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

Monday, October 12, 2015

Congrats Angus Deaton, Nobel Prize winner

The WSJ has a profile on the latest winner.
“Life is better now than at almost any time in history,” he wrote. “More people are richer and fewer people live in dire poverty. Lives are longer and parents no longer routinely watch a quarter of their children die.” 
Across its 370 pages, Mr. Deaton sought to explain why the world is a better place than it used to be, with substantial increases in wealth, health and longevity, but also why there are vast inequalities between and within nations. 
He concluded that international aid had little to do with that progress, and suggested that free trade and new incentives for drug companies would make a larger contribution in the future.

Saturday, October 10, 2015

A Mechanism to Fight Sexual Assaults

The Callisto sexual assault reporting system is clever use of game theory. Two features of sexual assault reporting is that: 1) they are widely believed to be under-reported because victims fear being caught in a "he-said-she said" case that goes nowhere; 2) but when one victim comes forward, sometimes there are more victims who could come forward too. As Ian Ayres explains in the WaPo, Callisto encourages the latter without exposing victims to the former. It does this by allowing a victim to file contemporaneous accounts into escrow. These accounts will only be unsealed if the accused party is named by another victim. This means that, if accounts in escrow are ever unsealed, the case becomes a "he said; they said," which is often more successful in court.

Hat tip: Joel Waldfogel

Monday, October 5, 2015

Why isn't our richest state saving enough for its state pensions?

Conneticut has a ``huge'' pension problem.  They have only 52% of the assets necessary to pay their discounted future pension liabilities, AND they are discounting future liabilities at an 8% rate.

Remember from earlier posts, a higher discount rate makes future liabilities look smaller, so cities and states save less for their pensions.  If they don't earn, e.g., at least 8%, then they wont have enough to pay the pensions when they finally come due.  This is what happened to Detroit.

What makes Conneticut so interesting is that they are the richest state in the USA and have saved the least, behind only Illinois and Kentucky.  Ordinarily, states which have big unfunded liabilities like this would have trouble borrowing money because investors would demand higher compensation (higher interest rates) for holding bonds with a higher risk of default.  However, because Conneticut has high taxes, and many high-income residents, there is a big demand for state's tax-deductible bonds.  This keeps the cost of borrowing low, and allows state politicians to ignore the pension problem:


“There’s almost limitless money to buy Connecticut bonds,” said Matt Fabian of research firm Municipal Market Analytics. Investors “are getting less of a risk premium than I think you deserve because of the high demand created by the wealth of the taxpayers in the state,” added Paul Mansour, head of municipal research at Hartford, Conn.-based Conning.

Saturday, October 3, 2015

Internal Prediction Markets Work Better than we Thought

New research by Cowgill and Zitzewitz investigates internal prediction markets used by corporations to evaluate new products or procedures. Compared to the more common political prediction markets, these markets have features that would seem to make them perform poorly. They tend to be thinly traded, bidders may have weak incentives, there is limited entry into the set of bidders, and the potential for traders with biases or ulterior motives. Despite that, Cogill and Zitewitz state:
The inefficiencies that do exist generally become smaller over time. More experienced traders and those with higher past performance trade against the identified inefficiencies, suggesting that the markets' efficiency improves because traders gain experience and less skilled traders exit the market.

So, there is learning-by-doing in bidding in prediction markets.

Hat tip: Marginal Revolution