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The Unbundled Economy: It’s one of the implications of (my guess at, given that I haven’t actually read) Free, its apparently what Tyler Cowen is talking about in his new book. As the price of transmitting small chunks of information crashes to zero, the efficient market structure no longer involves assembly and sale of bundles of chunks, but instead sale of the chunks themselves and after-market assembly.
Case in point, the porn industry (which is pretty much always at the leading edge of structural change.)
Vivid, one of the most prominent pornography studios, makes 60 films a year. Three years ago, almost all of them were feature-length films with story lines. Today, more than half are a series of sex scenes, loosely connected by some thread — “vignettes” in the industry vernacular — that can be presented separately online. Other major studios are making similar shifts.
…
In lieu of plot, there are themes. Among the new releases from New Sensations, a studio that makes 24 movies a month, is “Girls ’n Glasses,” made up of scenes of women having sex while wearing glasses.
But old habits die hard, even in the porn world:
“The feature is not as big a part of the industry today,” Mr. Orenstein said. But he says he still plans two to three bigger-budget releases each year, including the recently shot “2040,” which is about the pornography business of the future. Mr. Orenstein described the movie as “an almost Romeo-and-Juliet story between an aging porn star and a cyborg.”
As a part of a broader revival of Section 2 of the Sherman Act, the anti-trust division of the Department of Justice, under Obama appointee Christine Varney, has opened a review of potentially anti-competitive practices by the dominant telcom providers. One specific issue that has received attention is exclusionary contracting between wireless carriers (AT&T) and handset manufacturers (Apple iPhone.) The FTC is reportedly also exploring these contracts. Exclusive contracts bind a manufacturer’s handsets to specific carriers thereby hindering or preventing end-users from migrating to other carriers. The widespread nature of these contracts may create a barrier against entry by new, smaller wireless providers who cannot offer their users handsets that compete with the top models.
The review is reported to be at an early stage and may not lead to a formal investigation, but as this develops there are a few basic economic arguments to keep in mind. To start with, there is the benchmark “Chicago School” view which starts with the observation that exclusionary contracts require the voluntary agreement of the handset manufacturers. The manufacturers internalize the costs of the entry barrier because without entry they will have fewer competitive carriers to sell their phones to. Therefore, exclusive contracts must compensate manufacturers for this loss impying that these contracts will be in place only when the total surplus from exclusion exceeds the cost, i.e. when it is efficient. The Chicago argument is a longstanding pillar of regulatory policy that still holds sway today. From the article:
Jon Muleta, former wireless bureau chief of the FCC, said exclusive handset deals won’t be an issue the government can pursue on antitrust grounds unless major handset makers say they’re being forced into the deals. “The equipment providers enter into these deals willingly,” Mr. Muleta said.
The Chicago argument ignores the costs to end users from reduced competition in wireless service. It would apply only if manufacturers internalize all of the benefits to consumers from increased competition. But under any reasonable model of the wireless market structure, end-user consumer surplus would increase with more competition for wireless service and this becomes an externality relative to the parties in the Chicago bargain.
Secondly, the Chicago argument has been discredited as it takes a naive view of the way contract negotiation would work. Implicitly, the Chicago argument assumes that handset manufacturers must be compensated at least what they would earn if entry were to occur. But scale economies imply that a new carrier will enter only if sufficiently many, or sufficiently large, manufacturers remain free of exclusive deals. The dominant carriers can use a “divide and conquer” strategy which exploits the difficulty for handset manufacturers to coordinate severing their exclusive deals. Without this coordinated threat, manufacturers cannot extract the compensation envisioned in the Chicago argument, and again efficiency breaks down.
The definitive references here are Rasmusen, Rasmeyer, and Wiley “Naked Exclusion” and a follow-on comment by Segal and Whinston, both in the American Economic Review.
There is a separate defense of exclusive contracts, often cited and also reflected in the article.
Paul Roth, AT&T’s president of retail sales and service, told Congress last month that the billions of dollars the company invests in its network and services would be put at risk if government were to “impose intrusive restrictions on these services or the way that service providers and manufacturers collaborate on next-generation devices.” Mr. Roth said there is plenty of competition and innovation in the wireless industry.
AT&T’s tremendous investment in its 3G network will pay off only because of its exclusive deal with Apple to market the iPhone. Thus, it is often argued that exclusive contracts are in fact pro-competitive as they reward investment with profits that would otherwise be subject to hold-up or competed away. I will take up this argument in a subsequent post.
Love that sushi from Popeye’s. (toque tilt: kottke.)
Here is an excellent example of social choice paradoxes in practice: the voting system for the Olympic Venue. The article illustrates cycles, failure of unanimity and violations of independence of irrelevant alternatives. A great teaching aid, I will certainly be using it next time I teach my intermediate micro course. I thank Taresh Batra for the pointer.
