I’m not going to sit here condemning the Government’s decision to increase the retail price of oil in Malaysia. I’m actually half happy and half sad that the Government is doing this.

Half-Happy

The decision to increase the retail price of petroleum and diesel is a brave one. It’s going to be gravely unpopular with the public considering that rising cost of living was a major factor that led to the huge defeat by the ruling coalition.

From a macroeconomic point of view, I’m glad the decision was taken because Malaysia can never continue subsidising fuel. Malaysia is a net oil exporter. It will be a net oil importer in the next few years and its oil reserves is projected to diminish in the next 10 years. World oil prices have increased about 400 percent to roughly US$130 per barrel. The increasing world oil prices have seen the oil subsidies provided by the Malaysian government ballooned from RM19billion to a projected RM55billion this year.

Our whole economy is crippled by the Government’s inability to allocate valuable resources to more important investments for our country’s future growth. And the subsidies provided by the Government have only exemplified the subsidy mentality. Are we experiencing a mini resource curse where countries with natural resources experience slower economic growth?

Half-Sad

I’m actually pessimistic with this decision because the reduction of fuel subsidies will lead to inflation. And the problem with inflation in an economy like Malaysia is more serious as compared to Singapore. In Singapore, wages are continuing to rise due to the labour shortage and as long as the increases in wages are higher than the inflation level, there would not be much of a problem. But the problem with Malaysia is wages are not rising as fast as it ought to be.

This leads to a more serious fundamental problem plaguing our economy – our comparative advantage. We are still stuck in our 1980-90s mentality of attracting low value-added manufacturing FDI. We forget that we do not possess the comparative advantage in labour intensive industries anymore as countries like China and Vietnam open their doors to foreign investors.

This debate can go on for pages on where Malaysia has gone wrong, but I shall not spend time elaborating. There are many factors – corruption, transparency issues, education system, government efficiency etc

The bigger question that we should ask is what the government will do with the savings from the reduction in oil subsidies. In fact many will argue that the government is actually richer than ever before considering that Petronas and other commodities companies are posting record profits thereby contributing significantly more to the Government’s coffers through corporate taxes.

I’m sad at this because the bare fact is we do not know. The money might be used to fund important infrastructure projects or to improve our public transport, both of which will boost our country’s competitiveness and attractiveness as an investment location. Or the money can be wasted on some corruption-laden non-productive projects.

Where are we heading after this?

I was in Raffles Junior College this morning to attend a talk by a Harvard Admission Officer. Some Harvard Alumni member was also present there and together the both of them shared some rather interesting information about Harvard University.

I shall pick out the interesting part.

Harvard College admitted 1656 people last year. Around 27000 people applied to Harvard.

So your chances of entering Harvard = (1656 ÷ 27000) ≈ 0.061333 = 6.13%
Meaning for every 100 applications that Harvard receives, only around 6 people get admitted and the remaining 94 people are rejected.

Okay. That’s grim enough. But that’s not all. Ms Melanie also said international students (non-US citizens) make up around 10% of the intake.

So for international applicants like most of you and me, your chances of being admitted to Harvard = (0.061333 ÷ 10) = 0.0061333 ≈ 0.613%

And that means for every 100 international applicants, less than 1 gets admitted into Harvard.

Of course Harvard can’t admit every international student from the same country right? They need some diversity. The Harvard alumnus was kind to give some vital statistics. Every year around 5 Singaporeans, 4 Chinese, and 5-7 Indians are admitted into Harvard. From Malaysian newspaper report, I know that there is only 1 Malaysian from Kajang that got admitted into Harvard for this coming intake.

So for that sole Malaysian who got into Harvard, he defeated some rather steep odds against the other Malaysians.

His chances (and mine) of entering Harvard = (1 ÷ 27000) ≈ 0.000037037 = 0.0037%

Ok, to be fair, 3 Malaysians were admitted into Harvard the previous year. But the fact still remain, it’s still extremely hard to enter Harvard. Using this statistic of 3 Malaysians, my chances will be (0.0037 x 3) ≈ 0.0111%

There are 5 Singaporeans who got admission into Harvard, so your chances (if you are a Singaporean) of entering is roughly (0.0037 x 5) = 0.0185%

Let’s compare this to buying a 4 digit lottery in the corner gambling shop. Your chances of winning the first prize is [1 ÷ (10 x 10 x 10 x 10)] ≈ 0.0001 = 0.01%

So for me, the prospect of me gaining admission into Harvard is almost close to none. It’s like me buying a 4D number and hoping that I’ll win the first prize when the results are announced.

The Harvard alumnus also said that Singapore has a very disproportionate representation in Harvard. For a nation of around 4million people, the percentage of people being admitted for any single year is around (5 ÷ 4 000 000) ≈ 1.26 x 10-4%

As for China and India, the representation is only around (5 ÷ 1 000 000 000) ≈ 5 x 10-7%

So no wonder Harvard is so famous. It’s famous for rejecting so many people. And those that does gain admission into Harvard, they are rather set for life cause there are just simply too little people with a Harvard degree.

If the chances of me being admitted into Harvard are comparable to that of winning the first prize of a 4D lottery, then should I even consider applying? People say don’t waste your time and money buying the lottery. This is nearly the same thing. Now do you still want to try your luck entering Harvard?

I was reading the Today newspaper dated 27th November and there I read a published letter by a person on one method of ending rampant piracy of music, movies and computer softwares.

He was saying that no matter how tough the enforcement of the piracy law is, piracy will not go away easily. Well, in Economics term there is such a thing called demand for such pirated goods due to the cheap prices offered relative to the original products. And when there is a demand for such products, there will be people willing to take the risks (in this case fines and jail terms) to supply these products to earn profits.

