Price Discrimination by USPS Deemed Illegal

A US Court of Appeals has ruled that the US Postal Service may not price discriminate in the handling of DVDs in the mail. Since the regular automated sorting process would damage DVDs, they must be hand sorted. This usually incurs an additional fee but the USPS exempted Netflix. A competitor, Gamefly, sued because it was not getting the same treatment. So why would the USPS want to treat these two companies differently?

Presumably the post office came to this conclusion after considering the costs and the volume that Netflix delivers, Peter S. Vogel, partner with Gardere Wynne Sewell, told the E-Commerce Times.

So it may not be price discrimination at all.

When are You Liable for Damages from a Competing Product?

The NY Times reports that a man has sued for damages he claims were caused from an adverse event from taking a generic drug. Among the defendants is the brand name maker of the drug even though he never took the brand name drug maker's product. How can that be right?

The way that FDA market approval works for generic drug entry for the last three decades is that generic makers need only show that their product is bioequivalent to the original product. In that way, the generic product is essentially marketed under the originator's product label already approved by the FDA. So, the generic company is only making the claim that its product has the same risks as the originator product. Under the theory of the case, if the originator company's label did not sufficiently warn against an adverse effect, it is the originator's fault for mislabeling and not the generic's. (Any defects in manufacturing would remain the generic's fault.) This would make the originator firm responsible for making changes in labeling stemming from new information about a product for the product's entire life. Since the originator company is most likely to become aware of any newly discovered risks, this could be efficient.

However, it is possible that the source of the adverse effects is not clear. It may be due to the active ingredient not mixing well with the body chemistry for a certain sub-population of potential users. Or, it could stem from a particular handling of inactive ingredients that do not affect bioequivalence tests. If the latter, this ruling would allow generic makers to shirk on production because the liability would fall elsewhere. This will change behaviors.

“It has national implications,” said Bill Curtis, a Dallas lawyer who has filed hundreds of similar cases in several states. “I suspect that now, like most folks, if a client comes into my office, I’d be suing both the generic they took and the brand who’s responsible for the label.”

A likely result is more such cases due to branded companies having much deeper pockets than generic companies.

Hat tip: James Joaquim de Almeida Otterson

Fighting Alcoholism with Double Markups

Ben Franklin said "Beer is proof that God loves us and wants us to be happy" (or maybe not). But we also know that there are dire consequences from imbibing too much. According to Tim Hefernan's article in Washington Monthly, these consequences are in evident in much of Europe.

England has a drinking problem. Since 1990, teenage alcohol consumption has doubled. Since World War II, alcohol intake for the population as a whole has doubled, with a third of that increase occurring since just 1995. The United Kingdom has very high rates of binge and heavy drinking, with the average Brit consuming the equivalent of nearly ten liters of pure ethanol per year.

To an economist, an obvious way to discourage over-indulgence (or any indulgence) is to raise the price. Indeed, he claims these adverse consequences are the result of higher US prices. Hefernan argues that legal restrictions preventing vertical integration to eliminate double markups make the US supply chain inefficient and, thus, raise prices. But even this might be changing.

And so, for eighty years, the kind of vertical integration seen in pre-Prohibition America has not existed in the U.S. But now, that’s beginning to change. The careful balance that has governed liquor laws in the U.S. since the repeal of Prohibition is under assault in ways few Americans are remotely aware of.

I wonder if this change could be used to determine what the cost, in terms of lost consumer surplus, is per case of alcoholism avoided.

Yield Managment in Baseball Stadiums

It used to be that baseball ticket prices for the season were set before Spring training. Thanks to economist Barry Kahn, the San Francisco Giants price baseball seats dynamically depending on that game's, and that seat's particular demand. His software prices the seats much like airlines price their seats and with impressive results.

The Giants say the technology could add $5 million-plus in revenue this year. Revenues are up 12% this season and attendance has jumped 7% (true, the team is playing well), even as the league has seen a slight decline. Kahn is "changing the ticket world," says Russ Stanley, the Giants' ticketing chief. 

Hat tip: Olga Isengildina

Ticket-line Photos as an Anti-Resell Device

Disneyland sells daily passes for but also bundles visits for multiple days into their multi-day pass. Their current prices display a classic bundling strategy:

Park Hopper Ticket Prices

	1 day	2 day	3 day	4 day	5 day
Price
Age 3-9	$119	$158	$205	$225	$240
Age 10+	$125	$188	$220	$245	$260
Implicit Price per Day
Age 3-9	$119.00	$79.00	$68.33	$56.25	$48.00
Age 10+	$125.00	$94.00	$73.33	$61.25	$52.00

Suppose you and four other friends each want to go to the park for only one day. You could share the five day pass for less than half the price of five one day passes. This point has not been lost on ticket brokers who have used this arbitrage opportunity to undermine the whole pricing structure. To counter this, Disneyland is now photographing multi-day pass holders each day to verify that the 'non-transferability' clause on the ticket sale was not violated.

