Never start a land war in Asia--or a price war!

The Washington Post reports that Fidelity seems to be starting a price war with Vanguard, by offering zero-fee mutual funds:

Fidelity’s zero-fee funds include a Total Market Index Fund, made up of 3,000 U.S. publicly held companies, and an International Index Fund, made up of several thousand companies in overseas markets. 

Ironically, Vanguard and Fidelity have been accused of reducing competition among the firms they both own, like those in the airline industry.  Apparently, however, they haven't figured out how to reduce competition among themselves.  If only they had read Chapter 15.

HT:  Mike V.

How to cut opiod prescriptions

First, make sure that clinicians know about patient overdoses! A randomized controlled trial involved 861 clinicians in San Diego:

About half of them served as the control. The other half received this letter: “This is a courtesy communication to inform you that your patient (Name, Date of Birth) died on (date). Prescription drug overdose was either the primary cause or contributed to the death.” ... The researchers hypothesized that the letter would reduce opioid prescriptions. To test that hypothesis, they compared the number of opioid prescriptions a few months before and a few months after the letter was sent. In the control group, prescriptions stayed pretty steady (actually they increased modestly). In the group of clinicians that received the letter, by contrast, prescriptions decreased significantly. And those clinicians were less likely to start new patients on opioids at all.

Incentives of Ride Sharing Drivers

Back in the old, old days, when you hopped into a cab at the airport and asked to go to your downtown hotel, the cabbie would start out and then usually ask something like, "Have you been to this city before?" If you did not know your way, he might take the long way to increase the miles and the fare. The WSJ is reporting that some ride-sharing drivers are now taking longer routes too. 

Passengers aren't on the hook for the higher fare because they pay a fixed upfront price based on the app's estimate of the ideal route. And while drivers are encouraged to go the most direct route, they can choose to ignore their digital navigators for a route that tacks on extra miles. The drivers' pay is determined by the actual trip's mileage and time, which can vary based on traffic conditions or diversions.

In the taxi example, I quiz students on how taxi companies fixed this 'long-haul' problem. The simple solution was to set the fare to a per mile rate plus a fixed fee. By driving the shortest route, cabbies could save time, pick up more passengers and thus more of these fixed fees. I love that there was a simple contractual change to address the moral hazard problem. In the ride-sharing context, the problem may be too inconsequential to fix.

An Uber spokesman said the company estimates longhauling occurs on less than 1% of trips in the U.S. 

What do physicians have in common with pilots?

They both respond to performance metrics (tests and prescriptions for physicians; fuel consumption for pilots) even without an incentive.  Another randomized controlled trial from Randomistas:

...Working with the pilots' union the researchers reassured pilots that they would not be ranked against each other:  "This is not, in any way, shoape or form, an attempt to set up a 'fuel league table'" the letter told them.  Despite knowing this, pilots who received monthly reports on their fueld efficiency ended up guzzling les gas than pilots who did not receive such reports.  The feedback was purely private, yet it lead pilots to tweak their behavior.  With an experiment that cost less than $1000 in postage, Virgin Airways cut its fuel consumption by about 1 million litres.  

Book recommendation: Randomistas

Fun book about the benefits of randomized controlled trials to evaluate medical treatments, social programs, and business practice.  For example, in 2003, CVS ran a randomized trial, stopping price promotions in 400 randomly selected stores. 

Three months later, the evidence was in.  By axing the promotions, CVS sold fewer products at higher prices [yes, demand curves do slope downwards!].  Across the 400 stores that ran the experiment, profits were up.  Not surprisingly, CVS soon put the change in place across all its 9000 stores.  A simple randomized trial likely increased the organizations annual profit by $50 million.

On Gary Loveman, an economist who left Harvard to run Harrah's, and who comes to Vanderbilt to speak, said three are three cardinal sins at Harrah's:

...you don't harass women, you don't steal and you've got to get a control group.

Article: "How health care killed my father"

Long, but good article from the Atlantic documenting the problems in an industry where consumers purchase care largely using "other peoples' money."

The average insured American and the average uninsured American spend very similar amounts of their own money on health care each year—$654 and $583, respectively. But they spend wildly different amounts of other people’s money—$3,809 and $1,103, respectively.

