Glad well blogs

Last week, Malcolm Gladwell, the author of The Tipping Point and Blink, started a blog.

Those books are good but I am a fan of some of his writing for the New Yorker. Here is a selection (with links):

• Smaller: The Disposable Diaper and the Meaning of Progress -- a salute to one of the greatest inventions ever.
• The Bakeoff: Project Delta aims to create the perfect cookie -- describes a product design process involving several competing models.
• The Moral Hazard Myth: The bad idea behind our failed health-care system -- a nice descriptions of the problems associated with health insurance. See my comment on similar issues in Australia.
• The Televisionary: Big business and the myth of the lone inventor -- the story of Philo Farnsworth and the invention of television.

There are many others but this is a good start.

Pass the grade

You Passed 8th Grade Math

Congratulations, you got 10/10 correct!

Could You Pass 8th Grade Math?

Just as well. See how you go by clicking above.

The Marketplace of Perceptions

A nice little piece brought to my attention in the Harvard Magazine. A good read if you are procrastinating and thinking about procrastination.

How about some premium insurance?

As is the case every year, the Federal Government has announced how much it will allow private health insurance companies to increase their premiums. One might wonder why the Government should play a role in setting private health insurance premiums. And the answer is simple: it is paying for 30 percent of them and so has an interest in what they are.

But why, you might ask, can't competition between insurers 'regulate' the price? And the answer again is: the Government is paying a 30 percent premium. That means that if individual households search around for lower premiums, in effect, they only keep 70 percent of the savings. Not surprisingly, the Government distrusts that households will use their powers of consumer choice so as to allow competition to work. Add to that the possibility that consumers aren't necessarily so shrewd and rational when it comes to such things and the fact that it is hard to compare health insurance offerings anyway (it is a good example of a 'confusopoly') and we can't expect competition to be effective.

What we are left with, in contrast, is a terrible regulatory regime whereby the health insurers petition the Government for a fee rise based on their own cost increases and usually get it (or most of it). This reduces their incentives to contain costs and lo and behold we are footing the bill. Not just the average $150 rise in premiums but an additional $45 in public expenditures. This is not the sort of regulatory deal we put up with in other sectors such as energy and even telecommunications. (Boy, would Telstra love the health insurance deal!)

What is more is that there are several simple options at the Government's disposal to change this situation. One option is to change the health insurance rebate. As Stephen King and I have demonstrated a lump sum (or dollar) payment rather than a percentage would remove many distortions: including that to the incentives of consumers to search for lower premiums.

Another option would be to move to a modern system of price regulation. Incentive regulation sets the caps on prices (or in this case premiums) independently of short-run changes in the costs of individual firms. This is usually done by referencing some benchmark. While the choice of benchmark can often be contentious, in health care, benchmarking for the Government is easy: it could base the annual rise in private health insurance costs on the increase (if any) in Government expenditures on relevant public health services. Something it not only observes but can control.

Better still, if Government could get rid of the rebate entirely and subsidise private hospitals and medical expenses directly based on the same cost benchmarks as the public system. The would eliminate the need for regulation altogether and put the annual round of increases into the past. Indeed, this is only one of the benefits that might come from this more major type of reform.

You can read more about this in the book by myself and Stephen King, Finishing the Job (published in 2003) or in this op ed or this short article.

Only by doing something like this can we, as health consumers, get some real insurance -- over premiums as well as health expenditures.

Tests of "values"

Peter Costello announced his support of a new citizenship test for Australia based on respect for "Australian values." He did this in the context of criticising multiculturalism and so fueled fears of a lack of tolerance.

When it comes down to it, it is really unclear what testing "Australian values" could possibly mean. For instance, the Prime Minister claimed: "We welcome people from the four corners of the earth. The only thing we ask of them is that when they come here they become Australians before anything else." Taken at its face value this appears to hit Catholics who aligned with the Vatican (an Independent state) or Jewish people who happen to be Zionists. And let us not forget our own Constitution establishing as Head of State a non-Australian! In this respect, to talk of something called "Australian values" in this context makes absolutely no sense.

Perhaps the government means to go down the British route. Last year, the UK government introduced a new test based on a book "Life in the UK." It is hard to know precisely what questions are asked on this test but the BBC extrapolated based on the book (click here to try that out). I particularly love this question:

Life in the UK explains what to do if you spill someone's pint in the pub (we're not making this up). What, according to the book, usually happens next?
A: You would offer to buy the person another pint
B: You would offer to dry their wet shirt with your own
C: You may need to prepare for a fight in the car park

The answer is A. Isn't that nice?

