Thursday, January 31, 2013

Possible Patronage in Bid-Rigging

One USAID official is on his way out the door and another is alleged to collude with him on a contract for services that was "wired" for him to win the contract. The US News story from the AP deals mostly about legal wrangling over whether the DOJ has jurisdiction to investigate but the chief allegation is:
In an inspector general's "memorandum of interview" last June, investigators described their probe into allegations that "Lisa Gomer, general counsel for USAID colluded with David Ostermeyer, chief financial officer for USAID, by working with him to write a scope of work for a personal service contract ... in the Office of General Counsel." 
"Gomer planned to select Ostermeyer for the position," the memo said.

Governments are often the victim of bid-rigging in auctions because managers face few consequences for possible under-performance by the contractor.

Shopping for surgery

Tuesday, January 29, 2013

UK's LTE Spectrum Auction Strategy

The UK is releasing auctioning off spectrum for 4G LTE services to be offered there. Journalists want to know how the auction is progressing. But the story by David Gilbert of IBT indicates that the UK's Ofcom knows how to run an auction:
Ofcom has said that no information about how the process is going until it ends. "Due to the nature of the auction, it is important that information about the bids being placed remains confidential until the auction concludes to reduce any potential risk of strategic bidding which could distort the outcome of the auction."

Monday, January 28, 2013

Movie Streaming is Complementary with ...

Netflix's business model is to make money from movie rentals, and increasingly, rentals of movie streaming. Amazon prime also offers movie streaming but this is a sideline from its larger online services. Amazon prime is willing operate movie streaming as a loss-leader and make up the losses on the increased demand for complementary services. As Alexander Mizan points out:
Amazon is aggressively trying to set up exclusive content deals and is willing to pay more for them than NFLX, as the EPIX deal showed lately. Unlike NFLX that relies on streaming to make a living, Amazon's model for Prime is that of a loss leader, making up the difference in more retail sales. Granted, NFLX has a first-mover advantage in the business but AMZN has a bigger bank. It will be an interesting race. Another formidable competitor in streaming is Hulu, which is partly owned by Disney, NBCUniversal and Fox. Although rather small still, it's offering streaming service at the same price point as NFLX and (being owned by the studios themselves), it has a higher potential for quality programming.

Are these complementary relationships strong enough to undermine the stand alone streaming business model? 

Sports and/or Cooking Shows

Skip Saur points out that the dominant TV genre is sport broadcasting. He then explains why viewers of Top Chef are not (necessarily) subsidizing sports.

Cable TV offerings are common examples of product bundling and are much maligned and misunderstood by journalists and lawyers alike. The main policy issue is whether viewers of one genre of programming should have to pay for the programming she does not view.

Students of Managerial Economics know that bundling is profitable when it increases demand (adds value). For example, the costs of producing Top Chef are little different if there are 1,000 or 1,000,000 viewers. Bundling it with sports means that it survives on viewership more like the latter than the former. What would cost $1,000 per viewer a la carte, costs only $1 per viewer in the bundle. A la carte prices are set according to the value from the marginal consumer of a network which can be high for a few. Bundle prices are set according to the marginal network for all viewers which can be low for many. No show or genre is subsidizing any other. It is because most viewers place at least some small value on the option of viewing other genres that they are more willing to buy the bundle than networks one-by-one. The number of paying viewers rises with the bundle and so the price per show falls.

Sunday, January 27, 2013

A Regulated Price Floor

A supermarket's temporary price change is deemed illegal because prices are too low. Fresh Markets had a promotional offering of a gallon of milk for $2.99 but the State Agriculture and Forestry received a complaint and audited the store.
“They can sell it six percent over cost all day long. It’s when they sell it below cost that it becomes a problem,” State Agriculture and Forestry Commissioner Mike Strain told The Advocate.

