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I just saw Malcolm Gladwell on The Daily Show. Apparently his book David and Goliath is about how it can actually be an advantage to have some kind of disadvantage. He mentioned that a lot of really successful people are dyslexic for example.
But its either an absurdity or just a redefinition of terms to say that disadvantages can be advantageous. The evidence appears to be a case of sample selection bias. Here’s a simple model. Everyone chooses between two activities/technologies. There is a safe technology, think of it as wage labor, that pays a certain return to everybody except those the disadvantaged. The disadvantaged would earn a significantly lower return from the safe technology because of their disadvantage
Then there is another technology which is highly risky. Think of it as entrepreneurship. There is free entry but only a randomly selected tiny fraction of entrants succeed and earn returns exceeding the safe technology. Everyone else fails and earns nothing. Free entry means that the expected return (or utility thereof) must be lower than the safe technology else all the advantaged would abandon the latter.
The disadvantaged take risks because of their disadvantage and a small fraction of them succeed. All of the highly successful people have “advantageous” disadvantages.
My friend and Berkeley grad school classmate Gary Charness posted this on Facebook:
It has finally happened. This could be a world record. I now have 63 published and accepted papers at the age of 63. I doubt that there is anyone who *first* matched their (positive) age at a higher age. Not bad given that my first accepted paper was in 1999. I am very pleased !!
Note that Gary is setting a very strict test here. Draw a graph with age on the horizontal axis and publications on the vertical. Take any economist and plot publications by age. It’s already a major accomplishment for this plot to cross the 45 degree line at some point. Its yet another for it to still be above the 45 degree line at age 63. But its absolutely astounding that Gary’s plot first crossed the 45 degree line at age 63.
(Yes Gary was my classmate at Berkeley when I was 20-something and he was 40-something.)
If you are like me and you believe that thinking is better path to success than not thinking, its hard not to take it personally when an athlete or other performer who is choking is said to be “overthinking it.” He needs to get “untracked.” And if he does and reaches peak performance he is said to be “unconscious.”
There are experiments that seem to confirm the idea that too much thinking harms performance. But here’s a model in which thinking always improves performance and which is still consistent with the empirical observation that thinking is negatively correlated with performance.
In any activity we rely on two systems: one which is conscious, deliberative and requires “thinking.” The other is instinctive. Using the deliberative system always gives better results but the deliberation requires the scarce resource of our moment-to-moment attention. So for any sufficiently complex activity we have to ration the limited capacity of the deliberative system and offload many aspects of performance to pre-programmed instincts.
But for most activities we are not born with an instinctive knowledge how to do it. What we call “training” is endless rehearsal of an activity which establishes that instinct. With enough training, when circumstances demand we can offload the activity to the instinctive system in order to conserve precious deliberation for whatever novelties we are facing which truly require original thinking.
An athlete or performer who has been unsettled, unnerved, or otherwise knocked out of his rhythm finds that his instinctive system is failing him. The wind is playing tricks with his toss and so his serve is falling apart. Fortunately for him he can start focusing his attention on his toss and his serve and this will help. He will serve better as a result of overthinking his serve.
But there is no free lunch. The shock to his performance has required him to allocate more than usual of his deliberative resources to his serve and therefore he has less available for other things. He is overthinking his serve and as a result his overall performance must suffer.
(Conversation with Scott Ogawa.)
Grocery chain Trader Joe’s has opened up a legal can of whup ass on its self-professed “best customer,” Pirate Joe’s.
Vancouver, British Columbia shopkeeperMichael Hallatt, claims to have spent more than $350,000 at Trader Joe’s in the past two years. Trader Joe’s would like him to stop shopping there. What gives?
Hallatt, makes frequent drives across the border to shop the U.S. stores, then resells popular Trader Joe’s branded products in his own store, cannily called Pirate Joe’s.
