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.


                                              Football             Ballet
                              Football   (1,4)                  (0,0)
                                  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:
  • 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:

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.