Thursday, December 24, 2015

Sensible macro musings, from Doug Elmendorf

I overlapped with Doug during my stint in DC.  These short videos give a pretty good picture of the macroeconomic problems and policies to deal with them.  I have less faith than Doug in the ability of government to design investment policies that spur growth instead of re-distribute income, and I think he understates the tradeoff between re-distribution on growth, but on the whole, I think they are pretty good.

Wednesday, December 23, 2015

Why do Women pay More?

The Washington Post is reporting that NYC Department of Consumer Affairs has found that items targeted to women/girls are pretty consistently higher priced than those targeted to men/boys. Often the only perceptible difference is the color and packaging, as in these scooters:
Or these razors:
Across 800 products you get this pattern:
Possible explanations:

  • Informational disadvantages: Women are not as informed about the prices of alternatives and so are more willing to suck it up and pay the higher price.
  • Indirect Price Discrimination: Women have more inelastic demand and so it is profitable to charge them more.
  • Selection by preference for quality: These products may have lower quality, 'generic' versions, the price of which we do not observe. It could be that men/boys are more willing to trade-off quality for price while the women/girls who prefer the quality product really prefer the quality product.
  • Cost differences from scale economies: Women/girls may prefer a greater variety of consumer goods (e.g., wedding dresses versus wedding suits). This means that there are fewer units purchased for any specific item. With economies of scale, the version for men/boys will have lower average cost than the version for women/girls.

Monday, December 21, 2015

Avon Buyout

On Dec. 17, Cerberus announced that it will purchase Avon's North American operations. Avon has been struggling and this is thought to be a way of booting out the old management and making some important changes in how the firm markets beauty products. Do the markets bear this out?

1. If so, investors should value Avon more, and they do. See the stock market effect for Avon on 17 Dec here:




2. Also, if the buyout improves Avon's performance, it will likely come at the expense of competitors. And it seems that it does. Estee Lauder appears to have taken a hit.


Revlon, though, appears flat with the news. 
L'Oreal's stock price fell over the next two days.


Coty also closed lower but the decline started a day later two. (Coty's brands include: Calvin Klein, Chloe, Davidoff, Marc Jacobs, OPI, philosophy, Playboy, Rimmel and Sally Hansen.)

It does seem curious that the price responses for competitors are all a day later. But in all, it seems that this acquisition will move an asset to a higher valued use.

What causes the increase in tuition?

Government subsidies.

Remarkably, so much of the subsidy is translated into higher tuition that enrollment doesn’t increase! What does happen is that students take on more debt, which many of them can’t pay.

Tuesday, December 15, 2015

Seattle takes aim at the gig economy

Following Hillary Clinton's lead in calling out the gig economy,

The sharing economy—bolstered by high-flying start-ups including Uber, Airbnb and Lyft—allows individuals to share products and services like offering homes and apartments for rent, or driving passengers to destinations. The small tasks often are brokered through mobile smartphone apps, and the platforms connect freelancers with available short-term gigs.

the city council of Seattle has just voted to allow Uber and Lyft drivers to unionize:

In a statement after the vote, a spokeswoman for Lyft said that the ordinance passed would threaten the privacy of drivers, impose costs on passengers and the city and conflict with federal law.

This reminds me of one of my favorite Reagan critiques of progressive policy
If it Moves, Tax it. If it Keeps Moving, Regulate it. And if it Stops Moving, Subsidize it.
HT: Sarah

Monday, December 14, 2015

REPOST: Organizational Form Affects Decision-making

Organizational form affects decision making

The new Consumer Financial Protection Agency seems designed to be accountable to no one:

As an unaccountable bureaucracy with a single head, the bureau will be susceptible to bureaucracy’s worst pathologies: a tunnel-vision focus on the agency’s regulatory mission, undue risk aversion and agency overreach. While a more coherent consumer-protection regime is needed, consumer-protection goals often can conflict with other goals, such as promoting competition, lower prices and expanded choice for consumers; and ensuring safety and soundness.

The FTC, which enforces identical consumer protection laws, is organized along functional lines, with attorneys and economists each writing memos to a bipartisan Commission. By design, this results in conflict between the economists and attorneys, which allows benefit-cost analysis done by economists to be heard at the highest levels of the organizations.