The average guy down the street will feel that they are being ripped off by the huge companies for charging a very high price for their products and will resort to pirated goods to offset the high costs.

As such, the author suggested using the Big Mac type of pricing for these products to make them more affordable for the average person in different countries. When original products are more affordable for a significant majority of the population, people will be more inclined to buy original products thus lowering the piracy rate. Of course this have to be coupled with education on respecting intellectual property, but the current tactic of using only education and law enforcement is not very effective because it doesn’t deal with the affordability aspect of the problem.

The author goes on to continue giving example of how the Big Mac is priced differently in different countries although it is supposed to be the same size and have the same ingredients. For example the Big Mac costs S$3.60 in Singapore but across the Causeway in Malaysia it costs only S$2.40. In the US, it is S$4.70 while in Switzerland, it is S$8.20.

The Economist magazine also has a Big Mac index to measure the different prices of Big Mac around the world. It is based on the economic theory of Purchasing Power Parity (PPP) to see how a certain amount of money can buy different amounts of goods in different countries. But their main function of the Economist’s index is to measure how a certain currency is undervalued or overvalued. It takes the US dollar as a benchmark to compare the Big Mac prices and it found that certain Asian currencies are undervalued by as much as 40-50%.

Source: http://www.economist.com/markets/indicators/displaystory.cfm?story_id=8649005
Continuing on, what the author suggest is pretty much feasible. If McDonalds can do it worldwide and charge a different rate for the same product (Big Mac), why can’t the music, video and computer software companies implement the same thing?

They can charge different prices for the same product in different countries thereby making their products affordable for the masses. Then, they can all stop bitching about rampant piracy cutting their margins.

I believe this is a very reasonable idea to be adopted. Price Discrimination as they may call in Economics where producers charge different prices for the same product. Companies practise it all the time. But why can’t they use it for this purpose. Book producers do it by charging a cheaper price for text books for sale in Asian markets but a higher price in European markets. At the back of the book you see a small note: For sale in Asian markets only.

Well, Economics text books say: For Price Discrimination to occur, the supplier must have monopoly power, there must be a segmentation of the market, resale of the product must not be possible and the demand elasticity of the product must be different.

In this sense, the music, video and computer software industry satisfies all these 4 conditions.

In fact, by using this method, the producers will be able to increase revenue and profits. Although the producers will earn less for every product sold, but because the product is price elastic in Asian markets (Asians are very price conscious and will buy the cheaper alternative [also dependent on level of respect of intellectual property]), the overall decrease in prices will result in a more than proportionate increase in products sold. And as a result profits will increase. To make profits for the companies even bigger, they can further price discriminate internally within a country. They can charge consumers a lower rate. Companies and government that uses the products for commercial purposes meanwhile can be charged a higher rate.

I am very puzzled while such a simple idea cannot be implemented by these huge companies. Why can’t they work with the free market and undertake policies accordingly? Instead they are focusing all their efforts in bitching to governments to enforce piracy laws etc.

Record companies themselves are passionate about price discrimination. In fact they are pushing to practise price discrimination in the online music trade world. As we all know, Apple’s iTunes Music Store charges US$0.99 for a single download of song. However, record companies are pushing for flexible pricing. It wants iTunes Music Store to charge newer songs at a higher price and catalogue materials for less.

Source: http://www.engadget.com/2006/04/21/apples-itunes-pricing-to-stay-at-99-cents/

Why want to price discriminate in the US but not in Asian markets? Even for the 99cents a download, it is pretty much expensive for the average Asian consumers.

Take for example the average music CD price. In Malaysia, the average music CD costs RM40. In Singapore, it is around S$20 while in the US it is around US$10.

Assuming the average pay of the average worker is RM2000, S$2000 and US$2000 in the 3 countries, one will easily understand why piracy is more rampant in Malaysia and almost non-existent in the US. This is because to buy an average music CD, it costs 2% of the average Malaysian pay, 1% of the average Singaporean pay and 0.05% of the average American pay. You see, the proportion of income spent on music CD will be much higher in less developed countries. This is related to the Economist’s PPP because currencies of less-developed countries tend to be undervalued to the US dollar.

Big Mac is priced differently in different countries to make it more affordable for the average man. Yet, we have not heard of McDonalds complaining of low sales because it is not affordable.

Yes, it does not suffer from piracy situation, but it does have many local competitors who offer similar burgers at a cheaper rate.

Yes, I would agree that pirates sometimes can duplicate a product to such great quality that sometimes one cannot disseminate the differences of an original to a pirated product. But things can be further improved by educating the public on intellectual property. However, people will not resort to original products if the price difference is too massive.

One question for all of you to ponder: Why do book publishers rarely complain about piracy, in this case students photocopying their books? Because first the practise price discrimination according to regions and more importantly they offer value-added products. They offer more information on their websites, CDs with more programs, softwares, online tutoring, online mentoring, online marking and the list goes on.

Yes, I would agree that the cost of producing the goods will be similar although the selling price will be lower in most Asian countries. However one also has to consider that the cost of promoting a product will also be lower in Asian countries and the possible benefit of eradicating piracy in the long run.

In conclusion, by using the Big Mac style of pricing, products will be significantly affordable for the average man in different countries. With continuous education and campaigns on the need to support intellectual property and law enforcement by the police, I’m pretty sure more and more people will soon resort to buying original products and piracy rates will go down.

Technorati Tags: piracy, music, Economics, Big Mac, pricing, Purchasing Power Parity, price elastic, Asian, free market, Record companies, price discrimination

What do you think of this?

I found this in one of my fren’s pix in Friendster while surfing around a few days back. Kinda funny I guess. But is it true?

If only we learn this kinda Mathematical equations in class….maths will be so much simpler…..