By the way, there is another perfect social choice example from the olympics. In the 2002 women’s figure skating competition, Michelle Kwan was leading Sarah Hughes when the final skater, Irina Slutskaya took the ice. Slutskaya put in a sub-par performance which was nevertheless good enough to surpass Kwan. But the real suprise was that this performance by Slutskaya reversed the ranking of Kwan and Hughes so that Hughes leaped ahead of both Kwan and Slutskaya and won the gold. In the end, Hughes took the gold, Slutskaya took silver, and Kwan went home with the bronze medal. Here is a an old story.
This article (wig wiggle: The Browser) discusses various ways the Chinese judicial system differs from Western courts. One significant difference is summarized by Columbia Law Professor Benjamin Liebman:
Yet China’s courts are as deeply committed to populism as they are to professionalism. If Chinese judges decide to ignore a law in order to preserve thousands of jobs, they aren’t violating a sacred legal precept. “They’re supposed to take into account popular interests,” Liebman explains.
The article presents this in a way that presupposes that it will be obvious to us that this is a bad approach to judging. Indeed, public debate in the US about “judicial philosophy” also takes for granted that judges should base their opinions on the law, and not on popular opinion. But why is this so obvious? Why shouldn’t the job of a judge be to decide on a case-by-case basis what is in the public interest?
Put aside the obvious reasons. Popular opinion may be hard to read and political voice may not be equally allocated. Judges are administering justice, especially for those without political voice. Popular opinion may be short-sighted and judges are expected to be immune to short-run pressures and make decisions with better long-run consequences.
But even in cases where it is transparent and uncontroversial what the public interest is and there is no short-run/long-run trade-off, judges still should not decide cases on that basis alone. In fact, one of the most important functions of the court is to act against the public interest. Because incentives to make good decisions typically require that we expect a bad outcome if instead we make bad decisions. And ex post that bad outcome is typically not in the public interest. A court that is committed to uphold the law and act against the public interest ex post advances the public interest ex ante.
An interesting New Yorker article outlines, Operation Ceasefire, an anti-gang violence program in Cincinnati:
“David Kennedy, a professor from John Jay College of Criminal Justice, went to Cincinnati in the fall of 2006 to pitch his program, which is sometimes known as Ceasefire. Ceasefire begins with the fact that a small number of hardened criminals commit a hugely disproportionate number of serious violent crimes. Kennedy explained that, in Cincinnati, the police would identify gang members who were on parole or probation and compel them to attend a meeting. There, the cops would demand that the shootings end, and promise that, if they did not, the punishment would be swift and severe and target the entire gang. The city would also make life coaching and job counseling available to those who wanted out of the thug life.”
It seems the economic logic is this: You might not have the evidence or ability to punish only the few hardened criminals. If you punish the entire gang, they have good incentives to monitor the guy doing the violent crime. On the face of it, it seems as if it is futile to punish the innocent gang members but if they have a monitoring role they become like extra police officers. It’s hard and dangerous to reward them for turning in fellow gang members so carrot incentives are impossible. But stick incentives are not.
I enjoyed this article in the Boston Globe which surveys a variety of theories for the (mostly anectodal) tendency for the most vocal moralizers to be the most prone to vice. When you read an article like this you have to start with simple null hypothesis that, other things equal, making a person more concerned about moral behavior will make them inclined to act morally. Many of the stories in this article are tempting, mostly because we want to hate hypocrites, but ultimately don’t put up a good counterargument to this benchmark view. However the following excerpt is more subtle and in my opinion the most robust story offered.
When asked about the phenomenon of the hypocritical moralizer, psychologists will often point to “projection,” an idea inherited from Freud. What it means – and there is a large literature to back it up – is that if someone is fixated on a particular worry or goal, they assume that everyone else is driven by that same worry or goal. Someone who covets his neighbor’s wife, in other words, would tend, rightly or wrongly, to see wife-coveting as a widespread phenomenon, and if that person were a politician or preacher, he might spend a lot of his time spreading the word about the dangers of adultery.
I wanted to find my way to the famous pizzerias of Naples. But with two kids and luggage in tow, it was too daunting. If only I’d known about this service I might have done it:
“It seemed like a great idea at the time: hire ex-convicts to escort tourists through seedy Neapolitan streets. Who better to explain to the uninitiated the potential dangers lying in wait?
But after less than a month, the experiment has already run into trouble. The former convicts recently staged a wildcat strike after one worker was taken to police headquarters over a verbal altercation with a traffic officer.
