Thursday, February 26, 2015

Dynamic Pricing of Ski Lifts

With the wealth of e-commerce data, ski resorts have begun setting prices based on expected demand. It is hoped that "Dynamic Pricing" can increase visits when the weather is bad and demand is low and increase prices when the snow is good and demand is high.
The rise of e-commerce and more sophisticated data collection have propelled the concept [Dynamic Pricing] into new arenas. National Football League teams began deploying it last year, following those in the National Basketball Association and Major League Baseball. Golf courses use it to price tee times.

What other products might benefit from dynamic pricing? You need a pretty variable demand, some form of capacity constraint, and the ability to forecast expected demand from, say, an e-commerce site.

Saturday, February 21, 2015

Greece swerves

In an earlier post, we modeled the negotiations between Greece and its creditors as a game of chicken:  failure to reach agreement would be catastrophic for both, but agreement would require at least one of the two sides giving up on their stated positions.  

Greece saw that its creditors were committed to going straight, and conceded on all of the important negotiating points:

As OpenEurope explains,What points has Greece capitulated on?

1. Completion of the current review – Greece has basically agreed to conclude the current bailout. This is a clear capitulation for Greek Prime Minister Alexis Tsipras, who said the previous bailout was “dead” and the EU/IMF/ECB Troika is “over”.  
2. Remaining bank recapitalisation funds – Greece wanted this money to be held by the Hellenic Financial Stabilisation Fund (HFSF) ... However, this has been denied and the bonds will return to the EFSF.
3. Role of the IMF – The Eurogroup statement says, “We also agreed that the IMF would continue to play its role”. Again, Greece has given in on this point and the Troika continues to exist and be strongly involved in all but name.  
4. No unilateral action – According to the statement, 
The Greek authorities commit to refrain from any rollback of measures and unilateral changes to the policies and structural reforms that would negatively impact fiscal targets, economic recovery or financial stability, ...
5. Four months rather than six months – Greece requested a six-month extension, but the Eurogroup only agreed to four months. This is a crucial point: ... It is very likely we will be back in a similar situation at the end of June. 

Wednesday, February 18, 2015

Why do long-term hospitals discharge Medicare patients 23 days after surgery?

Because they get paid an extra 79% (as a lump sum) for doing so:

Under Medicare rules, long-term acute-care hospitals like Kindred’s typically receive smaller payments for what is considered a short stay, until a patient hits a threshold. After that threshold, payment jumps to a lump sum meant to cover the full course of long-term treatment. 
Since the marginal revenue for a patient who has reached the threshold length-of-stay falls to zero, most hospitals wait until the threshold has been reached, receive the lump sum, and then discharge the patient.  

The Journal analysis of claims Medicare paid from 2008 through 2013 found long-term hospitals discharged 25% of patients during the three days after crossing thresholds for higher, lump-sum payments. That is five times as many patients as were released the three days before the thresholds.
Kudos to the WSJ for doing some data mining to back up their stories.  

So to all my medical friends and students who still think that economics doesn't explain much about medical care, re-read chapter one, or re-watch the video, to re-familiarize yourself with rational, self-interested behavior.

Friday, February 13, 2015

What happens when you play "chicken" with a game theorist?

Greece's new finance minister is a game theorist, engaged in a game of chicken with the rest of the European Union.  Right now we have two teenage boys driving cars straight at one another, hoping the other swerves.

As anyone who has read Chapter 16 knows, to win the game of chicken, you commit to going straight, and rely on the other party's self interest to make him swerve.  But what happens when each party tries to commit to going straight?

These games typically involve each player trying to influence the final outcome until the very end, when one gives way. 
But game theorists warn that in real life, the end game may be one in which neither side concedes. This could happen if each party has committed so much to its uncompromising position, that it becomes impossible for it to change it.

The non-strategic view of bargaining (the alternatives to agreement determine the terms of agreement) offers further insight:

However, opting for forgiveness risks creating dangerous incentives for other countries to act in the same way as Athens. “Germany may decide that if the eurozone does not punish Greece, it will have problems with other countries such as Spain and Italy,” says Roger Myerson, a Nobel-winning economist at the University of Chicago. 

Mr Varoufakis should therefore try to convince Germany that Athens’ situation is unique and that other eurozone countries will not seek debt relief as a result, he says. In doing so, he would follow the illustrious precedent of the citizens of Melos, to whom Athens, during the Peloponnesian war between Athens and Sparta, gave the choice of surrendering or facing annihilation.

“The Melians sought to argue that they were different and that sparing them would not set a dangerous precedent vis-à-vis other islands,” says Mr Myerson.

The problem with this strategy, however, is that the other player may choose to build a reputation for toughness. This is what Athens opted for — it laid siege to the island and starved the inhabitants into submission.

Will workers "pay" to work for a good cause?

From a field study of Amazon Turk workers, Douglas Frank and Craig Smith find that about half of workers will accept a 12-18% wage discount to perform tasks that benefit a "socially responsible organization." 

These results suggests that "virtue" has its own reward, but the premium seems small.  

Of course, you should know that markets turn self interest into group interest, or that reward has its own virtue.  Read the book.  Or these posts.  Or this one.  

Thursday, February 12, 2015

Why are some countries so poor?

