Advice for selling on eBay motors: use lots of photos

A new economics paper has found that prices for cars sold on eBay motors rises the more photos you post on the site (about $80 extra for each photo).

Remember that adverse selection is caused by the fact that sellers have more information about the quality of the car than do buyers (economists call this "information asymmetry"). If buyers offer a high price, then they get a mixture of high and low quality vehicles, and pay more--on average--than the vehicle is worth. So buyers offer only low prices, correctly anticipating that only low quality vehicles will be offered for sale.

So how does a seller with a high value car convince a buyer that it is of high quality. The authors suggest that offering photos is akin to a guarantee of quality:

By disclosing their private information on the auction Web page in text and photos, the seller offers a contract to potential buyers to deliver the item described in the listing. If the disclosures define sufficiently detailed and enforceable contracts, the initial information asymmetry should play no role in determining the performance of the market.

I received this from a former student who verified that this theory, at least, works in practice:

My most recent eBay vehicle sale was a 102,000 mile seven year old truck, tons of bidding and sold for $11,000 sight unseen to a buyer in New York.

Text of the eBay listing is included links to all of the photos you see here:

Photos of EVERY body panel, EVERY interior angle, EVERY tire, EVERY engine bay angle, etc. Buyer was DELIGHTED upon receipt and couldn't believe I'd sent it to him with a full tank of gas.

What are the markets saying about Greece?

Economists love to personify markets, as if they "speak" through the prices they generate.  In this case, they seem to be saying that the resucue package will not much affect the probability of a default.  You see this in the high "compensating differentials" or "risk premia" that must be paid to investors for accepting the risk of default if they lend money to Greece, which is about 15%.  From Calculated Risk:

How to protect intellectual property without patents

Interesting review of a book arguing that we don't need patents and copyright anymore. Instead R&D managers obtain competitive advantage from their discoveries by using

1. lead time (suggesting a first-mover advantage),
2. secrecy,
3. complementary manufacturing capabilities
4. complementary sales and service efforts.

Averaged over all industries, patents and other legal mechanisms are near the bottom of the list of ways to protect intellectual property.

How to Fight Cognitive Bias

Kahneman, Lavollo, and Sibony discuss how executives can detect biases when reviewing recommendations from others - from the June McKinsey Quarterly:

Executives can’t do much about their own biases, as we shall see. But given the proper tools, they can recognize and neutralize those of their teams. Over time, by using these tools, they will build decision processes that reduce the effect of biases in their organizations. And in doing so, they’ll help upgrade the quality of decisions their organizations make.

Ironically, the first step in checking for detecting biases, many of them caused by deviations from the rational actor model,

1. Check for Self-interested Biases: Is there any reason to suspect the team making the recommendation of errors motivated by self-interest?

...is to use the rational actor paradigm to detect self interested or opportunistic behavior.

Psychological pricing in action

Shalimar (Indian restaurant) in Nashville (try the Tikka Masala) gives you a discount if you pay cash instead of charging a premium if you pay with a credit card.  This is consistent with the predictions of "loss aversion," a part of Prospect Theory that says people will go to greater lengths to avoid losses, than they will to realize gains.  So even though the two pricing schemes--cash discount vs. a credit card premium--are identical, the former "frames" the pricing policy as a gain, which brings in more business.    

Museum Bundling

Stockholm's Moderna Museet (modern art museum) and the Arkitekturmuseet (architecture museum) share a building and, therefore, share a pricing plan. The first cost 100 krona and the second cost 60 krona, but the combination cost 140 krona.



















I suspect most modern art fans are less enthusiastic about architecture and most architecture aficionados are less interested in modern art. For both groups, the profit-maximizing price for their first choice is greater than the profit-maximizing price for their second choice (adjusting for the apparent preference for modern art). That is, you would like to price discriminate between consumers' first choices and their second choices. But people rarely tell you which one they came for. With bundle pricing, they don't have to. So long as you are willing to take the same discount for both (20 krona in this case), they will self-select into the appropriate ticket purchase.

Mathematically, the increased sales from reducing the price on the second ticket has to more than make up for the lower margin. But this would be true since demand is usually more elastic for the second choice.

ATM's, jobs, and Luddites

When President Obama blamed the slow recovery in jobs on the invention of automatic teller machines, it reminded me of Frederick Bastiat's satiric argument that government should forbid the usage of everyone's right hand, because the resulting drop in productivity would mean more work, and more employment.

If that doesn't work, perhaps we should outlaw competition from the sun, to encourage candle makers to hire more employees.

New videos online

CHAPTER 1: Introduction: what this book is about

CHAPTER 2: The one lesson of business

CHAPTER 3: Benefits, costs, and decisions

CHAPTER 4: Extent (how much) decisions

CHAPTER 5: Investment decisions: look ahead and reason back

CHAPTER 6: Simple pricing

CHAPTER 8: Markets and industry-level analysis

CHAPTER 9: Relationships between industries: the forces moving us towards long run equilibrium

Jobs, Capital Intensity, and Education

As the economy becomes more capital intensive, the recovery from recession is much more sluggish. 

As jobs go to the more educated: unemployment rates vary dramatically by education.  

What happens when QE2 ends?

The Financial Times uses a combination of theoretical and empirical arguments to predict (suggest?) that the end of the so called QE2, the increase of supply of long term debt by the Federal Reserve, will result in a decline in asset prices.  One theoretical mechanism that would predict such an effect is that the end of low US interest rates will lead to a stronger dollar which will discourage exports:

The flood of dollar liquidity that has been poured into the market by the Federal Reserve has encouraged the growth of the so-called carry trade, in which currency investors sell the low-yielding US currency to invest in alternatives with higher interest rates such as the Australian dollar.

Many Asian reserve managers feel that the Fed’s quantitative easing policy was a deliberate attempt to engineer the dollar lower, to the benefit of the US economy. Thus, the end of QE2 may prompt a reduction in their diversification away from the dollar.

The empirical story is illustrated by the picture below, and the following discussion:

“Asset price inflation really is a consequence of QE,” says Paul Marson of Lombard Odier, a Swiss private bank. A 90 per cent rebound in the S&P 500, the main US share index, since its low point in March 2009 has coincided with the Fed’s two QE programmes. Commodity prices, as shown by the Reuters Jefferies CRB index, are up 67 per cent over the same period, while the dollar has fallen 17 per cent.