The argument was about a fine issued the day before to a worker with the group, who had crossed the street just a few steps from a crosswalk. “The first jaywalking fine issued in Naples in 200 years,” Corrado Gabriele, the program’s main institutional sponsor, said dryly.”
We should replicate this program in Chicago.
At a mafia trial in 1969:
There were sixty-four defendants, all from the
town of Corleone. The charges related to a mafi a war in Corleone that started in 1958,
and resulting in over fifty murders. There was signifi cant evidence tampering during the
trial, which experienced the rst public intimidation act. In fact, as the jury retired in
July, they and the judge received an anonymous note that read: To the President of the
Court of Assise, and members of the Jury: You have not understood, or rather, you don’t
want to understand, what Corleone means. You are judging honest gentlemen of Corleone,
denounced through caprice by the Carabinieri and Police. We simply want to warn you
that if a single gentleman from Corleone is convicted, you will be blown sky high, you will
be wiped out, you will be butchered and so will every member of your family. We think
we’ve been clear. Nobody must be convicted. Otherwise you will be condemned to death
– you and your families. A Sicilian proverb says: A man warned is a man saved. It’s up
to you. Be wise.” All sixty-four defendants were acquitted. Whilst there was undoubtedly
witness intimidation and evidence tampering, a lot of the evidence was fairly thin.
This is from the paper “Accomplice Witnesses, Organized Crime and Corruption: Theory and Evidence from Italy” by Antonio Acconcia, Giovanni Immordino, Salvatore Piccolo and Patrick Rey. As I told Salvatore in Anacapri, with more data and a bit of work, this will be a cool paper.
There has been a run on one of the largest banks in an economics-themed online role-playing game called Eve. The event merited an article at the BBC. The run was triggered when Ricdic, an executive of the bank made off with a large sum of virtual lucre and exchanged it for real-world cash.
Eve Online has about 300,000 players all of whom inhabit the same online universe. The game revolves around trade, mining asteroids and the efforts of different player-controlled corporations to take control of swathes of virtual space.
It has now emerged that Ricdic used the cash to put down a deposit on a house and to pay medical bills.
“I’m not proud of it at all, that’s why I didn’t brag about it,” Ricdic told Reuters. “But you know, if I had to do it again, I probably would’ve chosen the same path based on the same situation.”
Apparently, the bank had tremendous reserves and has so far withstood the run. Here is more information. Either real-world bank regulators have something to learn from Eve or the other way around because here is Ricdic’s comeuppance:
Ricdic has now been thrown out of the game as trading in-game cash for real money is against Eve Online’s terms and conditions.
The rules governing play within Eve would not have sanctioned Ricdic if he had simply stolen the cash and used it in the game, nor if he had bought kredits with real dollars.
Fedora Flourish: BoingBoing
A few years ago, we had breakfast at Sandeep’s house and he made us a delicious breakfast. One of the dishes was a strange egg and tortilla chip creation that everybody loved. I got the recipe from Sandeep and it has become part of our regular rotation ever since. We never knew what to call it so in my house it has always been known as Sandeep’s Special Breakfast. (I since had breakfast in Mexico City and I noticed a resemblance to something called Chilaquiles, so I guess that is what it must be.) It’s extremely simple to make and super yummy. It works great for lunch or dinner too.
1 yellow onion, sliced into wedges.
1 bag of Whole Foods restaurant style tortilla chips. (Whole Foods is not important but you want the chips that are made from tortillas, not the denser chips that are made directly from masa.)
8 eggs, lightly beaten
1 jar of tomatillo salsa. Anything is fine here, but this stuff called Xochitl
works really well. It has a smoky flavor that makes your Special Breakfast extra special. You can get it at Chicago-area Whole Foods.
Over high heat, add olive oil to a large saute pan and saute/fry the onions. You want them to brown and then soften a little. Turn down the heat and add a few handfuls of tortilla chips to the pan, breaking them with your hands into medium sized pieces. Toss them around in the pan to get them coated with the oil. Then add the eggs. Let them sit in the pan for a minute to cook a bit and then break the whole mass up and turn it over to cook some more. When the eggs are not quite completely done, pour in some of the salsa. The right quantity is something you figure out form experience. It should not be drenched in salsa. If the salsa is watery you should raise the heat and cook off some of the water.
You are done. It looks something like this on the plate.
(Until you serve the plate that is. Not long after that the plate is empty.)
Paul Krugman songs continue:
Paul may have the blues but we don’t: Happy 4th of July!
(Hat tip: Our music correspondent, Tomas Sjostrom)
Via Robin Goldstein, the work of Coco Krumme who analyzed wine reviews and classified words according to whether they are typically used to describe expensive or inexpensive wines.
