching center or home based workers were temporarily employed resulting
workers not having access to healthcare or social security.

• In the same Pakistani manufacturer’s supply chain, female home-based

workers faced discrimination based on their gender. They were paid the
least and faced the possibility of losing their jobs permanently due to
pregnancy.

• In one Chinese factory, workers were found to work up to 21 hours a day

during high seasons and without one day off in an entire month.

• Indian stitching centers were described as “pathetic.” Proper drinking water

or medical care facilities, and even toilets were often absent.

• Child labor was identified by workers producing for three different factories
in Pakistan.

ILRF is calling on the soccer ball industry to take immediate action to address the issues of
extremely low wages and proliferation of temporary workers in order to improve conditions
for the workers who produce the balls at the center of the 2010 World Cup.

________
Note by Jo: Please visit the following URL for the detailed report on the Missed Goals:
http://www.laborrights.org/sites/default/files/publications-and-resources/MissedtheGoal-
Summary_0.pdf

11
DISCUSSION QUESTIONS
Note from Jo:

We are doing managerial economics and we don’t mean to do a sociological or

humanitarian discussion on the child labor issue per se. We adopted this case only to
exercise how we can apply the economic principles we learned through the soccer ball
industry dynamics in Pakistan. As such, let us focus more on the major factors that stirred
the region and soccer ball industry and their economic implications – based on our logical
reasoning process first and discussing through the real dynamics the industry is going
through.

The articles discuss various factors that affected Pakistan (and World) soccer ball markets
since the child labor in Sialkot became the public issue in mid-1990s. The impacts naturally
involve both demand and supply shocks and the two shock types obviously influenced the
Pakistani Soccer Ball manufacturers interactive way.

However, for analytical purpose, let us see the economic impacts of the demand side
shock and the supply side shock separately and sequentially, with the demand shock
initiated through the publicity about the use of child labor first and the supply shock that
followed through the producers’ agreement to refrain from using child labor later. It is to be
assumed that the soccer ball manufacturing industry is competitive enough, which allows
us to analyze in a competitive market economics framework.

Q1 and Q2 are to be discussed from a theoretical perspective to showcase the possible

scenarios that may follow demand/supply shocks. And, in Q3, you are to elaborate upon
the real dynamics in practice.

1. (Demand Shock Only) Suppose that the international market for soccer balls is
perfectly competitive. (It will be very highly competitive in fact.) Discuss the following
questions together with appropriate graphs representing the market equilibriums and
individual firm’s decision.

(1) Ceteris paribus, how would publicity about the use of child labor impact the
demand for the soccer balls and their price in the world market?

(2) How about the output level of each individual firm from Pakistan in short run and
long run?

(More specifically, would Pakistan’s firms shutdown in SR? How about their
decision in LR? What would their decisions depend on?)

(3) How about Pakistani balls’ market share? Would it decrease for sure? Think both
in terms of short run and long run.

(Note that the firms might decide to exit the industry as the result of the demand
shock, which will cause a secondary supply shock independent of the main supply
shift to be caused by the Atlanta Agreement as we will see in Question 2 below. )
12
2. (Adding Supply Shock) Now, given the above demand shock, suppose that the
industry agreed to discontinue the use of child labor and also allow international
involvement to insure compliance. Keep working on your diagram from Question1
to answer the following questions.

(1) How would it affect the shutdown or exit decisions by the Pakistan’s firms
discussed in Q1 above? (Pay extra care to distinguish short run and long run
effects.)

(2) How would this change the world market for soccer balls? Would the price and
quantity higher or lower than before the journalist’s article?

(3) After all, would you conclude that the Pakistan’s firms can no longer survive
internationally?

3. Now, combining the reality updates from Reading 1 and Reading 4, how would you
interpret your discussions in Q1 and Q2 as weighed against/to what is actually
happening in practice?

4. Any thoughts of your own to add?

END OF CASE 3

13
14
BMS5110 Managerial Economics Designed by Seung-gyu Jo
NUS Business School

CASE 4

Economics of Personal Seat Licenses

and
Miscellaneous Pricing Strategies

1
Case 4:
Economics of Personal Seat Licenses (PSLs) and Other
Miscellaneous Sophisticated Pricing Strategies

Reading 1-1

Sports ticketing
The price is right
The Economist,
Jan 9th 2015, 22:09 by D.R.

FOR decades professional sports franchises have sat idly by while scalpers—ahem,
resellers—have made hefty profits off their mispricing of tickets. Although demand varies
wildly from game to game depending on factors like the home team's success, the
opponent and the weather, most clubs have set a single price for each seat at the start
of the season, and maintained it throughout the year. For particularly desirable matchups,
that leaves millions on the table for resellers to appropriate. In contrast, for less attractive
games, it causes thousands of seats to remain unsold.