And just what problem would that be? The buyer likes lower prices. The seller likes offering 'loss-leaders' every so often. The only ones harmed might be competitors or suppliers. Since competitors prefer softer competition they desire a government enforced cartel. Likewise, fiercer downstream  (supermarket) competition may serve to put downward pressure on upstream (dairy) wholesale prices. If this is the case, it would be yet another example of food producers getting special treatment from the government.

Hat tip: Craig Depken

Friday, January 25, 2013

Auto Alliance Cost Svaings

Economies of scope in products are often the result of economies of scale in producing a common  component. Case in point is the alliance between GM and PSA Peugeot Citeroen. They will be collaborating on a number of models. Some models marketed by both will based on a platform developed by one.
The two firms will also collaborate on further improvements to PSA Peugeot Citroen's EB three-cylinder petrol engine used in the 208, and have signed a definitive deal for joint purchasing that should bring better economies of scale for PSA and GM brands.

Thursday, January 24, 2013

What happens when your rewards are unfair?

Auctioning Jobs

DeveoperAuction has begun recruiting engineers by using auctions. As reported in TechCrunch, those who are  interested in leaving their current companies and have good credentials can apply to be part of a batch of candidates that potential employers will then bid on to offer them interviews. Software developers can then choose which interviews they want to take. Rather than recruiting agencies' usual commission of 20-20% of base salary, if the process ends with a placement, the employer pays DeveloperAuction 15% which is shared with the applicant.
The company was founded when Matt Mickiewicz, who co-founded 99Designs and Flippa, and LiveOps founder Douglas Feirstein, ran into each other at a conference and started complaining about how difficult it was to hire decent engineers. They started thinking about how to apply auction and game theory to recruiting and from that, DeveloperAuction emerged. 

They must have received A's in Managerial Economics.

Wednesday, January 23, 2013

Why Charge More for Women's Haircuts?

Some of the repetitions of  the initial news reports of the ruling by the Danish Board of Equal Treatment that men's and women's haircuts would have to be priced equally had a sub-text of 'those crazy Scandinavians are at it again' about them.
'It takes, quite simply, longer time with women,' said Connie Mikkelsen, chairwoman of the Danish organisation for independent hairdressers and cosmeticians.

But Alex Hern of the NewStatesman did the 'hard work' of actually reading a translation of the ruling. It turns out the ruling is due to a complaint from "a woman with a short, boyish haircut, who was nonetheless told she would have to pay the price for a 'woman's haircut.' " The facts appear to be a little more subtle than they seemed at first blush. The woman was being charged more for being a woman, not for having long hair. This would be 'gender discrimination.' But what is in it for a hairdresser to engage in gender discrimination?

It could be gender bias, essentially mere bigotry. It seems quite likely, though, that there are significant differences between men's and women's cuts that are independent of hair length. These differences could be based on costs (on average, even women's boyish cuts take longer than boy's cuts) or based on customer value (on average, women care more about a good cut than do men).

Regulating price equality has a few pernicious effects:

  1. If the difference is cost based, then price equality codifies an inefficient distortion. Markets abhor a distortion. We would expect innovations to surmount the distortion. Perhaps hair dressers refuse male customers so as to charge higher prices to high cost women. Perhaps less time is spent on women making their cuts  less stylish. Perhaps the shops absorb the hit, become less profitable and the marginal shop closes.
  2. Suppose it was value based. Without going into detail, Hal Varian showed us that price discrimination usually increases social welfare because more of the good is exchanged. The alternative single price is a single monopoly price.
  3. Suppose it was a mere bigotry against women. Price equality could rob women of the most important weapon they have to fight discrimination: choice. If the higher price was simply due to a bias against women, then price equality would not inform women who held this bias. They would keep patronizing bigots and bigots would suffer no consequences of their bigotry. It robs unbiased entrepreneurs of the opportunity to undercut these prices and drive biased hairdressers out of business. The greatest threat to bigots is having to compete with non-bigots.

