1. Survival of the fittest: Minimum wage in the Restaurant Industry.In “Survival of the Fittest: The
Impact of the Minimum Wage on Firm Exit”, Dara Lee Luca and Michael Luca write:
We study the impact of the minimum wage on firm exit in the restaurant industry, exploiting recent changes in the minimum wage at the city level. We find that the impact of the minimum wage depends on whether a restaurant was already close to the margin of exit. Restaurants with lower ratings are closer to the margin of exit at all observed minimum wage levels, and are disproportionately driven out of business by increases to the minimum wage. Our point estimates suggest that a one dollar increase in the minimum wage leads to a 14 percent increase in the likelihood of exit for a 3.5-star restaurant (which is the median rating on Yelp), but has no discernible impact for a 5-star restaurant (on a 1 to 5 star scale). Looking at data from delivery orders, we find that lower rated restaurants also increase prices in response to minimum wage increases.
Why does an increase in the minimum wage affect exit for medium rated restaurants but not high rated restaurants? What would you say is the impact on equilibrium prices for low/medium rated and high rated restaurants of an increase of the minimum wage? In your answer, suppose that restaurants are perfectly competitive for each rating level. Consider both how changes in the minimum wage affect both demand and supply for different rating levels.
2. Price Discrimination at the “Reputation Tour”.In a May 15th, 2018, article in the WSJ article
“Why Empty Seats at Taylor Swift’s Concerts Are Good for Business” journalist Anne Steele
For the current Taylor Swift tour, would-be concertgoers were encouraged to register for Ticketmaster’s Verified Fan program months before tickets went on sale. They could boost their standing in the ticket queue by watching music videos and purchasing the “Reputation” album or merchandise. Users then received codes that allowed them the chance to purchase discounted tickets over a six-day presale period.
The best seats—some with added VIP perks—cost $800 to $1,500 at face value for a given show, with those immediately behind them at $250 each. Spots in the back of the house go for about $50. Regular tickets for Ms. Swift’s tour three years ago cost about $40 to $225, according to Pollstar data. The Verified Fan presale tickets were each sold for about 25% below the price of face-value tickets sold during the public sale.
How is the Verified Fan system allowing Taylor Swift to increase revenue? After all, tickets through Verified Fan sell for 25% less than tickets for tours in previous years. In other words, why did Taylor Swift and Ticketmaster launched the Verified Fan program? If you were helping
Taylor Swift with the pricing of her tours, what would you modify/change in the system to improve profits?
Suppose that there is no resale by scalpers, and Taylor Swift can perfectly price discriminate, but demand for a given concerts is not sold-out (empty seats remain for that stadium). What does this say about demand for that concert (in particular about the WTP of consumers)? Imagine now that Taylor Swift can only charge the same price to all concertgoers (no price discrimination) and a given concert is not sold-out. What does this say about demand for that concert? You can use a linear demand curve to clarify your reasoning. Finally, is the claim that “empty seats is good for business” right?