Of course, maybe when the Treasure is talking about values, he means values in Australia: such as what bread costs here? That is, after all, his area of governorship. Indeed, he could take a lesson from another potential UK question:

And finally, what does Life in the UK tell you it is "very important" to do when
engaging a solicitor?
A: Ask if they have a potential conflict of interest
B: Ensure they are qualified in the area of law of concern
C: Find out how much they charge

The UK answer is C! So maybe Costello's values in Australia reflects British roots afterall.

More on email externalities

Take a look at this analysis of the emailing issue I raised earlier this week.

FYI (and since you may want my input on this) on the binder versus notebook issue I will take a stand: I think binders are more useful than notebooks (you can put additional stuff in them). So there is no need for any more emails on that one.

Product differentiation by ignorance

Telstra's Bigpond ISP launched its movie and TV download service yesterday. This is an interesting move given Telstra's stake in Foxtel as it appears to provide a competing service.

According to today's Australian Financial Review, the download service will be distinct from the cable TV service. Why? Well read this:

Families that insist on using their TVs to watch TV shows and movies would be able to do so -but only "if they can work out the black wire and the yellow wire and the red wire" to connect it to their PC, Telstra BigPond group managing director Justin Milne said.

Yes, go ahead and read that again, it did say what you thought it said. Only consumers with 'wire colour knowledge' will be able to freely substitute between content sources and watch that content on their TVs. Others who download will be confined to their PC. So no worries, no competition. After all, how many people have 'wire content knowledge'?

Obviously, the more relevant question is how many people who have 'work out Bigpond's download service' do not have 'wire colour knowledge'? Remember 'wire colour knowledge' is roughly equivalent to 'connect VCR to TV knowledge' and my guess is those with the 'CD tray is not a cup holder' knowledge are 'wire equipped.' So basically most downloaders will have a nice free choice. Talk about "delusions of differentiation"!

Actually, I have a Mac Mini hooked up to our TV. I haven't checked it out yet but there is a pretty good chance that the Bigpond digital rights management won't work there. In that case, Telstra will have managed to exclude 'sensible enough to use a Mac' households from their service. But is that differentiation or indifference?

Effective emailing

Dan Drezner identifies a New York Times story on emailing professors. I definitely couldn't let that pass without highlighting it here.

Email is definitely the best way to approach me outside of class. It also makes a quick reply possible.

But I do get students emailing me apologising for missing class; including with excuses. That is all very nice but when I have 70 plus students, I am unlikely to notice and in any case I figure class attendence is a student's responsibility; so turn up if you want to! Of course, if you are unwell I hope you return to health too and if you have a job interview, good luck. But traffic (!), enough with the excuses already.

Seating games

Some discussion has emerged on the web today about the 'age-old' up versus down toilet seat question. Apparently, the economics is pretty clear on this: the 'do not do anything to the seat after use' rule is more efficient than the always down rule. See this link for an informal discussion and this one for a formal treatment.

For my part, I -- as a teenager -- was listening to talk radio one morning where this was raised as a very divisive issue. My reaction was that this appeared pretty trivial to generate such conflict and, moreover, could be easily avoided by establishing a habit early in life. It takes about 30 turns to make something into a habit and so I trained myself at any early age to put the seat down.

I can recommend my strategy for ensuring the moral high ground especially when I got in trouble for missing the point. I formed a habit of putting both seats down. Apparently, one would have been preferable.

Practice anyone?

For my students out there reading this, please pay attention to the lecture or I'll switch the WiFi off.

No, seriously, take a look at this post by John Quiggin (via others). Make sure you can answer questions like this for the mid-term. Also, to the extent that you can, you can also see evidence that you might be outperforming many economics PhDs. (No wonder it is so hard for you to get substitutions for economics in the MBA course!)

Can't fault these words

Here is some sound advice from Scott Adams, the creator of Dilbert.

• The person who sits nearest the boss’s office gets the most assignments.
• Your potential for senior management will be determined by the three H’s: Hair, Height, and Harvard degree. You need at least two out of three. (Non-Harvard schools will be acceptable if it’s clear that you “could have gone” to Harvard.)
• Your hard work will be rewarded. Specifically, your boss’s boss will reward your boss for making you work so hard.
• There’s no such thing as good ideas and bad ideas. There are only your own ideas and other people’s. If you want someone to like your idea, tell him he said it last week and you just remembered.
• Teamwork is what you call it when you trick other people into ignoring their priorities in favor of yours.
• Leadership is a form of evil. No one needs to lead you to do something that is obviously good for you.
• You can estimate the time for any project by multiplying the number of idiots involved by one week and adding the number of capable co-workers times four weeks. (The competent ones are busier.)
• In any group of three coworkers, at least one of them will be a sadistic loser intent on grabbing your ankle as he circles the drain.
• Non-monetary incentives are every bit as valuable as they sound.
• Business success is mostly about waiting for something lucky to happen and then taking credit.
• Preparing a Powerpoint presentation will give you the sweet, sweet illusion of productivity.
• It is better to be an “expert” than it is to do actual work.
• The first month on any new job should be spent talking smack about the “idiot who had the job before you.”