She found that “about 65% of commonly occurring words are non-overlapping.” Words like “old,” “elegant,” “intense,” “supple,” “velvety,” “smoky,” “tobacco,” and “chocolate” predict expensive wines; “pleasing,” “refreshing,” “value,” “enjoy,” “bright,” “light,” “fresh, “tropical,” “pink,” “fruity,” “good,” “clean,” “tasty,” and “juicy” predict cheap wines. As for suggested pairings, “steak” and “shellfish” predict expensive wines; “chicken” predicts cheap wines.
As Robin points out it matters whether the reviews were based on blind tastings. If so, then the choice of word is in response to the taste of the wine and the correlation with price just tells us which words reviewers use to convey good taste. (Assuming you think that price is correlated with taste.) If the tastings were not blind then it is more likely that reviewers are responding to the label and are choosing words in response to the price.
Compared to non-fiction. Co-authorships leverage specialization. Certainly there are heterogeneous strengths in fiction writing and this should create gains from collaboration. But we don’t see it. I can’t think of any great work of fiction that was co-authored. There must be a good reason.
- Writing style is crucial in fiction. Multiple voices would make the work feel disjointed. They could try to collaborate on the writing process and together create one voice but maybe this puts too much of a drag on the creative process.
- Still, there are some who are good at imagining plots and characters and others who excel at the stage of actually writing once the idea has been conceived. Why don’t we see this kind of partnership?
- I bet there are great partnerships like this but we never know it because the partners agree to a single nom de plume.
My bottom line is that, ironically, the attraction of great fiction is a connection with the author. When we read beautiful prose or get turned on by an ingenious plot twist, we think of the author and we enjoy being close to the mind that created it. Multiple authors would confuse and dillute this feeling.
Jonah Lehrer illustrates a common misunderstanding of (im)probability. He writes:
It’s been a hotly debated scientific question for decades: was Joe DiMaggio’s 56-game hitting streak a genuine statistical outlier, or is it an expected statistical aberration, given the long history of major league baseball?
He is referring to the observation that 56-game hitting streaks while intuitively improbable will nevertheless happen when the game has been around for long enough. Does this make it less of a feat?
- Say I have a monkey banging on a keyboard. Take any seqeunce of letters. The chance that the monkey will bang out that particular sequence is impossibly small. But one sequence will be produced. When we see that sequence produced do we change our minds and say that’t not so surprising after all because there was certain to be one unlikely sequence produced? No. Similarly, the chance that somebody will hit safely in 56 straight games could be high, but the chance that it will be player X is small. Indeed, that probability is equal to the probability that player X is the greatest streak hitter ever to play the game. So if X turns out to be Joe DiMaggio then we conclude that Joe DiMaggio indeed accomoplished quite a feat.
- We might be asking a different question. We grant that DiMaggio achieved the highly improbable and hit for the longest streak of any player in history, but we ask whether 56 is really all that long? After all, he didn’t hit for 57, which is even less likely. To address this question we might ask, on average, how many players “should” hit safely in 56 straight games in the time that the game has been around? But this question is very easy to answer. Our best estimate of the expected number of players to hit 56-game streaks is 1, the actual number. (Because the number is close to zero, this estimate is noisy, but this is still the best estimate without making any assumptions about the underlying distribution.)
Should we be more scared of North Korea after their recent nuclear tests? Kim Byung-Yeon and Gerard Roland say “No”! They study the impact of major events related to North Korea (e.g. the conduct of the nuclear test in 2006) on South Korean financial markets and conclude:
“We found basically no effects on financial markets of events perceived as increasing the tension on the Korean peninsula. In a nutshell, the financial markets in South Korea are not afraid of Kim Jong-Il.”
They use “event study methodology” which is typically used in finance to study mergers. Prices before and after the merger are used to estimate its impact on value. The key is getting the date of the event right. If you get it too late for example, the price already incorporates the event. For example, if the South Korean markets had already incorporated the “news” of the North Korean test, they would not react significantly to the actual test. Not sure how the authors deal with this issue. In any case, their approach is a highly original attempt to apply economic methods to foreign policy.
In case you have not been following the catfight, let me get you up to speed. Chris Anderson wrote a book called Free. I haven’t read it, but it apparently says “all your ideas are belong to us” because the price of ideas is crashing to zero. Malcom Gladwell says “please don’t let my employer read that”…I mean, “No its not.”
Let’s have a model. There are tiny ideas and big ideas. The tiny ideas are more like facts, or observations or experiences. They are costless to produce but costly to communicate. They are highly decentralized in that everybody produces their own heterogenous tiny ideas. The big ideas are assembled from a large quantity of tiny ideas. Different people have different production technologies for producing big ideas from small ones. These could differ just in cost, or also in terms of the quality of big ideas that are produced, it changes the story a little but doesn’t change the economics.