Watch the organizational design of the new agency. I suspect it will put economists, if it has them at all, under the supervision of attorneys to reduce their influence, as was done during the FTC early years.

Saturday, December 12, 2015

REPOST: Why are so many donated kidneys discarded?


In the past, we have blogged about our inefficient kidney matching system:  almost 100,000 people are waiting for kidneys, only about 20,000 receive kidneys.

Now we learn that physicians throw away about 2000 usable kidneys.  One of the reasons is the government's performance evaluation metric:  If the number of failures exceeds expected levels by 50 percent, transplant programs are put on watch list, and then decertified if they dont improve.  This incentive encourages physicians to reject all but the best organs for transplant:
“When you’re looking at organs on the margins, if you’ve had a couple of bad outcomes recently you say, ‘Well, why should I do this?’ ” said Dr. Lloyd E. Ratner, direct of renal and pancreatic transplantation at NewYork-Presbyterian/Columbia hospital. “You can always find a reason to turn organs down. It’s this whole cascade that winds up with people being denied care or with reduced access to care.” 
After the University of Toledo was cited, a transplant surgeon cut back to about 60 transplants a year from 100, becoming far choosier about the organs and recipients he accepted. 
The one-year transplant survival rate rose to 96 percent from 88 percent, but Dr. Rees still bristles at the trade-off. “Which serves America better?” he asked. “A program doing 100 kidneys and 88 percent of them are working, or a program that does 60 kidneys and 59 of them are working? It’s rationing health care under the guise of quality, and it’s a tragedy that we are throwing away perfectly good organs.”
Someone, please, let these people use a market. 

Tuesday, December 8, 2015

Why is Finland is giving every adult $10,000/year?

To replace its cumbersome, costly, and bureaucratic welfare system:

The government thinks that the move will actually save money. Finland's welfare system is very complex and expensive to run, and the government hopes that simplifying it could reduce costly bureaucracy. 
It also argues that the change may encourage more people to look for work. About 9.5% of Finns are currently out of work -- the highest rate in more than a decade -- and the government believes some people are deterred from working because they're better off on unemployment benefit than accepting a minimum wage job.
HT:  Charles




What happens when you ignore lessons from Managerial Economics?

Venezuela's mistakes are familiar fodder to readers of this blog.  Things got so bad in Venezuela that in 2013, I even sent President Maduro a copy of the third edition, and urged him to read chapter two, to help him understand why Venezuela was running out of toilet paper and used cars.

 


“We’re in a state of constant deterioration,” said Juan Pablo Hidalgo, a 27-year-old hotel worker who voted on Sunday against Mr. Maduro’s allies in hope of economic improvement. “In any other country, people can save. Here, no one in my generation can save anything, much less have hopes of owning a car or a house.”

This is what happens when you don't study economics.  I wrote to President Maduro asking him for a plug that I can put on the cover of the fifth edition, "I should have read this book."

Friday, December 4, 2015

REPOST: how did Blockbuster solve the double markup problem?

Hal Varian's (Chief Economist at Google) tells the story of Blockbuster (a video "rentailer") and its distributors who suffered from "double marginalization" or "the double markup problem." In other words, competition between firms selling complementary products results in a price that is too high and output that is too low
Consider, for example, video tape rental industry. Prior to 1998, distributors sold video tapes to rental outlets, which proceeded to rent them to end consumers. The tapes sold for around $60 apiece, far in excess of marginal cost. The rental stores, naturally enough, economized on their purchase, leading to queues for popular movies.

The old contractual form suffered from double marginalization.  This means that upstream distributors set a single price and the downstream rentailers took this upstream price ($60) as a marginal cost and priced videos at the point where MR=$60.  Since 60 was far in excess of MC (almost all of the costs of video production and video rentailing are fixed), this resulted in video rental prices that were too high and output that was too low. 

The Blockbuster CEO recognized this as a problem and proposed a solution: 

In 1998 the industry came up with a new contractual form: studios provided video tapes to rental stores for a price between zero and $8, and then split revenue for rentals, with the store receiving between 40 and 60 percent of rental revenues.