The author's solution (a Democrat), make consumers spend their own money, e.g., with $50,000 deductibles for insurance:

I believe if the government took on the goal of better supporting consumers—by bringing greater transparency and competition to the health-care industry, and by directly subsidizing those who can’t afford care—we’d find that consumers could buy much more of their care directly than we might initially think, and that over time we’d see better care and better service, at lower cost, as a result.

Trucking demand is procyclical!

Website from a trucking company documents the effects of a pro-cyclical increase in demand for trucking:

Well into the third quarter of 2018, the trucking industry continues to experience the highest demand and yet tightest capacity for freight services in recent memory. Unemployment is low, falling to 3.9 percent in June. The national GDP is growing—4.1 percent in the second quarter. The housing market is booming; the demand for homes—both new and lived-in—far outnumbers the supply, so prices are often too high for buyers, according to NPR.

• large and small trucking companies alike saw both revenue and profits grow
• carriers will likely continue to seek rate increases in order to compete in the tightest driver recruiting market in decades.
• June was the 15th straight month in which prices increased on an annual basis in trucking’s spot market. 
• "We believe that this is the strongest normalized percentage level of truckload pricing achieved since deregulation (normalized meaning except for extreme periods of recovery from recession)."
• Some carriers are using most of these rate increases to pay professional drivers more to attract them to their fleets—and to retain the drivers they already have. 
• By the end of 2018, Klemp predicts pay will have increased 12 to 15 percent, a significant bump but still not enough to make up for the 16 to 19 percent shortfall of driver wages when adjusted for inflation. 

For affordable housing, move away from the coasts

This map plots the ratio of an average house to average income:

And as the Brooking article notes, and as I've noted, the lack of affordability in places like California can often be blamed on state and local government measures designed to limit the construction and diversification of housing. Zoning laws and other regulatory barriers to new housing production have decimated housing affordability of housing in many coastal cities.

Cities like San Francisco and Seattle have essentially become playgrounds for the wealthy in which existing homeowners fight tooth and nail any attempt to allow sizable amounts of new housing construction. They do this, they tell us, to preserve "the character of the neighborhood." But what they're really doing is using government regulations to drive up the prices on their own real estate, while driving lower-income people further and further out into the periphery. Oh sure, these Progressive guardians of the local "quality of life" might allow a handful of subsidized housing units to be built. After all, somebody has to make your cappuccino or do your dry cleaning. But the overall effect is to ensure few people can afford to move in.

The costs of obesity

From NY Times:

This economic burden hits low-income and otherwise disadvantaged populations the hardest, exacerbating income and wealth inequality. With insulin now costing up to $900 a month, a diagnosis of diabetes can mean financial ruin for a low-wage worker, especially if it results in uncompensated sick days or underemployment. And as disposable income declines, so too does the ability to afford a nutritious diet, creating a vicious cycle of poverty and diet-related disease.
...
 The total impact of obesity and its related complications on the United States’ economic output has been estimated at between 4 and 8 percent of gross domestic product. Even on the lower end, that’s comparable to the 2018 defense budget ($643 billion) and Medicare ($588 billion).

REPOST: Kidney Hold-up

Its seems that, back in 2012, a woman was fired by her boss soon after she donated her kidney to her boss ... because she was taking too long recuperating from the donation.

“I feel very betrayed. This has been a very hurtful and horrible experience for me. She just took this gift and put it on the ground and kicked it.’’

It seems she was hired, or rehired, so as to obtain access to her kidney. She had an implicit expectation that she would have continued employment post-donation. But after the operation, the decision was sunk and created a holdup opportunity.

Of course, she sued and apparently she lost. This may not have happened if selling a kidney were legal and she could have contracted for compensation. A market would likely have other benefits as it moves assets (kidneys) from low values uses (essentially "spare parts" in healthy bodies) to higher valued uses (bodies with nonfunctional kidneys).

REPOST: Sales "bunching" and high-powered commissions

Ian Larkin studies the use of "high powered" quarterly sales commissions, used by virtually every firm that sells software. A typical incentive compensation scheme (as a function of sales) is highly convex: a sales person earns 2% if she sells $100,000 worth of software; 5% if $500,000; 8% if $1,000,000, ..., up to 25% if $8,000,000.

