Monday, November 30, 2009

MSFT's exclusivity strategy

Is MSFT trying to "tip" the search engine market in their favor:
In an effort to keep News Corp.'s (NWS) newspaper content out of Google's search results, Murdoch's media giant has held early-stage talks to forge a deal that would put content from The Wall Street Journal, and possibly other company-owned publications, exclusively in Microsoft's Bing search engine, a person familiar with the talks says. The discussions come amid Murdoch's mounting frustration that Google (GOOG) benefits at the expense of his own media outlets when Web users search for news online. But analysts and antitrust experts say the move will do more to hurt Murdoch than Google.

In exchange for the exclusive content, Microsoft (MSFT) would pay an undisclosed fee, according to the Financial Times, which initially reported the discussions. Microsoft has also approached other news outlets about a similar agreement, the report said.

Microsoft would use exclusives with widely read publications as a way to gain share in the lucrative market for online search. Bing has a mere 9.9% of search traffic, vs. Google's 65.4%, according to October data from ComScore (SCOR).

Europe is mad at China

Because their trade deficit is growing:
The yuan is tightly linked to the dollar, not the euro. As the dollar has declined against the euro, the yuan has fallen with it, making Chinese goods cheaper in Europe and European goods more expensive in China.

Why are so many companies buying suppliers or distributors?

From Wall St. Journal:

The real meaning of Thanksgiving

From Stossel:
When the Pilgrims first settled the Plymouth Colony, they organized their farm economy along communal lines. The goal was to share everything equally, work and produce.

They nearly all starved. ...

The people of Plymouth moved from socialism to private farming. The results were dramatic.

"This had very good success," Bradford wrote, "for it made all hands very industrious, so as much more corn was planted than otherwise would have been. ... By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many. ... "

Incentives Matter - Pink Jail Edition

The Ben Hill County jail in Georgia is going pink - as in walls painted Pepto pink, pink coveralls, as well as "pink shower shoes, pink wash clothes, pink towels, pink sheets and pink blankets" The sheriff is hoping for an additional deterrence effect from making criminals live in a tween girl paradise.
"This is our decor and if they don't like our decor then they don't have to come back to our jail," said the Sheriff.
What's next, forced viewing of "Twilight?"

Kelo v. City of New London Update

In 2005, the US Supreme Court ruled (in a controversial decision) that government could use its power of eminent domain to transfer land from one private owner to another to further economic development. The City of New London had created the New London Development Corporation, a private body, to re-develop a neighborhood area surrounding Fort Trumbull and a new Pfizer research facility. The plan promised over 3,000 new jobs and increased annual tax revenue of a million-plus dollars a year.

So, how are things working out four years later? No re-development has occurred, and Pfizer just recently announced that they will be closing its facility in the area.

Tuesday, November 24, 2009

What was Lehman thinking?: McAllister Ranch


Should the H1N1 Vaccine be Sold? III

Earlier, I speculated on the effects of allocating the H1N1 vaccine without price signals and then suggested that doing so could increase theft. I forgot to mention that doing so also encourages the emergence of black markets that tend to undermine the intended allocation mechanism.

Monday, November 23, 2009

Optimizing Clothing Coverage

According to researchers from the University of Leeds, who studied the drawing power of women in a nightclub setting, women should bare 40 percent of their body in order to attract the most men.
The study, published in the journal Behaviour, found that the most popular women combined the 40 per cent rule with tight clothing and provocative dancing. The 15 per cent that combined all three criteria were approached by 40 men each.

Friday, November 20, 2009

Stupak Amendment Economics

Normally, I would refrain from weighing in on the landmine-strewn issue of abortion. But an NPR Morning Edition story today made me think of some economics of insurance coverage for abortions. It appears that swing votes on health care reform in the Senate will hinge on the Stupak amendment determining how restrictive the federal government will be in allowing insurance payments for abortions. The quote that piqued my interest was:

"Democrats who support abortion rights said the Stupak language would put such a regulatory burden on private insurers that cover abortion that they would stop. And for the first time, private citizens would be blocked from obtaining a legal medical procedure."

Not covered by insurance is not the same as being blocked. This begs the question of the efficiency of insuring abortions, or live deliveries by-the-way, at all. Because we know what causes it, pregnancy is an almost completely preventable condition where insurance could induce moral hazard. That is, if the average family has 2.2 children and the average delivery costs $5,000, then the family could pay the $12,000 in higher insurance premiums or at the "point-of-purchase." Insuring deliveries may induce more of them (though I doubt this is a big effect) or more expensive deliveries (whither the mid-wife?).

