Poking around

Today's FT Magazine has an interesting article by Tim Harford of the world of competitive poker. Game theorists since von Neumann have been interested in the game and with $250m supposedly bet each year more are trying to use game theory and computer science to profit from poker. Of course, the one thing we know is that this is a zero-sum game, so there will be losers. The effort is in trying not to be one.

Kauffman Foundation: Entrepreneurship Research Portal

The Kauffman Foundation who a few years ago awarded my co-author, Scott Stern, a medal for for excellence in entrepreneurship research, have established a research portal. You can access it here. Lots of good material for those interested in all aspects of entrepreneurship.

Postal insurance

[From Marginal Revolution] Today there is a store the the US Post Office is considering launching a stamp which can use to post a letter at any time in the future. This will hold even if, as is inevitable, stamp prices should rise. What this means is that you could confidently buy the stamps and not have to worry about having to put annoying little adjustments on when the price rises. There would be no reason not to stock up now. Moreover, the stamp would be priced at the same price as current first-class stamps.

How will this change the USPO's pricing behaviour? Before, when they put up postage prices, there would be an 'inframarginal effect' that spread over all postal customers: that is, the price of postage would rise to existing users and so most of them would end up paying more. Now, when the USPO puts up postage prices, there will be a large number of customers who are unaffected. This reduces the profits the USPO will make from putting up prices as they still suffer all of the costs of this as marginal customers turn away. So postage prices will rise more slowly than they have in the past.

Of course, this assumes that the type of customer who buys the fixed price stamp in bulk has the same willingness to pay for stamps as those who do not. This may not be the case. The fixed-price stamp offers two things: (i) more convenience for those who buy stamps in bulk for convenience; and (ii) insurance against future prices rises; also more valued by bulk purchasers. However, those bulk purchasers have alot of mail to send and likely are thinking more about that then 'emergency' letters that have high value but are not sent very often. In this case, the future marginal consumer will have a higher willingness to pay for stamps as compared to today. So things could flip and the USPO may be tempted to increase future stamp prices more rapidly.

While fun to theorise about, I suspect that with the post office under attack from electronic substitutes these days, they are constrained as it is and will want to think of products that simply make life more convenient. That is, they want to give people less reason rather than more to go to the post office.

The Romer Model

Paul Krugman recently reviewed a new book by David Warsh, Knowledge and the Wealth of Nations. [Here is a link to some extracts from the review].

One bit got my interest ...

Maybe that slight sloppiness reflects Warsh's relative lack of interest in applications of increasing returns other than the one he believes to be most crucial: as an explanation of economic growth. He portrays a famous 1990 paper about increasing returns and growth by Paul Romer of Stanford University as a
sort of pivot around which the whole way economists see the world changed.

Now "Romer 1990" is a terrific paper — I wish I had written it, which is the highest praise one economist can give to another. Yet I don't think it can bear the weight Warsh places on it. Nor is it clear that increasing returns really did transform our understanding of economic growth. In fact, Warsh seems to concede as much. "So there is a new economics of knowledge. What has changed as a result? The answer, it seems to me, is not much."

I think Paul Krugman is living in a different academic world from mine. For me, the Romer model was a watershed. Let's first go to the statistics on influence -- not just academic but wider. If we look at scholar.google.com you will find that the Romer's 1990 Journal of Political Economy paper receives 3122 citations. This paper was a follow-up to his 1986 paper that resolved a number of technical issues (with 3621 citations). These would place it at the top of influencial papers in economics in the last 20 years. By contrast, Paul Krugman's most cited 'increasing returns' work (his 1991 book Geography and Trade) received 2312 citations. Still alot but it was a book not a single paper.

What the Romer model did was identify the main issue for public policy with respect to economic growth: that is, that knowledge was a partially-excludable but non-rival good. What this meant is that the market would underprovide this as a matter of course but also provide us with too little innovation in terms of new products. That had been said before. What Romer showed was that this would lead to an additional and on-going distortion to the labour market for knowledge intensive workers. The returns to becoming a scientist or engineer were too low relative to other activities. It is this that would fundamentally limit growth rates both within a country but also across them as skilled workers migrated. This is what general equilibrium modelling was all about.

The Romer model was clear, it was precise and it was useable by others -- both theorists and empirical economists alike. And more importantly, its message was never misunderstood.

Games of honesty

A new post on the Freakonomics blog today describes a music artist, Jane Siberry, who sells on-line tracks by means of an honour system. No one has to pay but she posts statistics regarding what proportion of people have paid and what they paid. Suffice it to say, most pay her recommended price despite the ability to simply receive a 'gift.'

