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It’s 11/11/11, what else?

In some sense every day is a day to appreciate corduroy, but in another sense there is only one true Corduroy Appreciation Day, as declared by the venerable Corduroy Appreciation Club. That is 11|11, the date that most resembles corduroy. And this Friday being 11|11|11, it is the date that most resembles corduroy, ever. (Except for 11|11|1111, but I’m pretty sure the people of that time had yet to discover essential comforts like modern medicine, indoor plumbing, and finely waled fabrics.)

Portland seems to be the place to be.

I just caught the first episode, “Heat and Meat”, of the new season of Next Iron Chef. There were two parts to the competition. In the first part, chefs worked in pairs cooking a pig (the meat) over an open fire (the heat) in the wilderness. In the second part, the two chefs in the losing team had to face each other in a sudden death cookoff.  If you get to choose your teammate, one obvious strategy is to pick the best chef standing.  This maximizes your chance of winning outright and hence avoiding the elimination round. In fact, chef-contestant Spike got to pick the teams and did exactly this by picking Marcus Samuelsson whom he took to be the best chef.  (I missed the start of the episode so I do not know how Spike got chosen to be in this powerful position).

Things did not work out as Spike hoped.  Marcus and Spike ended up at the bottom of the pile. Spike then lost to Marcus in “battle scallop”.

What did Spike do wrong?  Obviously, picking the best chef as your partner carries a big risk – if you end up in the elimination round, you will likely lose.  Better to hedge by choosing a worse chef.  This increases the chance you get into the elimination round but also decreases the chance you do not make it out of the round.  Spike should have picked Alex Guarnaschelli.  She is a good cook but she gets tense and nervous.  A good partner for round 1 and also a weak competitor in round 2.  Perfect.

For three weeks in Italy:

The “Vivace” (vivacious) is a burger topped with bacon, salted spinach, marinated onions and mayonaise with mustard seeds.

The “Adagio” (slowly, like the musical term) is also a hamburger, topped with sweet-and-sour eggplant strips, sliced tomatoes and salted ricotta, all between a bun covered in sliced almonds.

There’s also a tiramisu.

Via Tyler Cowen, a quote from Daniel Kahneman on why a sandwich made by someone else tastes better.

When you make your own sandwich, you anticipate its taste as you’re working on it. And when you think of a particular food for a while, you become less hungry for it later. Researchers at Carnegie Mellon University, for example, found that imagining eating M&Ms makes you eat fewer of them. It’s a kind of specific satiation, just as most people find room for dessert when they couldn’t have another bite of their steak. The sandwich that another person prepares is not “preconsumed” in the same way.

Put aside the selection effect that conditional on a person making a sandwich for you, it is likely that they are a better sandwich maker than you.  Even in a randomized sandwich trial the effect would be there but I have a different theory why:

A large part of tasting is actually smelling.  You can verify this by, for example, eating an onion with your nose plugged.  Our sense of smell tends to filter out persistent smells after being exposed to them for awhile so that we cannot smell them anymore.  This means that when you are cooking in the kitchen, surrounded by the aromas of your food, you are quickly de-sensitised to them.  Then when you sit down to eat, it is like tasting without smelling.

When your spouse has done the cooking you were likely in another room, isolated from the aromas.  When you walk into the kitchen to eat, you get to smell and taste the food at the same time.  That’s why it tastes better to you.  The same idea applies to leftovers.  It takes much less time to reheat leftovers than it took to prepare the food in the first place so you retain sensitivity to more of the aromas when it comes time to eat.

This joke has been internetting for the past week. (Karakul kick:  Noam Nissan)

Here’s the game theorists’ version:  Three game theorists with identical preferences but asymmetric information walk into a bar.  The server asks “Does everyone want a beer?”  They respond in sequence:

• Game Theorist #1:  “Yes!”
• Game Theorist #2:  “Yes!”
• Game Theorist #3  “I don’t know.”

