Monday, January 26, 2015

Et tu Uber?

Uber betrays the very principles that made it so successful by capping pricing during the blizzard.  When these price ceilings create shortages, I hope they can explain to their customers why they were left out in the cold.  

The cap comes after an agreement struck between Uber and the New York City Attorney General’s office in January 2014 that required Uber to limit prices during“abnormal disruptions of the market”, including emergencies and natural disasters. Uber also announced a national policy for its price limits during those emergencies. 
In an email to Bloomberg, Uber said the following:
Dynamic pricing will be capped and all Uber proceeds will be donated to the American Red Cross to support relief efforts. 
The company later clarified to TechCrunch that the cap will be in place in any market that has declared a State of Emergency. 
While Uber plans to limit dynamic pricing during this storm, the company has had a bad history with emergency situations and surge pricing. In late 2012, Uber received criticism for raising fares during Hurricane Sandy. (The agreement with the NY AG came in part as a result of Hurricane Sandy backlash.)
I feel like taking Uber out of my textbook; or adding them to the chapter on how to keep regulators at bay.

Tuesday, January 20, 2015

Declining Demand for Labor

Who needs a cameraman to do local news anymore?
Here is a reporter using a selfie pole to become her own camera operator. As the opportunity cost reporting in the field just fell, we might expect more field reports.*

*Evidence that this is a new technology adoption can be seen in her choice to use a smartphone rather than the GoPro resting on the sidewalk.

Hat tip: Chris Phelan

Bargaining for a Happy Spouse

Leora Frieberg and Steven Stern have a new paper on intra-household bargaining titled, "Marriage, Divorce, and Asymmetric Information." Survey data ask spouses two questions that essentially get at:

  • "How happy are you in this marriage?"
  • "How do you think your spouse answered this?"
They compared these answers to divorces rates five years later. Of course, they find that people unhappy in their marriages divorce more often. But also, people who are more wrong (i.e., information is more asymmetric) about their spouse also divorce more often. 

How much would you give up to avoid a divorce? When you allow that marriages involve myriad small bargains everyday (e.g,, doing dishes, picking up dirty clothes, letting him/her choose the restaurant or movie), you get even more interesting results:

Our results show that people forgo some utility in order to make their spouses better off and, in doing so, offset much of the inefficiency generated by their imperfect knowledge. Thus, we find evidence of asymmetric information and interdependent utility in marriage.

This last sentences is as close as economists come to saying that husbands and wives might just love each other.

Monday, January 19, 2015

Lower fuel prices help air travel industry

Falling fuel prices are idling oil exploration rigs, encouraging consumers to buy bigger cars, and helping the aviation industry:

Falling fuel prices are encouraging airlines to keep less efficient aircraft in service for longer but they are also likely to see extra growth in air travel as airlines pass on the benefit to passengers in the form of lower fares. 
The value of in-service aircraft is rising as 80% to 90% of airlines renting aircraft have extended their use, said David Power, Chief Executive of Orix Aviation, an aircraft leasing company.

Sunday, January 18, 2015

Swiss banks face foreign exchange risk

Interesting article that draws the analogy between a strong member of the EU exiting the monetary union, like Finland or Germany, and the Swiss unpegging their currency from the euro.


After years of wondering whether the exit of a small, fiscally weak country like Greece could undermine the euro, policymakers will have to deal with an even bigger shock stemming from the exit of a small, fiscally strong country that is not even a member of the European Union.


Bottom line: we can learn who would benefit and who would be hurt by looking at the Swiss experience, e.g.,

Big Swiss banks fund themselves in Swiss francs, because so many people everywhere want the security of franc assets. They then acquire assets worldwide, in other currencies. When the exchange rate changes abruptly, the banks face large losses – a large-scale version of naive Hungarian homeowners’ strategy of borrowing in Swiss francs to finance their mortgages. 
Though the SNB had given many warnings that the euro peg was not permanent, and though it had imposed a higher capital ratio on banks, the uncoupling from the euro came as a huge shock. Swiss bank shares fell faster than the general Swiss index.

\

Friday, January 16, 2015

This is what they mean by "foreign exchange risk."

Swatch was hurt by the Swiss franc appreciation, but strangely, so were others:

Swatch:  Citigroup estimates that about 85 per cent of its cost of goods sold is in Swiss francs. A much lower proportion of sales are at home. The broker thinks that a rise of 12 per cent to 13 per cent in the Swiss franc against the euro could wipe 8-10 per cent off its earnings. Its shares fell 16 per cent on Thursday.
Novartis, Roche, and NestlĂ© : a combined $750bn or so in market value — each fell by a tenth immediately after the SNB shock. It is tempting to call this excessive. These companies are based in Switzerland but their revenues and costs are overwhelmingly located elsewhere. For NestlĂ© and Roche, which report in Swiss francs, there will be a translation effect on the accounts: reported sales will fall by the amount the currency rises, and reported earnings by a bit more than that. But there will be no economic effect on non-Swiss operations. For Novartis, which reports in dollars, there is not even the translation effect.