Start with a world where the marginal cost of communicating a tiny idea to another individual is large. Then the equilibrium market structure has big-idea producers who incur the high cost of acquiring tiny ideas, assemble them into big ideas and communicate the big ideas to the masses for a price. This market structure sustains high prices for big ideas and sustains entry by big-idea specialists.
Now suppose the marginal cost of communicating the tiny ideas shrinks to zero. Then an alternative for end users is to assemble their own big ideas for their own consumption out of the tiny ideas they acquire themselves for close to nothing. The cost disadvantage that the typical end user has is compensated by his ability to customize his palette of tiny ideas and resulting big ideas to complement his idiosyncratic endowment of other ideas, tastes, etc. The price of big ideas crashes. Former producers of big ideas exit the market. This is all efficient.
An important implication of this model is that the products that Anderson expects to be free are not the products Gladwell produces. So when Gladwell says that this is absurd because the economics do not support big ideas being sold at a price of zero, he is right. But that is because the big ideas are not being sold at all, and this is all efficient.
Our colleagues, Eran Shmaya and Rakesh Vohra have started a blog, The Leisure of the Theory Class. Only three posts so far, but it promises to be a feast of Gale-Stewart games, and gossip. I look forward to them making fun of Sandeep too.
When you self-check-in to United Airlines, they make a series of offers where you can upgrade to Economy Plus, get an aisle seat etc.
Why do they do this at the last minute? They are already experts at price discrimination but this usually occurs when you buy a ticket using advanced purchase, cancellation fees etc to separate out different buyers with different willingness to pay. You could do the same with aisle seats and Economy Plus.
Implementing price discrimination at the last minute helps you respond to information, e.g. how full the plane is, which you only have available at that time. Is that the only advantage?
There is a possible disadvantage for the airlines- price discrimination at the time of purchase is transparent to other airlines. They can coordinate on the pricing. But last minute pricing is intransparent. Maybe United even cuts the advance purchase fare, gives only interior seats to get surplus back via an “add-on” price for an aisle seat. This might trigger a price war.
On the other hand “add-ons” are very effective for extracting suplus at hotels (mini-bars etc) and for credit card companies (late fees etc). Is this what airlines are hoping?
Not Exactly Rocket Science describes an experiment in which vervet monkeys are observed to trade grooming favors for fruit. At first one of the monkeys had an exclusive endowment of fruit and earned a monopoly price. Next, competition was introduced. The endowment was now equally divided between two duopolist monkeys and as a result the price in terms of willingness-to-groom dropped.
Now, were the monkeys playing Cournot (marginal cost equals residual marginal revenue) or Bertrand (price equals marginal cost)? (The marginal cost of trading an apple for a grooming session is the opportunity cost of not eating it.) We need another treatment with three sellers to know. If the price falls even further then its Cournot. In Bertrand the price hits the competitive point already with just two.
Intermediate micro question: Can Monkey #1 increase his profits by buying the apples from Monkey #2 at the equilibrium price and then acting as a monopolist?
At the blog Everything Finance, Jonathan Parker breaks down the implications of the State of California issuing IOUs to rollover its debts, essentially creating a new currency whose value is pegged to the US Dollar. He makes a number of interesting points including the observation that since California cannot print Dollars, and cannot issue (conventional) debt, the IOUs place the State in a predicament reminiscent of financially-distressed countries having to defend a pegged exchange rate.
And unfortunately, the history of fixed exchange rates in practice includes lots and lots of these effective defaults. Governments that can issue these i.o.u.’s and have trouble balancing budgets tend to issue a greater value of their currencies than they have the will or ability to maintain. And default follows.
Prior to “maturity” will these IOUs trade at some market price reflecting the probability of default? One question is whether banks will be interested in buying IOUs, offering liquidity in return for the asset and a premium? The strategic issue is whether politically the State will find it more or less attractive to default if the IOUs are still largely held by private citizens, or instead mostly by banks?
My guess is that, in a crisis, a small number of banks would more effectively pressure the State to meet their obligations than if IOU holdings were less concentrated. If so, then I would expect banks to be buying IOUs at a steep discount. But does this create a Grossman-Hart style free-rider problem analogous to tendering shares in takeover bids?
As Jeff pointed out in an earlier post, David Levine thinks rational choice theory is remarkably successful and that behavioral economics may be doomed. This message has made it into experiments and the New York Times:
[S]uppose, instead of scanning people’s brains as they’re sipping wine in a laboratory, you tested them in a more realistic situation: a restaurant where they’re spending their own money. That challenge was undertaken at an upscale restaurant in Tel Aviv by two behavioral economists, Ori Heffetz of Cornell and Moses Shayo of the Hebrew University of Jerusalem, who expected to be able to manipulate diners’ choices by changing the prices on the menu.