Stephen King tried a similar idea in 2000 selling a book on-line in chapter installments. He bypassed traditional book publishers for his novel, The Plant. Instead, he released the book in installments through his web site (www.stephenking.com, of course). The cost of each installment was initially $1 each the first three episodes (1) 5,000 words; (2) 6-7,000 words; (3) 10-12,000 words. Installments 4 through 7 or 8 would be much longer-perhaps as long as 25,000 words-and the download price would go up to $2.50.

The deal was this: so long as 75 percent of people who download an installment pay up (on his site or at Amazon.com) he will publish the next installment. Note that it is downloads only and he is allowing people to distribute a particular download as widely as they wish. If fewer than 75 percent of those who download any installment pay, no further installment will be published

Here is a piece I wrote about that experiment. I speculated that it might have had a better chance of working had it had the transparency of the kind Siberry has used. The pitch was also put a little differently than Siberry. Rather than gifts, King appealed to guilt:

My friends, we have a chance to become Big Publishing’s worst nightmare. Not only are we going glueless, look Ma, no e-Book! No tiresome encryption! Want to print it and show it to a friend? Go ahead! There's only one catch: all this is on the honor system. Has to be. I’m counting on two things. The first is plain old honesty. “Take what you want and pay for it,” as the old saying goes. The second is that you'll like the story enough to want to read more. If you do want more, you have to pay. Remember: Pay and the story rolls. Steal and the story folds. No stealing from the blind newsboy!

Stephen King's experiment failed but that may be partly an issue of scale and partly an issue of poor design. It has been five years now, I wonder if someone will try it again.

A hole in your profits

I have a new post today on Aplia's blog. It is a review of a new paper by Steve Levitt that analyses whether a particular bagel business was maximising profits over the last twenty years. The answer: yes in some respects (quantities) but no in others (prices).

The bagel business was the subject of an earlier analysis of honesty. Here is an article describing that research. Stephen Dubner has provided another example today.

The five stages of traffic

At 5:40am this morning, a truck jacknifed on the Monash freeway outbound, knocked over a light and spilled oil onto all of inbound lanes. [Here is the account].

At 5: 50am I left my house to go inbound on the Monash freeway [yes, I know it is early but I like to do that to (ahem) avoid traffic]. At 5:55am I joined other commuters inbound at a standstill on the Monash where we sat for the next hour and a half before things cleared behind us and we turned around [the wrong way] and got off on the on ramp.

Now you get lots of interesting thoughts with this kind of experience. Here is a selection of mine:

• (Denial) For the first 15 minutes or so of our experience, my fellow commuters and I kept our engines running thinking it was just a matter of time before we got going. This stopped after the first traffic report on the radio telling others to avoid the Monash and perhaps not go into work altogether (!) because it was going to be at least three hours before it was clear.
• (Anger) This turned out to be more like frustration at the irony of my situation. If only I had left later I wouldn't be in this. If only I had brought something to do. If only it was light out so I could read the one magazine (The Economist of course) that I had.
• (Bargaining) This took the form of ringing people around the world that I thought might be up. Lots of voice mail sadly. Fortunately, someone called and that killed about 20 minutes. I saw others pleading with the front of the queue to move. I was eying the wholesale food truck wondering if they had any coffee.
• (Depression) Listening to the radio and realising that in fact while all were inconvenienced, I was part of a small minority who would be stuck here all day. I wish I had bought a TV for the car. VW have a good thing coming putting internet connections into cars. Why did my damn iPod break?
• (Acceptance) Just as I reached this stage, I saw cars behind me turning around. So I don't have much to report there. But I had reached the stage that it could have been worse: I might have had to go to the bathroom, I might have had three kids in the car like that one person on the radio or my congestion tolling plan might have been put into place in which case I would have been paying through the roof for this. [In the end, I hadn't reached the Citylink toll point so it was all 'free'].

[Thanks to Richard Speed for spurring these thoughts].

Finally! Sticky Measuring Tape

I am not in the habit of simply pointing out links but this one for sticky measuring tape is worthy of the widest dissemination.

Do they have one in centimetres?

Wrinkly pricing

Today amazon.com announced that it had switched from Google to Microsoft as the provider of search engine technology for its own A9 search engine. I hadn't thought much about A9 so I thought I'd check it out.