Full link here.

Tuning in doesn't make you tune out

As a parent, access to television is seen as a privilege and not a right. We place a television alluringly in the family room and then place an invisible wall around it saying 'Off Limits.' If a request to watch television comes in from one or more household members it is carefully reviewed by committee including taking of submissions from all interested parties, examinations of the time of the day and the day of the week, and a rigorous account as to the applicants' other merits (doing homework, asking nicely). Then a decision is based with reference to guidelines as well as precedent. Unfavourable decisions usually are accompanied by appeals and requirements for the committee to suggest alternative activities. Favourable ones are then referred to a lower level subcommittee to determine what will actually be watched on television.

In an earlier day, without DVDs or Tivo, that process would have been lengthy enough so that a new problem of 'there is nothing interesting on TV' would have come up and the TV may actually not get turned on. Today, we don't have the luxury and so practices are then reviewed by a non-consultantive panel regarding whether too much TV is being watched overall. In the end, I think an average child in our household ends up watching 4-6 hours per week (yes, per week; about a seventh of the average in the population. For TV loving parents such as us, this is somewhat surprising).

Our review panel devours any studies that might enlighten on this issue. The sum total of those studies has been basically uninformative. Some claim TV is plain bad, others it depends on what you watch and others depend on who watches with you. The end result is too use common sense as these outcomes also apply to books and computers.

A new study has appeared by Matthew Gentzkow and Jesse Shapiro that will get our attention this evening. These economists at the University of Chicago have used the fact that television was introduced at different times in different cities of the US. They have then taken standardised tests conducted in the 1960s to examine the long-term effects of television watching. Theoretically, if television is bad, if you had been watching it for 12 years before taking the test as opposed to 4 years or not at all, it would show up in test performance. [See this article in Slate for a more comprehensive explanation.] Moreover, this is all done at a time prior to VCRs etc where there was little ability of parents to choose what their children might watch and there was certainly no regulation of advertising content.

And the results: there is certainly no negative effect from television watching. If anything the effect was positive and more so for children in non-English speaking households and where the mother had less than a high-school education.

Can we disband our review processes now and let the kids watch TV until they are sick of it? Then we would have more time to get back watching as much TV as we did when we were growing up.

Game Reality

The Fox TV Network announced today yet another reality series. They all have their twists but this one's quite interesting. Nine contestants will be locked in a bunker. They will be asked to vote which of them should receive $1.5m. If they 'can't decide,' the amount they could win would be reduced and they will remain in the bunker to vote again the following week. However, as is typical of these things, one contestant will be 'removed' from contention each week but will still be able to vote. The interesting thing is that it is possible that the series could last anywhere from one to eight episodes.

The name of the show is 'Unan1mous' so we can presume the vote for the winner needs to be unanimous. It will be interesting to see if contestants will be able to vote for themselves. Either way it will be interesting. I am going to refrain from predicting what will happen here until we get a better sense of the rules (tune back in March) but it should be clear to all that the basic set-up here is akin to the Prisoners' Dilemma: in order to generate the maximum prize, all but one individual will have to sacrifice winning anything at all. This is usually a recipe for social disaster and I am pretty sure that is what Fox is banking on. Even better, the bigger the disaster, the cheaper the program is to produce.

Experimental economists go to alot of trouble to conduct experiments that test the predictions of game theory. But reality television is offering a new dimension to all of this with much higher stakes. In an earlier era, Scientific American offered its own slice of reality. Formulated by Douglas Hofstadter, in June 1983, Scientific American made the following (seemingly extraordinary) offer:

This talk of holding back in the face of strong temptation brings me to the climax of this column: the announcement of a Luring Lottery open to all readers and nonreaders of Scientific American. The prize of this lottery is $ 1,000,000/N, where N is the number of entries submitted. Just think: if you are the only entrant (and if you submit only one entry), a cool million is yours! Perhaps, though, you doubt this will come about. It does seem a trifle iffy. If you'd like to increase your chances of winning, you are encouraged to send in multiple entries without limit. Just send in one postcard per entry. If you send in 100 entries, you'll have 100 times the chance of some poor slob who sends in just one. Come to think of it, why should you have to send in multiple entries separately? Just send one postcard with your name and address and a positive integer (telling how many entries you're making) to:

Luring Lottery c/o
Scientific American......