Ian finds that these high-powered (convex) compensation schedules give sales people an incentive to "bunch" sales into the same quarter. Just as concave production costs can be reduced by "smoothing", i.e., holding inventories to buffer sales shocks, so too can convex commissions be increased by "bunching" sales into the same quarter, the opposite of "smoothing."

Using proprietary data from a large vendor he finds that 75% of sales are occur on the last day of the quarter; and 5% of sales occur on the first day of the quarter, as sales people give discounts to customers to accelerate or delay purchases. These discounts cost the firm about 7% of revenue, which is about the same amount that it pays out in sales commissions.

The 7% revenue loss suggests that there is a way to make both firm and its salespeople better off: adopt linear commission schemes to eliminate the incentive to "bunch," and split the 7% savings between the firm and its sales people in the form of higher commission rates.

When asked why they use these costly incentive compensation schemes, managers say only that they need them to retain their "superstar" sales people. But surely there is a better way to retain superstars, isn't there? As always, I would like to hear from readers on whether they think this would work.

REPOST: Do environmentalists cause pollution?

Carbon credits, designed as a payment to companies who reduce pollution, instead have the opposite effect. 

So since 2005 the 19 plants receiving the waste gas payments have profited handsomely from an unlikely business: churning out more harmful coolant gas so they can be paid to destroy its waste byproduct. The high output keeps the prices of the coolant gas irresistibly low, discouraging air-conditioning companies from switching to less-damaging alternative gases. That means, critics say, that United Nations subsidies intended to improve the environment are instead creating their own damage.

The problem can easily be understood using marginal analysis: pollution credits increase the marginal benefit of producing the harmful coolant. This increases supply, which reduces the price, which encourages more coolant consumption.

When the developed world (UN & EU) threatened to cut off the pollution credits, China and India threatened to release the gas into the atmosphere.  This is an interesting bargaining ploy that works only if the developed world cares more about the pollution than India and China.   

REPOST: Get rich slowly, the power of patience

Patience makes you rich.  I tell this to my kids, my students, and anyone else who will listen.

The theory is simple.  If you have a low discount rate, it means that the future is almost as valuable as the present.  For example, a "patient" person with a discount rate of 5% is willing to invest $100 if she can earn $105 in one year, a relatively low threshold for investing.  In contrast, an "impatient" person with a discount rate of, e.g., 30% is willing to invest only in much more lucrative investments, i.e., those earning at least 30%. 

The difference between the two is that the patient person will make more investments (those with a return between 5% and 30%) which will make the patient person rich.  Patient people invest more in education, smoke less, exercise, and watch their weight.  These activities all demonstrate a concern with the future, at the expense of the present. 

 Here is some new evidence:

Patience boosts wealth by much more than marriage or religion. Respondents with discount rates more than one standard deviation above the average of the sample had 29% less net wealth, a loss of around $130,000. More impatient people—similarly controlling for religion, income, race, sex, optimism and education—were more likely to smoke, drink excessively, and miss out on their flu shots and medical examinations.

The title of this blog post is stolen from colleague Bill Spitz's terrific book

Larry on Healthcare/incentives/Amazon

Colleague Larry Van Horn is a gem!  When you listen to his interview, pay attention to the economic principles: how bigger deductibles, which make consumers spend their own money on health care, change incentives and firm strategy.

Can inequality cure poverty?

Former student Quinn Connolly's book review of Steven Pinker does not put it that way, but:

According to Pinker, this “confusion of inequality with poverty comes straight out of the lump-sum fallacy—the mindset in which wealth is a finite resource.” Helpfully, Pinker reminds us how the Enlightenment revolutionized our understanding of economics. First, by teaching us that wealth is created; and second, by showing that we can make more of it.

Can Economics teach us how to live?

Former student Quinn Connolly translates Jordan Peterson’s Rules for Life into economics:

•  Signaling, “Stand up straight with your shoulders back.”
•  Moral hazard. Rule No. 2 is “Treat yourself like someone you are responsible for helping.” 
• Asymmetric information. Rule No. 9 is “Assume that the person you are listening to might know something you don’t.”
• Short-termism. ...shortsighted thinking can be used to justify absolutely anything and therefore “breeds nothing good.”
• Future Value.  “Pursue what is meaningful, not what is expedient.” 