Consider how the new pricing scheme changed the incentives of the video rentailer.  Now the marginal revenue from renting one more video was only 50% of the old marginal revenue, but the price was only 7.5% of the old upstream price.  Now the rentailer produced up to the point where (50%)MR=(7.5%)$60. 

.. these contracts increased revenue of both studios and rental outlets by about 7 percent and consumers benefitted substantially. Clearly, the revenue sharing arrangement offered a superior contractual form over the system used prior to 1998.

 This arrangement is subject of course to verification of the downstream revenue by the upstream distributor.  New "smart" cash registers at Blockbuster made this possible:

The interesting thing about this revenue-sharing arrangement is that it was made possible only because of computerized record keeping. The cash registers at Blockbuster were intelligent enough to record each rental title and send in an auditable report to the central offices. This allowed all parties in the transaction to verify that revenues were being shared in the agreed-upon way. The fact that the transaction was computer mediated allowed the firms to contract on aspects of the transaction that were previously unobservable, thereby increasing efficiency. 


More of Hal Varian's insights about economics (there are some good stories here) can be found in his popular columns.  He is most famous to MBA's for saying that "marketing is the new finance," urging the Quants, who used to go into finance, go into marketing instead. 

HT:  Vlad Mares

Amazon's strategic advantage: fast and low cost distribution

Thursday, December 3, 2015

Puzzle: why are marketers ignoring old people?

From a British blog,
A milestone in marketing stupidity has been reached. According to a September report by the U.S. Bureau of Labor, a majority of consumer spending (51%) is now done by people over 50. These people are the target for 10% of marketing activity. On the other hand, marketers spend five times as much money marketing to Millennials, the moronic obsession of every marketer on the planet.

 However, as an economist I dont buy the non-rational explanation offered:

There is no logic to the advertising industry's disregard for people over 50. It is marketing by selfie-stick - narcissism disguised as strategy.

Remember these are averages, and how much to spend on marketing is an extent decision, where the marginal effect of advertising is relevant.  It could be that the marginal benefit to advertising to young people is higher (they buy more in response to ads) or that the marginal cost of reaching them is lower, e.g., because they spend more time online.

For cigarettes, I know that new smokers switch more frequently between brands while established smokers are more loyal to a particular brand.  This may indicate more susceptibility to brand advertising, which rationally explain the high level of advertising aimed at young smokers.

I don't know what the answer is.  Would love those with more experience to weigh in.

HT:  High Lantern Group

Will this end moral hazard in banking?

The Fed ends "too big to fail" bailouts:
Under the new rule, banks that are going bankrupt -- or appear to be going bankrupt -- can no longer receive emergency funds from the Fed under any circumstances. 
If the rule had been in place during the financial crisis, it would have prevented the Fed from lending to insurance giant AIG (AIG) and Bear Stearns, Fed chair Janet Yellen points out.

Wednesday, November 25, 2015

M-PESA Breaks Down Regulatory Entry Barriers

A nice story by 60 minutes demonstrates the value of mobile money. What large corporations are jockeying to roll out in the US, Kenya has been doing for years with the most bear bones of mobile technologies. Users are able to make millions of micro-transactions per day over the mobile network using M-PESA. There are heart warming vignettes about the various ways  this benefits consumers. But the best part of the story for me was the erosion of entry barriers (around the 11:00 minute mark). The CEO of the mobile carrier explains:
Actually, when M-PESA started, Kenya's commercial banks implored the government to impose regulations to impede its development, but the government decided to take a hands-off approach, which is pretty unusual.

But other jurisdictions have taken notice.
The most effective barrier for the success of mobile money around the world is the banking lobby. The banking lobby in most parts of the world is a very strong lobby. And banks have looked at what's happened in Kenya and have decided that they don't want to see that happening in their own countries. 

But for the courage of some Kenyan government official, this may never have gotten off the ground.

Safety breeds risk



Can financial crises and other disasters be prevented? What was the role of the Federal Reserve, regulation, and risk in past crises? In the pursuit of safety from disaster, are we creating the conditions for the next one? Greg Ip, author of Foolproof, joined a panel of experts to discuss the themes of his new book at the Mercatus Center.


