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.
Wednesday, May 03, 2006
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:
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.
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.
Tuesday, May 02, 2006
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.
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.
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.
Sunday, April 30, 2006
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 ...
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?]
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?]
Friday, April 28, 2006
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.
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 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?
Thursday, April 27, 2006
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.
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.
Wednesday, April 26, 2006
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.
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.
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.
Tuesday, April 25, 2006
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:
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].
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].
(Un)Happy Meals?
Today brought moves for a code of conduct for the 'junk food industry' to limit the advertising content in junk food ads to children. One of the suggestions is that McDonalds would not be allowed to put toys in Happy Meals.
When it comes down to it, the whole move against advertising towards children is a red herring at best and at worst a distraction and excuse for governments not to hit at real problems.
When it comes down to it, the whole move against advertising towards children is a red herring at best and at worst a distraction and excuse for governments not to hit at real problems.
- First, it is highly unlikely that junk food ads were causing the problem. It is the junk food itself that is surely the issue. Let's face it, no one really believes that advertisements really work otherwise they would advertise carrots to children this way and it would 'solve the problem.'
- Second, Happy Meals are not about the food but about the toys. The good thing about the food is that it is in small quantities. In my day, when we went to McDonalds we would eat adult meals. Anything that stops that is surely a good thing. McDonalds is likely making all their money on selling the toys in these meals.
- Third, indeed, if we are worried about children eating McDonalds then the biggest threat -- ironically -- are the salads and sandwitches McDonalds now offers. These make it easier to sell Happy Meals. Why? Previously, a constraint on going to McDonalds was that increasingly health conscious adults would be resistant because they would have nothing to eat. Now, that is not the case. Remove that constraint and more children get McDonalds. Of course, I don't want to suggest banning healthy food at McDonalds only to suggest that playing around with these things is complicated.
- Finally, if we get politicians thinking that dealing with advertising is good health policy we won't get good health policy. Moves to control the actual content of food rather than the content of food messages is surely the way to go. Thus, moves to ban soft drinks in school tuckshops is a much better candidate for health policy focus.
No HECS for Biotechs
In today's Age, I respond to Mike Vitalie's suggestion that there be a HECS scheme for biotechnology firms in Victoria. I argue that while the intentions may be good, it may be 'solving the wrong problem' when it comes to VC funding.
You can read the Age article here. It basically expands on my blog from last week on the same issue.
You can read the Age article here. It basically expands on my blog from last week on the same issue.
Monday, April 24, 2006
Chickens and collective boycotts
On Friday, the Australian Competition Tribunal handed down its decision on the application by the Victorian Farmers Federation (VFF) to authorise collective boycotts by chicken growers in Victoria when negotiating with chicken processors. The ACCC had earlier allowed the VFF this right but the Tribunal overturned that authorisation. So growers will not be able to collectively boycott. You can read the decision here.
I acted for the chicken meat processors in this litigation; although any views I express here are my own. Not surprisingly, however, I think that the Tribunal decision is a good one and that there were likely to be manifest detriments from allowing chicken growers to collectively boycott (i.e., strike) during negotiations with processors; even if the terms of a strike -- in terms of notification etc -- were constrained. Put simply, current negotiations didn't seem to me to be so dsyfunctional that investment in the industry was being harmed. However, collective boycotts may have had many uncertain consequences, including "gaming" behaviour recognised by the Tribunal, that would have been detrimental. This is in addition to the likely price rises (at least in the wholesale market) that would have occurred.
As noted by the Tribunal, the case was a little unusual:
The 'Twilight Zone' feeling of this is easier to understand if one remembers that for there to be net benefits to the public from a collective boycott it must not be too effective in yielding anti-competitive consequences or other costs. That means it can't be too effective at all.
My assessment was that there were real concerns that the collective boycott would be effective. In so doing, I used approaches from game theory -- that the Tribunal ended up adopting -- to analyse whether a collective boycott or at least the threat of one was likely to be effective. In so doing, it was critical to assess whether the boycott would be credible. The Tribunal put this nicely:
Ultimately, the Tribunal assessed that there were circumstances under which collective boycotts may be highly effective and this was an important fact in driving their ultimate decision.
What is significant is that this is one of the first times I can remember that an Australian court has embraced game theory as a framework for analysing a competition issue and in particular the likelihood of a particular outcome. In regard to other antitrust cases, I had lamented lost opportunities to do this (see an account of the High Court's Rural Press decision here). This latest decision is a true step forward in economic analysis in our legal system.
I acted for the chicken meat processors in this litigation; although any views I express here are my own. Not surprisingly, however, I think that the Tribunal decision is a good one and that there were likely to be manifest detriments from allowing chicken growers to collectively boycott (i.e., strike) during negotiations with processors; even if the terms of a strike -- in terms of notification etc -- were constrained. Put simply, current negotiations didn't seem to me to be so dsyfunctional that investment in the industry was being harmed. However, collective boycotts may have had many uncertain consequences, including "gaming" behaviour recognised by the Tribunal, that would have been detrimental. This is in addition to the likely price rises (at least in the wholesale market) that would have occurred.
As noted by the Tribunal, the case was a little unusual:
As the hearing progressed a paradox emerged. In a negotiating context, a party threatening a boycott (whether or not lawful) will talk up the baneful effect of a boycott on the other party. Conversely, the other party will put on a brave front and minimize its potential effect. Yet, in the present case, the positions were reversed. The VFF contended that Processors would be able to make arrangements for alternative supplies and carry on pretty much as usual. Processors, on the other hand, predicted the most dire consequences. For the VFF, this is something of a diminishing return. The more readily ameliorated a boycott, the less effective the threat thereof to a point where the question arises whether there is much point in its authorisation at all.