You will be given the same chance of winning as if you had sent in that number of postcards with ‘1' written on them. Illegible, incoherent, ill-specified, or incomprehensible entries will be disqualified. Only entries received by 5:00 PM on June 30, 1983 will be considered. Good luck to you (but certainly not to any other reader of this column)!"

Well, what happened? It turned out that the vast majority of people in the world sacrificed for the common good and did not subit a 'claim.' However, a few thousand others did including one person for a googol entries (that is, 10 to the power of 100 or what Google would have been called if their founders could spell). So there was no chance of Scientific American paying out.

Given this, it is a wonder why Fox didn't make this more interesting: say $10m or $100m or even a googol million! But how much faith you one put in game theory translating into reality.

For any of my students out there, one thing you can be sure of: I am going to find a way for this to be on the exam.

Entertainment of the people, by the people and for the people

There is a part of me (actually a large part) that believes that in modern democracy the real differences between alternative governments is not politics or policies as much as how much entertainment value they might provide during their term in office.

When it comes down to it, Australian politicians do not offer what U.S. ones do in this regard. This week's events with the Vice President are a big case in point (see this link for one example). In an earlier era, we had such value from Dan Quayle; so much so that a part of me was sad when Bill Clinton was elected (especially as he droned through 45 minutes of acceptance speech). But boy did he turn out well on the entertainment front.

It seems to me that Australian politicians really need to get out more. What the above US examples have in common is that they happened on vacation or out of the office (or at least out of meetings) time. Australian politicians appear to be overworked and not spending enough leisure time or time in front of primary school classrooms. If they did this, we may be able to get a better quality of government (for our amusement that is) with probably little sacrifice in the quality of other things politicians provide.

Oh Honestly!

Today's Australian Financial Review ("Trouble brews for rival brands") reports that Honest Tea (Australia) has been portrayed by the NSW Small Business Minister, David Campbell, as a "big American corporation" threatening "the little guy." The remark has to do with Honest Tea's concern about an Australian rival's (Springleaf Tea) use of the domain name honesttea.com.au to promote their own product.

Now I don't know any more about the dispute than is contained in the press but I do know that Honest Tea is not only not a big corporation but is, in fact, the very epitomy of small, entrepreneurial firm competing with big corporations -- American and otherwise. The fact that they are in a position to export to Australia is a testament to what smaller businesses can do. They do not deserve the scorn of Ministers there to protect small business interests.

[Interest Disclaimer: Professor Barry Nalebuff, Honest Tea's founder and Chair, has visited Melbourne Business School on several occasions and his book Coopetition is required reading for MBAs. We both serve as advisors to Rismark International. Steve Hibbard works at Melbourne Business School. All views here are my own.]

The law of demand still holds

If you want to make a point that people are spending more and more on things they do not need (for the purposes of conspicous consumption), do you have to use bad economics to justify your case? Surely not.

In today's Age Sunday Magazine, there was an article about what exorbitant prices people will pay for things. It quoted Clive Hamilton (of the Australia Institute) who has written a book, Affluenza: When Too Much Is Never Enough. He is quoted as saying:

People are prepared to pay more for a product if the price is higher, regardless of intrinsic value. ... Economists think a market becomes more limited as the price goes up but today that is just not true.

Now it is true that economist's tend to believe in the law of demand: as you increase price, fewer people will buy. But this may not be the case for everything. Economists since Giffin have recognised the possibility that in some situations the law of demand may not hold (e.g., if price rises for margarine, people have more to spend and switch from margarine to butter). For other situations, price can be a signal of quality and so firms with high quality goods may not wish to drop prices even when there is excess demand (Joseph Stiglitz won a Nobel prize for that insight, so it is hardly obscure).

However, to say that there has been some fundamental change in the economy so that the law of demand is widely violated is simply not plausible. If so, we would see massive inflation and let's face it, that is not there. We would not see prices fall in the face of competition but we see that all of the time (e.g., telecommunications and computer equipment).

What is true is that firms are using product differentiation -- selling high and low quality versions of a product -- to price discriminate. But it is still the case that as they increase price for the high quality product, they reduce their sales of it.

My point is that the law of demand can work just fine and we can still worry about conspicuous consumption leading to problems. For an example see Robert Frank's excellent book, The Winner Take All Economy (published a decade ago).

Nonetheless, I did find the Age article enlightening on other fronts. For instance, it turns out there is significant demand for Kinder Surprise collections. Before we had children, we engaged in some definitely non-conspicuous, but significant, consumption of these chocolate eggs and have kept most of the toys that came with them. I'll be digging out the collection this afternoon for a visit to eBay to see if I can be surprised further.

