Friday, May 17, 2019

"Consumer testimonials are not reliable scientific evidence"--FTC

...In the initial immersion week of classes, a Luke Froeb-led lecture and discussion touched on a project at work and changed his decision making process. When he returned to the office, he changed course on how he was putting a bid proposal together. The revised bid added $400,000 to the bottom line, far more than the investment Vulcan was making in his Executive MBA degree. ... After just one class, Vulcan’s MBA investment was in the black,” he recalls with a chuckle.  (link)

Consumer testimonials that mention a number are one of the most effective forms of advertising for two reasons:
  1. People read the testimonial and think that they can do better than whoever gave the testimonial, a form of "availability bias";
  2. People do not understand that testimonials are drawn from a selected sample.  

These ads are so powerful and effective that the FTC requires a disclaimer to accompany them.  So here it is:
 “... testimonials are based on the experiences of a few people and you are not likely to have similar results."

I hope this disclaimer can undo the misperceptions may have been given to potential consumers of a Vanderbilt education.

Greedy capitalists save lives in Africa

Venture backed Zipline.com is saving lives in Africa by using Unmanned Aerial Vehicles (UAVs) to deliver blood to African hospitals that can’t stock all the necessary blood types. They have two bases which cover a 100 mile flight range and a drop zone the size of only two parking spots. The drones are pre-programmed, and fly 65 mph which results in 15-20 minute average delivery times.

Sunday, May 12, 2019

Lectures and books don't work; try this instead

Books and lectures are remarkably bad at conveying information.  Try this instead:
If pressed, many lecturers would offer a more plausible cognitive model: understanding actually comes after the lecture, when attendees solve problem sets, write essays, etc. ... Listeners’ attention wanders after a few minutes, so wouldn’t we want to interleave the problem-solving sessions with the lecture?... to understand something, you must actively engage with it.

Thursday, May 9, 2019

Wednesday, May 8, 2019

Concentration Increasing?

There have been reports that industry concentration has been rising in the US. If so, firms will tend to have more market power that allows them to set higher margins. If so, those lazy antitrusters need to wake up and protect competition.

But it all turns out how you define the market. As my students all know, markets can be defined in relation to three dimensions: product characteristics, level of geography, and unit of time. A new paper by Rossi-Hansberg, Sarte, and Trachter examines the data at a more local level. While national concentration measures are rising slightly, more local measures are declining. This is consistent with ever more competition (although there have been claims that product differentiation is increasing). 
Perhaps the antitrust bureaucrats can go back to their naps.

Hat tip: The Grumpy Economist

Addicts respond to incentives

Great post from MarginalRevolution.com:

I always get excited when people surprise me by acting against their self interest.  In this case, when Purdue Pharma replaced their OxyContin drug with a new, anti-abuse version that was more difficult to turn into an injectable, demand fell precipitously.

The addicts whose demand fell were aided and abetted by about 40% of physicians, who switched patients to more easily abused opiates.

BRAVO to Purdue Pharma!
 

Self promotion

Economics Blogs 2019

Why don't insurers try to mitigate risk?

Allison Shrager's terrific book, An Economist Walks into a Brothel, contains all sorts of innovative risk mitigation strategies pursued by people in all walks of life (see earlier blog post, How are Jet Skis like Financial Derivatives).  So why don't insurance companies spend more time figuring out how to mitigate risk?

The answer is simple:  Risk mitigation is not a source of "sustainable competitive advantage:"
Argument #4: mitigation is easy to copy. Underwriting risk selection is much less tangible and secrets can be a protected source of advantage. People can reverse engineer a dongle but not underwriting strategy. Once copied mitigation provides a one-off benefit to the market, changing the rate level but not the profit level (bit of a negative inventive because lower claims means lower premium and so less float!).

 Instead, insurers spend most of their time classifying risks (classification strategies are proprietary) which offers the benefits of diversification:

Argument #3: Improved classification allows for stratification and so diversification. Insurers are diversifiers. If you can segregate genuinely distinct classes of risk, portfolio volatility will drop.

Friday, May 3, 2019

Marketing in China is different [updated]

Article documenting US/Chinese differences in marketing:
  • China merchants have access to consumers over many different media:
  • ... most notably, Baidu, Alibaba, and Tencent, which together are known by the acronym BAT. To put this in a Western context, imagine if Amazon, Bank of America, Google, Facebook, Activision Blizzard, CNN, and ESPN were all owned by one company. That’s essentially how the big conglomerates work in China, with the BAT companies controlling most of the digital content across industries. 
    [This kind of consolidation allows for data collection that most westerners would find objectionable; but consolidation makes it possible for cross-platform programs to engage consumers seamlessly on a variety of media.]
  • Chinese companies have low discount rates
  • “Chinese companies have a growth mindset,” explained Hai Ye, a partner at McKinsey & Company. “Many of them can tolerate relatively low profitability in order to scale up quickly. This difference—driving market share versus bottom-line profit—gives the Chinese companies an advantage because they are willing to make big investments and take short-term losses to achieve long-term dominance.”

  • Speed-to-market is a huge priority:
  • Danielle Jin of Visa recalled how she approached her job when she worked as a marketer in the U.S. consumer packaged goods industry. “We would sit down with Walmart one to two years in advance and think about what seasonal promotion we would want to have,” she said. “We would have a thought-out calendar that centered primarily on price promotions—a system and process created over decades that was based on a somewhat rigid planning process.” By contrast, she explained, “a marketer with a Chinese mindset would talk about creating seamless content that cut across multiple platforms and was temporally relevant" [weeks, not years].

  • Bottom Line: Certainly US marketers could learn a lot from China.  But it is not clear that these techniques would work in the US, for at least three reasons
    1. Privacy concerns would prevent much of the data collection and sharing that is prevalent in China.  
    2. Antitrust Laws would likely prevent the kind of media consolidation that makes much of this possible 
    3. Older (mature) firms in the US where the struggle is to steal share rather than grow the market, mean that speed and growth may not be as important as profit [think Prisoners' Pricing Dilemma] 
UPDATE FROM JUSTIN:
  • Up until the last few years, the cost of capital/ loans was low.  Competitors that couldn’t beat you on quality and profit margins would go for scale and top line numbers. This results in everyone going opting for the top line. Contributing to this are state owned enterprises who are in every industry and tasked with top line growth, not profit margins.
  • China is also really new at marketing. Most of the big sales companies are distributors who have only sold existing, western brands so they don’t have experience building brands themselves. If you think about the biggest Chinese brands, they are known for their size, not their crafty branding. 
  • There is also a thing in China about “face.”  You can call it honor, prestige, or ego. Whatever it is, the biggest is seen as the strongest. I am working on launching a brand in China right now and I just had dinner two nights ago with my friend / distributor. We both agree that we would prefer to launch in tier 2 & 3 cities and get a bigger margin than fight it out in the more competitive tier 1 cities and lose money. As a Chinese guy once told my dad, “Sometimes we save face, but lose ass.”