Thursday, December 22, 2011

Legalizing Black Markets in Video Game 'Gold'

In many online video games, like World of Warcraft or EVE, players can have their characters trade for new abilities or weapons or all sorts of things. They acquire currency within the game to come up with the means to acquire these add-ons. And if they don't have the time or inclination to perform these more menial tasks, they can trade with other players for the currency. This created an incentive for 'gold farmers' to sell their game currency to other players for real cash on websites outside of the game environment. There are thousands of 'players' in less developed countries who earn a modest living selling the 'gold' they farm. Game publishers generally discourage this and so it became a 'black market' activity moderately suppressed by the game publisher.

In its recent release, the game Diablo III will embraced this activity and even expects to generate earnings by taking a percentage of each transaction. A nice discussion of this can be found at Penny Arcade's video of this market place.

Hat Tip: A Ward

Wednesday, December 21, 2011

Thursday, December 15, 2011

e-book contracting

The Wall Street Journal has an interesting article, "E-Book Readers Face Sticker Shock ," (gated) about pricing of e-books versus physical book. It seems that publishers are preventing retailer discounting of e-books even though they cannot do so for physical books. As a result, the discount for the electronic version is shrinking considerably.

Under the old book arrangement, major publishers charged the same wholesale price for e-books as they received for hardcovers. For a new novel priced at $25, for example, they received $12.50 for the e-book and $12.50 for the hardcover. When Amazon.com discounted the e-book at $9.99, Amazon took the loss.

But under the new pricing model, a $25 hardcover is often priced at $12.99 for the e-book. And because publishers receive 70% of the e-book retail price -- while retailers retain 30% -- that means publishers receive only $9.09. Publishers were willing to accept the lower profits because they felt the new arrangement preserved the value of books and encouraged other retailers to enter the e-book market.

I have a possible explanation after spending only 30 minutes thinking about this (meaning I very well could be wrong).

The publisher/retailer contract includes a different sort of sharing arrangement than before. With a fixed wholesale price, it would seem that, previously, retailers bore more risk but I believe that they were not charged for unsold physical books. This means that publishers bore a a substantial risk of eating the costs of a poor selling book. This gave them an incentive to exercise quality control in order to publish books that would sell well. With e-books, there are less costs to publishing a poor seller. To have similar quality control incentives, the new contract must make publisher payment a fraction of sales rather than a fixed wholesale price. But if it is a fraction, then retailers may want to discount too much. To solve this problem, publishers have prohibit e-book discounting.

Unfortunately, this may be illegal.
The Justice Department confirmed last week that it was investigating whether there was improper collusion between the publishers and Apple to prevent discounting. Publishers last week either disagreed with the allegations, said they were cooperating with regulators or declined to comment. Random House said it isn't part of the probe and otherwise declined to comment. Apple declined to comment at the time.
Hat tip to Dr. Jane

Wednesday, December 14, 2011

Cell Phones, Driving, and Decision Errors

I suspect that the NTSB is right that, on net, the costs from distracted driving while talking on a mobile phone outweigh the benefits. But this is a classic example of how decision errors can creep into decision making. Consider the hypothesis that banning mobile phone use while driving will save lives.


Ban mobile phone use while driving Don't ban mobile phone use while driving
Mobile phone use while driving causes more deaths than it saves

0 Type I Error
(false negative)
Mobile phone use while driving saves more deaths than it causes Type II Error
(false positive)
0

Type I Error Costs If distracted drivers only killed themselves, why stop them? The hidden cost is that they typically run into someone else or they take their passengers with them. Drivers may be less careful with other peoples' lives. So, the Type I error costs are all the innocents killed by distracted drivers. This has been the focus of most of the studies and the policy.

Type II Error Costs Drivers with mobile phones have related information during Amber alerts. They have notified media outlets when traffic was bad due to wrecks and thus saved thousands of hours in commute time - during which some wreck could have occurred. They have been able to coordinate with their called parties, getting directions, etc., which saves time which has some value. And of course, they derive utility from the call. But if your job is highway safety, as board member of NTSB, how much do you value these? Since no one writes news stories about the wreck that did not occur from accurate traffic updates, they are largely hidden. Also, if your job is highway safety, you may not value lost time and utility as much as those who must give it up.

