About 25 years ago, Peter Jennings interrupted General
Hospital to tell the nation Coca-Cola had decided to bring back its
original recipe. The nation was thrilled and sales soared.
The Federal Reserve’s impending rate hike is about as popular as
the New Coke; however, no soap operas were interrupted last week when the Open
Market Committee statement indicated rates would remain in “the current target
range” for a “considerable” period of time after quantitative easing ends.
Investors
embraced the news pushing both the Dow Jones Industrial Average and the Standard
& Poor’s 500 Index up more than 1 percent for the week.
On
the surface, it appears everything is in perfect order. However, experts cited
by Barron’s warned investors to pay
attention to the subtleties of the Fed’s statement which seems to indicate monetary
policy may be tightened faster than markets expect:
“Investors should keep an eye on the nuances
of the Fed statement... The Fed's estimates for the funds rate moved up again
to a median of 1.38 percent, instead of 1.13 percent at year-end 2015, and rose
also for 2016 and 2017. Such rises suggest that Fed Chair Janet Yellen might
face increasing dissent from both rate hawks and centrists on the Fed's Open
Market Committee.”
Also
of note last week, the Organization for Economic Cooperation and Development
(OECD) reduced its economic growth forecasts for the United States and other advanced
economies and recommended various economic policy changes suited to the needs
of each country.
Reuters reported the
organization has also recommended the implementation of measures designed to
prevent multinational firms from shifting profits to low-cost tax countries.
The topic was a point of discussion at the G20 summit last weekend. The
measures could help countries recoup billions of tax dollars and potentially
affect the balance sheets of companies targeted.
A Pharmacist has a headache. Does
she choose the name brand aspirin
or the store brand? That’s the subject of a working paper (Do
Pharmacists Buy Bayer? Informed Shoppers and the Brand Premium, August 2014) written by a pair of
economics professors at the University of Chicago Booth School of Business and their
co-authors. The team found:(Page 24)
“More informed shoppers buy more store brands
and fewer national brands. Consumer information plays a quantitative role in
health categories where our estimates imply that expenditures and market shares
would change significantly if all households behaved like expert shoppers. By
contrast, the role of consumer information is smaller in food and drink
categories where our estimates suggest much smaller gaps between expert and non-expert
shopping behavior.”
How
much less would Americans spend if everyone were an expert shopper? Currently, we
pay about $196 billion for packaged consumer goods (medications, juice, frozen
foods, etc.) each year. If we bought store brands rather than name brands, we’d
save about $44 billion dollars annually.(Page 2) That’s quite a
chunk of change.
So,
why do we buy premium brands? It may be because we believe they’re better. Freakonomics Radio recently held a peanut
butter and jelly (PB&J) sandwich taste test. Tasters were told one sandwich
was made with premium brands of PB&J and the other with store brands. The
tasters universally preferred the premium-brand sandwich. As it turns out, both
sandwiches were made with identical store-brand ingredients.
Consumers’
inclination toward national brands may reflect advertising-induced
misinformation, according to some economists; other economists
suggest premium products may indeed offer greater value to consumers. The
working paper concluded, “…A more informed population of consumers might change
whether and how much firms choose to advertise their products as well as which
products are introduced to the market.”(Pages 2 and 24)
Now,
getting back to the original question, it turns out 92 percent of pharmacists
buy store- brand headache remedies. Just 74 percent of the rest of us do
(although that statistic is somewhat skewed since doctors, nurses, and other
healthcare professionals tend to buy store brands more often than other
people). Either way, it’s a big difference.
Weekly Focus – Think About It
“Oh yeah, I’ll always
buy the most expensive golf ball, because if there’s even the tiniest chance
that there’s a little magic in there, then I want that magic.”
--Steve Levitt, Co-author of “Freakonomics”
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