Judge Leon (ATT/Time Warner) Should Have Read Chapter 16

If he had, the U.S. Dept of Justice might not have appealed Judge Leon's decision, arguing that he ignored the economics of bargaining.

The DOJ brief relies almost entirely on economics to make its case that when a vertically integrated content provider like ATT/Time Warner fails to reach agreement with a rival distributor, like Comcast or Charter, some consumers will shift to ATT's distribution (DirectTV).  This gives a merged Time Warner a better alternative which will allow it to capture a bigger share of the proverbial profit pie.

The ideas of Chapter 16,

The alternatives to agreement determine the terms of agreement

is reflected in the appellate brief:

It is fundamental to the economics of bargaining that a party derives leverage from having the ability to walk away, even if it never actually does so. If Time Warner truly could not walk away and the MVPDs knew that, it would have no leverage at all. 

All of this matters, because economics is what gives coherence to antitrust enforcement:

“To abandon economic theory is to abandon the possibility of a rational antitrust law.” Robert H. Bork, The Antitrust Paradox 117 (1978). That is what the district court has done, and why its ruling constitutes error. 

Optimal Stopping: How long should you search for a mate?

Computer scientists say that 25% of your time should be spent searching before you make an offer (propose) if you have a 50% chance of being rejected, then make an offer to the next person who exceeds the maximum of the first 25%.

Screening out ethical partners

In China, business people cannot rely on traditional mechanisms, like the rule of law, to facilitate wealth-creating transactions:

In a society where trust of strangers is minimal, contract law is fragile, contracts themselves regarded more as guidelines than binding commitments, and the civil courts largely swayed by personal influence rather than legal right, the shared fraternity of the night out is one route to trust between partners. It may not, as businessmen admit, be a particularly effective or reliable way, but it’s all they’ve got to work with.

So business people share alcohol, drugs, or prostitutes as a way of screening out partners who may not be trustworthy.  If the acts are illegal, it may give businesses "mutual hostages" to ensure cooperation; if not, it may screen out partners with "moral qualms about future dealings."

...It tells both sides that they’re playing by the same rules. ... Refusing to play the game, on the other hand, comes at a sharp cost. Businessmen who convert to evangelical Christianity and make a commitment to avoid vice or bribery describe sharp business losses as a result, as former partners turn away from them, fearful of their newfound probity.

The alternatives to agreement determine the terms of agreement

Rhode Island is using this principle to reduce its pension obligations:

Rhode Island officials then took the rare step of passing legislation that put bondholders ahead of other creditors and pensioners in the event of a municipal bankruptcy. Since cities and pensioners were bargaining in the shadow of bankruptcy law (if the parties did not reach agreement, a bankruptcy court would decide who gets what) the alternatives for pensioners deteriorated.

In Central Falls, Rhode Island, this shifted the bargaining advantage to the city and away from the workers, who had to get in line behind the bondholders:

After the 2011 bankruptcy, an event that received national attention amid predictions of widespread municipal failures, retirees agreed to 55% cuts because they feared facing even deeper cuts later. ... The concessions helped Central Falls emerge from bankruptcy in 2012 and create a “rainy day fund” that now holds $2 million.

Network effects work in reverse as well

Investors are worried about the future of Facebook and Twitter:

...No product is more reliant on network effects than social media...

Think of a product that doesn’t have much in the way of network effects — say, a 2018 Nissan Rogue. Now, maybe you’d like it if a bunch of other people bought the same car, because it would be easier to find after-market parts, and you could give each other knowing waves as you drive past yet another “Roguey” on the highway. But if no one else buys the car, you’re still going to be able to make your morning commute just fine.

Compare that with how you’d feel if your friends started leaving Facebook. Probably you’d check the site less often, giving the company less opportunity to sell ads against your news feed. And maybe eventually you’d decide to delete your own account.

Blockchain prediction markets

Prediction markets decentralized to avoid regulation.

NGDP #1 Will the growth rate of U.S. nominal GDP (NGDP) from Q1 2018 to Q1 2019 be above 4.5%?  

Augur predicts: 60% 

Will Democratic Socialists give us "a humane social order?"

A news story about Democratic socialism rising in the age of Trump, most notably 29 year old Alexandra Ocasio-Cortez:

the group’s constitution describes its members as socialists who “reject an economic order based on private profit” and “share a vision of a humane social order based on popular control of resources and production, economic planning..."