Unbeknownst to the diners or to their waiters, the economists monitored the choices of people who ordered from the prix fixe menu. The three-course meal cost included a choice of five entrees: shrimp gnocchi, pork shank, red mullet fillet, sausage or stuffed artichoke.
Next to each of these entrees on the menu, in parentheses, was the cost of what it would cost to order that entree from the à la carte menu. These prices didn’t affect the cost of the prix fixe meal, which was the equivalent of $30 no matter what the entree, but the researchers expected just the sight of the prices to make a difference. If the mullet were listed at $20 and the other entrees were $17, more people would presumably be enticed into ordering the seemingly more valuable fish.
But after three months of testing various combinations of prices, the researchers found they couldn’t sway the customers. Putting a higher price on the shrimp or any other entree didn’t make people more likely to order it.
This same stubbornly independent streak was manifest in another food experiment by the same researchers. This time they let people sample two kinds of candies — peanut butter bars and caramels — and varied the sticker prices for each one.
Superficially, the manipulation seemed to work, because people said they would be willing to pay more for a candy if it had a higher sticker price, but that was just in answer to a hypothetical question. When people were given a chance to pick a bag of candy to take home, they pretty much ignored the sticker prices and chose what they liked.
Why weren’t people duped into favoring the high-priced candies and entrees? Why did they follow their own tastes?
“Maybe, sometimes, old-fashioned economics is just about right,” Dr. Shayo says. “Maybe when it comes to food, people do have reasonably stable preferences. Some people like shrimp and some don’t, even if it’s worth a lot of money.”
Interestingly, the results also back up another hobbyhorse of economists: experiments with real payoffs give very different results to those relying on answers to hypothetical questions. As economic decisions involve real payoffs, its the results with real consequences that are a better predictor of what decision-makers will do when faced with real decisions. Economists insist that research papers with experiments use monetary rewards. I always wondered if this really mattered – perhaps it does.
Apparently we have arrived at the long run and we are not dead.
Do you remember the Microsoft anti-trust case? The anti-trust division of the US Department of Justice sought the breakup of Microsoft for anti-competitive practices mostly centering around integrating Internet Explorer into the Windows operating system. In fact, an initial ruling found Microsoft in violation of an agreement not to tie new software products into Windows and mandated a breakup, separating the operating systems business from the software applications business. This ruling was overturned on appeal and evnetually the case was settled with an agreement that imposed no further restrictions on Microsoft’s ability to bundle software but did require Microsoft to share APIs with third-party developers for a 5 year period.
Today, all of the players in that case are mostly irrelevant. AOL, Netscape, Redhat. Java. Indeed, Microsoft itself is close to irrelevance in the sense that any attempt today at exploiting its operating system market power to extend its monopoly would cause at most a short-run adjustment period before it would be ignored.
Microsoft was arguing at the time that it was constantly innovating to maintain its market position and it was impossible to predict from where the next threat to its dominance would appear. Whether or not the first part of their claim was true, the second part certainly turned out to be so. It is hard to see a credible case that the Microsoft anti-trust investigation, trial, and settlement played anything more than a negligible role in bringing us to this point. Indeed the considerations there, focusing on the internals of the operating system and contracts with hardware manufacturers, are orthogonal to developments in the market since then. The operating system is a client and today clients are perfect substitutes. The rents go to servers and servers live on the internet unconstrained by any “platform” or “network effects”, indeed creating their own.
The lesson of this experience is that in a rapidly changing landscape, intervention can wait. Even intervention that looks urgent at the time. Almost certainly the unexpected will happen that will change everything.
I read news mostly through an rss reader. The Wall Street Journal syndicates only short excerpts of their articles and if I click through I get a truncated version of the article follwed by a friendly invitation to subscribe to the journal in order to view the rest of the article. It looks like this.
But its not hard to get the full text of the article. I just use google and type in the title of the article. The first link I get is a link to the full text, no subscription required. I always explained this to myself using a simple market-segmentation idea. WSJ will not give their content away to someone who is browsing their site directly because that person has revealed a high value for WSJ content. Someone who is googling has revealed that they are looking for relevant content, without regard to source. There is more competition for such a user so the price is lower.
But today I noticed that bing, Microsoft’s new search engine, does not get the same special treatment. If I bing “At Chicken Plant, A Recession Battle,” the link provided leads to the same truncated article as my rss reader. Since users have free entry across search platforms I can’t see any reason why bing-searchers (bingers?) would be systematically different than googlers in terms of the economics above. Therefore I am giving up on my theory. What are the alternatives?
- Google has a contract with WSJ?