Monday, November 23, 2015

Is predatory pricing profitable?

Predatory pricing is rare, at least in the US, because it is an investment that rarely pays off.  After an incumbent firm drives an entrant out of the market by pricing low (and deliberately losing money), the incumbent must be able to recoup the lost money by raising price--without attracting more entry--when the entrant exits the industry.

Perhaps the best examples of predatory pricing come from the airline industry, when the Department of Justice brought several cases in the 1990's.
Probably our best known airline predation investigation involved Northwest's response to Reno Air's entry into the Reno-Minneapolis city-pair in 1993. Not only did Northwest institute service of its own on this route that it had previously abandoned, it also opened a new mini-hub in Reno that overlaid much of Reno Air's own operation. Our investigation was well under way when the matter was resolved because, with the intervention of the Department of Transportation, Northwest decided to abandon its overlay of Reno Air's hub operation.

See here why these cases are so hard to win.

In other words, the government needs to prove that the low fares and extra flights would prove financially ruinous if continued indefinitely. To make the argument stick, the government will have to prove that American could reasonably expect to recover its losses after Vanguard or Sun Jet exits the market by raising fares -- confident that its high fares would not attract another round of upstarts.

What is GDP?

Our friends at MR University have developed an online macro course with good, free content

Course Outline

2 The Wealth of Nations and Economic Growth
3 Growth, Capital Accumulation, and the Economics of Ideas
4 Savings, Investment, and the Financial System
5 Unemployment and Labor Force Participation
6 Inflation and Quantity Theory
7 Business Fluctuations
8 Transmission and Amplification
9 The Federal Reserve
10 Monetary Policy
11 Fiscal Policy

Saturday, November 21, 2015

REPOST: Fee-for-service medicine causes amputations


It is difficult to align the incentives of physicians (making money) with the goals of patients (low cost, high quality care) due to asymmetric information:  only the physician knows what the patient wants.

What distinguishes Medicare Advantage plans from traditional fee-for-service plans is the degree to which they use mechanisms designed to encourage the delivery of cost-effective quality care. Three critical mechanisms are financial incentives that are aligned with clinical best practices, a selective network of providers, and more active care management that emphasizes prevention to minimize expensive acute care.

Here is what happens:


  • Single-year mortality rates fell from 6.8 percent in the traditional fee-for-service sample to 1.8 percent 
  • Patients in the Medicare Advantage plans had shorter average stays in the hospital (about 19 percent shorter.)
  • Patients in the managed plans were more likely to receive preventive care ...For example, diabetic patients in the fee-for-service sample had an average of 11.5 amputations per 1,000 patients; those in HMO plans with global capitation had only 0.3. 


BOTTOM LINE:  Incentives matter
 “We've found that U.S. private insurers have created an operating model that can deliver better care at a lower cost and have a major role to play in the ongoing national efforts to improve health care quality,” said Stefan Larsson, a BCG senior partner and coauthor of the report. “Quite simply, we’ve found that the more aligned the care, the better the quality delivered.”

Friday, November 20, 2015

Running an art auction

Art is a textbook example of the advantages of an auction over simple posted price: an auction awards the art to the highest value bidder, and sets a price. Competition between the auction houses has taken the form of price guarantees:
Christie’s agreed to give the seller of “Four Marilyns,” Turkish financier Kemal Cingillioglu, a $40 million house guarantee, which means the house promised to pay him up to $40 million no matter how the silkscreen fared. Since it sold for less [only $32 million], the house could now need to pay him the difference. Christie’s declined to discuss the terms of the deal.
HT: Chris

Thursday, November 19, 2015

Make the rules or your rivals will: erecting barriers to entry

HT: Sohil

REPOST: Dating Game

Dating Game

QUESTION: A man and a woman are trying to decide where to go on a date.  The woman prefers ballet, but the man prefers going to a football game.  There is some gain to going together, but each would rather go to their preferred activity alone, than together to their less preferred activity.  Diagram this game, and show how best to play.