There is a claim, with little evidence that I know of, that many young couples substitute abortion for contraception. That is, couples are less willing to use contraception because they know that abortion is available. This too would be moral hazard. While access to cheap and safe abortions likely reduces unwanted births, it is also plausible that it increases unwanted pregnancies, the difference representing more terminations. If so, blocking insurance coverage for abortion would raise its marginal cost, leading more couples to use the contraception substitute. As a consequence, I would expect to see an increase in contraception and a decrease in unwanted pregnancies, but a likely increase in unwanted births as the substitution would not be perfect. The magnitudes of these effects could possibly be estimated if the Stupak amendment passes.

I have tried to stay morally neutral in this analysis. A moral calculus of the Stupack amendment, it seems to me, would then place weights on the social benefits of fewer pregnancy terminations versus the social costs of more unwanted births. The magnitudes of these benefits and costs are largely outside of the realm of economics.

Wednesday, November 18, 2009

Why are New Car Prices so Low on Black Friday?

According to research by, the day after Thanksgiving is the best day of the year to buy a new car.
The average new car discount on Nov. 27 is projected to be 7.5%. The average discount the day before and after is expected to be just over 6%. On a typical day throughout the year, car shoppers usually pay about 4.7% less than the sticker price. projected particularly large Black Friday discounts on certain models. For instance, consumers should be able to pay about 28% off sticker price for a 2009 Suzuki SX4 compact car, 26% off for a 2009 Nissan Titan or Ford F-150 pick-up or 20% off a 2009 Hyundai Sonata sedan.
The article notes that one explanation is that Black Friday falls toward the end of the month when dealers are feeling the pressure to fill monthly quotas. So, that explains why discounts might be higher relative to days earlier in the month. There are also a lot fewer people shopping on Black Friday compared to days near the end of other months. With no one else around, the salesperson's outside alternative to selling to you is pretty poor, so you can bargain for better deals.

Tuesday, November 17, 2009

Satire of the bailout

This Saturday Night Live skit was allegedly banned by NBC.

St. Lloyd

I finally got around to reading the Times of London piece in which Goldman Sachs chaiman and CEO, Lloyd Blankfien, claims to be "doing God's Work." A key quote is:

"We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle." To drive home his point, he makes a remarkably bold claim. "We have a social purpose."

Despite the article's swipes (why is this claim bold?) at the investment banking culture, I am convinced. These guys are singularly driven to make money and they succeed spectacularly. They are arrogant, brash, hyper-ambitious and probably not much fun at a tailgate party. But the rest of us are wealthier for their effort. It would be an impossible bar bet to settle but I would conjecture that Goldman Sachs has had as much of a positive impact on the lives of the poor worldwide as has Muhammad Yunus's Grameen Bank.

Oyster Strategy

Also on Morning Edition today was a story about the FDA protecting us from contracting Vibrio from eating raw oysters. Two snippets caught my attention.

First, it appears that the FDA will put this on hold to study the costs and benefits. Just what should the threshold costs be to the industry to justify not saving 30 people from getting sick and half dieing? Were these costs not studied over the last decade since "the public health debate over Vibrio was getting national attention in the mid-1990s?"

Second, Mike Voisin of Motivatit Seafood, a firm already protecting us from bad oysters, wants to FDA to back off. The usual "Raising Rival's Costs" theory is that early adopters want to impose the adoption costs on other firms by making the government mandate the adoption. He is clearly doing the opposite. Another possibility is that his firm derives market power from the product differentiation from "dirty" oysters and does not want the competition from more firms with closer substitutes. A third possibility is that this is what he truly believes and is advocating against his firm's own interest. We may not expect such an public exercise in moral hazard from the hired help, but since Mr. Voisin is also the owner, it may be plausible.

Will the Internet Undermine Movie Pricing?

Movie pricing has been a classic example of price discrimination. Get the most money from those willing to go to theaters. Get a little less later from DVD sales. Drop the price a bit more from viewing it on HBO. Finally, get what you can from "free TV" advertising.

So where does Internet delivery fit into the mix? There will be piracy, but this does not appear to be as big a problem as with music. This Morning Edition story claims that Internet delivery combined with HDTV is beginning to upset the whole deal.

Monday, November 16, 2009

Now only 3 blocks from the beach

One of my students built a house four houses away from the beach in Nags Head (pictured at left), partially due to subsidized FEMA flood insurance. Thanks to Tropical Storm Ida,they are now one house closer to the beach. 

