Thursday, December 10, 2020


Dozens of State's AGs and my former employer, the FTC, claim that breaking up Facebook, Instagram and WhatsApp is in the social interest. Common ownership of these multiple social media platforms is said to stifle competition. But are these platforms substitutes or complements?

How do they compete? Users pay nothing; advertisers pay to reach these consumers. The job of these two-sided platforms is to package groups of users to potential advertisers. Who uses the platforms and how they use them differ across users. Advertisers, seeking ever narrower customer niches, benefit from their ability to target the distinctiveness of each platform. A commonly owned FB/Insta/WhatsApp has an incentive to maintain these distinctions. Competing platforms would tend to position themselves to "steal" users from each other by seeking a product position with more in common with rivals (and could fail by doing so). Even for users on all three platforms, their use of one over another for a specific task could indicate to potential advertisers that they are more receptive to the ad message. And consumers benefit both from platform variety and from being better targeted in ads. Of the over 200 social networking services, the ones that seem to succeed do so by differentiating themselves and appealing to niche audiences.

Friday, December 4, 2020

Casinos Profit with Game Theory

Say you are playing in a poker tournament at a casino. The initial buy-in is $65 and gets you 2,500 chips (2.6 cents a chip). You also have the option of buying an additional 500 chips for $5 more (1 cent per chip). None of this additional buy-in money, however, goes into the prize pool - it goes straight to the casino. Do you buy the additional chips? If your opponents are buying the extra chips, you better buy as well to keep up. And, if they are not buying, you should buy to get a chip advantage. So, everybody has an incentive to buy. But, if everyone buys, no one has an advantage. Everyone is worse off from spending the $5. The casino, however, makes a nice profit by placing the players in a Prisoners' Dilemma. Nice. HT: Mind Your Decisions blog

Thursday, December 3, 2020

Tuesday, December 1, 2020

Incentive conflict between McDonalds and its Franchisees

The incentive conflict between franchisees and franchisors is well known.  Franchisors want to protect their brands, and want franchisees to invest in building a better retail experience.  However, because franchisees earn only a fraction of the returns from these brand-building investments, they are reluctant to to make them.

The conflict between McDonalds and its franchisees has come out into the open (2018 WSJ, 2019 Fortune, Twitter feed from a franchisee):
But traffic has waned in recent quarters, leading franchisees to voice concerns that the money they were being asked to invest in their stores for initiatives like remodels, self-serve kiosks, fresh beef, delivery, and all-day breakfast were not paying off.

“McDonald’s can set the direction of the brand, but you need the franchisees to buy into it,” says Senatore. “Franchisee alignment is so important to these systems.”

One way to manage this incentive conflicts is with:
  1. Contracts to reward actions that are easily observable and contractible; and 
  2. Vertical restraints, like exclusive territories, for actions that are not.  

Vertical restraints that restrict intra-brand competition among franchisees (e.g., with exclusive territories) give franchisees a profit stream that they are more eager to protect, i.e., with brand-building investments and higher-quality service.

Note that franchisees on freeways don't have much repeat business, so they can make more money by free riding on the brand reputation (e.g., by shirking on service or quality).  This incentive conflict is so costly to manage that McDonalds finds it easier to own and run their restaurants on the freeway.

HT:  Kaitlyn W.

Uh, Oh, ...

Amazon has made it much easier to defeat international price discrimination schemes, (like the one used by me.)

Managerial Economics (Hardcover)
by Luke M. Froeb,Brian T. McCann,Michael R. Ward,Mike Shor

United StatesUnited KingdomGermanyFranceCanada
Item price$194.61$194.61£105.00$150.10€230.34$256.30€227.10$252.70C$259.95$188.33
Shipping per itemFreeFree£2.99$4.27FreeFree€1.90$2.11C$1.99$1.44
Cost per shipmentFreeFree£3.99$5.70€14.00$15.58€9.00$10.01C$7.99$5.79

Consult an economist before buying a wedding dress

When Stephanie (her name has been changed to avoid embarrassment) went shopping for a wedding and bridesmaid dresses, she found valuable advice from an unusual source, Chapter 23 of her favorite economics text.  And it was not about sleeve options, figure flattery, or bustles.

She was puzzled that over half of the stores that sell wedding dresses do not permit photos, and do not have tags in the dresses that would identify the manufacturer and style type.  

These retail stores want to prevent customers from "free riding" on their fitting and display services:
I just spoke with someone who had all her bridesmaids sized in the store only to go online and buy them from a discount site. I would assume many of the brides are doing this as well.

Note that this is not just a problem for the store, but also a problem for the dress manufacturer: if stores cannot prevent free-riding, they will invest less in point-of-sales fitting services, and dress sales will suffer.  See our earlier post about golf club manufacturer PING, who faced a similar problem,
The discount retailers were advising consumers to visit a full-service retailer to request a custom-fitting session, and then bring the specifications for custom-made clubs back to the discounter. PING could control this kind of opportunistic behavior only by dropping dealers, a very costly option.

PING wanted to set a minimum retail price (called "retail price maintenance") to address the problem.  The minimum price meant that discount retailers could not undercut full service retailers.  The antitrust laws prevented this until the Supreme Court changed the case law.

For the wedding dresses, the no-photos policy created a problem for Stephanie because she wanted to photograph her bridesmaids in each of the dresses to make sure that they choose the best dresses for the wedding. So she chose to purchase from a large retail chain, like J. Crew, BCBG, Ann Taylor, or Nordstrom’s because they had solved the free riding problem, using exclusives, where only one chain carries the style.

For an economic analysis of resale price maintenance, see the amicii brief of 24 antitrust economists (I am one of the 24.)

UPDATE:  Amazon just made free riding a lot easier.