Let me repeat that I suspect that banning mobile phone use while driving is likely appropriate. I am just not certain that all the costs went into the decision.

Monday, December 12, 2011

Q: Are vaccines safe?

Penn and Teller demonstrate Type I and Type II errors as only they can. Do not watch if you are offended by strong language (this IS Penn and Teller after all).

Video Game Pricing

An article in Geekwire, "How Valve experiments with the economics of video games," contains some fascinating applications of managerial economics concepts. Evidently, consumer demand information is quite important:
We don’t understand what’s going on. All we know is we’re going to keep running these experiments to try and understand better what it is that our customers are telling us.
They use the tools we teach MBAs:
Now we did something where we decided to look at price elasticity. Without making announcements, we varied the price of one of our products. We have Steam so we can watch user behavior in real time. That gives us a useful tool for making experiments which you can’t really do through a lot of other distribution mechanisms. What we saw was that pricing was perfectly elastic. In other words, our gross revenue would remain constant.
And this has changed the current business practices:
We’ve gone from a situation where we dream up a game, we spend three years making it, we put it in a box, we put it out in stores, we hope it sells, to a situation that’s incredibly more fluid and dynamic, where we’re constantly modifying the game with the participation of the customers themselves
Hat tip Marginal Revolution

Sunday, December 11, 2011

Why God is a Republican and Santa Claus is a Democrat

The previous post made me think of PJ O'Rourke's classic essay from Republican Party Reptile

God is an elderly or, at any rate, middle-aged male, a stern fellow, patriarchal rather than paternal and a great believer in rules and regulations. He holds men strictly accountable for their actions. He has little apparent concern for the material well-being of the disadvantaged. He is politically connected, socially powerful and holds the mortgage on literally everything in the world. God is difficult. God is unsentimental. It is very hard to get into God's heavenly country club.

Santa Claus is another matter. He's cute. He's nonthreatening. He's always cheerful. And he loves animals. He may know who's been naughty and who's been nice, but he never does anything about it. He gives everyone everything they want without thought of a quid pro quo. He works hard for charities, and he's famously generous to the poor. Santa Claus is preferable to God in every way but one: There is no such thing as Santa Claus.

Angela Merkel is a Conservative and President Obama is a Liberal

A major rift has opened between Germany and the US on how to address the crisis now threatening the existence of the European Union.  President Obama wants the European Central Bank to print money to buy debt from indebted countries (the PIIGS) to prevent them, and the banks that lent money to them, from going broke.

On the other side of the Atlantic, Chancellor Merkel is concerned about the incentives that bailing out profligate borrowers creates:
Mrs. Merkel views the financial industry with profound skepticism and argues, in almost moralistic fashion, that real change is impossible unless lenders and borrowers pay a high price for their mistakes.

Althought the NY Times suspects a political motive:
President Obama, of course, faces re-election and sees the crisis in Europe as one of the biggest threats to his chances, as it could tip the American economy back into recession if austerity worsens the slump there. German officials are well aware of that and complain privately that electoral results are Mr. Obama’s chief concern

I think the two positions are emblematic of the deeper philosophical difference:
Charles L. Schultze, chief economist for former President Jimmy Carter, once proposed a simple test for telling a conservative economist from a liberal one. Ask each to fill in the blanks in this sentence with the words “long” and “short”: “Take care of the ____ run and the ____ run will take care of itself.”

Liberals, Mr. Schultze suggested, tend to worry most about short run, while conservatives are more concerned with the long run. Here Chancellor Merkel seems as if she has just read chapter 20, and is worried that unless we punish profligate borrowers, and those who lend to them, we will get more of both.