OK, they obviously ignored all of lessons of Chapter Two, showing the incentive aligning effects of private property and profit, and how incentives lead to inequality because they reward productivity.  

What happens when you pay excavators by the ton?

The Army Corps of Engineers found out when the paid contractors to tear down homes burned by the 2017 fires.  Not only were the sites four times as costly to excavate, as contractors over-excavated each home, removing concrete pads, and foundations that could have been re-used.  So now the Governor of California launched a program to refill the holes left by the contractors. 

HT: Marginal Revolution

Adverse selection vs. Moral Hazard

President Trump has overhauled private health insurance, allowing businesses to offer cheaper plans that do not have as many benefits.  The Republicans applaud the change because they think it will lead to more coverage, and address the issue of moral hazard; Democrats criticize it because they think it will lead to adverse selection, raising costs for less healthy people who need more coverage. 

Proponents of the new rule argue that AHPs will provide lower cost coverage for an estimated 4 million small business workers over the next 5 years including approximately 400,000 individuals who currently do not have coverage. Critics counter that without regulations requiring the inclusion of essential health benefits, such as maternity care, mental health, or prescription drugs, new AHPs will exclude important benefits and ultimately create significant and costly gaps in health coverage. They further argue that young, healthy individuals will flee the individual market for lower-cost AHPs, thereby leaving the sickest in the individual and small-group market to further drive up premiums.

Can Blockchain Tech. Resolve this Principal-Agent Conflict?

PROBLEM FACED BY ADVERTISERS:  how to figure out whether their ads are viewed by real people, not computer-generated bots, and how much of their spending is siphoned off by middlemen.

SOLUTION PROVIDED BY BLOCKCHAIN:  Marketers sometimes can manually audit digital ad campaigns, but proponents of blockchain say the technology offers a faster, more reliable way to track spending and reconcile discrepancies with suppliers...  The technology can also help track whether ads are running on websites with real traffic and on portions of them visible to ordinary users. That type of campaign information can be included in stored “blocks” along with pricing information.

SOURCE:  Article from WSJ

Netflix vs. HBO: a tale of two strategies

From the Atlantic:

HBO’s current profit model is simple but effective. People pay a fee (something like $15 a month) to subscribe; HBO uses that money to license movies and produce TV for subscribers to watch. Because of the company’s longtime reputation for high-quality, Emmy-winning shows like Game of Thrones and Big Little Lies, plenty of people subscribe, and HBO makes a lot of money. 

Netflix’s business approach, again, is about scale and is underwritten by investors. The company has focused on getting more worldwide users and hiking its subscription fee to increase revenues. But producing more original shows means Netflix burns through more money—a March 2017 report found Netflix had a negative free cash flow of $2.1 billion. A few months later, the company said in a letter to shareholders that it would remain in the negative for years, but that the investment would crucially help the company spread across the globe.

Now that HBO has been acquired by ATT, it is being pushed to mimic the Netflix strategy:

In this age, as Stankey made clear, “hours of engagement” are what matter most. Executives have long factored viewing data extracted from subscribers into their programming decisions, but online services can mine our viewing preferences much more minutely. The more data, the easier it is to understand what people want—at least that’s been Netflix’s guiding principle as it makes hits like House of Cards and Stranger Things, which are calibrated to play on audience nostalgia. But the idea that numbers alone will drive good or popular art is ludicrous; Netflix has made plenty of shows that haven’t hit the mark with audiences, like any other network.

Bubble-ology: "A Crisis of Beliefs"

Beliefs caused the credit bubble and subsequent bust (slides on the 2008 Financial Crisis)

1. Excess optimism, excess lending and investment 
2. Correction of expectations (due to bad news or waning of optimism) 
3. Recession (impaired intermediation or excess pessimism) 

==>Crises are due to non-rational beliefs, which may be amplified by traditional mechanisms.

"Change is inevitable, if you try to stop it, you will kill the economy"

Nice articulation of the gains from trade. 

Prevalence bias

Here is the essence of the experiments that document it:

…When blue dots became rare, purple dots began to look blue; when threatening faces became rare, neutral faces began to appear threatening; and when unethical research proposals became rare, ambiguous research proposals began to seem unethical. This happened even when the change in the prevalence of instances was abrupt, even when participants were explicitly told that the prevalence of instances would change, and even when participants were instructed and paid to ignore these changes.