Tuesday, January 22, 2013

Online Price Discrimination

The Wall Street Journal investigate price differences and discovered price discrimination. For example, Staples said "in-store and online prices do vary by geography due to a variety of factors, including rent, labor, distribution and other costs of doing business." Likewise, Capital One Financial Corp. has used personalization to decide which credit cards to display to website visitors. "Dynamic pricing" adjusts prices continuously in response to information including competitors' offerings and other factors.
Capital One says it gathers data about visitors while they are on its website and uses this information to suggest different products to them. "We do not use any of this data in credit decisioning or underwriting," a Capital One spokeswoman said. "We're making an educated guess about what we think consumers will like."

Its been a nice ride for Intel

For more than three decades, Intel has been riding the PC wave with above par earnings. Some of this wave is the result of superior Intel products but some is the result of increased demand for PCs for other reasons. But, as reported by Quentin Hardy in the NY Times, the era of PC dominance may be over and this is affecting Intel too.
At the after-hours price, Intel’s market capitalization dropped below that of Qualcomm — a smaller maker of chips, but a company that makes chips for smartphones and tablets. Even a year ago, this would have been unthinkable.

Unthinkable? This graph from ZDNet suggests otherwise.

What are the strategic implications?
“Longer term, Intel will move more aggressively into smartphones,” said Bobby Burleson, an analyst with Canaccord Genuity. “But everyone worries about their long-term gross margins.”

Friday, January 18, 2013

Why Block Auctions in Inauguration Tickets?

New York Senator Charles Schumer, who chairs the Joint Congressional Committee on Inaugural Ceremonies, is asking with eBay and Craigslist to remove listings for presidential inauguration tickets. And they are complying. Although ticket lottery winners must pledge not to scalp the ticket to turn a profit:
The lack of recipient tracking creates a gap between having people pledge not to resell awarded lottery tickets and incentivizing recipients to keep their promise. Without a way to track the allotted tickets, it is difficult to make the pledge as honorable as possible.

Students of Managerial Economics may well wonder why such an efficient mechanism for the allocation of goods as auctions is to be barred. Maybe efficiency is not the goal.

The tickets are obviously valuable, some have gone for $4,300, but are supposed to be distributed free of charge by congressional offices. The congressmen may want to extract a future favor from lottery winners. It is likely that a ticket requester motivated by a resale motive would have less of an affinity for the congressman and would be less prone to offer future favors. As evidence:
Bud Miller, executive director of the Coupon Information Center, wishes he had the same power to convince eBay to stop the illegal sale of coupons, like Schumer had over scalping inauguration tickets.  "Senators have the ability to move heaven and earth and occasionally a website," Miller said this afternoon. 

Flight Attendant Agency Problems

George Hobica got a retired flight attendant to open up to him at wrote about it in the Huffington Post. Much of it is the expected  complaining about passenger behaviors (e.g., having to repeat oneself to passengers wearing headphones). But some are represent mild to severe agency problems.

1. You know that coffee you ordered? It's actually decaf even though you asked for regular. We'd rather that you sit back, relax and fall asleep so you don't bother us too much. Our airline sent around a memo wondering why the decaf supplies were going so fast, noting that decaf costs more than regular coffee.

Not good but not too bad.
4. If a flight is late, the airline might have to pay us overtime. If the flight is going to be late anyway, we've been known to delay it even further in order make sure overtime kicks in, which on our airline means up to double the hourly pay. We might find some minor defect in the aircraft or use some other ruse to make up for the money we don't get paid waiting for take off.

More severe (and this may have happened to me recently).
12. Yes, we do ask the captain to leave the seatbelt on long after the turbulence has ended so we can serve in the aisles.

Pretty mild.
13. On night flights, we sometimes hold off on meal service as long as we can so that you'll be asleep and we'll have less to do.

Actually quite petty.

Does the FTC price discriminate?

Value of Transaction
Filing Fee
$70.9 million to
$141.8 million
(previously $68.2 million to $136.4 million)
$136.4 million to
$709.1 million
(previously $136.4 million to $682.1 million)
$709.1 million or more
(previously $682.1 million
or more)

There are two competing explanations for the higher filing fees for bigger transactions.
  • The cost-based explanation is that it takes more time and effort to investigate the competitive effects of bigger transactions.
  • The demand-based explanation is that bigger transactions generate more surplus, and so that parties are willing to pay more to complete the transaction.