Teams have accepted these inefficiencies for fear of alienating their customers by
increasing prices sharply with little advance notice, and because reliable data on the
secondary market was hard to come by. With the advent of the internet and resale sites
like StubHub, however, ever-greater numbers of fans are now buying previously
purchased tickets for prices other than face value. And the going rate for any given seat
has become available instantly to anyone with a mouse. As a result, franchises are
learning to price their tickets dynamically, just as airlines and hotels have long done.

2
Rather than developing proprietary pricing models, clubs in the United States, where the
trend has been the most pronounced, have mainly opted to outsource their pricing. So
far, the market leader has been Qcue, founded by Barry Kahn, an economist, which
says it sells 85% of dynamically priced tickets. Digonex, which also offers pricing
services to hotels and car parks, has also secured a number of high-profile clients.

Of the big North American sports, the fastest to adapt has been Major League Baseball
(MLB), mainly because it has the highest game-to-game variation in demand. Baseball
teams rotate their starting pitchers every five days, causing fans to choose specific
matchups in order to see a particularly interesting hurler. And since they play outdoors
almost every day, the weather and day of the week can lead to big swings in interest.
Demand can also change dramatically over the course of the season. Since less than a
quarter of MLB teams enter the post-season tournament in October, the stakes for
games in late September that determine which clubs will make it are extremely high.

Moreover, season-ticket holders make up a small share of total seats. And sellouts in
baseball are comparatively rare, because all of its stadiums can accommodate over
40,000 fans and its season is 162 games long. In the most extreme case, the Oakland
Athletics have given up on selling their upper-deck seats entirely, and covered them with
a tarp (pictured). This means teams usually have seats available right up to the first pitch,
providing more opportunities for last-second pricing changes.

As a result, just three years after the San Francisco Giants became the first MLB team to
offer seats with no set face value, over half the game's clubs are using dynamic pricing.
According to Mr Kahn, the impact on teams' bottom lines has been substantial. By
adjusting the price of a given seat by as much as five or six times over, they have been
able to raise full-price attendance by 15% and total ticket revenue by 30%.

The other big sports in the United States have been slower to move to flexible pricing. It
has proved of little use to the National Football League, which plays just 16 games a
year (almost all on Sundays); relies heavily on season tickets; and shares big
percentages of ticket revenue evenly among all clubs. As for the National Basketball
Association (NBA), its regular season is a much lower-pressure affair than MLB's, since
over half its clubs make the playoffs. Its arenas are indoors and can only hold 20,000
people. And many people who attend—particularly those who buy high-priced courtside
seats—are more interested in the broad experience of watching an NBA game than they
are in any specific opponent. Despite these hurdles, a third of the league's teams are still
using dynamic pricing in some form.

The next step for dynamic pricing will be globalisation. English football clubs have
already tried to follow baseball's lead in using statistical analysis to make better
decisions about which players to pursue. They could surely do the same with baseball's
innovations off the pitch: in fact, some research has already been done on how they
might make use of dynamic pricing. In the Premier League's cutthroat economic
environment, whichever club figures out how to apply it best the soonest will enjoy an
enviable advantage.

3
 ____________________

Reading 1-2

New PSL plan concerns many Tech hoops fans

Lubbock Avalanche-Journal

By DON WILLIAMS

Source: http://www.redraiders.com

Texas Tech Lady Raiders games were a highlight of retirement years for Shirley Wills
and her husband, Jim. They may continue to be but probably not to the extent of the
past five years.
"We really hate it, because we really love to watch those girls, and we love to watch
(Tech coach) Marsha (Sharp) and her program," Shirley Wills said Monday. "But we've
been priced out of the market."
Tech basketball fans who have gone 13 years without a price increase on premium
seats are being asked to commit between $1,250 and $4,000 over a 10-year period to
reserve the best spots in the new United Spirit Arena.
University officials say the personal seat licenses (PSLs) are needed to pay for the $51
million facility scheduled to open in January 1999.
"We've had excellent seats - right in the front, right in the middle - and have really
enjoyed the games," Shirley Wills said. "We'll pick the games we want to go to and buy
general admission tickets, but it won't be the same."