Various commentators are at a loss to explain why Trader Joe’s would cut off its best customer. But isn’t it obvious? Trader Joe’s always had the option of opening a store in Vancouver. Because it never did, it must be that it would not be profitable. Now the joint profits between Trader Joe’s and Pirate Joe’s cannot be higher than the profit that Trader Joe’s would have earned if it opened its own store. At worst Trader Joe’s could just replicate what Pirate Joe’s is doing, but probably it could do it more efficiently. So Trader Joe’s which earns only a share of the joint TJ/PJ profit must be less profitable than it would be if it opened its own store in Vancouver which it has already calculated to be unprofitable.
The upcoming Northwestern home game versus Ohio State has now sold out. Danny Ecker at Crain’s Chicago Business has the post-mortem:
Sales so far show the school was effective in its experimental“Purple Pricing” offer for about 5,000 single-game seats for the game.
The modified Dutch auction system, which guarantees that buyers don’t pay any more for tickets than anyone else in their section, ended up selling out at $195, $151 and $126 for seats on the sideline, corner and end zones, respectively.
On the secondary market, sideline seats have sold for an average of $190, corner seats for $135 and end-zone seats for $127. That suggests that fans haven’t been able to flip them for a profit — at least, not yet.
I haven’t decided yet and I can’t figure out which side this is evidence for:
Me: Oh I have to remember to set up your desk today because I promised that I would and that if I didn’t I would give you $2.
7 year old: I was hoping you would forget.
Me: Are you saying you would rather have $2 than your desk?
7yo: No, I am saying I would rather have $2 today and my desk tomorrow.
Me: Hold on, what would you rather have: $2 today and your desk tomorrow or $2 today, another $2 tomorrow and then your desk the next day?
7yo: $2 today, another $2 tomorrow and then my desk the next day.
Me: $2 today, $2 tomorrow, $2 the next day, and then your desk the day after that?
Me: And what is the number of days you would like to have $2 before you finally get your desk?
Here’s the preview:
Students all over are starting college this month, and some of them still have a nagging question: what, exactly, got me in? An admissions officer tells us the most wrongheaded things applicants try. And Michael Lewis has the incredible story of how a stolen library book got one man — Emir Kamenica — into his dream school. (Photo: Emir as a Harvard undergrad. Credit Terri Wang.)
Buy tickets starting at 10AM at NUSports.com for the games against Ohio State on Oct 5 and Michigan on Nov 16. We have added bidding this season: you may submit a bid below the current auction price and you will receive tickets if and when the price falls to your bid level. Here is an older post about Purple Pricing with some more information.
One form of mental accounting is where you give yourself separate budgets for things like food, entertainment, gas, etc. It’s suboptimal because these separate budgets make you less flexible in your consumption plans. For example in a month where there are many attractive entertainment offerings, you are unable to reallocate spending away from other goods in favor of entertainment.
But it could be understood as a second-best solution when you have memory limitations. Suppose that when you decide how much to spend on groceries, you often forget or even fail to think of how much you have been spending on gas this month. If so, then its not really possible to be as flexible as you would be in the first-best because there’s no way to reduce your grocery expenditures in tandem with the increased spending on gas.
That means that you should not increase your spending on gas. In other words you should stick to a fixed gas budget.
Now memory is associative, i.e. current experiences stimulate memories of related experiences. This can give some structure to the theory. It makes sense to have a budget for entertainment overall rather than separate budgets for movies and concerts because when you are thinking of one you are likely to recall your spending on the other. So the boundaries of budget categories should be determined by an optimal grouping of expenditures based on how closely associated they are in memory.
(Discussion with Asher Wolinsky and Simone Galperti)
The NRA successfully lobbied to stop gun control legislation. Several Democrats sided with Republicans to defeat it. But the NRA seems to have spent more than necessary to defeat the measures because they failed by more than a one-vote margin. It would have been enough to buy exactly the number of Senators necessary to prevent the bill from progressing through the Senate, no more than that.
