Switching Costs and Competition

How resistant to switching phone carriers would you be if you had to change your phone number when you changed your carrier? If a lot, then carriers can raise price without as much fear that you will abandon them for a competitor. These switching costs make demand less elastic. In a new working paper, "The Impact of Mobile Number Portability on Price, Competition and Consumer Welfare," Cho, Ferreira, and Telang show that:

... MNP intensified competition leading to an increase in consumer surplus. On average, the introduction of MNP decreased price by 7.9%. 

MNP policies were introduced despite strong objections from carriers and hastened the erosion of profits in the effected markets.

When will the bubble pop?

Value-investor Jon Shayne has a couple of interesting posts about the Fed's exit strategy, and Washington Irving's description of the credit bubble in 1880.

Note that value investors assume that assets have fundamental value, and that price can depart from fundamental value.  They make money by buying when prices are below this value, and selling when they are above. 

Value investors have to be notoriously patient, because the wait for stocks to return to fundamental value can be a long one.  

All my rich friends sold too early

This is a favorite saying of a dog walking buddy which might apply to the bond and equity markets of today.

As soon as investors get a clear signal that the Fed will slow down its money printing operations, some, like David Stockman, expect the market to fall. 

Notoriously pessimistic (but very funny) Zero Hedge thinks we have already received four signals that we are in bubble territory.
Of course, bubbles are phenomenon that cannot be understood by economic models, and by logical extension, economists, so my credibility here is low.

I am sending the President of Venezuela a copy of the 3rd edition textbook

Dear President Maduro,

I read about your efforts to make peace with the grocery stores to help alleviate shortages.  The toilet paper shortage seems particularly acute:

Government officials said this week they plan to immediately import food and 50 million rolls of toilet paper to keep up supplies. 

Increasing imports and government-set prices may work in the short run, but you will soon find yourself right back in the same position.  Government-administered prices cannot adjust fast enough to keep up with changing demand.

Over the years, I have taught many students from your country and they learn (spelled out clearly in Chapter 2), that voluntary transactions create wealth, and that price controls, taxes, and subsidies destroy wealth. 

I am going to send you a copy of my brand new third edition.  It is easy to read and will teach you to anticipate the consequences of various government policies that you might pursue.

If you cannot wait for the hard copy, you can buy an electronic version from Cengage, from Amazon, or from Barnes and Noble.

Please contact me if you have any questions.

Sincerely,

Professor Luke Froeb
Vanderbilt University

Thoreau was a polluter

Economist Ed Glaeser talks about cities.  Watch for the knock on Thoreau, and the ecological disaster wrought by back-to-the-land environmentalists.  (see Stewart Brand's Ted Talk on this).
 If Prof Glaeser is right, that density is green, does this mean that organizations like the Tennessee Land Trust, who work to reduce density, are wrong?

I think the answer is clear:  the Land Trust offers tax breaks to private land holders, to keep their property from density increasing development. That they can claim that this somehow benefits the public interest is mere propaganda.

Whom should we blame?

Several students wrote to tell me about this story:  Wealthy hire disabled guides to skip lines at Disney World.

If you are like most people you reacted with moral outrage at the idea of wealthy able-bodied people using money to take advantage of a benefit preserved for the disabled.  Some blame the disabled person who was running the guide service, while others blame the wealthy Manhattanites for using it. 

But this is a blog about management, so I focus on the management lesson:

When there is an inefficiency (people waiting in long lines for rides), there is also opportunity to make money.  

Disney sells VIP access to skip the long lines, which is a type of indirect price discrimination.  But there seems to be better ways for Disney to take care of this, like congestion pricing.  But just because I can think of another way to do it, the fact that Disney prefers to price this way suggests that there is something I must be missing.  

Would love to hear ideas on how Disney can better price rides.  

Note that this is an old problem,  Mickey Mouse Pricing, with many different facets, as explained by William Allen in his textbook. 

How does France differ from North Dakota?

Fracking has caused an increase in the supply of US shale oil that will change the US from the world's leading importer of oil to a net exporter.

"North America has set off a supply shock that is sending ripples throughout the world," said IEA executive director Maria van der Hoeven.

The surge in US production will reshape the whole industry, according to the IEA, which made the prediction in its closely-watched bi-annual report examining trends in oil supply and demand over the next five years.

The IEA said it expected the US to overtake Russia as the world's biggest gas producer by 2015 and to become "all but self-sufficient" in its energy needs by about 2035.