 ANSWER:

                                                 Man
                                              Football             Ballet
                              Football   (1,4)                  (0,0)
Woman      
                                  Ballet   (2,2)                  (4,1)


The man does better by going to the football game, regardless what the woman does, and the woman does better by going to the ballet, regardless what the man does.  These are called "dominant strategies."  The equilibrium of the game is for each to go to their preferred activity.

Notice, however, that the two players could make themselves better off by cooperating.  Self interest is taking them to a place (2,2) with a lower group payoff than the cells on the main diagonal. 

There are two ways to change the game to increase group payouts.

1. Alternate.  If the couples take turns, their group payout goes up.

2. Have the player that receives the higher payoff, compensate the other player for going to their less preferred activity.

In this case, the man could give 1.5 units to the woman if they go to the football game, which would change the payoff in the upper left to (2.5, 2.5).  This would change the equilibrium of the game.

Alternatively, the woman could give 1.5 units to the man if they go to the ballet.  This is the premise of an off-color South Park episode.

Wednesday, November 18, 2015

REPOST: the Real meaning of Thanksgiving

What they don't tell you about Thanksgiving in school

Peter Klein gives us a more complete story of the first Thanksgiving:

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This year I am giving thanks for private property.

Friday, November 13, 2015

Does life insurance cause suicide?

Insurance companies anticipate this kind of moral hazard, and typically include an exception for death by suicide.  However, the exception lasts only a few years, and varies by country.  Economists compared suicide rates in countries with shorter exceptions and found statistically significant evidence of moral hazard:

...the shorter the exemption period, the greater the demand for life insurance. And the greater the demand for life insurance, the higher the suicide rate. 

HT:  Mollie

How quickly does a strong dollar benefit consumers?

The answer from the Fed's Stanley Fischer:
One way in which the stronger dollar depresses inflation is by putting downward pressure on import prices. .. 
An important difference between the transmission of dollar appreciation to inflation compared with output is that the effects on inflation are probably more transient. In particular, given that most of the effect on inflation occurs through changes in import prices--and import prices respond quickly to the exchange rate--the peak effect on inflation probably occurs within a few quarters. From the standpoint of the outlook, this transience means that some of the forces holding down inflation in 2015--particularly those due to a stronger dollar and lower energy prices--will begin to fade next year. Consequently, overall PCE inflation is likely on this account alone to rebound next year to around 1-1/2 percent. And as long as inflation expectations remain well anchored, both core and overall inflation are likely to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate.

Thursday, November 12, 2015

How do brands grow? TV.

Distilled wisdom from Byron Sharp's How Brands Grow: What Marketers Do not Know:

Sharp begins by noting that the majority of any successful brand’s sales comes from “light buyers”: people who buy it relatively infrequently.The consequences of this insight are big:
  • ...you will never increase your brand’s market share by targeting existing users ... loyalty programmes, says Sharp, “do practically nothing to drive growth”.
  • ...a successful brand needs to find a way of reaching people who are not in its target market, ... advertising must somehow gain the attention of people who are not interested in it, have never bought it, or who bought it so long ago they can’t remember.
  • Advertising, says Sharp, works best when it doesn’t try and persuade, but merely makes us remember the brand at the point of purchase
  • Brands are not the rich sources of differentiation marketers like to think of them as, but short cuts through the complexity of decision-making. Most consumers aren’t aware of, ... the difference between NescafĂ© and Kenco and don’t want to spend longer than they need to thinking about which they prefer. They just want to get coffee and get home.
  • Brand engagement is largely pointless...A senior marketer at the drinks company Diageo, where Sharp’s book has been influential, put it to me bluntly. “After 10 or 15 years of f***ing around with digital we’ve realised that people don’t want to ‘engage’ with brands, because they don’t care about them.’
So what does all this mean for advertising?
Ideally, it would reach millions of people who aren’t particularly thinking about your product. You’d want them to see the same thing at around the same time, so that they can talk to each other about what they’ve seen, reinforcing each other’s memories of it. You would need to sneak up on them, since they have near-zero interest in hearing from you, indeed don’t want to. You’d need a form of content requiring negligible mental effort to process: one which comes in bite-sized chunks, but which is still capable of moving and delighting. It turns out there is an app for that: the TV ad.