But in fact the cost of defeating legislation is decreasing in the number of excess votes purchased. If the NRA has already secured enough votes to win, the next vote cannot be pivotal and so the Senator casting that vote takes less blame for the defeat. Indeed if enough Senators are bought so that the bill goes down by at least two votes, no Senator is pivotal.
Here’s a simple model. Suppose that the political cost of failing to pass gun control is c. If the NRA buys the minimum number of votes needed to halt the legislation it must pay c to each Senator it buys. That’s because each of those Senators could refuse to vote for the NRA and avoid the cost c. But if the NRA buys one extra vote, each Senator incurs the cost c whether or not he goes along with the NRA and his vote has just become cheaper by the amount c.
For the Vapor Mill: What is the voting rule that maximizes the cost of defeating popular legislation?
Non-peer reviewed, inaccessible data, and punditry that can’t tell the difference between P&P and a regular AER article can’t be good for the reputation of the journal, the AEA, or the profession.
Steve Tadelis, Distinguished Economist at eBay and his colleagues have done an experiment and seem to have concluded that its a waste of money to pay for sponsored links on Google when Google’s regular search algorithm shows links to eBay for free.
Before you read the rest of this post, go to Google and try searching for “Amazon.” You’ll probably notice that the top two listings are both for Amazon’s website, with the first appearing on a light beige background. If you click on the first — a paid search ad — Amazon will pay Google for attracting your business. If you click on the second, Amazon gets your business but Google gets nothing. Try “Macys,” “Walgreens,” and “Sports Authority” — you’ll see the same thing.
If you search for eBay, though, you’ll find only a single listing — an unpaid one. Odds are, after marketers at Amazon, Walgreens and elsewhere catch wind of a preliminary study released on Friday, their search listings will start to look a lot more like eBay’s. The study — by eBay Research Labs economists Thomas Blake, Chris Nosko, and Steve Tadelis — analyzed eBay sales after shutting down purchases of search ads on Google and elsewhere, while maintaining a control set of regions where search ads continued unchanged. Their findings suggest that many paid ads generate virtually no increase in sales, and even for ones that do, the sales benefits are far eclipsed by the cost of the ads themselves.
This is a dilemma for Google. Because it suggests that the way to capitalize on the popularity of their search algorithm is to discriminate against those who don’t pay for ads. But unless Google reinvents itself as a full-blown paid advertising site, such discrimination is likely to raise legal issues.
Here I am on the podcast Hang Up And Listen with hosts Stefan Fatsis, Mike Pesca and Josh Levin. Its a sports oriented podcast and I am talking about Purple Pricing. They had some very good questions. I come in at about the 25 minute mark.
Professional soccer leagues tend to be dominated year after year by a small number of top teams. Major League Baseball on the other hand, has seen World Series appearances by the Detroit Tigers, the Texas Rangers, the Philadelphia Phillies, the Tampa Bay Rays, etc. It seems like any team can assemble a champion.
These two sports have very different production functions. A baseball team is basically a collection of individuals. Among team sports its the closest thing to an individual sport. A team’s output is basically the sum of individual outputs with very little complementarity. In baseball there is very little talk of one player making his teammates better. The production function is additive and, offensively, players are perfectly substitutable.
Soccer is at the other extreme where players are highly complementary. Scoring a goal is a total team effort. Even the best striker needs good chances. In soccer, the best players are more productive when there are other good players on the team. The production function is closer to Leontif.
These differences in production explain the differences in market structure. Consider competitive bidding for a top player in the two sports. In baseball that player’s marginal product is the same on any team he would play for so many teams will compete and any team could land him. In soccer that player’s marginal value is highest for the team that is already the best. The competition is going to be very weak and he is likely to sign with the best team.
In baseball competition levels the playing field. In soccer it tilts it even further.
Many laws that restrict freedoms are effectively substitutes for private contracts. In a frictionless world we wouldn’t need those laws because every subset of individuals could sign private contracts to decide efficiently what the laws decide bluntly and uniformly. But given transaction costs and bargaining inefficiencies those blunt laws are the best we can do.
