Sunday, October 29, 2017

Houston Texans succeed by ignoring sunk costs

Although every econ student, and most MBA's, learn to ignore sunk costs, this learning seems not to have reached the NFL:
The propensity to stick with a quarterback too long isn’t just an anecdotal phenomenon favored by frustrated fans sick of losing with the same players. It has backing in research and hinges on the basic economic concept of sunk costs—the idea that money spent can’t be recovered. Typically, the more teams invest in a player, the more they’ll let him play.

Except for the Houston Texans, who have replaced their starter with Deshaun Watson, and now have one of the league's best offenses:
How the Texans reached this position—with an eagerness to look for a better option at quarterback at any given moment—sounds obvious. But it’s borderline radical in a league where coaches and executives attach themselves to their most prized investments with feverish devotion.

Some of the reluctance to ignore sunk costs is that management has to admit that they made an earlier mistake.

Friday, October 27, 2017

The Market for Disaster Recovery

According to this report, the cleanup from Hurricane Harvey in the Houston area may take longer than expected. Cities contract with various companies to remove debris that residents have piled up on curbsides on a price per cubic yard. These companies then contract with truckers with specialized equipment to do the actual work.
SIEGEL: After Hurricane Irma. That is Dee Sosa. He's the city manager of Groves. And here's what he told me. He says his city contracted with the DRC and agreed to pay a little under $10 per cubic yard of debris. DRC agreed to send an array of equipment. And in fact, the company sent some 10 or more of those big trucks.
SOSA: They're double trucks with a grapple in the middle. And there's about 300 of them in existence.

But then Hurricane Irma hit Florida. Demand for these trucks rose. The Florida cities were paying more per cubic yard. Owners of these big trucks  moved them to Florida.
SOSA: The best analogy I can make is like this. Let's say that you want me to Sheetrock your house, and I am the general contractor. And I hire the Sheetrock people, and I have them working for me all the time. But it's an arrangement whereby, hey, I find you work; you come in and work. I get a cut, and you get a cut.
All of a sudden, they have way more jobs available than there are Sheetrock people, and these guys can make more money someplace else. Well, I go back to you and say, hey, do you want to raise your price and try to match this so we can keep these guys here? 

This a variant of hold-up.

Wednesday, October 25, 2017

Should all movies have the same price?

Should a hotel charge the same price for its smallest room as the penthouse? Should a Mercedes Cabriolet cost the same as a Toyota Corolla? Of course not, but yet movie theaters in the United States charge the same price whether you're going to see the latest Oscar winner or the Emoji Movie.

But now, Regal Cinemas "plans to test demand-based pricing" by allowing prices to reflect consumer sentiment toward each specific film. Directors who see the ticket prices of their films in the discount bin might not appreciate the new pricing paradigm.

Saturday, October 21, 2017

How does Google Ad Words' auction ads?

Watch the video about how Google uses a second price auction to auction ad clicks--so the auction can be run asynchronously and automatically--using quality weighted bids. 

Friday, October 20, 2017

Cutting the Cord - Again

The WSJ is reporting that AT&T is losing traditional cable TV customers.
AT&T said in a securities filing late Wednesday that its video-subscriber base declined by about 90,000 customers in the third quarter as customers abandoned its fiber-optic-video and satellite-TV services. The decline, its third quarterly drop in a row, came despite nearly 300,000 new accounts on its DirecTV Now service, which streams channels over the internet.

Other cable TV providers are also losing their higher-margin subscribers to cheaper Internet streaming services. Streaming services continue to create content bundles similar to the traditional CATV bundles that appeal to consumers.

Moreover, this increased downstream competition is forcing content providers to negotiate lower prices to content distributors.
Shares of media companies also fell. AMC Networks Inc. lost 6.8%, Viacom Inc. declined 2.5% and Walt Disney Co. slid 1.6% on Thursday after Guggenheim Securities analyst Michael Morris downgraded the stocks. "We expect pressure on subscriber trends and audience size to continue for the foreseeable future" across the entire sector, he wrote.

For those of us old enough, this has a familiar ring to it. One of the FCC's policy goals in the 1990s was to increase competition for the local telephone telephone monopolies. However, it was difficult to get anyone to invest in stringing new wires to each household. A few foresaw that the growth mobile phone industry would lead to 'cord cutting' by millions in the US (and provide service to billions worldwide).

Tuesday, October 17, 2017

G-Eazy on opportunity cost

There is naturally a close affinity between economists and rappers, which is why it should be no surprise that G-Eazy's chart topping debut album, These Things Happen, includes his powerhouse economics-lecture-disguised-as-rap, Opportunity Cost.
Everything costs something bro
Winning somewhere, somewhere else you just lost something though
The cost of opportunities is always good to know
But if you know that then you're good to go

I could not have put it better myself.

You may watch the video but be warned that the G-Eazy also explores his feelings on non-economic issues with language some may find objectionable.

Gaming the ACA health exchanges

A recent headline proclaims that "Pennsylvania ObamaCare to see premiums spike amid Trump pay cuts." While premiums are in fact going up nationally (and are certainly exacerbated by the recent end to certain subsidies), the important part of the story is five paragraphs down.
While the increase is steep, in Pennsylvania it will only apply to the mid-level “silver” health plans that consumers can buy on the exchange.

Plans come in three tiers, bronze, silver, and gold. Government subsidies for purchasers are based on a state's price for the silver plans. The idea was that subsidies will reflect the "average" prices of a plan. It didn't take long, though, for state regulators and insurers to realize how to game this system, raising the price of silver plans to increase the subsidies that people can then use on bronze or gold plans.
If the price of a silver plan increases, tax credits that help customers purchase insurance will also increase, so the cost of the most comprehensive “gold” plan may be much cheaper than in previous years.