- WSJ would like to shut out googlers too but finds it hard to shut off a service that users have come to expect. Knowing this, they are keeping bingers out from the outset.
- The game between content providers has multiple equilibria. On the google platform they are playing the users’ preferred equilibrium. On the bing platform they have coordinated on their preferred equilibrium.
- Google has figured out a secret back-door that bing hasn’t found and WSJ just hasn’t gotten around to closing.
Ok the ideas are gettng more and more lame. I am stumped.
Incidentally, there was an article in the New York Times about DOJ investigations of Google, and a Google PR offensive:
“Competition is a click away,” Mr. Wagner says. It’s part of a stump speech he has given in Silicon Valley, New York and Washington for the last few months to reporters, legal scholars, Congressional staff members, industry groups and anybody else who might influence public opinion about Google.
“We are in an industry that is subject to disruption and we can’t take anything for granted,” he adds.
I collect kludges. Its an especially welcome addition to the collection when it involves a tasty snack:
DunceCap Doff: There I Fixed It.
I’ve been on Capri for a week for work. Here are some impressions largely of Anacapri.
Hotel
We stayed at the Casamariantonia. There were four of us so we got a suite. It’s pretty pricey but actually cheaper than the hotels. The hotel is family-owned and they are pretty helpful – the father walked with us part of the way to show directions to a rustic path from Anacapri to the Blue Grotto. The grandmother makes fresh tarts for the breakfast buffet. Our room was nice and had a small kitchen. There’s a grocery store opposite so you can cook if you want to. There’s balcony where you can hang out and good air-conditioning. Two downsides: no swimming pool (they are waiting for a permit) and no WiFi in rooms (you have to go downstairs to the lobby). This is the main reason for my lack of posts!
Restaurants
Our favorite by far was Da Gelsomina (photo was taken there). They have a swimming pool too. There is hefty charge (incl for sunbeds, towels, umbrella as well as entrance) but you get a discount if you eat there and/or stay at Casamariantonia. There is the usual Capri fare, ravioli caprese, insalata caprese, pennette aumm aumm etc, and it’s all done very well. There are also dishes you do not find elsewhere (e.g. gnocchi with gorgonzola and arugula), great fried stuff as an appetizer. They make their own organic wines which are delicious. Down the road from the restaurant there are two spots with amazing views of the lighthouse and the Faroglioni, three dramatic rocks in the ocean. They also have rooms. It’s a bit out of the loop at the top of a hill but they have a free bus service to drop you off and pick you up in downtown Anacapri. Might try it next time.
At 1.4 Euros to the dollar, costs mount up. Pizza is a good standby to tighten the belt. Ristorante Arcate does good pizza. Trattoria Il Solitario does pizza and also some original pastas (e.g. paccheri with lardo and fava beans).
What to do
1. Capri Walk up to Villa Jovis, Emperor Tiberius’s old home. Now in a state of decay. Great views. Walk back into town and eat at Bar Jovis or at Da Gemma, Graham Greene’s favorite restaurant with great views over the mountain and sea. There’s a bunch of chi-chi shops if you are into that kind of thing.
2. Boat trip Splash out for the personal boat ride (around E 50 more than the sardine can version). How else would you ride through the hole in the central Faroglioni?
3. Walk to Grotta Azzurra Take nice old pedestrian walk from Anacapri, not the main road. If you get lost you can find the main road.
4. Hike: There is a great walk along the sea from one pirate watchtower to another (not suitable for young kids).
Things to watch out for: Chair lift up to top of Monte Solaro has individual seats – not good for kids. Grotta Azzurra closes when sea is choppy and there can be a long wait. Go either before tourist hordes arrive from Naples or after they leave. Incidentally, Naples is a bit overwhelming. It feels like Bombay. So be prepared!
Top chess players, until recently, held their own against even the most powerful chess playing computers. These machines could calculate far deeper than their human opponents and yet the humans claimed an advantage: intuition. A computer searches a huge number of positions and then finds the best. For an experienced human chess player, the good moves “suggest themselves.” How that is possible is presumably a very important mystery, but I wonder how one could demonstrate that qualitatively the thought process is different.
Having been somewhat obsessed recently with Scrabble, I thought of the following experiment. Suppose we write a computer program that tries to create words from scrabble tiles using a simple brute-force method. The computer has a database of words. It randomly combines letters and checks whether the result is in its database and outputs the most valuable word it can identify in a fixed length of time. Now consider a contest between to computers programmed in the same way which differ only in the size of their database, the first knowing a subset of the words known by the second. The task is to come up with the best word from a fixed number of tiles. Clearly the second would do better, but I am interested in how the advantage varies with the number of tiles. Presumably, the more tiles the greater the advantage.