Some people might want to sign contracts that constrain themselves. For example I might know that I am tempted to drink too many Big Gulps and I might want to contract with every potential supplier of large sugary drinks, getting them to agree never to sell them to me even if I ask for it. But this kind of contract is plagued not only by the transaction costs and bargaining inefficiencies that justify many existing planks in the social contract, but in addition a new friction: these contracts are simply not enforceable.
Because even with such a contract in place, when I actually am tempted to buy a Slurpee, it will be in the interest of both me and my Slurpee supplier to nullify the contract. (It doesn’t solve the problem to structure the contract so that I have to pay 7-11 if I buy a Slurpee from them. If that contract works then I don’t buy the Slurpee and 7-11 would be willing to agree to sign a second contract that nullifies the first one in order to sell me a Slurpee.)
These considerations alone don’t imply that it would be socially efficient to substitute a blanket ban on large sugary drinks for the unenforceable contracts. But what they do imply is that it would be efficient for the courts to recognize such a ban if a large enough segment of the population wants it. (And this is no way intended to suggest that one Michael Bloomberg by himself constitutes a large enough segment of the population.)
The Walt Disney Co. recently announced its intention to “evolve” the experience of its theme park guests with the ultimate goal of giving everyone an RFID-enabled bracelet to transform their every move through the company’s parks and hotels into a steady stream of information for the company’s databases.
…Tracking the flow through the parks will come next. Right now, the park prints out pieces of paper called “FastPasses” to let people get reservations to ride. The wristbands and golden orbs will replace these slips of paper and most of everything else. Every reservation, every purchase, every ride on Dumbo, and maybe every step is waiting to be noticed, recorded, and stored away in a vast database. If you add up the movements and actions, it’s easy to imagine leaving a trail of hundreds of thousands of bytes of data after just one day in the park. That’s a rack of terabyte drives just to record this.
Theory question: Suppose Disney develops a more efficient rationing system than the current one with queues and then adjusts the price to enter the park optimally. In the end will your waiting time go up or down?
Eartip: Drew Conway
Congratulations to our colleague Aviv Nevo on his appointment to this position which Thomson-Reuters says will make him the top non-lawyer at the Department of Justice (there’s a joke in there somewhere).
Aviv joined our department the same year I rejoined and we both wanted the same office. Highest seniority in our department determines priority for choosing offices and to break the tie there was a coin toss. I was in Boston and couldn’t actually witness the coin toss but they tell me I lost.
So Aviv got the office, but he also got seniority which means he is in line to be chairman before me. I am sure he will be back with us in time to take his turn.
Imagine a genie which randomly imposes across-the-board budget cuts unless Congress votes to stop them before they happen. This would be a good genie.
Its easy to blame the other side for not coming to an agreement. The genie’s cuts will happen because both sides will blame the other for not reaching an agreement to stop them. This is different than proposing and approving of cuts yourself because you would get the blame for that.
And of course a random genie is blameless.
It’s not a first-best genie. The cuts are random and across the board. But because of the asymmetry of blame they wouldn’t happen otherwise.
Sadly its not even a real genie so the cuts never happen. But Congress and President Obama have now learned how to replicate the genie: impose the cuts on a future congress. From the point of view of the future congress the previous congress is essentially a random genie.
The previous congress, not being an actual genie, nevertheless avoids blame because everyone expects the next Congress to do the sane thing and replace the sequester with something sensible.
All we can hope now is that the current Congress looks at this sequester “debacle” and concludes that in order to make it work as intended the next time the threatened cuts have to be even bigger.
Consider a team selling tickets for its upcoming baseball season. Before the season begins it offers a bundle of tickets for every game. Some of these games however are certain to have very low attendance (games on a Tuesday, games against poor opponents, etc.) The tickets for these games will be placed on the secondary market at very low prices. Indeed one of the biggest problems for teams is the inability to prevent those secondary market prices from falling so low that they cannibalize single-game box office sales. The problem is so severe that many baseball teams are making arrangements with StubHub to enforce a price floor on that exchange.