Several other season-ticket holders randomly contacted Monday by The A-J expressed
similar sentiments.
"I think I'm going to have to reconsider before I decide to spend that much money for a
season ticket," said Brenda Cartwright, a Lady Raiders season ticket holder for about
four years. "I hate to lose tickets to the Lady Raiders. I love going to the games - it's a
good release - but that's a lot of money."
Floydada resident Kirt Wyrick, a Lady Raiders' season-ticket buyer since 1993, called
the PSL price "a pretty drastic jump for what it's been through the years."
"Maybe you could buy a good seat elsewhere without being out 4,000 bucks," he said.

4
Lubbock attorney Kerry Piper said he was "furious" about the premium price tag
attached to about one-quarter of the new arena seats. Piper is an admitted late comer,
having purchased Lady Raiders season tickets the past two years.
"We got them because we wanted to have some choice space in the new place, and
they took it away from us, basically," Piper said. "I know pro sports are doing this, but
this isn't pro sports, supposedly. I basically feel they've sold out their supporters over the
years."
The PSL sticker applies to slightly more than 4,000 of the 15,200 seats in United Spirit
Arena. Tech officials spent more than a year researching the plan and devised one that
athletic director Gerald Myers describes as "fair, equitable and one that gives us a way
to pay for the arena."
Big 12 Conference member Kansas requires an annual donation of at least $5,000 for a
premium seat in Allen Fieldhouse. For a prime seat at the Erwin Center, Texas asks
annual contribution of at least $1,000 from fans.
Lubbock attorney Jim Collins, a season ticket buyer in both men's and women's
basketball, said Tech's plan is reasonable by comparison.
"I thought it was very fair," Collins said. "You don't get something for nothing.
"The great thing about this is there are good seats for people that either can't or don't
want to spend that kind of money," Collins said. "You don't want to lose that big a fan
base."
Tech Chancellor John Montford and ticket manager Russell Warren said they believe
local fans' eagerness to sit in the PSL areas will increase by the time blueprints turn into
a tangible United Spirit Arena.
"Any time you talk about tickets, you talk about emotion," Montford said. "And no doubt
there will be some challenges ahead in terms of this program. Anytime you change
programs, there will criticisms, there will be a lot of questions, and there will be a lot of
concerns about those changes."

5
Tech has put PSL designations on seats in four sectors of the United Spirit Arena:
1) Raiders, 748 seats across from the team benches. Seats are priced at $400 annually
for 10 years (men's and women's games); $300 annually for men's games only and $200
per season for women's games only.
2) Techsans, 748 seats behind the team benches. Seats are priced at $200 per season
for Lady Raiders ticket holders only.
3) Matadors, 1,683 sideline seats immediately behind the Raiders and Techsans
sections and in a few corner sections. Seats are priced at $250 per season for men's
games, $150 per season for women's games or $300 per season for both.
4) Masked Riders, 864 seats, mostly flanking the Matadors locations and in two sections
directly facing the north-end baseline. Seats are priced at $175 per season for men's
games, $125 per season for women's games or $200 annually for both.
Payment plans include a 10-year lump sum up front; 60-month financing by a local bank;
or a 20-percent down payment followed by nine or five equal payments.
Tech fans have until Jan. 31 to commit to a PSL. Tech officials said there will be no
preference given to the order requests are received before that date.
Current season ticket holders and Red Raider Club members will receive information
through the mail on the PSL plan this week, according to Warren.
Jim McAuley, who served on a committee that researched the PSL plan, called seat
licensing revenues "a brutal fact" of staying abreast of the competition in the Big 12 and
other major conferences.
"With the kind of budgets we need to compete in the league we're in, that's just a given
or you're not going to have the arena," McAuley said. "So you decide whether you want
the arena or you want to spend 10 dollars a seat and play where we are."
Idalou resident Linda Denton said she and her husband, Jack, held season tickets for
men's and women's basketball for four years but had to make a choice for one or the
other last year.
"If they go up that much more, then I'm not saying we wouldn't go to the games, but we
wouldn't have season tickets," she said.
Like some Tech fans, Jim Berry indicated he's not overjoyed by the premium prices but
understands the program's need for another revenue source. Berry said he's purchased
men's and women's season tickets for about five years.
"I just hope they don't wind up with a bunch of seats right in the middle that nobody's
buying," Berry said. "That won't look too good."

6
Reading 2-1

Niners are selling $80,000 PSLs

NBC Sports
Posted by Mike Florio
April 18, 2016

At a time when the NFL is trying to entice people to choose to attend games in person,
the application of an $80,000 PSL to 1,000 seats in the 49ers forthcoming stadium
hasn’t deterred folks from signing up.

According to Scott Ostler of the San Francisco Chronicle, the 1,000 tickets costing $375
per game and 80 large for the lifetime of the stadium are nearly sold out.