Paying for Serenity

Last night we watched the DVD of Serenity, the movie/next episode of the Firefly television series. That series was cancelled after just 13 episodes but has been a big seller itself on DVD. But the movie was a surprise hit as well. And it was excellent by the way (well above average for an already good series).

What is interesting about this is that Firefly has been able to do what few before it have done: fail on free to air television and make money from a pay per view model. Of course, the biggest prior success for this model was Star Trek (and by this I mean the original series; also cancelled and later making a comeback at the movies).

With the cancellation of The West Wing, fans are lobbying for a similar move to pay per view. Their rationale is based on a simple back of the envelope calculation. It currently costs about $6 million to make a West Wing episode. That means that if you charged $1.99 per episode (as on iTunes) then you could break even with 2 million viewers (downloads). At the time of its cancellation there were an estimated 8 million viewers in the US alone, so the economics seem to stack up. (See this article in Slate for a discussion). Change the cast and use some bargaining power and you lower the costs making the case stronger.

Sadly, however, while this logic seems compelling, there is a really big difference between 8 million viewers who don't have to pay and 2 million viewers who do. Let's imagine that there is a price to be paid to watch a program on television (say a generous 20 cents). Then for a 1000 percent increase in price, demand would only have to fall by less than three quarters to make the economics worse. In a crude calculation, that translates to a price elasticity of demand of the order of 0.075; making it one of the most inelastic goods pretty much ever. This seems pretty implausible.

Now, I for one would be happy to pay $1.99 or more to watch the West Wing. But I am not sure the market will. But a West Wing movie, that is perhaps another matter. We will need to wait and see.

An iTunes Index for Exchange Rates

A few weeks ago, The Economist published its annual Big Mac Index. This has been a long-standing exercise by that newspaper to examine how close current exchange rates were to purchasing power parity (or PPP). The idea is to take a standardised commodity that is otherwise locally produced and compare prices across countries. According to PPP, exchange rates should adjust so that in the long-run, the purchasing power of a consumer across countries is the same. Big Mac prices (and perhaps Starbuck's Tall Latte prices) can, therefore, give an indication as to where PPP exchange rates should be.

One feature of Big Mac prices is that they, of course, build in variation in local costs. Put simply, the price of beef is lower in Australia than Japan and always will be. What one really needs is a standardised commodity that is free of variations in local costs.

It occured to me that iTunes individual song downloads were such a commodity. Like Big Macs their pricing is set by a single firm. But unlike Big Macs we can expect that there are no local variations in costs as for a given song it is the same music company that negotiations with Apple. Hence, all price variation is likely to be demand related.

There are many iTunes stores but only six distinct local currency prices (USA, Europe, UK, Japan, Canada and Australia). The following table is my calculation of the iTunes Index and based on today's exchange rates what the suggested over or undervaluation of each currency (relative to the US dollar) is:

There are two things interesting to note here. First, apart from Canada, iTunes songs are priced at a premium in other music stores. This echoes my observations about the Australian iTunes music store in The Age (4th November, 2005) where I noted the substantially higher prices for all iTunes products (if they were available) in Australia as compared with the US. Second, there is no relationship between the PPP implied exchange rates under the iTunes and Big Mac indeces. Indeed, there isn't even a qualitative consistency.

What is interesting about all of this is that I suspect it is the iTunes pricing -- something that was fixed but also was set as iTunes rolled out -- that is a poor predictor of PPP rather than Big Mac pricing that is flexible and also has a longer-term history. This suggests that iTunes may face some painful pricing reallignment in the future. Certainly, I do not expect exchange rates to adjust to resolve the distortion.

Of course, this might also suggest that it is just the US price that was set poorly. For instance, according to the Big Mac prices, the Australian dollar is overvalued with respect to the Yen but for iTunes, there is no overvaluation or undervaluation.

Nonetheless, if I am wrong and Apple based its iTunes pricing optimally on long-term forecasts of exchange rates, then the iTunes Index should outpredict the Big Mac Index for exchange rate movements as it is free of local variation. I guess time will tell on that one.

The earlier the better

Professor Jim Heckman (University of Chicago and 2004 Nobel Prize winner) presented a very interesting lecture on education policy here at the University of Melbourne. The main insight from his work is how effective (and productive in a social rate of return sense) early childhood interventions are. These are not to improve IQ but to prove the 'softer' stuff that allows you to make use of your IQ (e.g., motivation, social awareness, etc). What you experience prior to age 6 (!) is apparently critical in this.