If the latter, then the FTC is price discriminating against larger transactions.

HT:  Bass, Berry & Sims

Thursday, January 17, 2013

Admonish or Applaud Employee Outsourcing?

'Bob' found a way to get his job done, and done quite well, at no additional cost to his employer. According to The Register, 'Bob' was a "star developer" for a "a US critical infrastructure company." He was able to perform so well and still have time to goof off because he had outsourced his job to China. It cost him only one-fifth of his six figure salary. His scheme was only uncovered from a security audit. The story concludes that "Bob is no longer employed by the firm."

Was this an offense for which he should be fired* or is this an example of 'working smarter, not harder?' On the one hand, he was able to deliver to his employers superlative work at no additional cost. On the other hand, he was withholding from his employer a way to further reduce costs - either by replacing him or replacing others' jobs. This episode reminds me of David Friedman's beautiful essay on free trade entitled "Iowa Car Crop" reprinted in Steven Landsburg's "Armchair Economist."

*He may have violated security protocols or some other procedures. I am focusing on getting solely on the outsourcing one's job part.

Tuesday, January 15, 2013

Why steal Tide?

This seemingly irrational criminal obsession with the leading liquid detergent brand can be interpreted as a rational response to theft deterrent precautions for other, more valuable goods.:

...Most frequently stolen goods—GPS devices, smartphones, and other consumer electronics—are pricey, light, and easily concealed. They’re also not routine purchases, which means they can be locked up until buyers ask for them. Bulk goods like detergent are harder to run off with, but they’re also bought by dozens of customers daily...

This makes it costly for stores to lock these items behind a case.   This makes Tide relatively easy to steal.  Plus,
 Cashiers and stockists, working for low pay, are often disinclined to confront a potential criminal. “People at the cash register don’t stop you,” says one of Thompson’s informants, an ex-con who shoplifted for years. “They just let you go past.” What’s more, stolen bottles of Tide aren’t easily traceable.

So how is P&G reacting to this?
For its part, Procter & Gamble doesn’t seem overly concerned about the black-market popularity of its product. “It’s unfortunate that people are stealing Tide, and I don’t think it’s appropriate at all, but the one thing it reminds me of is that the value of the brand has stayed consistent,” says Raman, the marketing director. 

HT:  Brad

Price Discrimination by USPS Deemed Illegal

A US Court of Appeals has ruled that the US Postal Service may not price discriminate in the handling of DVDs in the mail. Since the regular automated sorting process would damage DVDs, they must be hand sorted. This usually incurs an additional fee but the USPS exempted Netflix. A competitor, Gamefly, sued because it was not getting the same treatment. So why would the USPS want to treat these two companies differently?
Presumably the post office came to this conclusion after considering the costs and the volume that Netflix delivers, Peter S. Vogel, partner with Gardere Wynne Sewell, told the E-Commerce Times.

So it may not be price discrimination at all.

When are You Liable for Damages from a Competing Product?

The NY Times reports that a man has sued for damages he claims were caused from an adverse event from taking a generic drug. Among the defendants is the brand name maker of the drug even though he never took the brand name drug maker's product. How can that be right?

The way that FDA market approval works for generic drug entry for the last three decades is that generic makers need only show that their product is bioequivalent to the original product. In that way, the generic product is essentially marketed under the originator's product label already approved by the FDA. So, the generic company is only making the claim that its product has the same risks as the originator product. Under the theory of the case, if the originator company's label did not sufficiently warn against an adverse effect, it is the originator's fault for mislabeling and not the generic's. (Any defects in manufacturing would remain the generic's fault.) This would make the originator firm responsible for making changes in labeling stemming from new information about a product for the product's entire life. Since the originator company is most likely to become aware of any newly discovered risks, this could be efficient.

