economics - where to begin?

never too basic, o. nate. always worth going through these things, though i would worry if i hadn't understood it, as having a moderate understanding of capital investment is part of my current role. BUT i hadn't really got the capital efficiency point, or your description of what follows from that. (I should have understood it, having worked for companies owned by PE in the past - their problem was that they were trying to sell just as the 2008 crisis hit).

what you describe would still seem to involve driving a lot of cost out, or increasing revenue from the same cost base, at some point, which is fine if it's done responsibly but can obviously also reduce the quality of the outputs a lot of the time.

I just tried to 'answer' the yellow kid's question, but actually just ended up back asking the same question. to be willing to take on and service that debt surely, all things being equal, reduces amount buyers are willing to pay. unless it involves the process i described in the para above.

regardless, it seems to work against stable ongoing business concerns, which don't necessarily have the capacity to grow beyond their existing market (say a restaurant servicing a certain catchment area), but which generate enough cash to make it worthwhile for the operators/owners.

i feel the mid-tier jamie's/gbk/real greek restaurant business is a v good example of this, but actually i have no idea how much PE has been involved in their problems.

it appears not, at least wrt Jamie Oliver's restaurants. they just struggled in a notoriously difficult industry:

In February, after closing 12 restaurants through an insolvency process known as a company voluntary arrangement, Mr Oliver appointed restructuring experts AlixPartners to find private equity backers to turn the business round.

The plan, according to a potential investor, was to change the restaurants to become more-focused on Mr Oliver himself, rebranding them “Jamie Oliver at Cambridge”, for example.

“The challenge with the business plan was that it was an unproven brand so it was a big ask, and the risk outside of the London estate was sufficiently high to make it difficult to get funding for,” the investor said.

No backers were found.

hey fizzles,

i don't know a tonne about PE but this is a pretty thorough paper looking through the data:

https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_2019122.pdf

Abstract: We examine thousands of U.S. private equity (PE) buyouts from 1980 to 2013, a period that saw huge swings in credit market tightness and GDP growth. Our results show striking,
systematic differences in the real-side effects of PE buyouts, depending on buyout type and external conditions. Employment at target firms shrinks 13% over two years in buyouts of publicly
listed firms but expands 13% in buyouts of privately held firms, both relative to contemporaneous outcomes at control firms. Labor productivity rises 8% at targets over two years post buyout (again, relative to controls), with large gains for both public-to-private and private-to-private buyouts. Target productivity gains are larger yet for deals executed amidst tight credit conditions. A postbuyout widening of credit spreads or slowdown in GDP growth lowers employment growth at targets and sharply curtails productivity gains in public-to-private and divisional buyouts. Average earnings per worker fall by 1.7% at target firms after buyouts, largely erasing a pre-buyout wage premium relative to controls. Wage effects are also heterogeneous. In these and other respects, the economic effects of private equity vary greatly by buyout type and with external conditions.

one thing that makes quantifying the effect of PE on firms hard is that PE usually enters the picture once things are going badly, so you can't just subtract their numbers before PE from the numbers after or you'll overstate the negative effects from the pre-existing trend; you need to find some firms who were on a similar prior trend that didn't undergo PE and compare the differences. the research group who wrote that paper have access to a uniquely large and good database of firms, which allows them to do a good job in making those comparisons

thanks flopson, and indeed thread, for generating exactly the conversation i was looking for. i’ll have read of the paper and then get back here.

This is pretty simple compared to a lot of what gets discussed here, but has anyone written about the proliferation of no interest financing of consumer products? I feel like everything I buy on the internet now has the option to pay in installments. I assume some kind of financing cost is simply baked into the price, so does that make me a sucker for not taking advantage of it? It’s a phenomenon that bothers me.

I became particularly aware of it when I got what seemed to be a dramatically inflated quote for Andersen windows and when I complained about the price their response was “were you told about our financing options?” Like as though it’s fine to overpay if you don’t have to pay it all now.

quite often it's a separate company that does the financing and so yeah the company selling the product is paying a cut to the financing company. in australia, afterpay is one of the biggest buy now pay later financing companies and they're actually allowed to prevent retailers charging the customer more to use afterpay (https://www.abc.net.au/news/2020-12-07/buy-now-pay-later-players-wont-be-asked-to-pass-on-retailer-fees/12956250)

I assume the following:

they charge more, or they charge some sort of fee for using the service
they charge for missed payments, making the whole endeavor worthwhile

I assume they're also have a vested interest in the buyer maybe missing a couple payments, which will make the interest-free part null & void... and also warrant a hefty late fee or something.