Here is a quote from Robert Parker

“Any serious introspection of the global wine market for Bordeaux over the last two years has to include the fact that it is impossible to determine the amount of 2009 Bordeaux futures (and in a few months, 2010 Bordeaux futures) that have actually been sold to consumers. Throughout Bordeaux there is talk of the massive market in Asia, and the increasing significance of the English wine investment firms, but there are those (and I wouldn’t dismiss their opinions) who tend to think that such assertions are grossly inflated. Moreover, they argue that there is a real bubble that is in danger of bursting if the right external influences unfold. One theory is that the Big Eight (which includes all the first growths of the Médoc as well as Haut-Brion and the trifecta of unofficial first growths of the Right Bank, Petrus, Cheval Blanc and Ausone) are actually hoarding huge inventories of their wines to inflate prices. This theory also suggests that the super seconds and many of the other cherished names in Bordeaux are doing the same thing. Why? They are trying to manipulate the market price. The appearance of little or no appreciable quantities of wine from two great vintages equals higher and higher prices. Is there a falsification of the demand from Asian consumers? The fact is, no one seems to know the answer. While some 2009s have not held their initial opening prices because they were too high, many have. If much of the 2009s, as well as the 2010s, are not sold through to wine consumers, who are the true marketplace since they actually drink these wines, and then tend to replenish their stock, buttressing the marketplace, then this is a bubble. Despite huge warehouses filled with reserve stocks of great vintages, prices could be set for a major adjustment, just as we have seen in the United States with the real estate market. What, if any of this, is true?

