Incentive alignment: Lincoln Electric

I show this video on the first day of class as it is a stark illustration of how difficult it is to align the incentives of individuals with the goals of a company.  At Lincoln, they do it by devoting lots of effort to measuring individual productivity.  When you have a good performance metric, it is much easier to design incentive compensation schemes that (i) give employees enough information to make good decisions; and (ii) the incentive to do so.

Declining Barriers to Entry to 'World Music'

The BBC's story on the success of the song "Despacito" (4.6 Billion streams and counting) suggested that this was emblematic of the the growing internationalism of the popular music industry.

Sir Lucian Grainge, [head of Universal Music Group] said ... "The industry has predominantly been English-speaking artists for the last 50 years [but] streaming will continue to open up music from Latin America artists globally.

This reminded me that his observation has been confirmed recently by a more systematic investigation by Fernando Ferreira and Joel Waldfogel, "Pop Internationalism: Has Half a Century of World Music Trade Displaced Local Culture?" They show that the traditional bias in overseas markets toward English language songs has declined toward more home country produced songs in the last decade or more. This is likely due to improvements in information technology: the Internet allows consumers to find new music more easily and IT lowers the burdens for musicians to produce and distribute their music.

This has implications for the how talent scouts will search for the next Luis Fonsi.

Money markets and religion

Historical explanation for the religious acceptance of for-profit borrowing and lending:

...When the Catholic Church held a monopoly in Europe, the clergy could ‘sell’ salvation at high prices – including strict prohibitions and purchased ‘indulgences’, which usurious sinners could buy in order to be absolved. But in the 1500s, during the Reformation, theologians such as Martin Luther denounced these practices. They advocated a more direct relationship with God that did not rely on priests as intermediaries, and founded new Christian movements such as Protestantism. The effect was that of a new company undercutting a monopoly. As Christian factions competed for believers, it led to a faith-based ‘race to the bottom’. And to increase their appeal, sects made fewer demands on believers – which meant weakening their stance on usury.

HT: Marginal Revolution

What is the Appropriate Strategic Response to Entry?

Bloomberg has a nice article on how London cabbies have changed their stance to ridesharing. Many taxicabs and municipalities have responded to the entry of Uber with a hard stance including protectionist measures and sometimes violence. Now they seem to be accommodating and imitating this entry.

After resisting everything Uber, the cabbie told me that he and his colleagues are shifting to a more constructive response -- they are adapting. For example, he is part of a syndicate that now uses an app similar to Uber’s to provide riders with an expanded menu to hail and pay taxis, as well as offer them more control and transparency. The sector is a lot more willing and able to accept credit card payments. And it is all part of an effort to improve customer relations.

In a moment of frankness, he admitted that Uber has delivered a much-needed wake-up call. For him, it is no longer about stopping Uber; nor is it just about co-existence. A growing number of traditional taxis cabs are also embracing some of their rival's best practices.

Part of this change is the realization that ride-sharing represents both a competitive threat and a more efficient 'production' technology.

The initial phases of Uber’s technology-led “disruptive innovation” proved particularly powerful because they lowered in a remarkable way the barriers of entry to both the supply of urban transportation services and the demand. Few disruptions influence both sides in such a dramatic and lasting fashion. 

By allowing massively underused assets -- personal vehicles otherwise sitting idle -- to double as taxis, Uber significantly increased the provision of the service. And by measuring client satisfaction in a timely and high-frequency manner, it ensured that the bulk of this additional service would be clean, responsive, accountable, efficient, cost-effective and friendly. 

The revolution on the demand side came from Uber’s understanding -- and use -- of the power of mobility, big data, and artificial intelligence. In doing so, it met the growing digitalization desires of clients (initially, mostly millennials, but increasingly encompassing a larger part of the population) eager to gain greater direct control over activities that had become ill-served, increasingly distanced and, in some cases, alienating. By also making the payments and settlement process more efficient and transparent, Uber further improved the experience for riders -- leading many to substitute the service not just for other forms of public transportation, but also for private cars.

How many ways can you price discriminate?

Also in my travels, I got to got to Heidelberg and rode the funicular up to the schloss. Their pricing schedule demonstrates multiple ways in which they price discriminate.

1. The additional charge for the return down the hill (3 Euro = 12 Euro - 9 Euro) is much less than the  single ride up the hill (9 Euro). Since the stroll down the hill is a closer substitute than the climb up, demand is more elastic coming down.
2. The "concession" is a catch-all phrase for the elderly, students, and maybe a few others. These folks tend to be poorer and more elastic and so get a discount.
3. They charge lower average prices for groups of preschool children. This is a form of bundling.
4. They charge lower average prices for large groups and the rates fall as group size increases. This is more bundling with larger groups being more elastic.
5. Finally, families get increasingly larger discounts on ever more children. That is, there are quantity discounts on kids.
6. Did I miss any other dimensions?

Two-way Bundling

Here is the pricing schedule from a recent trip to Dolmabahçe Palace. Note that the average price per person falls for families and that the price per museum falls as you bundle the Official Part with the Family House.

The Economics of Panhandling

how economists see the world, article here

HT:  MarginalRevolution.com

Models are tools

Slideshow on the use of macroeconomic models that reminds me why I study micro.

Swearing as a signal

Signals are convey information only if they are costly to use.  Otherwise, it too difficult to interpret what they mean.

To see this, consider what you learn when you hear someone use the F-word.  Some of my friends use it almost as punctuation, so it means very little.  However, when someone who abhors swearing uses it, I know to pay attention because it is costly for the sender to convey information in this manner.

Analytically, think of the sender as having two potential kinds of information:  crucial information or moderately important information.  Only the sender knows the type of information, and it can be communicated with or without swearing.  It doesn't pay for the sender to incur the costs of swearing to communicate moderately important information.  Rather, swearing is reserved for communicating crucial information.

Why does it cost more to insure a Tesla?

The AAA is raising rates to insure Tesla's, and Tesla is angry:

The rear-wheel-drive Tesla Model S is involved in 46 percent more claims than average, and those claims cost more than twice the average, it said.

it wasn't clear whether this was due to Adverse Selection (people who buy Tesla's are worse drivers, or more prone to file claims, and the Tesla is expensive to repair) or Moral Hazard (those who buy Tesla's drive more recklessly after they buy).

Remember Adverse selection is caused by hidden information about a person's type, moral hazard is caused hidden information about actions.