Wednesday, November 11, 2015

Set the markets free

Wealthy patrons are getting kidneys much more quickly and frequently than poor ones:
Researchers studied the national database of organ donors from 2000 to 2013 and found that patients who simultaneously listed at more than one center had higher transplant rates, lower death rates while waiting, were wealthier and were more likely to be insured.
How do they do it?
... wealthier patients ... have the money for travel, temporary housing and other costs of multiple listing that are not covered by health insurance, Givens said. Patients with state-run Medicaid generally have lower income and may not have the option to list themselves at a center in a different state.
Time is now for a market.

HT:  Marginal Revolution

Tuesday, November 10, 2015

How are rents determined for Nashville Penthouses?


By an auction:

The starting prices ( see the auction here) underscore the light-speed leaps that rents in the city have taken because of that demand.  
Bidding on the one-bedroom penthouse units begins at $5,300 per month (nope, not a typo). Minimum starting bids for the two-bedroom units range from $5,600 a month to $9,000 a month (still not a typo, I double-checked).  
The minimum bid for a three-bedroom unit is between $8,000 a month to $10,000 a month (people, I have professional editors. These figures are real. See for yourself!)

HT:  Burch


Question: what happens when you reduce punishment?

Answer:  Crime increases



In this case, we are talking about major league pitchers deliberately throwing at batters, called "Hit By Pitcher" or HBP.  In 1994, the HBP rate exploded.  Why?

Before 1994, if a pitcher deliberately hit a batter, the batter's team would retaliate.

After 1994, the rules changed to a "warning-then-eject" rule.  Once the “warning-then-eject” rule was implemented, teams effectively got a free HBP, with no fear of retaliation. Team A hits team B, then both teams get warned and team B can’t retaliate without automatically losing their pitcher and manager! They de-incentivized retaliations to such a degree that they actually incentivized the first HBP.

Article summarizing the history of the HBP rule and with nice graphs of the HBP data: 
http://www.hardballtimes.com/the-hbp-explosion-that-almost-nobody-seems-to-have-noticed/

HT:  Eric E.

Socialism, really?

With a presidential candidate calling himself a socialist and suggesting we emulate Denmark, I want to do a little bubble bursting.  From past blog posts mentioning Denmark.  (The last one on the Scandanavian Model is the most interesting to me.)

Sunday, November 8, 2015

Rev. Mgt. comes to DC (for parking meters)

from the Washington Post:

This “surge pricing” means you could be paying $8 an hour to park in Chinatown-Penn Quarter at peak times. 
You read that right. $8. An hour. 
City officials say the idea is to reduce downtown traffic congestion, 25 percent of which, studies show, is caused by vehicles circling the block looking for a parking space. It is simple supply and demand, they say.


Wednesday, November 4, 2015

Why do grads of liberal arts colleges earn less?


WSJ reports what those who have read chapter 9 knew all along:
Administrators at some liberal arts colleges say the disparity can be explained in part by the fact their students are following passions that may not yield high earnings, not because the graduates lack job options. They also caution that median earnings figures are skewed in favor of colleges that offer degrees in higher-paying fields such as engineering, business and health care.

Tuesday, November 3, 2015

Google Expands its Platform Strategy

Google is partnering with General Assembly to offer a boot camp for mobile developers using the Android operating system (reported by Bloomburg and NPR).
According to a report General Assembly released in September, the demand for mobile developers of all types has increased more than 150 percent in the past five years. 
The No. 1 thing they [Android developers] hear from their developer network is, I need more developers!

The Android operating system is core to Google's larger strategy. Helping to train developers to write apps for it will increase the supply of complements to the entire platform. In the longer term, this effort is likely to make the platform that much more valuable.

Monday, November 2, 2015

What happens when Wal-Mart opens a Supercenter?



 Stossel's conclusions are supported by Academic Research:  when Wal Mart opens a supercenter (grocery store), they offer "many identical food items at an average price about 15%-25% lower than traditional supermarkets." This raises welfare for consumers by about 20% of their food expenditures.   In addition to the direct effects of another option for consumers, there is the indirect benefit of increased competition on rival prices, an additional 5%.  And these effects are much bigger for poorer consumers.