Not everyone is reacting well to the new prices. 66-year-old Henry Gross has season
tickets on the 50-yard line at Candlestick Monster Park (or whatever they call the place)
at $129 per game. To keep the seats, he’ll have to pay $350 per ticket, plus a one-time
PSL of $30,000 for each seat.

“The sentimental side of me says, yes, absolutely, even if I had to mortgage my entire
estate,” Gross told Ostler. “But the realistic side of me says, why would I do that? So I
can tell someone I’m now 65 years as a season-ticket holder? I love and cherish that,
but nobody in my family, and none of my friends, think it’s a good investment. Not even
the ones that I take to games.

“I took [the 49ers' proposal] to two people I’m close to, guys who are much wealthier
than I am. They had been season-ticket holders in the past. I asked each, independently,
would they like the rights? Is it a good deal? Both of them told me it’s horrible.”

7
Even if Gross thinks it’s a “horrible” deal, the 49ers are banking on enough people with
enough money choosing to give enough of that money to the 49ers in order to generate
enough of the money necessary to pay for the new stadium.

It’s part of the complex balance between public and private contributions to a new
stadium. If the public wants to minimize the contribution, the moral obligation to include
large numbers of tickets the public readily can afford is reduced, if such obligation even
exists. Either way, the stadium has to be paid for.

Then there’s the reality of economics. Supply. Demand. If people will pay the money,
then the price is right. If they won’t, the price point needs to be adjusted.

The more that people want something, the more the price will increase. In a market
where plenty of really rich people reside, it’s no surprise that the PSLs are moving —
and it’s no surprise that people who don’t want to pay that much to continue doing what
they’ve been doing are upset.

As long as enough people will write the check, it doesn’t matter.

Reading 2-2

5 Stages of Grief:
The Giants’ Personal Seat Licenses
By ANDREW FURMAN

MARCH 18, 2019, 12:20 AM

Giants fans are dealing with a wide range of emotions over personal seat licenses. It can
be summed up by the simultaneous glee of many people on the waiting list finally getting
their call (e-mail, actually) and the realization of the high prices and garbage offerings
that are left over. The Ultimatenyg Giants blog has chronicled the PSL issue in no less
than 14 installments, all found with this link.

The origination of PSLs for the Giants traces back to Oct. 25, 2005, the day Wellington
Mara died. If the Duke were still alive, he’d be saying that the Giants would impose a
personal seat license on its fans over his dead body. Perhaps this is why, coincidentally

8
or not, soon after Mara’s death, a new stadium was proposed, built and financed with
partial funding from revenue generated from PSLs.

Lifelong fans who kept their seats through the late 20th century dismal years of bad
football were understood to be in partnership with the team. Not anymore. Gone is the
loyalty that the Giants showed to their steadfast customers. This is a divorce, a death.
Good grief! The array of emotions fits right in with the death of a relationship between
the owner and the fan.

Denial There is plenty of this going around from all parties involved. Fans: “I can’t
believe that Mara’s son is forsaking the memory of his father so quickly and soaking us
for this money.” Or another one from people on the wait list who finally get the call: “I
never thought this day would come when I could get season’s tickets, and now that it
has, I cannot believe I am going to have to pass because I cannot afford to pay the sums
they are asking!”

Anger “Those bleeping sons of the owners. All they did right was get good genes, and
as soon as their fathers pass away they spurn the people who paid their bills.”

Denial2 This time it is the owners’ turn. Steve Tisch this past week when raising the last
steel beam: ”I’ve not heard anybody complaining. No one is upset.” Was he deaf and
dumb during halftime of the Redskins game this past September, when he was roundly
booed by the fans? As soon as he was done speaking, the jeers turned immediately to
cheers when Christie Brinkley began her turn with the mic. To quote a Redskin fan at the
game, when briefed by a Giants fan on why fans were booing Tisch, “I know it’s Christie
Brinkley, but I think after what you just told me, even Osama Bin Laden would have
gotten a round of applause.”

Anger2 When Giants fans heard the Denial from Tisch, they blew their tops. We called
him a con artist for trying to spin the sales as something everyone welcomed, when it
was clear from the beginning that most fans did not welcome the extra cost. Tisch has
yet to explain how tens of thousands of fans on the wait list are passing on this
opportunity en masse. We know it is the cost of the license, but Tisch wants to con us
into thinking that everyone is happy with the proposition. Fans have to accept that the
owners have the right to do anything they want with their franchise. But likewise the fans
can at least be afforded a simple amount of respect by having Tisch state the truth and
admit what is really going on. Perhaps there would be a little less resentment if there
was acknowledgment that people’s dreams of being season-ticket holders were dashed
by the costs of the PSLs.