Consult an economist before buying ski boots

It turns out that ski boots require point-of-sales fitting services, similar to those required to sell wedding dresses and golf clubs.  But rather than using exclusivity and resale price maintenance to eliminate competition from discounters, ski and boot shops have started charging customers $25-$50 for boot fittings, but only if they end up purchasing elsewhere.

I wonder if this is enough.  Boots that sell for $600 in a retail ski shop, can sell for $372 online.

HT:  Jay

Wednesday, December 7, 2011

Finally, a solution to the Euro crisis that might work

Pay the politicians with bonds whose values are tied to the market's estimate of their credit worthiness:

...allow euro-zone countries to issue so-called "blue bonds" and "red bonds." Blue bonds would be jointly guaranteed by all members of the euro zone and allow member states to borrow up to 60% of GDP. To fund borrowing beyond that, countries would have to issue red bonds, which would be backed only by their national treasuries and therefore trade, under most circumstances, at higher yields.

To complement joint bond issuance, I would suggest that all euro-zone politicians receive a significant part of their compensation in the form of blue or red bonds. If a country has to issue red bonds because its debt-to-GDP ratio exceeds 60%, politicians would be paid in red bonds.

Otherwise they would be paid in blue bonds. Bonds would have to be held for five years but would be convertible: If the debt-to-GDP ratio falls below 60%, red bonds would be converted into blue. Likewise, if this ratio rises above 60%, blue bonds would be mandatorily converted into red bonds.

This way, politicians would be rewarded when their countries are able to borrow cheaply and punished when their countries' cost of funds goes up. Politicians would be well-compensated when their countries are perceived as solvent; they would take heavy losses if their countries fell into serious financial difficulty.

Physicians don't die like we do

Instead they shun the expensive, intrusive, costly, and futile end-of-life-care they give to the rest of us:

Almost all medical professionals have seen what we call “futile care” being performed on people. That’s when doctors bring the cutting edge of technology to bear on a grievously ill person near the end of life. The patient will get cut open, perforated with tubes, hooked up to machines, and assaulted with drugs. All of this occurs in the Intensive Care Unit at a cost of tens of thousands of dollars a day. What it buys is misery we would not inflict on a terrorist. I cannot count the number of times fellow physicians have told me, in words that vary only slightly, “Promise me if you find me like this that you’ll kill me.” They mean it. Some medical personnel wear medallions stamped “NO CODE” to tell physicians not to perform CPR on them. I have even seen it as a tattoo.
Link.   HT: marginalrevolution.com

Monday, December 5, 2011

Consult an economist before buying a wedding dress


When Stephanie (her name has been changed to avoid embarrassment) went shopping for a wedding and bridesmaid dresses, she found valuable advice from an unusual source, Chapter 23 of her favorite economics text.  And it was not about sleeve options, figure flattery, or bustles.

She was puzzled that over half of the stores that sell wedding dresses do not permit photos, and do not have tags in the dresses that would identify the manufacturer and style type.  

These retail stores want to prevent customers from "free riding" on their fitting and display services:
I just spoke with someone who had all her bridesmaids sized in the store only to go online and buy them from a discount site. I would assume many of the brides are doing this as well.

Note that this is not just a problem for the store, but also a problem for the dress manufacturer: if stores cannot prevent free-riding, they will invest less in point-of-sales fitting services, and dress sales will suffer.  See our earlier post about golf club manufacturer PING, who faced a similar problem,
The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option.

PING wanted to set a minimum retail price (called "retail price maintenance") to address the problem.  The minimum price meant that discount retailers could not undercut full service retailers.  The antitrust laws prevented this until the Supreme Court changed the case law.

For the wedding dresses, the no-photos policy created a problem for Stephanie because she wanted to photograph her bridesmaids in each of the dresses to make sure that they choose the best dresses for the wedding. So she chose to purchase from a large retail chain, like J. Crew, BCBG, Ann Taylor, or Nordstrom’s because they had solved the free riding problem, using exclusives, where only one chain carries the style.

For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists (I am one of the 24.)

UPDATE:  Amazon just made free riding a lot easier.