Well I had always known that A9 allowed searches inside books. But this also allows classified searches in many places including reference sources, Wikipedia, blogs and of course the web in general. All that is fine but nothing special.

What was interesting was the deal: sign up to A9 and you receive 1.57% off pretty much everything at amazon.com. The idea for the discount is to get you searching tehre and presumably to sell targetted products. But why the 1.57%?

Well, it turns out that 1.57% is just rounding and what they would like to give you is 1.57142857142857142857 ... % or (22/14)% discounts; that is, pi/2. So amazon.com are saying, "search with us and get just less than pi/2% off all products." Actually, they don't say that you get just less so there curent offer is somewhat misleading. But hey if you trying to get "wrinkly" about pricing then at least you should be mathematically accurate!

All this reminds me of primary school when we had to draw maps of Australia. The teachers were always saying "make the coast wrinkly." The idea is that our maps would be more realistic. In the end, there were alot more bays, harbours, inlets and fjords than really was the case.

Amazon.com are going for "wrinkly" pricing against all convention and all ability for mental computation. But I guess they will end up attracting the seriously price conscious customers that way.

The long blog

I write alot. Really, quite alot. What the means is that quite often I forget that I have written about something in the past and am reminded of it by others.

In addition, like many people, I have lots of usernames and passwords for various sites. I keep mine all nicely encrypted on my computer and occasionally I take a look at what I had registered for.

Today, I noticed that I had two blogger usernames! Yes, I already had a blog; something I had forgotten when I decided to launch this one earlier this year.

That ancient blog -- well before blogging became a big thing -- was called 'GameTheorist.' You can link to it here. It will become clearly apparent why I had forgotten about it: there is only one entry, dated January 2nd, 2003.

In those days, blog entries did not have things as sophisticated as titles (nor were the templates as good) but the lone entry there is about using game theory to toilet train our children. Suffice it to say, I was an advocate!

Interestingly, I was also an optimist. I concluded that by honing in my knowledge of game theory with my new found gift for child psychology we would have our next child toilet trained in no time. I concluded: "Let's see how it goes."

It didn't go so well; a story I will recount in a later entry. For the moment, apart from the last bit I am pretty satisfied with that single entry.

While it didn't take off that time, officially, this makes me one of the longest running bloggers around! Over three years and now counting.

Regardless of politics there will be profits

Regardless of politics the following statement is true: increased demand and reduced supply for oil should mean lower profits for petrol producers.

Jon Stewart got it right when debating the issue with Wall Street Journal correspondent Kimberley Strassel who needs Economics 101 training and focused on how high profits were good for shareholders. [A similar 'debate' played out at NBC's Meet the Press].

Basically, oil is the chief input into producing petrol. Everything points to it being high because there are problems getting supply from Nigeria, Iraq and Iran. Everything points to it being high because China and India are booming. What that means is that the costs of producing petrol have done up.

Regardless of whether petrol production is a monopoly or perfectly competitive or somewhere in between, this should mean lower profits. If it is not, something else is going on and it is not competition.

The Age: Galbraith reflection

Today's print version of The Age contains a very short reflection by myself of John Kenneth Galbraith. The online edition has the full version which itself is an edited version of my earlier post.

The Determined Big Thinker

This has been a bad week for the challengers of 'conventional wisdom.' First, Jane Jacobs and now news that John Kenneth Galbraith has passed away at the age of 97. (The grand obituary was published today by the New York Times).

In many respects, JK Galbraith was the writer who got me into economics when I was in high school in much the same way as demand and supply didn't. He had a turn of phrase that inspired and communicated. His breadth of coverage, captivated all and challenged the way I looked at the world. It taught me to be wary to 'easy routes' and simplistic arguments; a value I carry with me to this day.

It was years later that I learned that far from being the centre of economics, the top of the list for a Nobel prize, Galbraith, while prominent, was not considered at the forefront of economic contributions. What is more, it is precisely those things that made him so appealing to me initially, that also pushed him to the fringe in academic economics.

People often like to talk about the market centric nature of the economics profession and to suggest that Galbraith didn't have a great impact there because he thought more about institutions than markets.

In fact, nothing could be further from the truth. His first major work on American Capitalism pointed out that the US economy didn't really look like a market economy at all with its large corporations and large unions so that a broader approach than market economics was needed to understand it. And by and large economists have heeded that call over the past 50 years.