Thursday, October 29, 2015

Federal health insurance death spiral?

An insurance "death spiral" is driven by adverse selection:  if sicker people are more likely to sign up for the insurance, then rates must increase to compensate the insurers for the higher expected costs.  The higher rates mean that only even-sicker customer will find the rates attractive, so rates must rise again; and the spiral continues.

It looks as if the death spiral has started in Mississippi:

Mississippi will be ground zero for ObamaCare's individual mandate to buy coverage or pay a tax penalty. The state already is near the bottom when it comes to the percentage of the subsidy-eligible individuals who are enrolled via HealthCare.gov — just 38%. 
Now Mississippi's subsidized premiums are about to jump far more than any of the 36 other states using HealthCare.gov. For 30-year-olds in Yazoo City earning about $25,000 (214% of the poverty level), the after-subsidy cost of the cheapest bronze plan will spike by $554, or 60%, in 2016. That will hike the cost of this $6,800-deductible plan — the cheapest way to avoid paying a $695 mandate tax — to just under $1,500.
HT: MarginalRevolution

Wednesday, October 28, 2015

REPOST: Why are Turkey prices 9% lower at Thanksgiving?

Why are Turkey prices 9% lower at Thanksgiving?

The NY Times explains the debate among economists who worry about such things:

The most intuitive and popular explanation for a high-demand price dip is that retailers are selling “loss leaders.” Stores advertise very low prices — sometimes even lower than they paid their wholesalers — for big-ticket, attention-grabbing products in order to get people in the door, in the hope that they buy lots of other stuff. You might get your turkey for a song, but then you also buy potatoes, cranberries and pies at the same supermarket — all at regular (or higher) markups. Likewise, Macy’s offers a big discount on select TVs on Friday, which will ideally entice shoppers to come in and buy clothes, gifts and other Christmas knickknacks on that frenzy-fueled trip.

When you price complementary products (chapter 12) it makes sense to reduce the price.  An alternate explanation is from the demand side:

Consumers might get more price-sensitive during periods of peak demand and do more comparison-shopping, so stores have to drop their prices if they want to capture sales. Perhaps, during the holidays, the composition of consumers changes; maybe only rich people or people who really love turkey buy it in July, but just about everybody — including lower-income, price sensitive shoppers — buys it in November. Or maybe everyone becomes more price-sensitive in November because they’re cooking for a lot of other people, not just their nuclear families. 
“People are a little less picky about what they’re buying for other people,” explains Judith Chevalier, an economics professor at the Yale School of Management. “Let’s say I prefer Coke over Pepsi. If I’m buying for myself, I’ll probably buy Coke even if it’s more expensive. But if I’m buying soda for a party, I have no reason to think everyone else also prefers Coke, so I’ll go with whichever brand is cheaper.”

If turkey demand becomes more price elastic around Thanksgiving then we know that it makes sense to reduce price (Chapter 6).  A related explanation is that prices dont change, but rather the more price sensitive consumers substitute toward the cheaper brands. 
 One paper looking at canned-tuna prices argued that this kind of brand substitution was the primary case for an overall decline in price during Lent. It turns out that the cheapest tuna brands aren’t significantly discounted during Lent, but because the cheap brands temporarily accounted for a much higher share of overall sales, they dragged down the average price of a can of tuna.

HT:  Sam

REPOST: Walmart vs. Amazon: Profit vs. Growth

Walmart vs. Amazon: Profit vs. Growth

Optimal pricing in a simple one product, one firm, one price world involves a simple tradeoff: higher prices mean more profit on each good sold, but fewer goods sold. The MR=MC calculus can be expressed in terms of margins an elasticity as:

 (P-MC)/P=1/|elasticity|

Simply put it says that the optimal margin should equal the inverse demand elasticity.  So for example, if you demand elasticity is -2, then your optimal margin is 50%.

Retail outlets usually have much lower margins:  Amazon's margin is 4% and Walmart's margin is 8%.  (For comparison, a traditional grocery store or gasoline vendor has 10% margins).  The Financial Times wonders whether Walmart's move into online makes sense:


Initially the Walmart offer will only be available in a few US markets, but if it goes national, Amazon’s US retail margins, already under 4 per cent, could come under pressure. Amazon and its investors seem perfectly comfortable with low returns, though. 