Bargaining Longtime season tickets holders in the first and second tier of Giants
Stadium flocked upstairs to the $5K and $1K licenses, while the $20K coach’s clubs

seats are unfilled. This is part of the bargaining that fans did with their own principles.
They are disgusted with being charged this fee, on top of paying for tickets, parking,
high-priced food and beer, and the extra two “wasted” preseason games. But they figure
if they go to the cheaper licenses, they keep the family tradition, ritual and Sunday
passion alive. The rest of us on the wait list get the expensive “Club” and less desirable
end zone scraps as choices. No thanks.

9
Depression Now that is a double-meaning if we ever saw one! The timing of this PSL
launch could not be much worse. Fans who are depressed about being cut out of the
stadium experience because of the cost are also at severe risk because of the economic
turbulence faced by the New York area and the entire country. Our advice to blog
readers is simple: Fans need to deleverage the same way banks, businesses and the
country need to deleverage. Paying $10K or $20K for a “right” to have entertainment is
the complete opposite of what is taking place in the real world. What is also interesting is
that the Giants may get burned to the tune of $300M from Lehman going under. If that
cost of the new stadium is added to the extra costs of building this stadium at the top of
the market (for steel and other associated costs), the revenue needed may turn the
dream of a seat license into a nightmare of having to pay exorbitant “rent” (a k a ticket
prices) on these vehicles. Just some “depressing” items to be aware of.

Acceptance Mara and Tisch can say anything they want, and they can do anything they
want. Giants fans have plenty of choices. The Ultimatenyg Seat Plan: $1K for an HDTV,
free games, reasonably priced beer, no charge for parking, no flex schedule, no 40
minute-delay in getting out of the stadium and no lines for the bathroom. It’s not the
dream, but especially in this recession, it’ll work.

10
 DISCUSSION QUESTIONS

The selected articles in the case demonstrate various pricing strategies employed –
or could be employed – by professional and collegiate sports. Like many other
innovations in business of sports, the general notion underlying this idea is that the
sports teams can further improve upon their financial situations. Discuss the economics
of PSLs and other sophisticated pricings strategies focusing on the following lines of
questions:

1. Based on Reading 1-1 and 1-2:

(1) Briefly review the various pricing strategies professional/collegiate sports teams
are adopting.
(2) Now paying more attention to the PSL policy, justify the decisions by NFL teams
and universities to introduce the PSLs to finance their new sports facility. (Please
discuss the basic economic rationale that would apply to the both cases. If you’d
like to, you can take a sample NFL team of your choice to share the details.)

2. Based on Reading 2-1 and 2-2

(1) As you would sense through the articles, some PSLs turn out to be a great
success while some others a failure. (For your reference, Philadelphia Eagles or
San Francisco 49ers are examples for the former while Oakland Raiders’ case
for the latter.) And some teams – such as New England Patriots – decided
against selling PSLs to help to pay for the new stadium building.
Discuss why. You can touch upon the non-economic factors while focusing on
the economic rationales for your arguments. (Note: Please refer to the reading
‘The PSL – Wildly Unpopular but Economic Sense’ from IVLE, should you like.)

(2) PSLs and other sophisticated pricing strategies are not only confined to the
sports teams but also to the other art or musical theatres and orchestra etc.
Reflecting upon what we have learned in classes, evaluate what our local cultural
house Esplanade is currently doing. (For this part, please do not limit your
interest to two part pricing only but extend your thoughts to other sophisticated
pricing strategies. Be imaginative.)

(You do not have to review all. You can pick a few of those pricing strategies that you
think are worth reviewing, including price discriminations from Lecture Notes 8 and PSLs
and/or bundling from Lecture Notes 9. For example, many of cultural halls and orchestras
all around the world are offering season tickets/PSLs to guarantee the season ticket/PSL
holders a spot for a year for the concerts and shows. However, some units like
Singapore’s Esplanade do not seem to be offering them for the events in this beautiful
cultural facility. Any economic reasoning? Other than season tickets/PSLs, which sort of
sophisticated pricing strategies is it exercising? No matter which pricing aspect you
picked, please quote and discuss their recent pricing policies in practice.)

