Tuesday, August 15, 2017

Game theory applied to extreme view protests

In light of events in Charlottesville over the weekend, I am reposting from a story in the WSJ. Germans pledged money to an anti-nazi group for every meter that nazis marched. You cannot help but smirk when watching the video.


I suggest that the next time an alt-right, nazi, or KKK rally is planned, a similar campaign is launched. I know many would pledge money for every hour that the speeches are made and their protest lasts if donations went to a suitable organization that peacefully counsels these folks back into the mainstream. Then hand out lozenges so they could continue as long as possible. Have a signboard with a running total so they could see how much they have raised.The media would eat it up.

Monday, August 14, 2017

The Dark Side of Incentive Pay?

The Financial Times recently published a thoughtful commentary by Jonathan Ford arguing that performance pay in the financial sector has been bad for financial market consumers. He extolls the virtues of the post-war, pre-liberalization banking system where a particularly industrious bank manager might get rewarded with a letter of commendation from the bank president. Ford notes that there were flaws.
The system was not perfect: it could entrench snooty managers and make credit hard to come by.

In contrast to these halcyon days, today's financial managers face constant competitive pressure and are constantly rewarded for increasing profits. We hope that profits are generated by delivering ever increasing value to customers. But, especially during the financial crisis, there were many examples of bankers fleecing customers. He notes that the bad acts are a result of bad incentives and suggests a remedy for these bad acts.
But there is of course a simpler way to avoid offering bad incentives. That is simply to pay employees a salary based on what the job is worth.

On net, was the move to market liberalization, and incentive pay as a consequence, worth it?

I will note that, over the past four decades, the financial sector has seen nearly as much innovation as the IT sector. Spreads between interest rates to borrowers and savers and in stock market transactions have shrunk dramatically. More consumers have access to more financial instruments than ever before in part because because more financial instruments are available at cheaper rates than ever before. Ask your grandparents if they diversified their retirement fund into international equity funds when they were your age and you will probably get a blank stare. This innovation is also a result of market liberalization. Would de-liberalization and a reduction in banker incentive pay put also a halt to further financial market innovation?

Thursday, August 10, 2017

Non-Standard Real Estate Commissions

The relationship between home sellers and their realtors represents a classic principal/agent problem. Realtors are engaged in many activities related to selling the property such as photographing it, listing it, coordinating with home buyers' agents, holding open houses, and so on. Since realtors have traditionally earned a 6% commission on sales they have an incentive to engage in these costly activities. But realtors know much more about how the market is likely to shake out than do their clients. All else equal, they would recommend dropping the price so that the house will sell faster and without all that effort since 94% of the lower sales price is born by their clients. What happens when they bear the full 100%? Levitt and Syverson showed that when realtors sell their own homes, on average, they keep them on the market longer and sell them for higher prices.

So maybe a 6% commission is not enough to eliminate shirking. How do you provide stronger incentives without giving away too much? Alina Dizik at the WSJ reports that owners of high priced houses are getting creative.
[Mr. Mahller's] agent would earn a 2% commission, and the buyer's agent would get a 2.5% commission on the home's sale price. The sweetener: Mr. Mahller's agent also pocketed an extra 5% commission on the difference between the asking price of $2.7 million and the final sale price, which was $2.85 million.

Micro econ videos from Marginal Revolution University

Course Outline

2 Supply, Demand, and Equilibrium
3 Elasticity and Its Applications
4 Taxes and Subsidies
5 The Price System
6 Price Ceilings and Price Floors
7 Trade
8 Externalities
9 Costs and Profit Maximization Under Competition
10 Competition and the Invisible Hand
11 Monopoly
12 Price Discrimination
13 Labor Markets
14 Public Goods and the Tragedy of the Commons
15 Asymmetric Information
16 Consumer Choice
17 Exam

Tuesday, August 8, 2017

Why I can't buy a Tesla

Well, besides not being able to afford one.

Because the state of Texas does not allow Tesla to sell me one. Reason TV documents this form of auto dealer protectionism. Tesla has chosen to only sell direct to consumer, or has vertically integrated into retailing. The state of Texas prohibits automobile sales that do not go through a dealer, or they require manufacturers to outsource the retailing function. It is hard to imagine how this regulation benefits consumers. Don't let Bubba tell you that Texas is a bastion of free markets.

