FB/Insta/WhatsApp

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.

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

RIP: Walter Williams

His iconoclastic consequentialism will be missed. RIP Walter.

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 States		United Kingdom		Germany		France		Canada
	USD	USD	GBP	USD	EUR	USD	EUR	USD	CAD	USD
Item price	$194.61	$194.61	£105.00	$150.10	€230.34	$256.30	€227.10	$252.70	C$259.95	$188.33
Shipping per item	Free	Free	£2.99	$4.27	Free	Free	€1.90	$2.11	C$1.99	$1.44
Sub-total	$194.61	$194.61	£107.99	$154.37	€230.34	$256.30	€229.00	$254.81	C$261.94	$189.77
Cost per shipment	Free	Free	£3.99	$5.70	€14.00	$15.58	€9.00	$10.01	C$7.99	$5.79
Total	$194.61	$194.61	£111.98	$160.08	€244.34	$271.88	€238.00	$264.83	C$269.93	$195.56
	Buy at Amazon.com		Buy at Amazon.co.uk		Buy at Amazon.de		Buy at Amazon.fr		Buy at Amazon.ca

Price discrimination

Economists take care to differentiate between direct price discrimination (where you set different prices to different groups by identifying members of each group and charging them different prices) and indirect price discrimination (where you offer products or packages tailored to each group at different prices and have buyers self-select).

Admittedly, I'm not sure which one this is.

Hospital Cost Containment Gone Awry

Or installment #753 on unintended consequences. In a new paper in the Journal of Political Economy, Diane Alexander studies how physicians responded to a new bonus program for reducing total hospital costs. From her abstract:

Doctors respond to the bonuses by becoming more likely to admit patients whose treatment can generate high bonuses and sorting healthier patients into participating hospitals. Conditional on patient health, however, doctors do not reduce costs or change procedure use. These results highlight the ability of doctors to game incentive schemes and the risks of basing nationwide health care reforms on pilot programs.

Designing an appropriate incentive scheme is difficult.

Removing a noisy signal improves decision making: Army removes photos from promotion sheets

 From The Army Times:

The Army will no longer include official photos for officer selection boards, beginning in August, to help eliminate unconscious biases in the promotion process...

To their credit, the Army first ran an experiment to determine the consequence of the change and found that when the photo was removed:

...there was less variance between voters’ scoring, meaning voters ranked candidates more similarly across the board. After removing the photo, voters also took less time to make decisions on each individual file, and the outcomes for minorities and women improved.

A similar change, Ban the Box, a ban on employers asking about criminal background, saw some employers turn to race as a proxy for criminal background.  The difference seems to be in the value of the signal:  removing a noisy signal results in better decisions; but removing a valuable one does not.  

One student uses questions about criminal background to screen for honesty, which results in better hiring decisions at his firm.  Unsurprisingly, honesty seems like a valuable signal.  

HT:  Evan W.

Did Warren Buffett finally read Chapter 9?

He is applying the "indifference principle" to criticize high tax states with unfunded pensions.  From Zero Hedge:

“If I were relocating into some state that had a huge unfunded pension liability, I’m walking into liabilities. . . And those are big numbers. Really big numbers. . . They will come after corporations. They will come after individuals. . . They’re going to have to raise a lot of money.”

BOTTOM LINE:  A mobile asset, like labor, will move to where it can earn the most.  Consequently, young, wealthy, and productive people will be drawn to states like Tennessee, Texas and Florida (which have low income taxes and relatively healthy pensions).  

I am sending the Pope a copy of my textbook

From the Pope's Encyclical "Fratelli Tutti" ("Brothers All"):

The Pope also makes no secret of his opposition to the global capitalist free market economy. He proposes instead that wealthy countries form a seamless bond with the have-not peoples of the global south. ... The problem with redistribution, of course, is, as Margaret Thatcher famously said, "Soon you run out of other people's money." After everyone has been made equally medium-poor, then where, without incentives for hard work and production, are further disbursements supposed to come from?  

Hopefully, the Pope will at least read Chapters 1 and 2 as he makes the implicit assumption that no one will respond to the perverse incentives he proposes, but I am not hopeful.  When I sent a free copy of the 3rd Edition to President Maduro (I even signed it), his country went into freefall (past posts about Venezuela).