Here is a public policy implication:

… When strong sexism declines, for example, … what was once not considered sexism at all (e.g. “men and women have different preferences which might explain job choice“) now becomes violently sexist. 

I am thinking about how this kind of bias might appear in a business setting.   For example, as particular kinds of accidents become less prevalent (rarer), if consumers overestimate the probability of these accidents, then consumers will be willing to pay much more than the cost of the insurance [probability of an accident times the cost of an accident].

Greg Mankiw on the Poverty Trap

Mankiw's graph shows that as you earn more income (plotted on the horizontal axis), the amount of money you receive (income - taxes + subsidies) is does not increase, at least for lower-income earners.  Until your earned income hits about $40,000, the extra money you receive from earning more is near zero.

Longer Trains

The WSJ reports that freight trains keep getting longer.

The freight train is now on track to stretch up to 3 miles long, with 200 cars or more.

CSX Corp., for instance, in April said its average train length rose 5% in the first quarter from a year earlier, a signal to investors and analysts that the railroad is gaining efficiency.

The relative sizes of fixed costs and marginal costs seem to be behind this. Long trains mean fewer, more efficient trains which save on fuel and crews. This also means fewer but longer delays at crossings, perhaps better for residents to plan around but worse unplanned trips by, say, emergency vehicles.

There are challenges:

Operating trains that are double the length of standard size trains involves mastering the distribution of weight and pulling force. The longest, heaviest trains may have four locomotives in front, two in the middle and two at the end.

Online Sales Tax and Vertical Integration

Last week, the US Supreme Court reversed earlier decisions on the collection of sales tax by online retailers. Previously, states could not tax a company that had no physical presence in the state. Now, states can collect sales tax on retail items sent to residents of the state.

Large online retailers had a presence in almost all states and so collected state sales taxes from all customers. Mom & Pop venders may have sold across state lines but usually only collected from local residents. Mid-sized online retailers, however, had to weigh the option of expanding into a state with the 6-8% higher costs that their customers would have to pay. Avoiding those costs, likely affected some facilities purchase decisions. Now that this  tax can no longer be avoided, I expect more of the mid-sized firms to vertically integrate into states where they had been hiring third-party vendors.

What is the elasticity of demand for Whole Foods?

After Amazon bought Whole Foods, there was increase in foot traffic (a proxy for sales):

Whole Foods’ foot traffic has increased roughly 3% year over year in each of the quarters since Amazon bought the chain, ...  That came after two straight years of stagnating sales at the chain before the deal. 

Presumably caused by a decrease in price:

Amazon.com Inc. AMZN -0.61% on Monday put itself in the unusual position of being a first-mover on price cuts when it slashed the sticker price on more than 100 items at Whole Foods Market Inc.,many by more than 30%. 

To calculate the implied price elasticity of demand for Whole Foods, divide the quantity increase by the price decrease:

 elasticity = (%change in Q)/(%change in P)=(+3%)/(-30%) = -0.1

Demand seems very inelastic.  If Amazon were trying to maximize profit on its Whole Food sales, it should have raised price, because revenue would have gone up, and quantity, and costs would have gone down.  In fact, the stock price reactions seem to underscore the unprofitability of the move:

Investor concern that Amazon’s price cuts at Whole Foods will trigger a price war led to a stock selloff among traditional grocers Monday, continuing last week’s slide. Sprouts Farmers Market Inc.’s stock tumbled 10%, while Natural Grocers by Vitamin Cottage Inc. was down by more than 2%. Kroger, the largest U.S. grocery chain by stores and revenue, slipped 1.4% before largely recovering, while Wal-Mart Stores Inc.’s shares slid slightly.

What seems more plausible is that Amazon is applying its traditional pricing algorithms to the acquired Whole Foods stores.

Amazon typically relies on algorithms that scrape competitors’ prices before automatically matching or narrowly undercutting them on its website. It focuses on items that are most popular on the site and that drive traffic, according to former executives in Amazon’s retail divisions. That gives the retail giant a reputation for having the lowest prices, part of its strategy of driving more shopper traffic.

Shirking Level 100

CompetitionToolBox.com

New web apps designed to teach oligopoly models to lay people.  Just as a child can learn to throw without knowing Newton's Laws of motion, so too can an attorney learn how the models work by using them. 