Three more storms like Ida and my student will own beach front property.

UDPATE:  FEMA insurance offers $1million coverage for $2000/month.  

iPhone App for Organ Donation

We have often discussed the problem of the shortage of organs available for donation. In a recent New York Times column, Richard Thaler of the University of Chicago (and one of the authors of Nudge) urged Steve Jobs to develop an iPhone app that would facilitate more people donating organs.

Turns out, you don't have to wait for Apple. A company called Serenity Integration developed an app called Donate Lives that identifies where users live and then directs them to the web site from the state where they live that lets them sign up to be an organ donor.

Wednesday, November 11, 2009

"Results not typical" disclaimer is no longer enough

The most effective testimonial advertising mentions a number, like "I lost 74 pounds wearing Slimming Insoles."  Not only are some consumers too naive to realize that the number (if truthful) is being drawn from the tail of a distribution, but they also have the Lake Wobegon bias (where everyone is above average) that tells them that they can probably do better than the person in the testimonial.  For these reasons, virtually all the fraudulent advertising at the FTC involves testimonial advertisements that mention a number. 

Now the FTC is trying to limit the use of testimonials

Under the revised Guides, advertisements that feature a consumer and convey his or her experience with a product or service as typical when that is not the case will be required to clearly disclose the results that consumers can generally expect. In contrast to the 1980 version of the Guides – which allowed advertisers to describe unusual results in a testimonial as long as they included a disclaimer such as “results not typical” – the revised Guides no longer contain this safe harbor.

But remember that testimonials can be used for good or for evil. Jenny Craig, the legitimate weight loss system, uses testimonials throughout their website, e.g.

Kristen S. Age: 32
Weight Lost: 28 lbs*

I had a baby not too long ago, and found myself struggling to get the weight off. It was easy to put the weight on, but getting if off was another story. I love caring for my baby, but would ...

*Results not typical

Now it looks as if they will have to qualify these testimonials with formal statistical studies, raising the cost and reducing the effectiveness of their weight loss message.

Best site on the web  Click on South Africa and Zimbabwe and watch the tragedy unfold.

How to Convey Free Trade Arguments

When I want to see an Economic argument made in its simplest and clearest form, I am usually led to Steven Landsburg.

The Costs and Benefits of Off-Label Marketing of Pharmaceuticals

Pharmaceutical companies are prohibited from marketing products for uses other than those approved by the FDA. Despite this prohibition, the practice seems to remain fairly widespread according to this Bloomberg article. As just one example, Pfizer recently paid the largest criminal fine in history, $2.2 billion, for off-label promotion of Bextra. Bextra was approved only for the relief of pain associated with arthritis and menstrual discomfort; however, the company had been promoting it for all types of pain relief.

With such huge potential fines, why would pharmaceutical companies engage in this type of behavior? Perhaps it’s a rational calculation of the costs and benefits. Another example discussed in the article is the epilepsy drug Neurontin. Pfizer paid a $430 million penalty in 2004 for promoting off-label use. But, the drug has brought in over $12 billion in revenue, a large portion of which came from off-label use.

Let’s see if we can calculate the expected costs and benefits. The article notes that the prosecutor’s sentencing memo claimed the 94% of Neurontin’s 2004 revenue came from off-label use. Assuming off-label uses might have grown over the years (and just to be conservative), let’s assume that 50% of the $12 billion in Neurontin revenue came from off-label uses. In the early 2000’s, Pfizer’s net margins were running around 20%, meaning that off-label Neurontin sales generated around $1.2 billion in profit. Not too hard to see why companies might be engaging in this behavior (and it’s even more obvious if you think in terms of expected costs – if you figure there’s only a 50% chance of getting caught and paying a $400 million fine, the expected cost drops to $200 million).

Monday, November 9, 2009

Latest from Merle Hazard

With his latest tune, Merle comes out of the policy closet.

Maddening Mattress Market

The mattress industry in pretty interesting from an economic perspective. If I want to buy a new car, a new appliance, or some other sort of major purchase, it's pretty easy for me to compare products across manufacturers and across retailers. Ever tried to do this when buying a mattress? It's nearly impossible. First, there's a bunch of gibberish used to describe all the different attributes of a mattress. More importantly, manufacturers tend not to sell the same mattress to different retailers. While the functional attributes of a particular mattress will be the same across retailers (assuming you could ever figure that out), there will be some sort of minor change along with a different product name to make it extremely difficult to comparison shop.

