Friday, August 2, 2013

Facebook politics: Big Mac prices

This ones' already making the rounds of mockery, but I should pile on because it is the perfect example of Facebook politics: The Huffington Post ran a story claiming that McDonald's could double its wages by raising the price of a Big Mac by 69 cents and all dollar menu items by just 17 cents. This story spread all over Facebook, and by the time HP issued a correction everyone's Facebook feeds had already moved on.

It turns out that the study was actually a paper by an undergraduate who made some basic math errors. Not that undergraduates can't write publishable resarch! But this would've been laughed out of peer review in any econ journal.

More to the point, though, is that, even if the student had gotten the math totally right, his study still would have been a complete joke, because his methodology was a complete joke.

He simply looked at total employee compensation as a percent of total revenue, saw that it was 17% (turns out it's 25% or higher for some reasons you can discover by following the above link) and argued that, if McDonald's raised all its prices by 17%, it could then pay workers double! Tah-dah!

This is just silly. At no point is there any consideration that revenue will change if McDonald's increased its prices. Really? The theories of supply and demand are maybe the most important takeaway from econ 101--if prices rise, quantity demanded falls. If McDonald's prices are competitive, this means that increasing prices will lower revenues. How much will it lower revenues? 17%? 25%? Less, more? To find this out, you actually have to do some empirical analysis that involves much more than just glancing at a company's accounts. The relevant metric is of the elasticity of demand for a Big Mac--how sensitive is demand for Big Macs to price changes? I don't know the answer, but my guess is that it's fairly sensitive, since fast food is relatively competitive, and that raising McDonald's prices by 17-25% would be a very good move for Burger King. To find the answer, you would need to do some econometric analysis on historical price data for relevant fast food items. You would also have to control for changing times. The elasticity of demand for a good is not constant. It changes during recessions, as people's preferences change, as substitute goods become more or less available, and so on.

The moral here is, if a news agency reports on some economic news, just as when they report on science news, there are some things you immediately need to investigate. If you are not capable of knowing the obvious warning signs of hack investigation, you probably should ask some friends before you post dumb news stories to Facebook.

That is, if you're interested in spreading the truth. If you're only interested in scoring points against your political enemies, then keep on truckin'.

As a side note, the original story was supposed to make you think, "Those jerks at McDonald's, 68 cents is nothing!" I thought, "Holy crap, 68 cents a burger is huge! They'd lose millions if they did that." To understand why, you need to first understand that loads people really do change their behavior on the basis of a single penny.


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