Thursday, January 15, 2015

Swiss franc appreciates agains the Euro


The Swiss Central Bank had been "pegging" the price of the Swiss franc to the euro, to make sure that Swiss exports were not priced out of the European market.  To do this, they had to print swiss francs and buy foreign assets, or hold foreign currency.  This increased demand for foreign currency, which increased the "price" of a euro in the market for foreign exchange.  This benefited European consumers, and Swiss exporters.  

Wednesday, January 14, 2015

Apologies to the Venezuelan Bishops

In past posts, we have blogged about how ignorant our clergy is about wealth, poverty, and policy.  But after the Venezuelan Bishops came out with a strong and simple brushback of the Pope, I owe them an apology

In a refreshingly powerful and direct statement, Venezuela’s bishops Monday blamed “Marxist socialism” and “communism” by name for the horrors and chaos gripping their country, according to a story in El Universal. 
The bishops said the long lines of people trying to buy food and other basic necessities and the constant rise in prices are the result of the government’s decision to “impose a political-economic system of socialist, Marxist or communist,” which is “totalitarian and centralist” and “undermines the freedom and rights of individuals and associations.” 
The Venezuelan bishops specifically stated that the private sector was critical for the well being of the country. The document, read by Monsignor Diego Padron in Spanish, said the country needs “a new entrepreneurial spirit with audacity and creativity." 
So not only did these bishops diagnose the cause of the misery correctly; they also warned that communism harms the poor most of all.

I think the Pope could use a copy of the new edition (fourth) of Managerial Economics, like the one I sent to the Venezuelan President.



Monday, January 12, 2015

Effects of disability payments

An interesting story is developing around a West Point professor and disabled vet on the perverse incentives created by our efforts to help wounded vets:

As he paced back and forth in front of the soldiers, some of them leaning on crutches, Colonel Gade said that too many veterans become financially dependent on those monthly checks, choose not to find jobs and lose the sense of identity and self-worth that can come from work.

“People who stay home because they are getting paid enough to get by on disability are worse off,” he said. “They are more likely to abuse drugs and alcohol. They are more likely to live alone. You’ve seen these guys. And the system is driving you to become one of them, if you are not careful.”

Obviously, the messenger is important for a message like this.

How did Blockbuster's CEO solve the double marginalization problem?

Hal Varian's (Chief Economist at Google) tells the story of Blockbuster (a video "rentailer") and its distributors who suffered from "double marginalization" or "the double markup problem." In other words, competition between firms selling complementary products results in a price that is too high and output that is too low:
Consider, for example, video tape rental industry. Prior to 1998, distributors sold video tapes to rental outlets, which proceeded to rent them to end consumers. The tapes sold for around $60 apiece, far in excess of marginal cost. The rental stores, naturally enough, economized on their purchase, leading to queues for popular movies.

The old contractual form suffered from double marginalization.  This means that upstream distributors set a single price and the downstream rentailers took this upstream price ($60) as a marginal cost and priced videos at the point where MR=$60.  Since 60 was far in excess of MC (almost all of the costs of video production and video rentailing are fixed), this resulted in video rental prices that were too high and output that was too low.

The Blockbuster CEO recognized this as a problem and proposed a solution:

In 1998 the industry came up with a new contractual form: studios provided video tapes to rental stores for a price between zero and $8, and then split revenue for rentals, with the store receiving between 40 and 60 percent of rental revenues.

Consider how the new pricing scheme changed the incentives of the video rentailer.  Now the marginal revenue from renting one more video was only 50% of the old marginal revenue, but the price was only 7.5% of the old upstream price.  Now the rentailer produced up to the point where (50%)MR=(7.5%)$60.

.. these contracts increased revenue of both studios and rental outlets by about 7 percent and consumers benefitted substantially. Clearly, the revenue sharing arrangement offered a superior contractual form over the system used prior to 1998.

 This arrangement is subject of course to verification of the downstream revenue by the upstream distributor.  New "smart" cash registers at Blockbuster made this possible:

The interesting thing about this revenue-sharing arrangement is that it was made possible only because of computerized record keeping. The cash registers at Blockbuster were intelligent enough to record each rental title and send in an auditable report to the central offices. This allowed all parties in the transaction to verify that revenues were being shared in the agreed-upon way. The fact that the transaction was computer mediated allowed the firms to contract on aspects of the transaction that were previously unobservable, thereby increasing efficiency. 


More of Hal Varian's insights about economics (there are some good stories here) can be found in his popular columns.  He is most famous to MBA's for saying that "marketing is the new finance," urging the Quants, who used to go into finance, go into marketing instead.

HT:  Vlad Mares