Similarly, Galbraith's account of the stock market crash of 1929 remains a solidly neoclassical account of a market failure with arguments that still underpin our notions of booms and crashes to day. More importantly, his small but very provocative work, The Nature of Mass Poverty (1979), stands out as an early contribution of formal, equilibrium thinking to a field -- economic development -- that had been devoid of such things prior to that.

It is worth outlining that contribution a little more. In that book, the ideas of which were generated when he was US Ambassador to India, Galbraith argued that mass poverty was a bad equilibrium where surely better ones also existed. He suggested that the reason for this was that those in poorer countries faced an actual lower return to investment (particularly in human capital) than those in richer countries, precisely because the job opportunities for higher skill workers were not available. And why weren't they available? Because firms were not investing to utilise them as there were few high skill workers about.

This looked like bad news for poorer countries -- trapped in a vicious cycle. But it also offered hope. Policy interventions could break the chicken and egg problem that caused all of this and generate rapid growth. And what was number one on the list of such interventions: what we would term today as globalisation. Not just freer trade in goods and capital but most critically people. What better incentive for those in poorer countries to invest in education than the ability to tap into the high returns to education in richer ones. Immigration was the key to ending world poverty, wrote Galbraith. You can't get much more market-oriented than that.

It is Robert Solow, reviewing one of Galbraith's books, that best captured the divide between Galbraith and many other economics. Solow saw economists as "determined little thinkers." They spend time on marginal issues (literally) rather than being able to forecast the impact of radical change. The basic idea is economic theory is well equipped to handle some situations -- the dry stuff that most economists spend their time on -- but not for larger issues. Those require more than just economic theory to be dealt with an economists, Solow argued, do more good by staying away from them. Galbraith did not do this. His purpose was large and all encompassing. Galbraith was a determined big thinker. His books wrote of theories of everything but for that very reason did not yield straightforward solutions. Thus, no consensus could ever emerge around Galbraith. Economists didn't have the tools to work our whether he was right or wrong, even if he was provocative. I'll miss him.


Just a taste ...

"Economics is extremely useful as a form of employment for economists."

"If all else fails, immortality can always be assured by spectacular error."

"You will find that the State is the kind of organization which, though it does big things badly, does small things badly, too."

“Faced with the choice between changing one's mind and proving there is no need to do so, almost everyone gets busy on the proof.”

"The only function of economic forecasting is to make astrology look respectable.”

"Modesty is a vastly overrated virtue."

"Under capitalism, man exploits man. Under communism, it's just the opposite."

"Wealth is not without its advantages, and the case to the contrary, although it has often been made, has never proved widely persuasive."

Cloogle

Over the past week or so, I have been steadily going through the daily challenges on The Da Vinci Code Quest (brought to us by Google). I can recommend it thoroughly. It takes less than a minute but is a nice distraction.

The idea is to solve puzzles, reveal clues and use Google to solve the clues. Suffice it to say, there are alot of clues you can solve this way. This is going to make Dan Brown's next novel quiet a challenge: to find clues that a simple or more complex Google search couldn't solve. If not, there is going to be alot of Robert Langdon googled the two associated words on his mobile phone and headed straight for the Palazzo di Venezia in Rome!

Of course, this suggests an interesting novel twist. Whomever the villan is, such as the modern equivalent of the Knights Templar or CERN, will deliberately manipulate Google's page rank to have the wrong answers come up prominently on Google throwing Langdon off the sent. Now that idea is worth a 4 page chapter in a thriller! [Does anyone know if Dan Brown is reading this? Did I just become a Plot Troll?]

Profile of a troll

The FT (Wednesday, 25th April) had a profile of Nathan Myhrvold, a former Microsoft exec, who set up a company Intellectual Ventures, essentially for patent trolling. Here is one article and one video on what he is doing.

Following up from my earlier post defending patent trolls, there is a sense in which Myhrvold sees himself as providing liquidity in markets for ideas; especially as he employs people to generate patentable ideas.

But he also buying up patents of failed start-ups too. This situation can only be favourable to innovation: start-ups who can earn a little money even if they fail are more likely to attract investment funds in the first place. And the more patent trolls there are, the more that avenue for profits can work out in the innovator's favour.

Good popcorn and low ticket prices?

A few weekends ago, while I was writing an exam for my students, I got to thinking about popcorn and movies. Part of this thinking was inspired by this piece by Edward Jay Epstein that the entire movie theatre business was driven by popcorn and soft drink sales. That is, theatres competed not to be able to make money from movie tickets but from other sales. This appeared to make some sense given the high margins on those products and their persistence in the face of competition. [Something that was the subject of one of my earliest posts on this blog].