However, it is possible that the source of the adverse effects is not clear. It may be due to the active ingredient not mixing well with the body chemistry for a certain sub-population of potential users. Or, it could stem from a particular handling of inactive ingredients that do not affect bioequivalence tests. If the latter, this ruling would allow generic makers to shirk on production because the liability would fall elsewhere. This will change behaviors.
“It has national implications,” said Bill Curtis, a Dallas lawyer who has filed hundreds of similar cases in several states. “I suspect that now, like most folks, if a client comes into my office, I’d be suing both the generic they took and the brand who’s responsible for the label.”

A likely result is more such cases due to branded companies having much deeper pockets than generic companies.

Hat tip: James Joaquim de Almeida Otterson

Monday, January 14, 2013

Fighting Alcoholism with Double Markups

Ben Franklin said "Beer is proof that God loves us and wants us to be happy" (or maybe not). But we also know that there are dire consequences from imbibing too much. According to Tim Hefernan's article in Washington Monthly, these consequences are in evident in much of Europe.
England has a drinking problem. Since 1990, teenage alcohol consumption has doubled. Since World War II, alcohol intake for the population as a whole has doubled, with a third of that increase occurring since just 1995. The United Kingdom has very high rates of binge and heavy drinking, with the average Brit consuming the equivalent of nearly ten liters of pure ethanol per year.

To an economist, an obvious way to discourage over-indulgence (or any indulgence) is to raise the price. Indeed, he claims these adverse consequences are the result of higher US prices. Hefernan argues that legal restrictions preventing vertical integration to eliminate double markups make the US supply chain inefficient and, thus, raise prices. But even this might be changing.
And so, for eighty years, the kind of vertical integration seen in pre-Prohibition America has not existed in the U.S. But now, that’s beginning to change. The careful balance that has governed liquor laws in the U.S. since the repeal of Prohibition is under assault in ways few Americans are remotely aware of.

I wonder if this change could be used to determine what the cost, in terms of lost consumer surplus, is per case of alcoholism avoided.

Yield Managment in Baseball Stadiums

It used to be that baseball ticket prices for the season were set before Spring training. Thanks to economist Barry Kahn, the San Francisco Giants price baseball seats dynamically depending on that game's, and that seat's particular demand. His software prices the seats much like airlines price their seats and with impressive results.
The Giants say the technology could add $5 million-plus in revenue this year. Revenues are up 12% this season and attendance has jumped 7% (true, the team is playing well), even as the league has seen a slight decline. Kahn is "changing the ticket world," says Russ Stanley, the Giants' ticketing chief. 

Hat tip: Olga Isengildina

Wednesday, January 9, 2013

Ticket-line Photos as an Anti-Resell Device

Disneyland sells daily passes for but also bundles visits for multiple days into their multi-day pass. Their current prices display a classic bundling strategy:

Park Hopper Ticket Prices
1 day 2 day 3 day 4 day 5 day
Age 3-9 $119 $158 $205 $225 $240
Age 10+ $125 $188 $220 $245 $260
Implicit Price per Day
Age 3-9 $119.00 $79.00 $68.33 $56.25 $48.00
Age 10+ $125.00 $94.00 $73.33 $61.25 $52.00

Suppose you and four other friends each want to go to the park for only one day. You could share the five day pass for less than half the price of five one day passes. This point has not been lost on ticket brokers who have used this arbitrage opportunity to undermine the whole pricing structure. To counter this, Disneyland is now photographing multi-day pass holders each day to verify that the 'non-transferability' clause on the ticket sale was not violated.

Airline Price Coordination

It seems that the first proposed fare increase of 2013 will fail. United Airlines instituted modest increases and Delta Airlines came on board. American Airlines was still deciding when Southwest Airlines indicated it would not. So, the fare hikes were rescinded.