END OF CASE 4

11
12
BMA5001 Managerial Economics Designed by Seung-gyu Jo
NUS Business School

CASE 5

Game Theory
Behind
Big Tire Blowout and Engagement Rings

1
Case 5-A: The Big Tire Blowout

Background Synopsis
Seung-gyu Jo

Automobile business news in late Summer 2000 was dominated by talk of blown tires,
pictures of flipped SUVs and a couple of corporate giants waving pointed fingers. In
August, Bridgestone/Firestone was forced to recall 6.5 million of tires that it
manufactured, one of the biggest consumer recalls in history. The action followed a
Houston TV investigative report that linked an unusually high number of fatal rollover
accidents due to tire failure involving the popular Ford Explorer SUV. The report led to a
federal government investigation into whether or not the companies were responsible for
perhaps more than 100 deaths on U.S. roadways.

At first, Ford and Bridgestone/Firestone seemed to be working together on the problem.

But once the U.S. Congress got involved, the cooperation broke down and the fur flew.
Ford began to claim that the situation was a "tire problem, not a vehicle problem."
Bridgestone/Firestone countered by pointing out that Explorers were involved in a
disproportionate share of the injury-causing accidents that were attributed to tire failures,
and that the reason was that Ford recommended an Explorer tire pressure outside the
tire's designed range. It soon became apparent to observers that the companies'
attempts to shift blame to the other only served to highlight both firms' apparently
negligent behavior.

In early October, 2000, a Chicago law firm filed a class-action lawsuit against Ford and
Bridgestone/Firestone seeking to collect for deaths, injuries and economic losses
associated with the Big Tire Blowout of 2000. The suit could cost the companies billions
of dollars before it is all over.

Francis X. Markey's following article posted on the “Dismal Scientist” Web site considers
the actions of the two companies in the wake of the tire debacle by applying some of the
concepts used in game theory. Please read the article below and answer the questions.

“GAME THEORY ON DISPLAY”

The Dismal Scientist
By Francis X. Markey

“The drama of the Firestone tire recall continues to unfold, most recently featuring a
congressional hearing. While the two firms have accepted some blame for the defective
tires and the related auto accidents, Ford and Bridgestone (Firestone's parent company)
have primarily sought to deflect culpability and distance themselves from ultimate
responsibility. These efforts to shift blame have been increasingly unsuccessful,

2
however, as each firm has only served to highlight the negligence of the other, resulting
in an economic scenario known as the Prisoners' Dilemma.

It started on August 9, when Bridgestone first announced a massive recall of several

Firestone tire models primarily used on Ford light trucks. As safety inquiries progressed,
however, it became clear that the roots of the tire problems trace much further back.
Complaints about the Firestone tires date back throughout the past decade. In addition,
it has come to light that Ford initiated recalls or widespread replacements of the tires in
at least 16 foreign markets over the past two years, all without notifying U.S. safety
agencies.

Efforts by both Ford and Bridgestone to maintain consumer and move past the recall
incident have proven fruitless as further complaints and reports of accidents have
flooded into the National Highway Traffic Safety Administration in the wake of the recall.
The stock of both companies has suffered. Bridgestone shares have lost approximately
50% of their value over the past month, and Ford shares are well below their 52-week
high. While the recall itself and heightened consumer complaints have severely
impacted the two firms, the finger pointing and attempts to shift blame have proven even
more damaging. In this way, Ford and Bridgestone have fallen into the Prisoners'
Dilemma.

The Prisoners' Dilemma is a common game theory scenario that involves two prisoners
being held for suspicion of committing a crime together. Each prisoner has the option of
remaining silent or cooperating with the police. If neither prisoner talks, they both receive
only a mild punishment for lack of proof. However, if one prisoner confesses, or betrays
the other prisoner, as the case may be, the prisoner who chooses to talk will go free,
while the other who remains silent will receive full punishment. If both prisoners decide
to talk, they will both be punished, but less severely than if they had refused to talk when
the other had confessed. The result is that, without collusion, both prisoners will choose
to talk as that option holds a lower penalty when their partner in crime also confesses.
And each prisoner can correctly assume that their partner will confess because doing so
is to each person's best personal interest, regardless of the other person's actions.
Unfortunately, both prisoners are thus worse off than if neither of them had spoken in the
first place.

As with the prisoners, Ford and Bridgestone both chose to speak in their efforts to avoid
the highest possible penalty, with the end result being that both firms now appear to
have acted in a much more negligent manner than was originally supposed. Ford has
repeatedly insisted that the tire failure is a tire problem only, pointing out that Goodyear
tires used on the same models as the recalled Firestone tires did not experience any
problems. Ford's CEO has publicly declared his "disappointment" with Firestone, and the
company's lobbyists had gone so far as to request that their chief executive not be
required to sit next to the Bridgestone CEO during the congressional hearings.