Planet Money is making me re-think my opposition to subsidies for NPR with this episode on Peruvian Economist Hernando de Soto, who discovered that Peru was so poor due to over-regulation--it takes over a year's worth of work just to get the permits to open up a business in Peru--and the lack of respect for private property rights.

Interestingly, they uncover what I consider a scandal at the World Bank who ranks countries on the ease of doing business:  in response to lobbying by labor organizations, the Bank stopped measuring the time it takes to fire a worker as an indicator of the ease of doing business.

As readers of this blog know, if you make it hard to fire a worker, you also make it less likely that they will be hired.  That the World Bank changed an economic indicator suggests that they are willing to trade academic integrity for political support.

Why am I so disappointed when I discover economists behaving exactly in the way our models predict?

Wednesday, February 11, 2015

How many economists does it take to deliver roses on Valentine's Day?

None, the market will do it.

But it takes at least two to explain how it all happens:

From:  the Microeconomics course at

Have you ever wondered how we have access to fresh roses each Valentine's Day in chilly cities where roses couldn't possibly grow?
In a new video (I, Rose) from MRUniversity’s Microeconomics course, we’ll take you around the world for a glimpse at the rose growers and distributors who bring us affordable roses every February.
The second video in this section (A Price is a Signal Wrapped up in an Incentive) shows the invisible hand at work as we discuss how the flower industry responded to the 1970s oil crisis.
We'll also address questions such as:
  • What is the "great economic problem" and which is better at solving it -- central planning or the price system?
  • Is speculation actually useful to the market process?
  • What are prediction markets? Can they be useful in predicting elections? What about predicting the popularity of Hollywood films?

Sunday, February 8, 2015

Why are rents increasing while the number of renters increases?

If price and quantity both increase, it has to be an increase in demand:

But for many, slow income growth and a lack of savings are the main reasons for renting instead of buying, even as mortgage rates remain historically low. Accumulating savings has become even more difficult as rents rise in many cities. Rents outpaced inflation in all of the 11 cities except for Dallas and Houston, where they remained largely flat, according to the NYU-Capital One report. Rents rose the most in Washington, D.C., over the seven-year period, with a 21% increase in the median rent when adjusted for inflation.

Friday, February 6, 2015

Why are Tokyo Apartment prices rising?

The Financial Times has a good article on the effects of Japan's program to print money to buy bonds (increasing the supply of loans), which drives down long term interest rates (the price of a loan).

Lower interest rates increase housing demand, which drives up the price of houses, clearly illustrated in the graph above.  

Lower interest rates also depreciate the yen relative to foreign currencies due to lower demand for yen in the market for foreign exchange (because foreign investors are less likely to want yen to invest in Japanese bonds because of the lower rates).  This makes Tokyo apartments look less expensive to foreign buyers, which also increases demand for housing.  

From a macroeconomics point of view, this is supposed to start a virtuous cycle:  higher prices lead to higher wages which causes consumers to spend more:  because one consumer's spending is another worker's income, the cycle continues  This is the so-called "Keynesian multiplier."

In Tokyo, at least, it is not working because consumers are buying smaller houses, 

Until consumers get more confident, it will be hard to create a cycle of positive inflation, where rising spending provides the fuel for wage increases and thus more spending. The popularity of Abenomics will also remain under threat: smaller apartments are not what the Japanese public expected from an economic stimulus.

Is this really an arbitrage opportunity?

Kansas has an under-funded, defined-benefit pension system that is becoming more and more costly to fund, diverting expenditures from roads, schools, and the like:

Many investors in the municipal-bond market are concerned that retirement costs will eventually cripple states, particularly in Illinois and New Jersey, which also have settled SEC charges related to pension disclosures. State retirement systems have far less funds than they need to meet all their projected payouts, with the Pew study putting the combined shortfall at $915 billion as of 2012.

Instead of trying to reduce its pension obligations, Kansas wants to earn some money by borrowing at 5%, and then investing the money in its pension fund, where it thinks it can earn 8%.  This would represent an arbitrage opportunity, except for the fact the the pension investments are in higher risk securities which naturally earn a risk premium.  This means that the extra return that they generate are compensation for the additional risk that Kansas will incur.
Even under the best circumstances, pension bonds come with the risk that expected spreads won’t materialize. Since Oakland, Calif., sold the first pension-obligation bonds in 1985, cities and states have issued about $105 billion of the debt, the Center for Retirement Research said last year. Those deals have had returns averaging 1.5% annually since 1992, thanks to market gains following the financial crisis, the center said.

We have blogged about under-funded pensions before.  They arise because the median voter, and the politicians they elect, typically do not understand or care about the problem. Refreshingly, Nashville's Mayoral candidate David Fox has raised the issue in his campaign:

...The danger of debt is probably the issue he's most passionate about: He gives the sense that the city's unfunded liabilities and debt really do keep him up at night.  
"What do you think is gonna happen when our national economy, as it will do cyclically — when our national economy goes sideways for several years?" Fox asks. "We're going to see a lot of municipal bankruptcies. Because unfunded liabilities are too big, the balance sheets are way out of whack, you have way too much debt at the municipal level, and a lot of cities are going to go bankrupt. That's not gonna be an accounting adventure, that's gonna have a real bad effect on people who live in these cities."

TRUTH IN BLOGGING DISCLAIMER:  I am leaning towards Fox (and his wife is a former student).