I want to compare this with an analogous contest between a human and a computer to measure how much faster a superior human’s advantage increases in the number of tiles. Take a human scrabble player with a large vocabulary and have him play the same game against a fast computer with a small vocuabulary. My guess is that the human’s advantage (which could be negative for a small number of tiles) will increase in the number of tiles, and faster than the stronger computer’s advantage increased in the computer-vs-computer scenario.
Now there may be many reasons for this, but what I am trying to get at is this. With many tiles, brute-force search quickly plateaus in terms of effectiveness because the additional tiles act as noise making it harder for the computer to find a word in its database. But when humans construct words, the words “suggest themselves” and increasing the number of tiles facilitates this (or at least hinders it more slowly than it hinders brute-force.)
We will take a first glimpse at applying game theory to confront the incentive problem and understand the design of efficient mechanisms. The simplest starting point is the efficient allocation of a single object. In this lecture we look at efficient auctions. I start with a straw-man: the first-price sealed bid auction. This is intended to provoke discussion and get the class to think about the strategic issues bidders face in an auction. The discussion reaches the conclusion that there is no dominant strategy in a first-price auction and it is hard to predict bidders’ behavior. For this reason it is easy to imagine a bidder with a high value being outbid by a bidder with a low value and this is inefficient.
The key problem with the first-price auction is that bidders have an incentive to bid less than their value to minimize their payment, but this creates a tricky trade-off as lower bids also mean an increased chance of losing altogether. With this observation we turn to the second-price auction which clearly removes this trade-off altogether. On the other hand it seems crazy on its face: if bidders don’t have to put their money whether mouths are won’t they now want to go in the other direction and raise their bid above their value?
We prove that it is a dominant strategy to bid your value in a second-price auction and that the auction is therefore an efficient mechanism in this setting.
Next we explore some of the limitations of this result. We look at externalities: it matters not just whether I get the good, but also who else gets it in the event that I don’t. We see that a second-price auction is not efficient anymore. And we look at a setting with common values: information about the object’s value is dispersed among the bidders.
For the comon-value setting I do a classroom experiment where I auction an unknown amount of cash. The amount up for sale is equal to the average of the numbers on 10 cards that I have handed out to 10 volunteers. Each volunteer sees only his own card and then bids. If the experiment works (it doesnt always work) then we should see the winner’s curse in action: the winner will typically be the person holding the highest number, and bidding something close to that number will lose money as the average is certainly lower.
Here are the slides.
(I got the idea from the winner’s curse experiment from Ben Polak, who auctions a jar of coins in his game theory class at Yale. Here is a video. Here is the full set of Ben Polak’s game theory lectures on video. They are really outstanding. Northwestern should have a program like this. All Universities should.)
Wine and movies have a lot in common. They are both worldwide markets for highly differentiated products with critics who are visible and economically important. But while there are as many film critics as there are films and opinions about films, there are just a handful of highly influential wine critics, Robert Parker’s Wine Advocate, The Wine Spectator, and a few others. This is somewhat counterintuitive because there are many, many more wines than films. Here are a few thoughts.
- People know their taste in movies better than they know their taste in wine. This makes it easier to find idiosyncratic movie critics that have similar tastes. Similar critics face an entry barrier in the wine world.
- All wines taste the same and the role of a critic is just to tell you which wines you are supposed to like and which wines you can brag about drinking. This creates a natural oligopoly among the wine critics who the market coordinates on.
- Wines are given as gifts and movies are not. This means that wine critics are rewarded for reflecting general rather than specialized tastes.
- A very small fraction of wines are good and wine criticism just means tasting thousands of wines until you find the good ones. This creates increasing returns to scale in wine criticism, another source of natural monopoly power.
- The movie businesss is less competitive so a blockbuster film earns more rents and as a result there is more rent seeking, especially in marketing. Thus the emergence of David Manning. There is no analogous force behind “The feel good wine of the year!”
- Wine critics provide a service for wine-makers, film critics are serving film-goers. What makes a good wine critic is the ability to articulate what wine buyers will buy. Whoever is best at this will dominate.
Cynics believe some version of 6 and 2 (Parkerization.) I don’t understand why 5 wouldn’t be the same for wine and film maybe this is just a matter of time. 4 may be true in the mid-range but whether this matters depends on whether you think wine critics are really influential here or rather at the high end where there are relatively few consistent performers. I lean toward 1, Gary Vaynerchuck notwithstanding, which is a less cynical version of 6.
I believe that the study referred to in this CNN piece is pure noise. (Don’t bother watching it. Bottom line: 1 in 5 teens admits to “sexting.”) But that doesn’t mean that it carries no information. The mere fact that this claim would be repeated, at the expense of the marginal piece of news, turns pure noise into information.
Cheap Talk 