For their part, Bridgestone has stated that Ford contributed to the tire failure by
recommending a lower tire pressure than the manufacturer in order to ensure a
smoother ride. A lower pressure places greater stress on a tire and also increases heat.
Also, Bridgestone has pointed out Ford's negligence by producing a memo showing that
Bridgestone executives thought that the U.S. Department of Transportation would
probably have to be notified in the event of foreign market recalls because the same
products were being sold in the U.S.A step that Ford did not take.

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 Thus, by independently seeking their own self-interest, Ford and Bridgestone have made
the situation even worse, revealing mistakes that may have never come to light and
causing members of Congress to threaten them with prosecution for criminal negligence.
And while this is no doubt a positive development for consumers, it was certainly not the
desired outcome for the two companies. It's too bad that the principals at Ford and
Bridgestone didn't fit more economics classes into their college curriculums.” (By Francis
X. Markey)

_________

BMW Recalls 1.6 Million Cars

Over Defective Takata Air Bag Part

By Christopher Jensen
July 16, 2014
o
BMW is recalling about 1.6 million 3 Series cars from the 2000-6 model years, including
about 574,000 in the United States, over a concern that the front-seat passenger could
be injured by metal shards from a deploying air bag in a crash, the company said
Wednesday.
The component — the air bag inflator — was made by the troubled Takata Corporation,
which has been responsible for more than 10 million vehicles being recalled worldwide
over the last few years by major automakers, including Toyota, Honda and Subaru.
BMW said that the explosive propellant inside the inflator case was not prepared
properly and could produce too much power when air bags deploy. The excess force
can rupture the inflator’s metal case, sending fragments into the passenger
compartment. On the passenger side, the fragments are likely to first go up toward the
windshield or down toward the front-seat passenger’s feet.
All the BMWs are being recalled for a problem with the passenger-side air bag, although
the automaker said it was not aware of any inflators rupturing on its vehicles.

Takata has also had trouble with the driver-side air bag. Honda acknowledged that two
drivers were killed in the United States when they were hit by inflator-casing shards.
The BMW recall announced Wednesday is an expansion of a 42,000-vehicle recall over
the inflators that the automaker issued in May 2013 for the 3 Series from the 2002-3
model years. It was part of a worldwide recall of about 3.3 million vehicles by Honda,
Toyota, Nissan and Mazda, and included about 1.7 million vehicles in the United States.

BMW said in a statement that its most recent recall was “a voluntary precautionary
measure.” However, once an automaker is aware of a safety problem it must within five
business days inform the National Highway Traffic Safety Administration of its plan for a
recall or face a civil penalty.

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Case 5-B: Game Theory behind Engagement Rings

The Strange (and Formerly Sexist) Economics

of Engagement Rings
M AT T HEW O 'BRIEN

APR 5, 2012

Diamonds are forever, but the meaning of the diamond engagement ring has changed
dramatically in the last century. Today's symbol of love was once something more like
virginity insurance.

Why do men buy diamond rings for our fiancées? There's the emotional story. We enjoy
making grand gestures of commitment to the people we love. Behind that, there's the
marketing story. DeBeers' historic ad campaign, crafted by the real-life mad men at N.W.
Ayers, convinced generations of lovers that diamond bands were synonymous with
eternal devotion. But behind that, there is economic story that is just as important and
fascinating.

Once upon a time, diamond rings weren't just gifts. They were, frankly, virginity
insurance.

A now-obsolete law called the "Breach of Promise to Marry" once allowed women to sue
men for breaking off an engagement. Back then, there was a high premium on women
being virgins when they married -- or at least when they got engaged. Surveys from the
1940s show that roughly half of engaged couples reported being intimate before the big
day. If the groom-to-be walked out after he and the bride-to-be had sex, that left her in a
precarious position. From a social angle, she had been permanently "damaged." From
an economic angle, she had lost her market value. So Breach of Promise to Marry was
born.

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But in the 1930s, states began striking down the "Breach of Promise to Marry" law. By
1945, 16 states representing nearly half of the nation's population had made Breach of
Promise a historical relic. At the same time, the diamond engagement ring began its
transformation from decorative to de rigueur. Legal scholar Margaret Brinig doesn't think
that's a coincidence, and she has the math to prove it. Regressing the percent of people
living in states without Breach of Promise against a handful of other variables -- including
advertising, per capita income and the price of diamonds -- Brinig found that this legal
change was actually the most significant factor in the rise of the diamond engagement
ring. It's historically plausible. The initial mini-surge in diamond imports came in 1935,
four years before DeBeers launched its celebrated advertising campaign. What's going
on here?