What about "make no payments for 48 months!!"?
And then four years later you have to start paying for a used mattress.

jinx

so does that make me a sucker for not taking advantage of it?

I suppose this really depends on your own utility function. Personally I am averse to "taking advantage" of 0% financing as I prefer the certainty of the up front cost. Keeping track of payments and direct debits for me would be a negative burden that would outweigh any potential benefit (at least in the era of low interest rates on deposits, and where I am lucky enough to have met my immediate needs, and have a cash surplus).

I guess the analysis of this will fall somewhere within intertemporal choice theory - and if we are inclined to accept a much higher prices of goods with 0% financing there could be a number of explanations (e.g. a significant intertemporal discount rate, imperfect information, imperfect processing power etc.?).

In so far as the financing cost being baked into the price, perhaps instead this could be viewed it as a method of price segmentation? On the assumption there is a correlation between the price elasticities of consumers and their likeliness to use financing.

Sketching it out let's say you have two groups of consumers for a given good -

(1) price elastic consumers who are less likely to invoke 0% financing options for a number of potential reasons (e.g. differing utility functions, or vanity, or perhaps just inexperience with such financing options because they have not needed to use such options in the past); and

(2) price inelastic consumers (who are potentially more experienced with 0% financing or their circumstance dictates that they must use it to get what they are after).

Let's say a profit maximising producer makes a supply to the market at price X in the case of no financing.

And in the case of financing being used the producer's price is effectively (X-B) - where B is the cost they pay to a third party (Payl8r for example) for taking the risks of the financing side. But by doing so this allows the producer to sell to type 2 consumers that they would otherwise miss out on, presumably without dramatically decreasing the full price X income from the type 1 consumers? Something to chew on.

Definitely interested in reading more on this type of stuff.

I suppose there is a parallel in price segmentation in the fact that if you search for them you can find discount codes for many websites, but not everyone searches for them

and we definitely shouldn't discount the additional time cost to the consumer signing up to financing or searching for discounts

I wasn't thinking of it in terms of stealth price differentiation, but it makes sense.

I assume the following:

they charge more, or they charge some sort of fee for using the service
they charge for missed payments, making the whole endeavor worthwhile

i don't think its the price discrimination thing. cause it's the same price to buy on layaway at 0 interest. its actually cheaper cause you could lend the money in the interim and make the interest. interest rates are low and no one would realistically do that for retail purchases, but still

fizzles is otm here:

the obvious benefit is that they will sell more because more people can afford it on a per month basis. even without factoring in fees it’s worth the margin hit.

the buy-now-pay-later service gets fees from the retailer directly, about 5% per sale according to this. that's where the bulk of the money comes from. the article says fees are a minority of the revenues. is it worth it for the retailer? they still get 95% from each sale. so if the price stays the same, they lose 5% on people who would've purchased anyway, and gain 95% on people who wouldn't have purchased without buy-now-pay-later. so as long as there is 1 person who was induced to buy by buy-now-pay-later for ever 20 who buy-now-pay-later'd but would've purchased anyway, it's worth it for them

retailers may be raising prices in response to this; it is a positive demand shock. i doubt by very much, but i could be wrong

1209 to 2019

The Bank of England governor says that cryptocurrency investors should be prepared to lose all their money 🤡 pic.twitter.com/OgNk143iIC

— Aleksandra Huk (@HukAleksandra) May 8, 2021

Wow can’t believe the standard of living of your average £1/year laborer has declined so much in the last 800 years

???????

That graph is 100% accurate and completely useless as a means of understanding economics, finance or money.

Yeah, a lot of crypto supporters think low inflation is a bad thing.

I haven't read the book this is reviewing, so the review may be deeply unfair, but I agree with the review's argument that much of what gets criticised in 'economics' is really just 'the right'. https://t.co/C9qi7XqrIx

— Lafargue (@Lafargue) May 20, 2022

https://www.epi.org/anti-racist-policy-research/disparities-chartbook/#laborcharts

I note that this thread on economics already existed.