The 'Twilight Zone' feeling of this is easier to understand if one remembers that for there to be net benefits to the public from a collective boycott it must not be too effective in yielding anti-competitive consequences or other costs. That means it can't be too effective at all.
My assessment was that there were real concerns that the collective boycott would be effective. In so doing, I used approaches from game theory -- that the Tribunal ended up adopting -- to analyse whether a collective boycott or at least the threat of one was likely to be effective. In so doing, it was critical to assess whether the boycott would be credible. The Tribunal put this nicely:
... two conditions must hold in order for a collective boycott to represent a credible threat that would enable Growers to have their demands met. First, the benefit Growers potentially could gain from a given demand in contract negotiations (such as higher growing fees, sharing of certain costs with the Processor etc) exceeds the costs to them of a collective boycott of a given duration. Second, the cost to Processors of acceding to the Growers demands must be less than the cost to them of a collective boycott of the given duration threatened by the Growers. It follows from this that combinations of demands by Growers and threats of collective boycotts of particular durations that met these requirements would be likely to generate a credible threat that would lead Processors to accede to the demands made by Growers.
Ultimately, the Tribunal assessed that there were circumstances under which collective boycotts may be highly effective and this was an important fact in driving their ultimate decision.
What is significant is that this is one of the first times I can remember that an Australian court has embraced game theory as a framework for analysing a competition issue and in particular the likelihood of a particular outcome. In regard to other antitrust cases, I had lamented lost opportunities to do this (see an account of the High Court's Rural Press decision here). This latest decision is a true step forward in economic analysis in our legal system.
Sunday, April 23, 2006
Launching the iPod: Who would have thought it?
Youtube has just posted Steve Job's introduction to the very first iPod; almost 5 years ago now. When you watch it, the first thing that hits you is the small room this was done in and all the empty seats. Hardly the introduction you would expect from what became a killer appliance in the music industry.
The initial iPod was only for Mac (Windows would have to wait another year), ultraportable with firewire and with a 10 hour battery life. Apart from a neat design and great performance, there was nothing to suggest here that this would be more than another gadget with another name -- iMac, iBook, iPod, iEverything. Indeed, it was not until the opening of the iTunes Music Store (two years later) that anything special looked like coming from this. Just goes to show: who can predict?
Another interesting bit in the video is a comparison of alternative devices. Here is the table put up:
A CD player costs $75 and has 15 songs equating to $5 per song.
A Flash player costs $150 and has 15 songs equating to $15 per song.
A MP3 CD costs $150 and has 150 songs equating to $1 per song.
A hard drive costs $300 and has 1000 songs equating to $0.30 per song.
Notice the problem here? It assumes that once you put a CD in a CD player you can't change it. I hope that wasn't on the business plan. Hardly a good description of consumer decision-making.
The initial iPod was only for Mac (Windows would have to wait another year), ultraportable with firewire and with a 10 hour battery life. Apart from a neat design and great performance, there was nothing to suggest here that this would be more than another gadget with another name -- iMac, iBook, iPod, iEverything. Indeed, it was not until the opening of the iTunes Music Store (two years later) that anything special looked like coming from this. Just goes to show: who can predict?
Another interesting bit in the video is a comparison of alternative devices. Here is the table put up:
A CD player costs $75 and has 15 songs equating to $5 per song.
A Flash player costs $150 and has 15 songs equating to $15 per song.
A MP3 CD costs $150 and has 150 songs equating to $1 per song.
A hard drive costs $300 and has 1000 songs equating to $0.30 per song.
Notice the problem here? It assumes that once you put a CD in a CD player you can't change it. I hope that wasn't on the business plan. Hardly a good description of consumer decision-making.
Of lemons and rejections
Tim Harford has a little piece in the FT today on George Akerlof and his insights regarding markets for used cars.
Apart from explaining Akerlof's nobel prize winning contributions he also describes his difficulties in getting his work published ...
Akerlof's problems in getting published were not isolated. George Shepherd and I wrote an account of the problems that faced many economists who would eventually win the Nobel prize [see "How Have the Mighty Fallen," Journal of Economic Perspectives, 1994]. George published a book of letters that we received from many famous economists. I also recounted how we came to write that paper in my edited volume, Publishing Economics (Edward Elgar, 2000). Finally, here is another account of another Nobel prize winner -- Robert Lucas.
Apart from explaining Akerlof's nobel prize winning contributions he also describes his difficulties in getting his work published ...
used cars were just the beginning for Akerlof. His neat little paper was turned down by two top journals because they couldn't see past the trivia of his example. He recalls that a third, the Journal of Political Economy, had a better reason for rejecting him: the paper couldn't be true, because if it was true then economics would be turned on its head.
The Journal of Political Economy was half right. Akerlof did turn economics on its head - and eventually received the Nobel Prize for doing so - not by documenting the travails of used-car buyers and sellers, but by showing how corrosive a little bit of inside information can be to all sorts of markets. Insurance, including health insurance, is one possible casualty.
Akerlof's problems in getting published were not isolated. George Shepherd and I wrote an account of the problems that faced many economists who would eventually win the Nobel prize [see "How Have the Mighty Fallen," Journal of Economic Perspectives, 1994]. George published a book of letters that we received from many famous economists. I also recounted how we came to write that paper in my edited volume, Publishing Economics (Edward Elgar, 2000). Finally, here is another account of another Nobel prize winner -- Robert Lucas.
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