MoviePass, Bundling and Adverse Selection

The Wall Street Journal reports that MoviePass is offering subscribers the opportunity to see an unlimited number of first-run movies in theaters. Since the marginal cost of another patron is about zero, this sort of bundling can really increase value to consumers. If implemented appropriately, MoviePass could extract some of this additional value. But there may have been a couple problems with the implementation.

First, the monthly subscription is just $9.95 per month. Since the average movie price is just shy of this amount, a customer who sees two or more movies per month comes out ahead. MoviePass reimburses theaters at face value, meaning that they lose money if customers view more than one movie per month. The plan was to generate additional revenue through targeted advertisements, but this does not appear to have filled the gap.

Second, the type of customer who would take advantage of this deal is likely to be an enthusiast who views well over one movie per month. That is, adverse selection may be severe. One investor quipped:

"I'm saving $70 a month going to the movies and losing thousands investing in the company that's letting me do that," lamented Mr. D'Ariano.

The end result is that the parent company has lost a lot of market value, "... MoviePass lost $98.3 million on $48.6 million of revenue in the quarter ended March 31 ..." Ouch!

The hidden benefits and costs of Corporate Social Responsibility

Another fabulous pointer from MarginalRevolution:

John List started his own firm and ran randomized control trials in different cities (varying the wage and the CSR or the "corporate social responsibility" mission of the firm). He found that it was easier to attract workers to the CSR mission (adverse selection):

...the C.S.R. job attracts about 33 percent more in application rates, so ... “Rather than paying someone $15 instead of $11, I can just say I’m a C.S.R. firm and pay them $11 and I’m going to get the same ... volume of recruits.”

And that these workers were 25% more productive on average.  However, they were also less ethical, 24% more of these workers were found to be cheating on the tasks that they were being paid to do (moral hazard).  Apparently, having a CSR mission gives the workers a moral "license" to behave less ethically.  

Markets for blood

From MarginalRevolution:

It’s a very odd “ethical policy” that leads Canadian provinces to ban paying Canadians for plasma but then import paid plasma from the United States. I am one of the signatories (along with Al Roth, Vernon Smith and Gerald Dworkin among others) of a letter that argues for the efficiency and ethics of allowing compensation for blood plasma donation. 

Squeezing Scalpers is Backward Integration

The WSJ reports that scalpers are less important to Taylor Swift's current "Reputation" tour. About 3% of the tickets find their way to stubhub versus the usual 30%-50%. Previously, scalpers would purchase tickets to performances by high demand artists and resale these tickets at a markup. In essence, the promoter "outsourced" the task of price discrimination to scalpers. Scalpers were able to capture a margin but bore the risk of unsold seats. Since there is virtually free entry into scalping, I suspect they earn very small economic profits. Promoters would be happy with this if scalpers were better at price discrimination and so were able to pay higher prices up front.

"The primary market has been ceding pricing control to secondary markets," said David Goldberg, a former senior Ticketmaster executive.

But CRM technology has come to concert promotion. Taylor Swift's promoters now have the edge in ferreting out which fans are less price elastic.

For the current Taylor Swift tour, would-be concertgoers were encouraged to register for Ticketmaster's Verified Fan program months before tickets went on sale. They could boost their standing in the ticket queue by watching music videos and purchasing the "Reputation" album or merchandise. Users then received codes that allowed them the chance to purchase discounted tickets over a six-day presale period.

By exploiting this information, they can publicize discounts to hardcore fans while raising overall prices.

The best seats--some with added VIP perks--cost $800 to $1,500 at face value for a given show, with those immediately behind them at $250 each. Spots in the back of the house go for about $50. Regular tickets for Ms. Swift's tour three years ago cost about $40 to $225, according to Pollstar data

Dress it up as cutting out the middleman but this tour "has already grossed 15% more." This is because her organization is now even better at price discrimination than these middlemen had been.

Jobs Elasticity

Seattle recently voted to institute a "head" tax estimated to average $540 per year per employee. Amazon cited this as a reason to halt construction on an office building in Downtown Seattle estimated to bring an additional 7,000 jobs. Or the demand for labor is downward sloping.

