Friday, January 15, 2021

Bargaining with Macaques: the alternatives to agreement determine the terms of agreement

 At the Uluwatu temple in Bali, monkeys steal high value items from tourists, and then ransom the items back for food.  Higher valued items are returned only after higher payouts.  From MarginalRevolution.com:

After spending more than 273 days filming interactions between the animals and temple visitors, researchers found that the macaques would demand better rewards – such as more food – for higher-valued items [like mobile phones, wallets and prescription glasses].

Bargaining between a monkey robber, tourist and a temple staff member quite often lasted several minutes. The longest wait before an item was returned was 25 minutes, including 17 minutes of negotiation. For lower-valued items, the monkeys were more likely to conclude successful bartering sessions by accepting a lesser reward.

The story illustrates lessons from Chapter 17:  the alternative to agreement determine the terms of agreement (more valuable items result in higher negotiated prices); and higher-value items require more bargaining time as the parties invest more time in determining the gains from trade (the difference between the parties' outside alternatives).

Friday, January 8, 2021

Good early signal from the Biden administration: First doses first!

 MarginalRevolution reports that the Biden administration will release all the available doses of COVID vaccine, essentially over ruling the bureaucrats at the FDA, to vaccinate twice as many people with a half dose!

The expected benefit of a one-dose regime is millions of lives!

This is a good harbinger of decision-making under the new administration, 

Violence, Institutions and the Rule of Law


The violence in DC undermines the institutions that support the rule of law. Without them, we descend into chaos.  

Wednesday, January 6, 2021

Are the FDA's incentives aligned with the goals of the people?

The FDA is resisting pressure from academics to vaccinate more people with single doses:
"At this time, suggesting changes to the FDA-authorized dosing or schedules of these vaccines is premature and not rooted solidly in the available evidence," Dr. Stephen Hahn, FDA commissioner, and Dr. Peter Marks, director of the FDA's Center for Biologics Evaluation and Research, said in a statement. "Without appropriate data supporting such changes in vaccine administration, we run a significant risk of placing public health at risk."

Apparently, these FDA bureaucrats want more information before making a decision. 

However, we know how to make decisions under uncertainty: minimize expected error costs or maximize expected value. The expected benefit of one-dose regime (vaccinating twice as many people with a half dose) is millions of lives.
The simplest argument for First Doses First (FDF) is that 2*0.8>.95, i.e. two vaccinated people confers more immunity than one double vaccinated person. But there is more to it than that. Perhaps more important is that with FDF we will lower R more quickly and reach herd immunity sooner. 
Here’s an extreme but telling example. Suppose you have a pop of 300 million, need 2/3 to get to herd immunity and you have 100m doses and can vaccinate 100m a month. Then with FDF you vaccinate 100m in first month and a new 100m in the second month and then you are “done.” i.e. you can then do 2nd doses more or less at leisure since you are at herd immunity (yes, I know about overshooting, this is a simple example). If instead you do second doses you vaccinate 100m in first month and the same 100m in the second month which leaves 100 million at risk for another month. Under second doses you don’t reach herd immunity until the third month. Thus, under FDF you save a 100m infection-month which is a big deal.

The FDA has a long and sorry history of delaying medical innovation because type I errors (doing something that turns out to be wrong) are visible and type II errors are not (not doing something that turns out to be right). These bureaucrats seem to be putting their own interests ahead of those of the people they are supposed to protect.

This is a well-known incentive problem:  unless we evaluate bureaucrats based on expected value, not on whether they commit Type I errors, they will respond accordingly.

Tuesday, January 5, 2021

More Notice and Minor Accolades

Woohoo, we have made Feedspot's "Top 100 Economics Blogs & Websites To Follow in 2021." We come in at number 57. This is a pretty comprehensive list of blogs on just about every field of economics.


Thursday, December 10, 2020

FB/Insta/WhatsApp

Dozens of State's AGs and my former employer, the FTC, claim that breaking up Facebook, Instagram and WhatsApp is in the social interest. Common ownership of these multiple social media platforms is said to stifle competition. But are these platforms substitutes or complements?