Aside from the frustration of trying to buy in this market, it's interesting to think about why these obfuscation practices persist. Sure, I see that it helps retailers keep margins higher. But, why doesn't some low-cost competitor step in and offer straight-forward pricing that would appeal to consumers (maybe such a company is out there, but I didn't see it)? And why does this practice persist in the mattress industry but not other home products? I suspect part of it has to do with the limited number of manufacturers. Hmmm.

Friday, November 6, 2009

Should the H1N1 Vaccine be Sold? II

Earlier, I was speculating about the benefits of using the price system to allocate H1N1 vaccine. I forgot to mention that an artificially low price encourages "other means of procurement." Yesterday, the AP reported thieves stealing a truckload.

Wednesday, November 4, 2009

How well do you know your economists?

Find out with this quiz that asks you to identify ten famous economists (thanks to Robert Whaples via Marginal Revolution)

He's Giving Away the Secrets

Here are Dan Dresner's Ten Timeless Tips to becoming a management consultant. Relatedly, my Chinese co-author's recent email strategized on methods to embiggin our upcoming event's exposure through dynamic Powerpoint links, cross-promotion synergies at MangEcon, and "going Texan" in appearance. BTW, while most lists contain ten items "mine goes to eleven." Let me know what you think!

Monday, November 2, 2009

This is unexpected

A new research paper finds that target CEO's do NOT sell out their shareholders in order to keep their jobs in a merger:
CEOs have a potential conflict of interest when their company is acquired: they can bargain to be retained by the acquirer and for private benefits rather than for a higher premium to be paid to the shareholders. ... we find no evidence that the premium paid is lower when the CEO is retained by the acquirer. Strikingly, the target stock price increases more at the announcement of an acquisition by a private firm when the CEO is retained than when she is not. This result holds whether the private acquirer is a private equity firm or an operating company and for management buyouts.

More on iTunes pricing

The most profitable scheme would be two-part pricing, with an "entry" fee and a low cost per song:
The most revenue, according to the 2009 survey data, would be generated by charging the students $21.19 for entry and 37 cents a song. This could raise the producer surplus by 30% compared with uniform pricing. Consumer surplus would also rise in this instance, because some people would buy songs they would have not have done at a higher uniform price. Spotify, a rival to iTunes, has a model somewhat like this for its premium service, where it charges a monthly fee for songs without limit.

Demand for Hand Sanitizer

H1N1 has caused demand for hand sanitizer to more than double.

Should I have gotten my flu shot in September? I am always on the margin for this decision. I am at low risk for transmission, but the cost is low (though transactions costs could be high). Hand sanitizing is effective against transmission of the H1N1 flu as well as the run-of-the-mill annual flu bug. Because of this, the non-H1N1 flu is likely not to be as big a problem this Winter (it will be interesting to see how much). Since there is a smaller chance that I would catch non-H1N1 flu from some contagious student, my willingness-to-pay for the non-H1N1 shot should have fallen. As it turns out, my physician offered it to me at zero marginal price at my annual check up. My willingness-to-pay fell but the price fell even more.

Hat tip: Craig Depken

White House Promises Kept

This AP Fact Check by Calvin Woodward takes exception with Republican claims that the stimulus package generated jobs at a cost of $246,000 a job. The main criticism of this estimate is that not all of the effects, or spending, have been felt yet.
"Hundreds of such projects have been on the books, in which the full value of the contracts is already counted in the spending totals, but few or no jobs have been reported yet because the work is only getting started."

Quite right. Back in January, there were plenty of warnings about how long the process would take. Rather than the 600,000 jobs claimed for just this Summer, the White House's longer term claim is that "The recovery plan will save or create about 3.5 million jobs ..." At a $787 billion price tag for the stimulus package, that comes to a mere $225,000 per job. The only surprise is that the Republicans could not inflate it more. In fact, it looks like looks like the president is delivering on this promise.

Paying for Bone Marrow Donation

If I needed to pick up a little extra cash, I could go to one of the many plasma collection facilities in the area and probably make $50 for a couple of hours work. Or, I could try to make a heck of a lot more by hawking one of my kidneys. The government has no problem with my doing the first but has some serious objections to the second. Why?

One argument is that plasma is renewable, so the decision to donate doesn't involve irrevocably parting with a portion of my body that won't grow back. If you find this line of argument to be at least partially persuasive, what do you think about the ban on compensating bone marrow donors? It seems to me that it's pretty similar to the plasma case. Others appear to agree and are pressuring Congress to repeal the ban.