The problem has a much simpler solution: stop selling season tickets. The team should instead offer the following type of bundle: you may purchase tickets for all of the predictably high-demand games at the usual season ticket discount.Then you may add to that bundle any subset of the low-demand games you desire but each at a price equal to the face value of the ticket.
This arrangement will make both season ticket holders and the team better off. Season ticket holders will opt not to add the low demand games (unless the opponent is a team they really like for example) and since they weren’t going to those games anyway they are saving money.
The team will increase revenue: supply of tickets to low demand games will be controlled. Secondary market tickets will be priced at or near face value because nobody will buy a ticket at face value for a lousy game unless they actually plan to use the tickets. This enables the team to hold prices at their desired (i.e. revenue maximizing) level without cannibalism.
We, Jeff and Sandeep, are working with Northwestern Sports to launch what we think is going to be a revolutionary way to sell tickets to sporting events (and someday theatre, concerts, and restaurants…). Starting today it is in effect for two upcoming Mens’ Basketball games: The February 28 game against Ohio State and the March 7 game against Penn State.
We are using a system which could roughly be described as a uniform price multi-unit Dutch Auction. In simpler terms we are setting an initial price and allowing prices to gradually fall until either the game sells out or we hit our target price. Thus we are implementing a form of dynamic pricing but unlike most systems used by other venues our prices are determined by demand not by some mysterious algorithm.
But here is the key feature of our pricing system: as prices fall, you are guaranteed to pay the lowest price you could have got by delaying your purchase. That is, regardless of what price is listed at the time you reserve your seat, the price you will actually pay is the final price.
What that means is that fans have no reason to wait around and watch the price changes and try to time their purchases to get the best possible deal. We take care of that for you.
It also removes another common gripe with dynamic pricing, different people paying different prices for the same seats. Our system is fair: since everyone pays the lowest price, everyone will be paying the same price.
We explain all of the details in the video below. If you have any questions please ask them in the comments and we will try to answer them.
And Go ‘Cats!
Update: Price alerts are now available. You may send email to firstname.lastname@example.org to be notified when prices fall. (And if you just want to know when prices reach some target p, put that in your message.)
The paper doesn’t seem to exist yet but here are slides from talk by Raj Chetty, Emmanual Saez and Lazlo Sander. They randomly altered the incentives for referees at the Journal of Public Economics to see what it takes to get referees to give timely reports. Some referees were offered cash. Some were simply given shorter deadlines with no carrots. Still others were threatened with public shame if they did not submit reports on time. Not surprisingly the threat of humiliation caused many referees to refuse the contract altogether. Perhaps less surprisingly, cash didn’t do much better than simply shortening the deadline. The latter did help a bit.
Kofia krumple: Tobias Schmidt
- When you turn a bottle over to pour out its contents it is less messy if you do the tilt thing to make sure there is a space for air to flow back into the bottle. But which way of pouring is faster if you just want to dump it out in the shortest time possible? I think the tilt can never be as fast.
- I aspire to hit for the cycle: publish in all the top 5 economics journals. But it would be a lifetime cycle. Has anyone ever hit for the cycle in a single year?
- If you know you’ll get over it eventually shouldn’t you be over it now? And if not should you really get over it later?
- The efficient markets hypothesis means that there is no trading strategy that consistently loses money. (Because if there were then the negative of that strategy would consistently make a profit.) So trade with abandon!
- I predict that in the future the distinct meanings of the prepositions “in” and “on” will progressively blur because of mobile phone typos.
That commercial was rejected for the Super Bowl broadcast yesterday. And because of that it will be seen by many many people (even you!). Indeed the value of the publicity from being rejected rivals that of being accepted. You’ll get people actively watching your ad rather than just passively.
