Wii U, Content and Pricing

Nintendo is lowering the price of its new 8th generation console, Wii U, from $349 to $299 after disappointing sales. They got a one year head start on the 8th generation competitors, Microsoft's Xbox One and the Sony's Playstation 4, to be released for the coming Christmas holiday shopping season. But at the time of its launch there were only 29 games for the Wii U (though there are nearly 200 now). In contrast, there are already 63 games expected for the launch of the Xbox One launch and 110 for Playstation 4. Why buy a Wii U if the game selection is limited?

Video game consoles are examples of two-sided markets (consumers and publishers). Consumer demand increases the more games that publishers write for it and more publishers will write for it the larger the customer base is. New games using the latest generation of hardware are an important complements to consoles. Nintendo writes a number of these games but most are written by a network of third party game developers and publishers. Nintendo works hard to keep a steady flow of games from this network available to console adopters, as does Microsoft and Sony. Perhaps not hard enough. Apparently, the lack of content has led to more elastic demand and, thus, price decreases.

Is China real estate a bubble?

HT: Alex

Is stock price a good performance evaluation metric?

If you announce that you are leaving and your company increases in value by $18B, it was probably time to go.  

HT:  Sam

Prices and health care expenditures

Healthcare expenditures vary widely across different areas.  The economist has an article on the causes.

For Medicare patients [where prices are fixed by the federal government], most variation comes from differences in patients’ health status [consumption] and the overuse of a particular service, post-acute care, [e.g., nursing homes]. 

For privately insured patients, price gaps are to blame. ... In areas with a dominant hospital chain, prices are likely to be higher. The IOM reports that price mark-ups account for 70% of the variation in commercial spending.

How to commit bank fraud

Former student Brian Fox, of Confirmation.com, has created a case study based on some brazen frauds.

I, Pencil: The Movie

The movie version based on the famous essay by Leonard Read.

Reading this essay back in college was one of the more important determinants of me studying economics.

Hat tip: Ed Lopez

The Demand for Low Skilled Workers Just Fell

For over two centuries, mechanization in agriculture led to huge increases in output per farmer so that the demand for farm workers fell. Mechanization in manufacturing has led to so much worker productivity that, even though employment fell nearly 40%, output has more than doubled in the last 40 years. Slowly, mechanization is making inroads on some routinized services jobs - e.g. ATMs and bank tellers, scanners and grocery store clerks or MOOCs and professors? But some very low skilled jobs seemed to be stubbornly impervious to mechanization.

Now mechanization may be reducing demand for hamburger flippers. Momentum Machines has mechanized hamburgers preparation that they claim that is able to produce 360 fresh hamburgers per hour with tomatoes, pickles and such sliced to order.

Perhaps other fast food items will soon succumb to mechanization too.

Do Stock Brokers Work For Their Clients?

They might soon. The WSJ reports that U.S. Department of Labor is expected to propose new rules that would ensure that brokers and other securities professionals would act solely for the benefit of their clients when advising on individual retirement accounts. Currently, they have no fiduciary responsibility to their clients. Since they typically earn fees in proportion to the transactions their clients make, they have perverse incentives for more transactions even if these are not in the clients' best interest. A fiduciary responsibility would help alleviate this but may have other consequences.

The brokerage industry is concerned that they will not be able to earn enough under the proposed rule. As the consistently cogent reporting of Megan McArdle points out, this may be the best evidence for the change in the rules.

On the other hand, when I hear that brokers won’t be able to service small clients any more, my basic reaction is "Good." Essentially, brokers are arguing that they can’t afford to give you honest advice; their livelihood depends on being able to steer you into investment vehicles that pay them kickbacks. Sorry, commissions and referral fees. And where do the fees come from? Why, your pocket, ultimately; there’s a reason your broker has to be paid to tell you that this is a good idea. This sort of free advice you can’t afford.

Why I don't Teach Regression in Managerial Economics

A new textbook adopter asked why there is no chapter on demand analysis in our favorite textbook. I explain why I do not teach this in this longish post.

I was recently made aware of data on the top grossing concert tours in America in the previous decade (hat tip to Mark J Perry).These data are easily read into statistical software where one can then generate an average price as revenue divided by tickets. Plot these and you get what might look like a demand curve.

To get something like an elasticity from this, one would typically take logarithms and regress one against the other. In this case, regressing ln(tickets) against ln(price) yields an elasticity estimate of about -0.5 but regressing ln(price) against ln(tickets) yields an elasticity estimate of about -2.0. If you were going to make pricing decisions based on these elasticity estimates, you might want a bit more precision than this. So what went wrong?

• Are these tours representative of other tours? Many applications of such an analysis would apply the estimate to another setting. For example, one might want this to inform pricing for bands outside of the to 50 or tours in other countries. It is probable that the demand for these mega-stars differs from the demand for up-and-coming bands or in for tours in different locations. But we don't really know how it differs.
• Does the demand curve differ across these tours?  These data points may not be on the same demand curve. There could be differences in locations, production values, etc. that are also affecting the demand. It is likely that, were these factors included in the analysis, they would affect the elasticity estimates. Typically, one needs to collect data on these other factors affecting demand.
• Do important assumptions of regression analysis hold? This is subtle but it is key. Often, demand differs across observations in ways that we might recognize but are not able to measure. It is likely that some artists choose to tour less because there is so much demand that they get a big enough windfall from very few events. (For example, the point in the upper left is for Barbara Streisand who reportedly suffers stage fright.) Regression analysis assumes that the error terms are independent of the explanatory variables. But if artists with greater unobserved drawing power do not have to tour as much, this is violated. More generally, prices and quantities are affected by profit maximization which depends on unobserved variation in demand. In almost all cases, because the demand varies in ways that we do not observe, simple elasticity estimates will be biased. If managers do not know this, they might be lulled into false precision due to the apparent sophistication of regression analysis.