Let's think like an economist. An engaged couple aren't all that different from a borrower
and a lender. The woman is lending her hand in marriage to the man, who promises to
tie the knot at a later date. In the days of Breach of Promise, the woman would do this
on an unsecured basis -- that is, the man didn't have to pledge any collateral -- because
the law provided her something akin to bankruptcy protection. Put simply, if the man
didn't fulfill his obligation to marry, the woman had legal recourse. This calculus changed
once the law changed. Suddenly, women wanted an upfront financial assurance from
their men. Basically, collateral. That way, if the couple never made it down the aisle,
she'd at least be left with something. And that something was almost always small and
shiny. The diamond ring was insurance.

So, should a jilted bride give back the engagement ring? Today, the answer is often yes.
But back when rings first came into vogue, part of the point was that she wouldn't. It was

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a security against a default on the engagement. The good news is that this seems so
alien to us today. Women have their own careers. They earn more degrees. And, for the
younger generation, they out-earn men. More importantly, the stigma against premarital
sex has disappeared. A broken engagement isn't a lasting financial disaster for a woman
like it was before. The diamond engagement ring has itself undergone a transformation.
It's no longer a security. It's just about signaling nowadays. It's anachronistic. But don't
try telling your girlfriend that.

_____________________

All’s Fair, Even in Love

Tim Harford
from BBC online, August 2006

(-----) Game theory is a versatile tool. It can be used to analyse any situation where more
than one person is involved, and where each side’s actions influence and are influenced
by the other side’s actions. Politics, finding a job, negotiating rent or deciding to go on
strike are all situations that economists try to understand using game theory. So, too, are
corporate takeovers, auctions and pricing strategies on the high street.

But of all human interactions, what could be more important than love?

The economist using game theory cannot pretend to hand out advice on snappy dressing
or how to satisfy your lover in the bedroom, but he can fill some important gaps in many
people’s love lives: how to signal confidence on a date, or how to persuade someone that
you are serious about them, and just as importantly, how to work out whether someone is
serious about you.

The custom of giving engagement rings, for instance, arose in the US in the 1930s when
men were having trouble proving they could be trusted. It was not uncommon even then
for couples to sleep together after they became engaged but before marriage, but that
was a big risk for the woman. If her fiancé broke off the engagement she could be left
without prospects of another marriage.

For a long time, the courts used to allow women to sue for “breach of promise” and that
gave them some security, but when the courts stopped doing so both men and women
had a problem. They did not want to wait until they got married, but unless the man could
reassure his future wife then sleeping together was a no-no.

The solution was the engagement ring, which the girl kept if the engagement was broken
off. An expensive engagement ring was a strong incentive for the man to stick around -
and financial compensation if he did not.

Modern lovers might think the idea of engagement ring as guarantee is a thing of the past,
but they can still use game theory to size up their partners.

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When a couple with separate homes move in together, selling the second home is an
important signal of commitment. That second home is an escape route - valuable only if
the relationship is shaky. If your partner wants to hang on to his bachelor pad, do not let
him tell you it is merely a financial investment.

Game theory tells you that he is up to something.

Tim Harford is a Financial Times columnist and author of “The Undercover

Economist”. He presents a new BBC series, Trust Me, I’m an Economist,
starting on BBC Two

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DISCUSSION QUESTIONS:

Case 5-A: Big Tire Blowout

1. Provide a brief summary of the case.

2. Based on Markey’s description of the Ford-Bridgestone/Firestone situation,

design a normal form game by specifying the strategies and assigning the
payoffs, and then analyze the game to best describe the observed behavior by
the players.

3. Please provide the further historical follow-ups on the case and discuss by
extending the game form you created in Q2.

4. What would you suggest for possible actions/strategies that Ford and
Bridgestone/Firestone could have taken to better deal with the situation? You
may want to compare the case to the BMW’s 2014 recall decision of 1.6 million
cars over Takata airbag issue. (Hint: Focus on what ‘strategic moves’ you might
take to escape from the dilemma situation.)

Case 5-B: Game Theory behind Engagement Rings

1. Provide a brief summary of the case.

2. The game theoretic secrets behind the engagement rings have been
verbally sketched in the article. Create your own game to describe and
analyze a situation surrounding a lady and a man who proposes to her
(and, if you would like to further extend, possibly some other players
that you think might be an active or an external part of the game). Be
creative.

The focus of the case is on the ‘strategic aspects’ of the engagement

rings. In this respect, when discussing, you are recommended to
factorize the importance of the following features into your model: (a) an
engagement ring is a diamond or something similar which are unusually
valuable, (b) the ring is not to be returned and (c) (importantly) the ring
had a signaling feature, given the potential concern described in the
article that a proposed female might have had.

END OF CASE 5

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