Wednesday, November 25, 2015

M-PESA Breaks Down Regulatory Entry Barriers

A nice story by 60 minutes demonstrates the value of mobile money. What large corporations are jockeying to roll out in the US, Kenya has been doing for years with the most bear bones of mobile technologies. Users are able to make millions of micro-transactions per day over the mobile network using M-PESA. There are heart warming vignettes about the various ways  this benefits consumers. But the best part of the story for me was the erosion of entry barriers (around the 11:00 minute mark). The CEO of the mobile carrier explains:
Actually, when M-PESA started, Kenya's commercial banks implored the government to impose regulations to impede its development, but the government decided to take a hands-off approach, which is pretty unusual.

But other jurisdictions have taken notice.
The most effective barrier for the success of mobile money around the world is the banking lobby. The banking lobby in most parts of the world is a very strong lobby. And banks have looked at what's happened in Kenya and have decided that they don't want to see that happening in their own countries. 

But for the courage of some Kenyan government official, this may never have gotten off the ground.

Safety breeds risk

Can financial crises and other disasters be prevented? What was the role of the Federal Reserve, regulation, and risk in past crises? In the pursuit of safety from disaster, are we creating the conditions for the next one? Greg Ip, author of Foolproof, joined a panel of experts to discuss the themes of his new book at the Mercatus Center.

Monday, November 23, 2015

Is predatory pricing profitable?

Predatory pricing is rare, at least in the US, because it is an investment that rarely pays off.  After an incumbent firm drives an entrant out of the market by pricing low (and deliberately losing money), the incumbent must be able to recoup the lost money by raising price--without attracting more entry--when the entrant exits the industry.

Perhaps the best examples of predatory pricing come from the airline industry, when the Department of Justice brought several cases in the 1990's.
Probably our best known airline predation investigation involved Northwest's response to Reno Air's entry into the Reno-Minneapolis city-pair in 1993. Not only did Northwest institute service of its own on this route that it had previously abandoned, it also opened a new mini-hub in Reno that overlaid much of Reno Air's own operation. Our investigation was well under way when the matter was resolved because, with the intervention of the Department of Transportation, Northwest decided to abandon its overlay of Reno Air's hub operation.

See here why these cases are so hard to win.

In other words, the government needs to prove that the low fares and extra flights would prove financially ruinous if continued indefinitely. To make the argument stick, the government will have to prove that American could reasonably expect to recover its losses after Vanguard or Sun Jet exits the market by raising fares -- confident that its high fares would not attract another round of upstarts.

What is GDP?

Our friends at MR University have developed an online macro course with good, free content

Course Outline

2 The Wealth of Nations and Economic Growth
3 Growth, Capital Accumulation, and the Economics of Ideas
4 Savings, Investment, and the Financial System
5 Unemployment and Labor Force Participation
6 Inflation and Quantity Theory
7 Business Fluctuations
8 Transmission and Amplification
9 The Federal Reserve
10 Monetary Policy
11 Fiscal Policy

Saturday, November 21, 2015

REPOST: Fee-for-service medicine causes amputations

It is difficult to align the incentives of physicians (making money) with the goals of patients (low cost, high quality care) due to asymmetric information:  only the physician knows what the patient wants.

What distinguishes Medicare Advantage plans from traditional fee-for-service plans is the degree to which they use mechanisms designed to encourage the delivery of cost-effective quality care. Three critical mechanisms are financial incentives that are aligned with clinical best practices, a selective network of providers, and more active care management that emphasizes prevention to minimize expensive acute care.

Here is what happens:

  • Single-year mortality rates fell from 6.8 percent in the traditional fee-for-service sample to 1.8 percent 
  • Patients in the Medicare Advantage plans had shorter average stays in the hospital (about 19 percent shorter.)
  • Patients in the managed plans were more likely to receive preventive care ...For example, diabetic patients in the fee-for-service sample had an average of 11.5 amputations per 1,000 patients; those in HMO plans with global capitation had only 0.3. 

BOTTOM LINE:  Incentives matter
 “We've found that U.S. private insurers have created an operating model that can deliver better care at a lower cost and have a major role to play in the ongoing national efforts to improve health care quality,” said Stefan Larsson, a BCG senior partner and coauthor of the report. “Quite simply, we’ve found that the more aligned the care, the better the quality delivered.”

Friday, November 20, 2015

Running an art auction

Art is a textbook example of the advantages of an auction over simple posted price: an auction awards the art to the highest value bidder, and sets a price. Competition between the auction houses has taken the form of price guarantees:
Christie’s agreed to give the seller of “Four Marilyns,” Turkish financier Kemal Cingillioglu, a $40 million house guarantee, which means the house promised to pay him up to $40 million no matter how the silkscreen fared. Since it sold for less [only $32 million], the house could now need to pay him the difference. Christie’s declined to discuss the terms of the deal.
HT: Chris

Thursday, November 19, 2015

Make the rules or your rivals will: erecting barriers to entry

HT: Sohil

REPOST: Dating Game

Dating Game

QUESTION: A man and a woman are trying to decide where to go on a date.  The woman prefers ballet, but the man prefers going to a football game.  There is some gain to going together, but each would rather go to their preferred activity alone, than together to their less preferred activity.  Diagram this game, and show how best to play.


                                              Football             Ballet
                              Football   (1,4)                  (0,0)
                                  Ballet   (2,2)                  (4,1)

The man does better by going to the football game, regardless what the woman does, and the woman does better by going to the ballet, regardless what the man does.  These are called "dominant strategies."  The equilibrium of the game is for each to go to their preferred activity.

Notice, however, that the two players could make themselves better off by cooperating.  Self interest is taking them to a place (2,2) with a lower group payoff than the cells on the main diagonal. 

There are two ways to change the game to increase group payouts.

1. Alternate.  If the couples take turns, their group payout goes up.

2. Have the player that receives the higher payoff, compensate the other player for going to their less preferred activity.

In this case, the man could give 1.5 units to the woman if they go to the football game, which would change the payoff in the upper left to (2.5, 2.5).  This would change the equilibrium of the game.

Alternatively, the woman could give 1.5 units to the man if they go to the ballet.  This is the premise of an off-color South Park episode.