His papers are available on the web. But if I relate these findings to those in an earlier blog about IR reforms, I worry if the cost of those reforms is going to be much greater economically than anyone has appreciated to date. Coupled with the government's lacklustre approach to childcare and we are working in the wrong direction on this one.

Blog links

I thought I'd just take a second to note blogs of people I know out there:

• John Quiggin: my occasional co-author
• Kim Weatherall: my IPRIA colleague
• Dan Drezner: my Stanford classmate
• Harry Clarke: La Trobe economist
• Aplia: the folks at aplia.com

All different, all with interesting stuff.

Restraining parents

Steve Levitt of Freakonomics fame wrote an interesting paper recently that strongly suggested that car seats did not assist in preventing child fatalities in car crashes any more than seat belts. A link to his article and related findings is here.

Now when I proudly brought this excellent piece of econometric research home as evidence as to how we could free up space in the car, I was informed that our household behaviour would not be changing. Car seats all around until they are well beyond 6 years old. Well, we had the seats anyway (4 or 5 by last count between various cars and ages and a total expenditure of $1000).

I suspect that reaction will be similar. Give parents and option and suggest that it will have a marginal improvement in safety and they will demand it in droves. Get some government regulations and it is entrenched forever.

But one wonders how far this might go. Suppose I developed a cocoon type restraint whereby you took said children, put them in a coffin like structure with a little window to look out of and staked them neatly in the boot of the car or SUV. Now I am pretty sure I could get some engineer to demonstate their safety properties. Coupled with an alluring idea of having the kids out of sight while driving (whine free!) and I think this is a winning product.

Parental demand for safety (subject to wealth constraints) seems to me to be unlimited and as close to inelastic as we are ever going to find. Although against this is the fact that we are yet to see the 'Safe and Silent Cocoon.' Nonetheless, an issue of public policy makers interested in consumer protection is how to restrain parental purchases of unnecessary equipment. I for one could use some restraint.

Playing the new IR game

In this week's BRW, David James considers how the game between employers and employees will change under the new industrial relations regime. He quotes yours truely: "Employers can celebrate, but employees shouldn't have families." I apparently go on ...

When you change who gets what, it will change people's lives. Take someone who has four weeks leave, and can take two of those and buy it back. The claim is: 'You don't have to buy it back, so how can you be worse off?' But if I am an employer who sees a benefit in having people work for 50 weeks a year instead of 48, who am I going to hire? I am going to hire the people who sell back the two weeks at a good rate, which basically means people without families. That is going to change the work culture of Australia. I find it ironic that a government committed to family values is enacting this kind of legislation.

You might wonder where to find the game theoretical model underlying these views. For this I need to thank a diligent PhD student of mine -- Martin Byford -- who worked out the bargaining model to analyse the impact of allowing entitlements to be traded. His paper is available here. Utilising an economic model of bargaining (similar to that in my textbook, Core Economics for Managers), he finds that competition in the labour market can mean that these reforms will leave some workers worse off. More importantly, when coupled with minimum wage laws, these reforms may reduce overall efficiency as well. Sadly and perhaps surprisingly, the trade union movement hasn't shown much interest in these ideas even if the business press has (another irony!).

Martin and I published an op ed piece in The Age last year on this topic (for the non-economist, it is an easier read than the technical paper).

Externalities happen

My Principles of Microeonomics textbook (with Stephen King and Greg Mankiw) uses a dog 'mess' example to illustrate the concept of negative externalities. No solution is proposed.

Click here to see the Freakonomics solution. Costly but perhaps effective.

Rembrandts in the playroom

Last year, in a piece for The Age, I wrote about what appeared to be a change at the Lego company as to how they received user innovations.

That article talked about the Lego Factory concept that had users design new lego sets for a share of the royalties. This was a good example of user-based innovation as described by MIT's Eric von Hippel in his book Democratizing Innovation.

It turns out that that was just the tip of the iceberg according to February's Wired. User-based innovation has appeared to have infiltrated the whole innovation process at Lego.

News for Econ Students

News for Econ Students

Just to show that I ain't that evil, here is another blog with interesting exam ideas and other information for economics students.

I particularly liked this post on price discrimination at Starbucks. I'll have to ask for a 'secret' cappucino the next time I am there.

Solving the email game

This morning's news reported intentions by AOL and Yahoo! to provide certain delivery of email for the price of stamp.

We all know the current situation that email sent may not be delivered or may be delivered into a spam filter. As Ariel Rubinstein identified almost two decades ago, this presents real problems for reliable coordination. (His paper is conveniently available on-line).