Friday, October 13, 2017

Perverse incentives in soccer

Presumably, the primary goal of any sport governing body is to provide adequate incentive for competitors to do battle on the field (court, pitch, etc.), each striving for victory. Things don't always turn out that way. 

My all time favorite example of the strangest (incentive-driven) spectacle in sport is from the 1994 Shell Caribbean Cup involving a match between Barbados and Grenada. 
A very poorly-conceived (though well-intentioned) tournament rule stipulated that any goals scored in overtime (and, by virtue of a sudden-death rule, there could only be one) would count double, as if the team scored two goals. The idea was to reward teams in close matches. This simple rule led to a very strange match.
Barbados needed to win the match by two goals to advance in the tournament. If they failed, either losing the match or winning by only one goal, their opponent Grenada would advance instead. With less than ten minutes left in the match, Barbados led by exactly two goals and began to play very defensively. In the 83rd minute, Grenada finally scored, making the score 2-1. Barbados tried to answer but, with only three minutes remaining, was unable to score. Members of the Barbados team contemplated their options. To advance, they needed either to score one more goal in the last three minutes (winning by two), or force the game to extra time where a goal would count as if they won by two. Barbados scored on their own net, tying the game at 2-2.
This is not yet the odd part of the match. The Grenada players, initial shock abating, developed their own strategy. If they could score on Barbados in the waning minutes, they would win the match and advance. But, if they could score a goal on themselves, they would lose by one goal which was still enough to advance. 
For two minutes, Grenada tried to score on either goal, with Barbados players split between defending their own goal and that of their opponents!
Normal time ended in a tie and the game did go to overtime, in which Barbados scored a game winner and advanced (though was eliminated from the tournament in the next round). No penalties for the players' actions in this game were handed down by soccer's governing body since both teams were earnestly trying to win their group, and the farce was the result of silly incentives.

Thursday, October 12, 2017

Pricing Political Risk - Catalunya

The recent referendum on Catalan independence injected some uncertainty into the Spanish bond market. Investors required a premium to own these bonds because they did not know how if the government was going to be able to pay them off. But prices have fallen since the vote, suggesting that investors think much of the uncertainty has been resolved.

Tuesday, October 10, 2017

Keeping Assets in Low Valued Uses - Jones Act Edition

If you wanted to truck oranges from Miami to New Orleans, it doesn't matter where the truck was made. If you wanted to fly them, it doesn't matter where the plane was made. But if you put them on a boat, the Jones Act says the ship must be American made or be subject to tariffs and fees. How much of a difference does this make?

Enough so that the administration temporarily waived the act so as to get shipments to Puerto Rico after hurricane Maria. Evidently, they believed this measure was restricting the free flow of emergency provisions. But, alas, the waiver will not be renewed. Some clever economist should measure how much this waiver lowered costs (and maybe saved lives). If so, we might have the ammunition needed to repeal this blatant protectionism.

Monday, October 9, 2017

Repost: Bargaining exam question

Bargaining exam question

Suppose that a grocery store knows that 50% of its customers are Coke Loyalists (they consume only Coke); 25% are Pepsi Loyalists (they consume only Pepsi); and 25% are Switchers (they will consume either Coke or Pepsi).  If the Grocery store did not carry Pepsi, they would earn $15 million on Coke sales (before payment to Coke);  and if the store did not carry Coke, it would earn $10 million on Pepsi sales (before payment to Pepsi).  Currently the store carries both Coke and Pepsi, and earns 20 million on total soft drink sales (before payment to Coke and Pepsi).
  1. How is the $20 million profit split between Coke, Pepsi, and the Grocery store?
  2. How would the profit be split if Coke and Pepsi merged and bargained jointly?
HINT:  the alternatives to agreement determine the terms of agreement.

NOTE:  Professors, e mail me for the answer.

REFERENCE:  Werden, Gregory and Luke FroebUnilateral Competitive Effects of Horizontal Mergers II: Auctions and Bargaining, Issues in Competition Law and Policy, W. Dale Collins (ed.), ABA Section of Antitrust Law, 2008, vol. 2, 1343. Available at SSRN:

Saturday, October 7, 2017

Friday, October 6, 2017

Rivals Horizontally - Cozy Vertically

With the latest releases of the Apple X and the Samsung Galaxy 8, we expected pretty intense rivalry. Maybe not so much seeing how Samsung is one of the major suppliers of components for the Apple X. The WSJ reports that Samsung "stands to make $110 from for each top-of-the-line, $1,000 iPhone X that Apple sells." For example, Samsung "is the only significant manufacturer of the organic light-emitting diode, or OLED, displays Apple has adopted to create the iPhone X screen." Furthermore,
An analysis conducted by Counterpoint Technology Market Research for The Wall Street Journal finds Samsung is likely to earn roughly $4 billion more in revenue from iPhone X parts than from components made for the Galaxy S8 in the 20 months after the new iPhones go on sale Nov. 3.

This suggests to me that Samsung's real comparative advantage is in the cutting edge technologies embedded in these components. Like most electronics, I suspect there are substantial scale economies  (and perhaps learning curve effects) in the production of these components. It can lower its unit costs be producing ever more units. It has vertically integrated into assembling them into phones so as to move down this cost curve. It hardly cares whether these components are in its own phones or are sold to downstream rivals to be included in the rival's phones.