There are other empirical concerns as well and there are methods meant to address each one of them. However, they take more than a few weeks in a Managerial Economics class to learn. I have learned many of them only after a long career. (I joke with MBA students that they can hire me to do this. But because I am both slow and expensive, I am usually only hired for litigation where speed and cost do not seem to matter.) 

Most of these estimation concerns are greatly alleviated by well-run experiments. These can yield quick, cheap and precise estimates of the important underlying parameters. And experiments in business are becoming so much more popular that they will largely replace regression analysis for these applications.

Nashville's own Merle Hazard, "The Great Unwind"

Travelocity of Health care

Medibid allows hospitals to "dump" their unused capacity at much cheaper prices:

A full knee replacement, which is billed at a rate of $50,000 or more can usually qualify for an insurance discount reducing the cost to $25,000. This same procedure can be done through MediBid at a cost of $10,000 in a US facility, or as low as $7,500 overseas. By allowing doctors in the US to compete on an equal playing field with overseas providers, the patient wins. MediBid harnesses the power of Domestic Medical Tourism.

Hat tip:  Matt (come by for a 3rd edition coffee mug)

President Maduro didn't read Chapter 2

In May, I sent a copy of my third edition textbook to President Maduro, to help him understand why his country ran out of toilet paper

Now Venezuela is running out of used cars:

With new car prices carefully controlled, import dollars strictly limited, and demand for wheels way outstripping supply, Venezuela must be one of the only places in the world where cars raise in value the second they move off the lot. With people forced to turned to fix assets to protect the value of their savings, waiting lists for new cars have grown notoriously long. These days, new cars are just another arbitrage opportunity; a steel-rubber-and-glass version of a CADIVI dollar.

This book can help.  Please encourage him to read chapter 2.

HT:  Jamie

Parking Meters and Yield Management

San Francisco has experimented by converting about a quarter of its parking meters to "smart meters" in which the price depends on current demand. SFpark, which uses the smart meters and ground sensors to measure parking occupancy and adjust prices accordingly, is providing valuable lessons for San Francisco about reducing the amount of time drivers spend cruising the streets for a parking space.The people running the trial have published the first results here. This experiment also allowed them to calculate price elasticities at different locations and times.This one is taken from a blog entry about the paper.

Hat tip: Mark Perry

Cartel Enforcement

... is difficult even when the cartel is legal ... and participation is mandatory. NPR did a recent story on the implementation of agricultural cartels marketing orders. Some farmers will go to lengths to cheat on their allotment. Of course, this is the dominant strategy in the prisoner's dilemma. These cartels are endorsed by the USDA as a way to boost the income of farmers.

Meet Marvin Horne, raisin farmer. Horne has been farming raisins on a vineyard in Kerman, Calif., for decades. But a couple of years ago, he did something that made a lot of the other raisin farmers out here in California really angry. So angry that they hired a private investigator to spy on Horne and his wife, Laura. Agents from a detective agency spent hours sitting outside the Hornes' farm recording video of trucks entering and leaving the property.

What did the Hornes do to become the subject of a surveillance campaign? They sold raisins. More specifically, they sold all the raisins they produced.

In the 1980s, the FTC started an investigation into applying the antitrust laws to these practices. If I recall correctly, Congress passed a law prohibiting the FTC from investigating or issuing a report. It is nice to have powerful friends.

Speeding Ticket Insurance

Anticipate adverse selection and moral hazard.

Hat tip: Brandon Vanderford

How do you subsidize risk taking without encouraging more risk taking?

That is the goal of President Obama's plan to reform the mortgage industry:

He wants a housing finance system that has the government backing to provide cheap mortgages and dedicated off-budget funding for low-income constituencies. But he does not want subsidies that encourage bad housing decisions and leave the taxpayer on the hook for losses. In short, he wants the upside of the traditional system without the downside.

Quality Competition

You kids out there can ask your parents about drive-up photo developing.

Are states and cities saving enough for the pensions?

A report from Boston College says "no," because they are still using very optimistic discount rates, illustrated above.  Remember that higher discount rates mean that you don't have to save as much to fund future pension promises. 

Here is the scary bottom line:

In other words, Boston College found that unfunded liabilities may be almost double the official estimates despite applying a lower return assumption to just a piece of the overall calculation (in addition to eliminating asset smoothing). ....

For local and state government pensions and other post-retirement benefits, I suggest a rough rule of thumb of doubling the shortfalls found in official reports. Reality may prove worse than that, but let’s be optimistic.

We have blogged about over-optimistic pension assumptions.  I hope I never have to tell our Mayor, "I told you so."  

Burned by the Beanie Baby Bubble

Bubbles are visible to most people only with the benefit of hindsight. But with fads, even during the fad, most people understand that it will end. Some consumers simply enjoy the the ride while it is happening. They buy the leggings they saw in Flashdance. They get tickled by Elmo. They wear the pastels they see on Miami Vice. Few consumers view these fads as investment opportunities because they know it will collapse but they do not know when. Meet Chris Robinson Sr.:

The one flaw in Robinson's financial plan -- and it's a big one -- is that he never sold any Beanie Babies while they were hot commodities. He still has thousands of them. Once that market crashed, odds are that he would have sold them at a loss had he tried to do so. With hindsight, Robinson seems to understand the error of his ways.

Hat tip: Jeff Smith