The problem is simple: if you and I need to coordinate our activities and a lack of coordination is really costly, then if communication between us is even slightly unreliable, we may shy away from such activities altogether. Moreover, doing simple things such as acknowledging the receipt of email can't help (and indeed may make things worse!) if the acknowledgment cannot be reliably sent.

What this means is that AOL and Yahoo!'s solution is going to have to be perfect if it is going to provide real value.

Is this a joke?

On the way to Melbourne airport there was a billboard for Villa and Hut. If you just glance at it (as you do when you are driving) you will notice that they claim to be "voted the best homewear store in the world."

Sounds impressive but drop your eyes down and you will see in much smaller print a qualification "by internal staff poll." Not that that is bad -- if it wasn't true that might be a problem. But really, isn't this just a tad misleading? The homepage of their website says the same thing and much as I have tried I haven't seen a hint that this is all tounge-in-cheek.

Attracting eyeballs: The Dark Side

When you embark upon writing a blog like this (as I have done), you can't help but turn to wonder how you get a readership. Even if what you say is interesting, there are so many alternatives for most people, that getting noticed is a problem.

My approach was to see if I had any sources of power I could leverage (at least in away that was not ultimately self-destructive. That is, I turned immediately to the dark-side of market power.

Here is what I have done. I have 80 fresh faced MBA students starting the compulsory Managerial Economics subject here at Melbourne Business School. I like to come up with exam questions based on current business topics (that is, true). So I told them that I would use this blog as the source for those questions. If the students want a little less surprise in the exam, they should read this blog regularly.

So there you have it: I have some power to get my student's attention and have leveraged that to build readership of this blog.

Fortunately, there is a subtle efficiency here. My main trouble in getting good ideas for exam questions is not coming up with them (I think of them all the time). It is remembering them. By commiting myself to write interesting ideas here I also make it easier for myself in writing the exam.

Actually, even this little exercise has given me an exam idea: am I really going to gain a good following from my dark-side eyeballs strategy? Tune in on exam day to find out!

Important parallels (or Survivor-off-demand)

The season premiere of Survivor: Panama began in the US on Friday. It will be shown here but as usual it is unclear when. And, as usual, it will be with enough lag that those of us using the Internet will have to keep off to avoid knowing who won.

CBS -- the US owner and broadcaster of Survivor -- are offering two non-free to air TV means of watching Survivor. First, it is available at Google's new video store. Second, it is available from CBS's own web-site as an 'on demand' option (viewable for 24 hours after downloading). Each will cost US$1.99. And each can be played on any Window's based PC. Moreover, they were available only a few hours after broadcast (in time for an evening showing here) and ad-free.

But, just as in Apple's iTunes Music Store, both sites restrict purchases to the US only. Actually, for Google the check is an IP address and so you must actually be in the US. For CBS, a US credit card address appears sufficient.

The question is why? And the answer is easy -- because presumably CBS has done deals with local broadcasters that give them exclusivity (for some period of time) or at least until they are broadcast locally. Although there are indications the restrictions may be indefinite. (For example, old episodes of Star Trek available on Google are restricted to the US; long after broadcast and DVD availability everywhere).

But that is only half the answer. From an economics perspective, a channel of distribution should only be shut down by a producer if it is inefficient. Downloads are not inefficient and offer improvements in quality to some. So we have to ask ourselves: would the amount of revenue (in advertising) that a local broadcaster (such as Channel 9) loses from downloads available elsewhere exceed those that CBS could gain from making those downloads widely available? With regard to local affiliates in the US, CBS has decided that the answer is no. Why would the answer be different for Australia?

Moreover, it is unclear to me (although, I am not a lawyer) why such a restriction does not violate our parallel importing laws. After all, no local broadcaster could prevent DVDs of Survivor from being brought to and sold in Australia by an importer but what about downloads that compete with local broadcasts? There appears to be an import(ant) parallel here (pun intended!).

Beware of sharp predictions (especially about popcorn)

In a recent Slate article (click here), Steve Landsburg puzzles as to why some hotels bundle internet access for free but movie theatres never bundle popcorn for free. He writes: "... in the real world, popcorn, unlike wireless Internet, is never free." Landsburg goes on:

It's logically possible that by pure coincidence the
numbers at every movie theater in the world all work out the same way,
while the numbers at hotels work out one way half the time and the
other way the other half. But "pure coincidence" theory is even less
satisfying than the "differential greed" theory. There must be
something I'm missing that makes popcorn essentially different from
Internet access. I remain stumped.Well, here in Australia we can
help him out as the 'real world' is different: popcorn is sometimes free.
If you go to those 'first class' options such as Director's Lounge or Gold
Class, the popcorn is free. Of course, your ticket price is higher.

