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.