This is a problem for the broadcaster because first of all it is failing to capitalize on a valuable asset: the monopoly authority to reject ads. Second the plethora of rejected ads and their publicity dilutes the value of its other asset: the monopoly provider of broadcast airtime. So the Super Bowl broadcast network needs to find a way to capitalize on the publicity they can generate by rejecting ads and also to make rejected advertisers pay for the negative externality on accepted advertisers. How to do it?
Charge an enormous price to submit your ad for consideration. If you are accepted you get the submission fee refunded. If you are rejected, tough luck.
Added: You can also put a check box on the submission form allowing advertisers to secretly specify whether they want to be accepted or rejected.
Some might prefer the publicity/price of rejection over the actual broadcast. Without the checkbox they might not submit out of fear they will be accepted.
Imagine the publicity you can get when a marginal ad (like the one above) is rejected “unfairly.”
I say the deadweight loss here is not so large. Most art exhibitions are not self-financing from the side of the viewers, which suggests that the demand to see the pictures is not higher than the costs of mounting the exhibit. Arguably you can throw in philanthropic support as another part of “market demand,” but I consider that a separate valuation issue. Maybe our current artistic institutions are under-providing marketing opportunities for businesses and foundations, but that still won’t get you a major pent-up demand to view the pictures, again not relative to cost. The very popular pictures, such as the good works by the Impressionists and post-Impressionists, are shown quite frequently, including in traveling exhibitions.
Context matters a great deal in this setting. Currently most of the Louvre is not being viewed at any point in time, as the crowds tend to cluster in a few very well-known areas. Many people would want to go see anything they are told they ought to go see. What is underfunded is some kind of “demand for participation in a public event,” not the viewing of art per se. If only they could create more hullaballoo around the more obscure Flemish painters.
Almost all museums have large stretches of empty walls. I would put up many more pictures there, as indeed I do in my own home. That museums do not do this I find striking and indicative. Nor do I see viewers and visitors demanding this, if anything the unspoken feeling might be to wish for a bit less on the walls, so that one may have the feeling of having seen everything without exhaustion.
The costs of storing art are high. Perhaps the Louvre should sell some of its lower-tier works to private collectors. But the general public just doesn’t want so much more art to see, not if they have to pay for it and maybe even if they don’t.
But I can’t help but ask what was the deadweight loss of all of Tyler’s ideas lost to the world pre-blogosphere? Is MR self-financing? How good a measure is the price (free) of the consumers’ surplus it generates now?
I just hope this doesn’t make me a Flemish painter.
Check out the prices on Stub Hub for tickets to the upcoming Big10 basketball game between the Iowa Hawkeyes and the Wisconsin Badgers. Quite a few of them are significantly below the $24 face value of the tickets. This can happen because fans who buy season tickets for Badgers basketball are buying for the games against the conference powerhouses. For the games against cellar dwellers like Iowa they dump their tickets on the secondary market at whatever price they will fetch.
Coping with scalpers who buy tickets through the box office and resell them at inflated prices is one thing. You could have raised prices yourself but you chose not to. But what do you do when scalpers are undercutting your box office price?
You should buy the tickets back from the scalpers is what you should do. The fans who are going to buy from the scalper at the low price might also be willing to buy at box office prices. If you buy the cheap tickets on StubHub first then the box office is the only option left for them. And if they do buy from the box office you have made a profit because you bought low and sold high.
But there’s a chance those fans aren’t willing to pay box office prices and in that case you’re just losing money. So there’s a tradeoff. It means that you don’t want to buy secondary market tickets at prices just below your box office price but you definitely do want to buy the tickets priced so low that they are worth the risk. Indeed there is some optimal offer price that you should be prepared to repurchase tickets at.
In fact every venue’s box office should be both a buyer and seller of tickets with an optimally calculated spread between bid and ask prices.
Now you might wonder whether this only further encourages season ticket holders to dump their unwanted tickets. Indeed it does but that’s exactly what you want them to do. The tickets will be reallocated more efficiently and you will capture the gains from trade. Moreover, fans are now willing to pay higher prices for season tickets if they know they can easily resell their unwanted tickets. You can then raise season ticket prices to capture those gains.