Airline Price Coordination

It seems that the first proposed fare increase of 2013 will fail. United Airlines instituted modest increases and Delta Airlines came on board. American Airlines was still deciding when Southwest Airlines indicated it would not. So, the fare hikes were rescinded.

What do we infer from this episode? On the face of it it, this looks like an attempt at a collusive price increase. Firms will not openly discuss fare increases for fear of violating antitrust laws. This sort of tentative fare hikes that become more established only if they are met by competitors is very like the form of 'tacit collusion' one might expect. But it is also the case that having systematically higher fares than your competitor, even by a few dollars, will decrease ticket sales dramatically. I would suspect that a firm level elasticity of -10 for this kind of decision would not be too high. In this case, one would also expect prices across firms to move together.

Happy New Year: resolutions, debt, politics

When we don’t care enough about the future, we eat too much, exercise too little, borrow too heavily, smoke, and forget to floss.  Although these behaviors seem to make us happy, most of us realize that when the future finally gets here, we will be dealing with some serious remorse.   

To prevent such inter-temporal disappointment, we find ways to let our future selves take control of our current behavior.  For me, it is writing down what I hope to accomplish during the day on a note card.  For some reason, my future self is awake at the beginning of the day, and the note card is a way of telling my day self to stay on task. For others, it is cutting up credit cards, drinking Prosecco (only 9% alcohol), marrying your personal trainer, or letting a “friend” coach your fantasy football team.  All of these devices let our future selves take control of our current behavior, to do things that would otherwise be left undone.

Similarly, a year ago, our then-future politicians designed the fiscal cliff to stop their day selves from piling up debt.[1] However, on January 1, when the future became the present, President Obama and Congress duped their future selves. If our politicians don’t find a way to hold their day selves accountable, the markets eventually will, and remorse won’t begin to describe the future[2] we are passing on to our kids.   The debt ceiling is another device to let their future selves take control.  But based on what just happened, my expectations are low.

Happy New Year.

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[1] “The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money.” ― Alexis de Tocqueville.

[2] If you add our current debt (about 100% of our income) to our unfunded liabilities (about 400% of our income, depending on assumptions), you see how deep we are in it.  Countries are thought to be in serious trouble when their debt reaches 100% of income. 

How do you catch price fixers?

The Economist has a piece on using data to uncover cartels.

In a 2006 paper Ms Abrantes-Metz, Luke Froeb of Vanderbilt University, John Geweke of the University of Iowa and Christopher Taylor of the Federal Trade Commission used the price of fish sold to American military bases in the late 1980s to backtest the theory. A cartel had stitched up the market for cod, flounder, haddock and perch. When the cartel reigned, the prices of perch were oddly stable. But when providers began to compete, prices dropped by 16% and also became choppier, reflecting fluctuations in wholesale fish prices (see right-hand chart). A new paper on a generic-medicines cartel in Mexico found something similar.

The magazine actually got the numbers wrong:   after the cartel collapsed, price went down by 23%, but the coefficient of variation (the standard deviation divided by the mean) went up by 263%.

This lead the authors to try to identify conspiracies by low variation.  They didn't find any.

Here is a link to the paper. 

Rental Car Formats

Avis is buying Zipcar. Where will the value be created? Avis is a traditional rental car company catering mostly to business travelers. Zipcar specializes in hourly rentals in dense cities for car-less residential customers to get errands done. Avis Chief Executive Ron Nelson claims three possible sources of synergies.

Avis expects the deal to lower the companies' combined costs by $50 million to $70 million a year. Mr. Nelson said the synergies were tied to three components: lower fleet costs, better fleet utilization and increased revenue by targeting corporate clients, one-way rentals and airport bookings.

In particular, there could be a cost complementarity as Avis's traditional business customers tend to rent during the week while Zipcar's tend to rent during weekends. A merger could decrease both units' idle time of their the chief asset, cars.

Bundling, Moral Hazard and Holdup

American Airlines offers a lifetime of first class travel for a large up-front fee. Those who purchase appear to have dramatically increased the amount they travel. Did AA really not anticipate this?

The AAirpass system had rules. A special "revenue integrity unit" was assigned to find out whether any of these rules had been broken, and whether the passes that were now such a drag on profits could be revoked.

Paraphrase, Now that you have sunk funds into the pass, we want to limit what the pass entitles you to.

Hat tip: Jeff Smith