Put here is a more straightforward possibility. Here is a link to an offer I received yesterday from Hoyts. If you pay for your tickets with Visa, the popcorn is free.

So the economic theory that predicts that we should sometimes see free popcorn is correct. It is just Professor Landsburg's casual observation of the real world that caused a conundrum.

That wasn't a US invention!

Thanks to www.westwingtranscripts.com I was able to read the following exchange in the live (but fictional) debate episode between Republican Vinick and Democrat Santos in The West Wing. I love the show but this gaff regarding who invented ulcer treatments really irked me.

Here is the relevant bit:

-------------------------------------------------------

SAWYER Senator, let me ask you about a related issue which is prescription drug prices and those prices have been going up at a rate more than double the inflation rate. So, would you favor re-importing American drugs from Canada where they are much cheaper?

VINICK You know why drugs are cheaper in Canada; because the government controls the price. Do you know how many life-saving drugs are invented in Canada? None, because the government controls the price.

SANTOS Well, Canadian laboratories have helped to create some very important drugs.

VINICK No, nothing like the miraculous drugs that the American pharmaceutical industry has given to the world.

SANTOS Given to the world? I guess you haven't seen the price list lately, sir.

VINICK Not long ago, if you were HIV positive in this country you were marked for death. Not anymore. And that's thanks to our pharmaceutical companies. You know, in the 1970s, the most common cause for surgery was ulcers. Now, you get an ulcer, you take a pill. Is it an expensive pill? Yes. A dollar does seem like a lot to pay for one pill. But how does a dollar a day sound compared to a $30,000 surgery bill? So, are prescription drugs expensive? Yes. Do they save us from getting hit with much more expensive hospital bills? Yes. Do they save lives? Yes. American pharmaceutical companies save us money and they save lives and the Democrats can not stop attacking them.

SANTOS Why should the pharmaceutical companies get protection that no other American industry gets? We can buy anything else from Canada; why not prescription drugs?

VINICK Because the Canadian price controls are unfair to American companies.
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Now there is alot to think about here but the bit I didn't like was the ulcer example (highlighted).

The Republican candidate was batting for protection of pharmaceutical company interests (the usual, the US people have to pay more than Canada so the companies will have an incentive to develop drugs). But he then cited as a prime example of this: the development of ulcer treatment which is now cured by a simple anti-biotic saving thousands in on-going treatment.

The problem with this example is that this treatment was discovered and developed in Australia using publicly funded research. To make matters worse, just two weeks before the live debate was aired (!), the Australians who discovered this won the Nobel prize (that is Marshall and Warren for "for their discovery of the bacterium Helicobacter pylori and its role in gastritis and peptic ulcer disease") I am not even sure the treatment is IP protected. So this is hardly a good example of the need to protect US pharmaceutical companies against Canadian imports.

Actually, the Australian PBS system does it all -- low prices and protection of innovative returns but that is a discussion for another time.

Three Words: Structure, structure, structure

Today Telstra is indicated how it will split (e.g., Australian Financial Review -). Need I remind the world that operational separation is just another form of regulation and the best thing would be a real change in structure.

Indeed, last year in New Matilda (click here) I argued that not only would this increase competition and overall welfare (lest that should be enough) but also that a split of Telstra would actually get the Federal government more money!

Now to work out why a broad win-win doesn't occur, requires us to locate some people who would lose out. The search is quite difficult and I'll see what I can do later.

Blogging Inspiration

You might wonder why I decided to do this at this time. Well, Andrew Leigh (a very interesting scholar from ANU) is visiting the University of Melbourne this semester (and teaching at MBS, I should ad). He has an interesting blog (imaginingaustralia.blogs.com). I thought the medium might work for me too.

I'll point to other blogs from people I know as they post interesting stuff.

Andrew has posted a note announcing my blog. Now that qualifies as interesting to me! Go to: Imagining Australia: Ideas For Our Future : New arrival in Ozeblogistan

2005 Innovation Index

Richard Hayes (Research Fellow at MBS/IPRIA) and I have updated the Innovation Index. The index is a measure developed initially by Scott Stern and Michael Porter to measure a country's capacity to innovate. Scott Stern and I did an update for Australia in 2003 and Richard and I produced an update in 2004.

This years Innovation Index is refined further. The bad news is that Australia's potential has declined -- mainly due to a loss in the perceived strength of IP protection. Nonetheless, our ranking with respect to other countries remains unchanged.

Welcome

Welcome to the CoreEcon blog. As is usual with these things, this is an experimental first stage. Nonetheless, let's see how this goes.