Free as in liberated. Here’s the opening paragraph:
I wrote this paper with the recognition that it is unlikely to be accepted for publication. There is something liberating about writing a paper without trying to please referees and without having to take into consideration the various protocols and conventions imposed on researchers in experimental economics (see Rubinstein (2001)). It gives one a feeling of real academic freedom!
The paper reports on long-running experiments relating response times to mistakes in decision-making.
Its here. I like the purpose, as given on the masthead:
This blog is to help me remember stories and papers and provide ideas for students taking the Behavioral and Experimental class. It will focus on behavioral and experimental economics, with the occasional gender story.
Most of the posts are indeed links to papers with quotes from abstracts, but I enjoyed this one departure from normal programming
One of my colleagues talked about a (not very inspired) way to do research, which he adequately describes as keyword research (and which he denounces whole heartily). The idea is the following, which seems to work very well for theory papers: Take a bunch of keywords, select a few, check if a paper has been written if so, try again…
In that spirit, I came across the following blogpost: Sociology title Generator
Bearskin bow: Mobius.
Its called Nostra Culpa and its a 16 minute 2 act opera dramatizing the exchange on Twitter between Paul Krugman and Estonian President Toomas Ilves about that country’s austerity program. Robert Siegel interviewed the librettist and composer on NPR yesterday:
SIEGEL: I would sort of have expected you to have written this for a tenor and a baritone. But unexpectedly, for me at least, the two characters – Paul Krugman and President Ilves of Estonia – are both sung by the same mezzo-soprano.
BIRMAN: Right. Well, the mezzo-soprano is somebody I’ve worked with before and she’s, I think, one of the greatest talents in Estonia as a dramatic singer. And my idea – my sort of inspiration to set these words was not so much to make some kind of argument, but to have the singer portray the people themselves who are stuck in this – between these two sides.
SIEGEL: Now, one writer observed that the entire exchange between Krugman and Ilves consisted of a 70-word blog post with chart, and then four tweets. Puccini had a lot more to work with when he sat down to write “Tosca,” let’s say.
BIRMAN: Well, one could write an opera, a full-length two-hour opera, using just this content, in my opinion. Because, in a way, why is the story interesting? To me it’s interesting because we have been discussing this ever since 2008, 2009 – what to do and how to get out of this, and we’re still not out. And the story is being written as we go.
The opera has its debut on April 7 in Estonia.
Consider a monopolist which sells two different goods to two independent markets. The firm sets the profit maximizing price in the two separate markets and suppose one of those prices is high and the other is low. Now suppose the firm bundles the two goods: they are no longer sold separately but instead if you want one you must buy both. The profit-maximizing price of the bundle will be higher than the low priced good but lower than the high priced good. Consumers of the previously low-priced good are worse off, consumers of the previously high-priced good are better off because of the bundling.
This is one simple point to have in mind when thinking about bundling of cable channels versus a la carte pricing. The bundling mixes the elasticities of the two separate demand curves and leads to pricing in between the individual profit-maximizing prices. If sports channels are in high demand and food channels are in low demand then people who like food but not sports are justified in complaining about bundling.
But as Alex Tabarrok points out, these complaints are often poorly targeted, instead focusing on the differential costs cable networks charge the cable companies for access. Bundling is often viewed as a way of cross-subsidizing high-cost cable channels by raising prices on subscribers who view low-cost channels. For example Kevin Drum, responding to an article in the LA Times breaking down the cable companies’ balance sheets, asks for a la carte pricing so that
“sports fans would be forced to pay the actual cost of their sports programming without being subsidized by the rest of us.”
Alex presents a simple example to demonstrate that this focus on costs is misguided. But just because they’ve got their reasoning wrong doesn’t mean they came to the wrong conclusion. And in debunking the analysis Alex himself overlooks the basic point about bundling above.