Interestingly,  the process has been banned in France, while the UK recently lifted a moratorium on drilling for shale gas.

Will employers drop health insurance for employees?

It looks as the misnamed Affordable Care Act creates strong incentives to do so:

... there is no assurance that employers will decide to keep that coverage once the costs are brought home. It turns out that the penalties for employers will be in the range of $2,000 to $3,000 to dump their coverage, which is far less than the $16,000 or so that it costs them to maintain the existing coverage. It takes little imagination, therefore, for employers to announce to their employees that they will divide the gains from dropping their current coverage through a salary increase of say $7,000, ...

Dynamic Beer Pricing

At The Brew Exchange, the price of a brand of beer depends on how many people order it, or order its competitors.

Our 100+ beers are divided into categories (IPA, Lager, Cider ect…) Each time someone orders a beer, the price goes up for the next person who orders the same beer. The others in the category go down by the same amount. The more popular the beer is, the higher the price goes, while those not being ordered continue to fall.

Supply and demand at work as prices adjust in real time.

Keeping up with the fluctuating beer prices is both easy and a little entertaining. You can watch the prices rise and fall in real time via our 1960’s style ticker running above the bar. 

 Hat tip: Darshak Patel

Anticipate adverse selection: what if only high cost individuals buy health insurance?

President Obama's health care plan has a problem:  If younger, healthier people opt not to purchase mandated health insurance, and instead pay for the penalty, then insurance "pool" will consist mainly of older, sicker, and higher cost people. 

Insurance companies are spooked by this possibility, so they are already raising premiums to protect themselves from potential losses. Yet this step can help create the very problem that they are trying to avoid. If premiums are high—or even just perceived to be high—young people will be more likely to avoid buying insurance, which could start the negative, downward spiral of exchanges full of the sick and elderly with not enough healthy people paying premiums.

Does health insurance improve health?

No, but it does improve financial well-being. 

Another large scale randomized study among low-income, able bodied Oregonians tested the effects of Medicaid.  Here is what they found:

“The study did not generate any evidence that Medicaid coverage translated to measurable improvements in physical health outcomes over a two-year window,” said lead researcher Katherine Baicker of the Harvard School of Public Health. “It did generate robust improvements in mental health and enormous reductions in financial strain and hardship.”

I dont want to keep picking on Esther Duflo, but she is the only one I know in the administration that  advocates such randomized trials to evaluate policy.  She has been appointed to the administration policy council.  Will she recommend policy changes based on the science?

Private property saved early settlers

Another history lesson that you won't learn in school:

Four hundred years ago today 105 men and boys disembarked from three ships and established the first permanent English settlement in North America. They built a fort along what they called the James River, in honor of their king.

By 1609, there were 500 settlers. And within six months fewer than 100 were still alive. People were desperate. They ate dogs and cats, then rats and mice. They apparently ate their deceased neighbors. ...

But when a new governor, Thomas Dale, arrived a year after the starving time, he was shocked to find the settlers bowling in the streets instead of working.

Dale’s most important reform was to institute private property. He allotted every man three acres of land and freed them to work for themselves. And then, the Virginia historian Matthew Page Andrews wrote, “As soon as the settlers were thrown upon their own resources, and each freeman had acquired the right of owning property, the colonists quickly developed what became the distinguishing characteristic of Americans – an aptitude for all kinds of craftsmanship coupled with an innate genius for experimentation and invention.”

 I am not a historian.  But usually things don't fit neatly into a narrative like this.  Anyone who can debunk this, or correct for accuracy, please do in the comments below. 

Who goes double-down against a Carny?

Another one in which the headline almost tells the whole story. It seems that "Henry Gribbohm loses life savings at carnival, wins giant stuffed banana with dreadlocks."

Actually, there is more. After losing $300 trying to win an Xbox, he goes home, gets the rest of his $2,300 'nest egg,' and blows that too. Let me get this right:

• He goes through his entire 'pocket change' trying to win a prize worth no more than his pocket change.
• He carries around pocket change representing 10% of his entire wealth.
• With that gone, he decides to chance more of his accumulated life savings.
• He decides to chance his entire life savings.
• His life savings are kept in his home.
• And this is the carny's fault, "It's not possible that it wasn't rigged."

The money quote at the end of the video:

"Henry's got bigger problems than that big banana."

The lesson that every carny knows: "Anticipate adverse selection."