But is this just posturing or might Amazon actually scrap the project? A friend did some calculations. Amazon has about 45,000 employees in Seattle. Amazon paid $250 million in state and local taxes in 2017. The tax would add about $24 million in new taxes in Seattle, So 7,000/52,000 = 0.132 and $45m / $250m = 0.18 making the elasticity 0.134/0.18 or 0.74. This estimate seems to me to be within the realm of possibility. The threat appears to be more than mere "cheap talk."

Hat tip: John McMillan

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Dog invents currency, convinces humans to accept it

The problem with fiat currency, backed by nothing but the faith that it is valuable, is that the monetary authority will print more of it.  This leads to an erosion of faith which shows up as inflation.   The dog pictured above has invented his own currency.

Early on in Negro's tenure at the school, he came to be aware of the little store on campus where students gather to buy things on their breaks; sometimes they'd buy him cookies sold there. 

This, evidently, is where the dog first learned about commerce — and decided to try it out himself. 

"He would go to the store and watch the children give money and receive something in exchange," teacher Angela Garcia Bernal told The Dodo. "Then one day, spontaneous, he appeared with a leaf in his mouth, wagging his tail and letting it be known that he wanted a cookie."

The dog has apparently have found a way to credibly commit to not printing money to finance deficit spending. Venezuela could learn something from him.

Adverse Selection in Marriage Markets

Someone is having some fun over at "Mail Order Husbands" which appears to be a spoof on the notion of mail order brides. Perhaps adverse selection is a bit more severe among men. Ladies, here are just three of the gentlemen to select from. The others are hilarious too.

Gain an Ally in Your Negotiations

A strike hurts management because the firm does not earn revenue. But it also hurts customers, which could hurt with public relations. If you simply don't collect fares, you hurt management and get the public on your side. This could increase your bargaining position. This strategy could be adopted more broadly.

Kidney Holdup

Its seems that, back in 2012, a woman was fired by her boss soon after she donated her kidney to her boss ... because she was taking too long recuperating from the donation.

“I feel very betrayed. This has been a very hurtful and horrible experience for me. She just took this gift and put it on the ground and kicked it.’’

It seems she was hired, or rehired, so as to obtain access to her kidney. She had an implicit expectation that she would have continued employment post-donation. But after the operation, the decision was sunk and created a holdup opportunity.

Of course, she sued and apparently she lost. This may not have happened if selling a kidney were legal and she could have contracted for compensation. A market would likely have other benefits as it moves assets (kidneys) from low values uses (essentially "spare parts" in healthy bodies) to higher valued uses (bodies with nonfunctional kidneys).

How "localized" is hospital competition?

So-called "gravity choice models" estimate demand using revealed preference.  For example, a vacationer who passes a nearby polluted lake to travel a more distant one tells us that she values the pollution reduction associated with the more distant lake by more the increased “travel time” that she “pays” for it.  Similarly, a consumer who passes a lower-quality grocery store to visit a more distant one tells us that he values the higher quality shopping experience by more the increased travel time that he pays for it.  In both of these applications, the opportunity cost of travel is estimated or assumed to be about $25/hour, close to the median wage.

For health care gravity choice models, however, consumers behave as if their travel costs are much, much higher.  For example, a typical patient will not travel five minutes for elective surgery at a more distant hospital with much lower mortality risk.  The implied opportunity cost of travel is several orders of magnitude higher than in these other contexts, e.g., as much as $100/minute.  This means that competition is extremely localized, or that a merger between two nearby hospitals, located even a small distance away from a non-merging rival, can have enormous effects. 

However, the real reason for the observed reluctance to travel may not be the patient's aversion to travel, but rather the preferences of the patient's physician.

DeveshRaval and Ted Rosenbaum at the FTC show this by estimating travel costs by comparing the change in hospital choice between the first and second births for women who move and switch hospitals.  If the travel costs are all that is determining hospital choice then the woman should switch to a nearby hospital for her second child's birth.  But the data show that the woman is often likely to go to hospitals that are not as close at second birth.  The authors conclude that there must be that something other than distance, like physician preference, determining her choices.  

Their corrected estimates of travel cost imply that demand falls by 5.4% for an extra minute of travel, about half of what it would be without the correction.  

Bottom line:  hospital competition is localized, but about 50% less localized than it would appear from looking at simple choice models.