How do they compete? Users pay nothing; advertisers pay to reach these consumers. The job of these two-sided platforms is to package groups of users to potential advertisers. Who uses the platforms and how they use them differ across users. Advertisers, seeking ever narrower customer niches, benefit from their ability to target the distinctiveness of each platform. A commonly owned FB/Insta/WhatsApp has an incentive to maintain these distinctions. Competing platforms would tend to position themselves to "steal" users from each other by seeking a product position with more in common with rivals (and could fail by doing so). Even for users on all three platforms, their use of one over another for a specific task could indicate to potential advertisers that they are more receptive to the ad message. And consumers benefit both from platform variety and from being better targeted in ads. Of the over 200 social networking services, the ones that seem to succeed do so by differentiating themselves and appealing to niche audiences.


Saturday, December 5, 2020

Should we ban private label brands?

Democrat Rep. Cicilline thinks so:  

Rep. Cicilline says, “you can be one or the other. You can't set all the rules, control the marketplace, and also sell on it.” What he forgets is that vertical integration benefits consumers and businesses alike. If America followed Cicilline’s way, this new law would drive up the prices of everyday goods. In fact, it would be illegal for CVS to sell generic over-the-counter medications, leaving low-income Americans with fewer options and higher prices.

And don't forget the beneficial effect that private brands have on competition within a store:

And most consumers like having these generic brands as options because they’re cheaper, force prices down of name brands, and can even push companies to improve their quality.

So who benefits from this?  Rival brands.  

BOTTOM LINE:  Antitrust laws protect competition, not competitors.

Disclosure:  I wear only Kirkland (Costco's private label) clothes.     

Friday, December 4, 2020

Casinos Profit with Game Theory

Say you are playing in a poker tournament at a casino. The initial buy-in is $65 and gets you 2,500 chips (2.6 cents a chip). You also have the option of buying an additional 500 chips for $5 more (1 cent per chip). None of this additional buy-in money, however, goes into the prize pool - it goes straight to the casino. Do you buy the additional chips? If your opponents are buying the extra chips, you better buy as well to keep up. And, if they are not buying, you should buy to get a chip advantage. So, everybody has an incentive to buy. But, if everyone buys, no one has an advantage. Everyone is worse off from spending the $5. The casino, however, makes a nice profit by placing the players in a Prisoners' Dilemma. Nice. HT: Mind Your Decisions blog

Thursday, December 3, 2020

Tuesday, December 1, 2020

Incentive conflict between McDonalds and its Franchisees

The incentive conflict between franchisees and franchisors is well known.  Franchisors want to protect their brands, and want franchisees to invest in building a better retail experience.  However, because franchisees earn only a fraction of the returns from these brand-building investments, they are reluctant to to make them.

The conflict between McDonalds and its franchisees has come out into the open (2018 WSJ, 2019 Fortune, Twitter feed from a franchisee):
But traffic has waned in recent quarters, leading franchisees to voice concerns that the money they were being asked to invest in their stores for initiatives like remodels, self-serve kiosks, fresh beef, delivery, and all-day breakfast were not paying off.

“McDonald’s can set the direction of the brand, but you need the franchisees to buy into it,” says Senatore. “Franchisee alignment is so important to these systems.”

One way to manage this incentive conflicts is with:
  1. Contracts to reward actions that are easily observable and contractible; and 
  2. Vertical restraints, like exclusive territories, for actions that are not.  

Vertical restraints that restrict intra-brand competition among franchisees (e.g., with exclusive territories) give franchisees a profit stream that they are more eager to protect, i.e., with brand-building investments and higher-quality service.

Note that franchisees on freeways don't have much repeat business, so they can make more money by free riding on the brand reputation (e.g., by shirking on service or quality).  This incentive conflict is so costly to manage that McDonalds finds it easier to own and run their restaurants on the freeway.

HT:  Kaitlyn W.