The theory goes like this. Consumers don't think about buying popcorn or not until they are at the movie theatre. That means two immediate things: (i) movie ticket prices will be all they look at when deciding where to go and (ii) that they can be subject to monopoly pricing for popcorn when they finally get there. But it also means that movie ticket prices will be discounted somewhat because the theatres expect to earn some money from other stuff.

But then, this has another implication. Movie theatres will earn much more from add-on sales (like popcorn, etc.) if they are much more tempting when people get to the theatre. So the theatres that provide great food options will earn more money from that and will have a bigger incentive to get people through the door. In competition with other theatres that means that their ticket price will be slightly lower. But do we see this? Do we see movie theatre with the lowest ticket prices having the best confectionary options? My causal observation suggests that this isn't happening. But if that is the case, how can Epstein be right in saying add-on sales drive the movie theatre business?

The price remains the same

Tyler Cowen today asks: why are all iTunes songs the same price? This is a good question because it is clearly the case that some songs are more popular than others and indeed have differential quality (see this CNN story today). All indications are that the real reason is as basic as: Apple wants simplicity so it can sell more iPods even if the music companies would like to be able to say more about pricing levels.

Of course, we should remember that while Apple practices this policy within countries, it does not between them (so much so that you could construct a currency index based on the differentials). But this is more support for the simplicity story than against it.

But when it comes down to it, if a one price fits all model is profit maximising, it implies that, from Apple's perspective at least, the price elasticity of demand for each song is the same at current demand levels. [Of course, I am assuming here that Apple is paying the same royalty per song for each song]. And Apple from time to time have free song downloads so maybe they have assessed that this is not too far off. One day, my empirical colleagues might be able to sort that out.

Ads on iTunes

Reports today that Apple is considering putting advertisements in iTunes. This is not as new as it seems as ads already appear embedded within Podcasts. But the ability to truely target viewers and know precisely who is watching what is a tempting prize for advertisers.

Of course, the real opportunity here would be for Apple to provide consumers with more options. I have earlier written that to provide books with and without ads, at different prices, might make sense for publishers. The same is true of podcasters and even those 'publishing' music. Provide users with the option to download a podcast for free with ads or pay for one without them. That allows you to match consumer preferences or dis-satisfaction over ads with additional sources of revenue to cover the largely fixed costs associated with providing content.

She loved her cities

News today that Jane Jacobs, the author of The Death and Life of Great American Cities and Cities and the Wealth of Nations, has passed away.

In an earlier academic life, she inspired myself and two of my classmates (Raphael Bostic and Scott Stern) to work on understanding what drove urban growth. The idea that cities had a life of their own and both a resistance to management and a fragility to their life should management go too far.

Her work saw details that economists would never worry about. For instance, she begins her primary work with an appreciation of the sidewalk as the lifeblood of neighbourhood communities and goes on to extoll the virtues of aged buildings and rail against the incursion of the car. It was as if she lived in a city; which of course she always did.

Standing room only

We have it for buses, trains and ferries, why not airplanes? According to reports today, Airbus has been advocating the use of standing passengers to increase passenger numbers on planes. Hey, we all know that with the way seats have gone there isn't much comfort there anyway and for airlines it saves the cost of carrying around all those heavy seats.

Here is the relevant bit:

Airbus has been quietly pitching the standing-room-only option to Asian carriers, though none has agreed to it yet. Passengers in the standing section would be propped against a padded backboard, held in place with a harness, according to seating experts who have seen a proposal.

Well that is one way to drive business class sales. It is also unclear whether there would be any real loss in safety. And for families, well my kids want to wander around the plane anyway. I am happy not to pay for a seat there.

Of course, the big move here is to take more account of the third dimension of space. On long-haul flights, the preferred way to be put is not seat, certainly not standing, by flat and horizontal. It always occurred to me (and given my lack of sleep on planes I have spend some time thinking about this) that by laying everyone down we could have everyone lying down in three rows vertically as well as horizontally. The idea would be a bit like those Japanese capsule hotels. So the move to consider standing seems to me to be a move in the right direction.

But another question occurred to me while reading today's accounts: why do people sit on the space shuttle? After all, if there was ever a time that sitting didn't matter and being strapped in standing was a good idea, isn't it for Earth orbit space travel? If we are lifting payloads at $x'000 per kilogram, let's save on those seats. Let's face it, they are gravity-specific furnishings.

[Thanks to Scott Stern for pointing this news out].