What do we infer from this episode? On the face of it it, this looks like an attempt at a collusive price increase. Firms will not openly discuss fare increases for fear of violating antitrust laws. This sort of tentative fare hikes that become more established only if they are met by competitors is very like the form of 'tacit collusion' one might expect. But it is also the case that having systematically higher fares than your competitor, even by a few dollars, will decrease ticket sales dramatically. I would suspect that a firm level elasticity of -10 for this kind of decision would not be too high. In this case, one would also expect prices across firms to move together.

Sunday, January 6, 2013

Happy New Year: resolutions, debt, politics

When we don’t care enough about the future, we eat too much, exercise too little, borrow too heavily, smoke, and forget to floss.  Although these behaviors seem to make us happy, most of us realize that when the future finally gets here, we will be dealing with some serious remorse.   

To prevent such inter-temporal disappointment, we find ways to let our future selves take control of our current behavior.  For me, it is writing down what I hope to accomplish during the day on a note card.  For some reason, my future self is awake at the beginning of the day, and the note card is a way of telling my day self to stay on task. For others, it is cutting up credit cards, drinking Prosecco (only 9% alcohol), marrying your personal trainer, or letting a “friend” coach your fantasy football team.  All of these devices let our future selves take control of our current behavior, to do things that would otherwise be left undone.
Similarly, a year ago, our then-future politicians designed the fiscal cliff to stop their day selves from piling up debt.[1] However, on January 1, when the future became the present, President Obama and Congress duped their future selves. If our politicians don’t find a way to hold their day selves accountable, the markets eventually will, and remorse won’t begin to describe the future[2] we are passing on to our kids.   The debt ceiling is another device to let their future selves take control.  But based on what just happened, my expectations are low.
Happy New Year.

[1] “The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.” ― Alexis de Tocqueville.
[2] If you add our current debt (about 100% of our income) to our unfunded liabilities (about 400% of our income, depending on assumptions), you see how deep we are in it.  Countries are thought to be in serious trouble when their debt reaches 100% of income. 

Thursday, January 3, 2013

How do you catch price fixers?

The Economist has a piece on using data to uncover cartels.

In a 2006 paper Ms Abrantes-Metz, Luke Froeb of Vanderbilt University, John Geweke of the University of Iowa and Christopher Taylor of the Federal Trade Commission used the price of fish sold to American military bases in the late 1980s to backtest the theory. A cartel had stitched up the market for cod, flounder, haddock and perch. When the cartel reigned, the prices of perch were oddly stable. But when providers began to compete, prices dropped by 16% and also became choppier, reflecting fluctuations in wholesale fish prices (see right-hand chart). A new paper on a generic-medicines cartel in Mexico found something similar.

The magazine actually got the numbers wrong:   after the cartel collapsed, price went down by 23%, but the coefficient of variation (the standard deviation divided by the mean) went up by 263%.

This lead the authors to try to identify conspiracies by low variation.  They didn't find any.

Here is a link to the paper. 

Rental Car Formats

Avis is buying Zipcar. Where will the value be created? Avis is a traditional rental car company catering mostly to business travelers. Zipcar specializes in hourly rentals in dense cities for car-less residential customers to get errands done. Avis Chief Executive Ron Nelson claims three possible sources of synergies.
Avis expects the deal to lower the companies' combined costs by $50 million to $70 million a year. Mr. Nelson said the synergies were tied to three components: lower fleet costs, better fleet utilization and increased revenue by targeting corporate clients, one-way rentals and airport bookings.

In particular, there could be a cost complementarity as Avis's traditional business customers tend to rent during the week while Zipcar's tend to rent during weekends. A merger could decrease both units' idle time of their the chief asset, cars.

Bundling, Moral Hazard and Holdup

American Airlines offers a lifetime of first class travel for a large up-front fee. Those who purchase appear to have dramatically increased the amount they travel. Did AA really not anticipate this?
The AAirpass system had rules. A special "revenue integrity unit" was assigned to find out whether any of these rules had been broken, and whether the passes that were now such a drag on profits could be revoked.

Paraphrase, Now that you have sunk funds into the pass, we want to limit what the pass entitles you to.

Hat tip: Jeff Smith