A trickier question is how much pain Walmart is willing to tolerate. Its US margins are 8 per cent and it mints cash. Competing properly online may well mean sacrificing some of that. Capital investment, as a proportion of sales, at Amazon is more than double Walmart’s. It is traditional to fault Amazon for sacrificing profit to growth. Perhaps Walmart should take some heat for sacrificing growth for profit.

In other words, Walmart is following the traditional MR=MC profit maximizing strategy, while Amazon is producing where MR<MC (it is selling too much), and is thus sacrificing some profit for bigger output (and hopefully future profit).  

Tuesday, October 27, 2015

Only Schmucks shop at Best Buy stores

It looks as if Best Buy has been discriminating against its in-store customers, by showing them a fake intranet with prices higher than its real internet store.
Company spokesman Justin Barber, who in early February denied the existence of the internal website that could be accessed only by employees, says his company is “cooperating fully” with the state attorney general’s investigation. Barber insists that the company never intended to mislead customers. 
State Attorney General Richard Blumenthal ordered the investigation into Best Buy’s practices on Feb. 9 after my column disclosed the website and showed how employees at two Connecticut stores used it to deny customers a $150 discount on a computer advertised on BestBuy.com. 
Blumenthal said Wednesday that Best Buy has also confirmed to his office the existence of the intranet site, but has so far failed to give clear answers about its purpose and use. “Their responses seem to raise as many questions as they answer,” Blumenthal said in a telephone interview. “Their answers are less than crystal clear.”

This kind of indirect price discrimination (higher prices at the store, lower prices online) is typically legal, deceiving consumers about its existence likely runs afoul of the Consumer Protection Laws, at least in Conneticut, which has a very aggressive Attorney General.

Remember, consumers don't like learning that they are "schmucks."

HT:  Ben

Tuesday, October 20, 2015

How did property rights save China, the Pilgrims, and Vietnam?

Good short video on the incentive aligning effects of private property at our friends at MarginalRevolution University

Why does Deloitte pay its women managers more than men?


Bloomberg has an article documenting a gender pay gap for MBA's, that shows up only after several years in the work force:
One explanation for the gender gap may be that women are less likely to be bosses. Women in our survey say they’re responsible for a median of three employees; men manage five. Twenty seven percent of women say they had no direct or indirect reports, vs. 20 percent of men.

Deloitte appears to be an outlier:
A company that bucks the trend is Deloitte, which is known for going to extra lengths to keep mothers in the workforce. For the 33 female MBAs at Deloitte who responded to our survey, the typical salary was $169,000—$4,000 more than the 65 men at the firm.

My question is whether the $4000 is a compensating differential, the compensation paid to women to keep them at Deloitte?

Monday, October 19, 2015

The Koreas at night

This is a nice "natural experiment," that shows the effects of a market economy (south) vs. central planning (north).

For more on what makes countries rich and poor, see Marginal Revolution University's lecture on Basic Facts about Growth and Development

Tuesday, October 13, 2015

Misusing words

Students of this blog know about how much I hate Bureaucratese.  Student will be happy to know that I found a new pet peeve:  incorrectly used words.  I think my favorite is "impact."

Impact and affect (and effect)

Many people (including, until recently, me) use impact when they should use affect.Impact doesn't mean to influence; impact means to strike, collide, or pack firmly.
Affect means to influence: "Impatient investors affected our rollout date."
And to make it more confusing, effect means to accomplish something: "The board effected a sweeping policy change."
How you correctly use effect or affect can be tricky. For example, a board can affect changes by influencing them and can effect changes by directly implementing them. Bottom line, use effect if you're making it happen, and affect if you're having an impact on something that someone else is trying to make happen.
As for nouns, effect is almost always correct: "Employee morale has had a negative effect on productivity." Affect refers to an emotional state, so unless you're a psychologist, you probably have little reason to use it.
So stop saying you'll "impact sales" or "impact the bottom line." Use affect.
(And feel free to remind me when I screw that up, because I feel sure I'll backslide.)

HT:  Kimberly