Monday, August 7, 2017

Nukes as Sunk Costs

Two South Carolina utilities have plans to abandon two nuclear reactors that are still under construction. The two reactors have cost the utilities roughly $9 billion and are less than 40 percent completed. They were expected to begin generating electricity after 2021 at cost of $25 billion — more than twice the initial $11.5 billion estimate. At the same time, demand growth has not materialized and the costs of alternative energies, such as natural gas and wind, have fallen substantially.

Scana Corporation, the project's owner, said in a statement,“Ceasing work on the project was our least desired option, but this is the right thing to do at this time.” This beats throwing more money at an increasingly unviable project.

Splitting the check? There's an app for that

Do you have to pay for other people's drinks if you didn't order any? Do you chip in for an appetizer you didn't eat? How do you split tax and tip?

So starts the CNN story about splitting the check (without losing friends). The social etiquette of group dinning may be evolving due to  the advent of smartphone payment apps like Venmo and Square Cash that allow funds transfers among friends. Moreover, apps such as Tab or Plates are specifically designed to split the check using these funds transfer apps.

It used to be that when I initiated the invitation, I expected to pick up the tab. Often, there was an expectation of later reciprocal invitations which helped facilitate the development of longer term relationships. Sometimes though, it encouraged free-riding as they ordered from the top-shelf. But if it is easy settle-up after each shared meal, both reciprocation and free-riding are reduced.
Paying only for what you ordered -- particularly down to the cent -- used to feel stingy. But the apps help reduce the pressure to round up or kick in a little extra.

Friday, August 4, 2017

Set prices to reflect costs AND demand

Andy Kessler at the WSJ documents multiple instances of inappropriate use of break-even analysis.
  • The USPS saw the volume of first class mail "fall from 103.7 billion letters in 2001 to 61.2 billion last year." More substitution with email and online bill pay makes demand more elastic implying margins should fall. Instead, the USPS raised prices 50% to make up for the shortfall.
  • ESPN's subscribers have dropped from 100 million in 2011 to 89 million today. To 'make up the difference' it raised prices from $4.69 per sub a month to $7.21 today.
  • Microsoft kept raising the price of its Windows operating system to computer manufacturers at the same time Android based computing came to dominate the market.
  • Booksellers have raised effective prices on digital books "to offset the decline of physical copies."
The article documents many more examples. These examples share some commonalities. Firms had enjoyed substantial market power but now face unexpected competition. Managers feel pressure to meet investor expectations. And then they forget their marginal analysis. The lesson is:
Increasing prices attracts others to attack your market. Amazon's Jeff Bezos warns: "Your margin is my opportunity." 

Thursday, August 3, 2017

Fantasy Football Draft or Auction?

Tristan H. Cockcroft at ESPN has seen the beauty in auctions.With football season just around the corner, many a fan is looking to put together the ultimate fantasy football roster. And the first step is drafting players among your league members. What is wrong with a draft?
I'm tired of the annual charade of one of my longest-standing home leagues, in which the owner who draws the dreaded 10-spot -- it's a 10-team league -- reacts as if it's some sort of death sentence.

He proposes an English auction perhaps, as our favorite textbook shows, because it is essentially equivalent to a second price auction in which the bidding strategy is simple. Simplicity is important when you are bidding on multiple players and not just buying a single item. Still, he provides lots of advice on strategy: don't fall in love with players, avoid bidding wars, don't bid for players you won't use, don't get rattled, etc.

Tuesday, August 1, 2017

Bargaining as a Group

Last month, FTC alumni Dan O’Brien and Jon Leibowitz along with Russell Anello, completed a study extolling the virtues of Healthcare Group Purchasing Organizations (GPOs). GPOs bring together multiple firms to buy of common products jointly rather than separately. Among the ways this lowers costs is by lowering their counter-party's disagreement value.
A healthcare provider’s bargaining strength depends in part on the size of the loss it can impose on a vendor by refusing agreement. If a vendor has little to lose from failing to reach an agreement with the provider, then the provider’s bargaining position is weak, while if the vendor has a lot to lose, then the provider’s position is strong.