I raise this issue only because it is a possibility. The fact that no one can (or wants to) provide the actual sales figures of how much 2009 (or over the next six months, how much 2010) is actually being sold through to consumers is astonishing. If most of the stocks of these two vintages are held by importers, négociants, wholesalers, or on paper by investment firms, then it is obvious the consumers have not purchased 2009 and eventually 2010. In any event, I think this scenario has to be raised, given the overheated marketplace and the sometimes absurd rhetoric about how popular these wines are at prices of $1000 or more a bottle.” Robert Parker, May 3rd 2011 Experiments concerning the effect of publishing calorie counts on restaurant menus tend to show little effect on choices. In the experiments that I know of, choices before and after publishing calorie counts are compared. But this form of test cannot be considered conclusive. Some people were overestimating the calories and they might cut back, some were underestimating and they might eat more. There is no reason to expect that the aggregate change should be positive or negative. A better experiment would be to use a restaurant where calorie counts are already published and manipulate them. Will people change their choices when you add 5% to the reported calories? 10%? What is the elasticity? It’s a safe guess that there would be little response for small changes and a large response for very large changes. Any response at all would prove that their is value is publishing calorie counts because it would prove that this information is useful for choices. The only question that would remain is how those welfare gains measure up against the cost of collecting and publicizing the information. 1. There is an inverse relationship between how carefully you stack the dishes inside the dishwasher and how tidy you keep it outside in your kitchen. 2. In addition to funny-haha and funny-strange there is a third category of joke where the impetus for laughter is that the comedian has made some embarrassing fact that is privately true for all of us into common knowledge. 3. It would be too much of an accident for 50-50 genetic mixing to be evolutionarily optimal. So to compensate we must have a programmed taste either for mates who are similar to us or who are different. 4. It is well known that in a moderately sized group of total strangers the probability is about 50% that two of them will have the same birthday. But when that group happens to be at a restaurant the probability is virtually 1. There is a study by some economists and statisticans on the correlation between the price of a wine and ratings in blind tastings by tasters who are not informed of the price. The headline result in the paper is that higher priced wines don’t get higher ratings. If anything they get lower ratings. It is typically used in the first paragraph of blog posts to set up various theories about how people use price information to tell themselves what they should and shouldn’t like. (For example, here’s Jonah Lehrer.) But why should we expect higher priced wine to get higher ratings in tastings? Suppose there are 100 different styles of wine and for every different style there is a group that likes that style and only that style. There will be a lot of variation in the price of different styles because the price will depend on the supply of that style and the size of the group that likes that style. Now ask a person to taste a randomly selected wine and rate it. There will be no correlation between price and ratings. There are many styles of cheese with different prices. Would we expect the price of cheese to predict ratings in blind tastings? Here’s another variation on the same idea. Suppose there are just two styles of wine, subtle and not-so-subtle. Some people appreciate the subtlety but most don’t. Suppose that the supply of subtle wine is lower so that its price is higher. Then again a study like this will produce an overall negative correlation between price and ratings. And indeed if you read past page 3 of the paper you see that an effect like this is in the data. Our data also indicates that experts, unlike non-experts, on average assign as high – or higher – ratings to more expensive wines. The coefficient on the expert*price interaction term is positive and highly statistically significant. The price coefficient for non-experts is negative, and about the same size as in the baseline model. The net coefficient on price for experts is the sum of these two coefficients. It is positive and marginally statistically significant. The linear estimator offers an interpretation of these effects. In terms of a 100 point scale (such as that used by Wine Spectator), the extended model predicts that for a wine that costs ten times more than another wine, non-experts will on average assign an overall rating that is about four points lower, whereas experts will assign an overall rating that is about seven points higher. This is the third and final post on ticket pricing motivated by the new restaurant Next in Chicago and proprietors Grant Achatz and Nick Kokonas new ticket policy. In the previous two installments I tried to use standard mechanism design theory to see what comes out when you feed in some non-standard pricing motives having to do with enhancing “consumer value.” The two attempts that most naturally come to mind yielded insights but not a useful pricing system. Today the third time is the charm. Things start to come in to place when we pay close attention to this part of Nick’s comment to us: we never want to invert the value proposition so that customers are paying a premium that is disproportionate to the amount of food / quality of service they receive. I propose to formalize this as follows. From the restaurant’s point of view, consumer surplus is valuable but some consumers are prepared to bid even more than the true value of the service they will get. The restaurant doesn’t count these skyscraping bids as actually reflecting consumer surplus and they don’t want to tailor their mechanism to cater to them. In particular, the restaurant distinguishes willingness to pay from “value.” I can think of a number of sensible reasons they would take this view. They might know that many patrons overestimate the value of a seating at Next. Indeed the restaurant might worry that high prices by themselves artificially inflate willingness to pay. They don’t want a bubble. And they worry about their reputation if someone pays$1700 for a ticket, gets only $1000 worth of value and publicly gripes. Finally they might just honestly believe that willingness to pay is a poor measure of welfare especially when comparing high versus low. Whatever the reason, let’s run with it. Let’s define $W(v)< v$ to be the value, as the restaurant perceives it, that would be realized by service to a patron whose willingness to pay is $v$. One natural example would be $W(v) = \min \{v, \bar v\}$ where $\bar v$ is some prespecified “cap.” It would be like saying that nobody, no matter how much they say they are willing to pay, really gets a value larger than, say $\bar v = \1000$ from eating at Next. Now let’s consider the optimal pricing mechanism for a restaurant that maximizes a weighted sum of profit and consumer’s surplus, where now consumer’s surplus is measured as the difference between $W(v)$ and whatever price is paid. The weight on profit is $\alpha$ and the weight on consumer surplus is $1- \alpha$. After you integrate by parts you now get the following formula for virtual surplus. $(1 - \alpha) W(v) + (2 \alpha - 1) [v - \frac{1-F(v)}{f(v)} ]$ And now we have something! Because if $\alpha$ is between $0$ and $1/2$ then the first term is increasing in $v$ (up to the cap $\bar v$) and the second term is decreasing. For $\alpha$ close enough to $1/2$, the overall virtual surplus is going to be first increasing and then decreasing. And that means that the optimal mechanism is something new. When bids are in the low to moderate range, you use an auction to decide who gets served. But above some level, high bidders don’t get any further advantage and they are all lumped together. The optimal mechanism is a hybrid between an auction and a lottery. It has no reserve price (over and above the cost of service) so there are never empty seats. It earns profits but eschews exorbitant prices. It has clear advantages over a fixed price. A fixed price is a blunt instrument that has to serve two conflicting purposes. It has to be high enough to earn sufficient revenue on dates when demand is high enough to support it, but it can’t be too high that it leads to empty seats on dates when demand is lower. An auction with rationing at the top is flexible enough to deal with both tasks independently. When demand is high the fixed price (and rationing) is in effect. When demand is low the auction takes care of adjusting the price downward to keep the restaurant full. The revenue-enhancing effects of low prices is an under-appreciated benefit of an auction. Finally, it’s an efficient allocation system for the middle range of prices so scalping motivations are reduced compared to a fixed price. Incentives for scalping are not eliminated altogether because of the rationing at the top. This can be dealt with by controlling the resale market. Indeed here is one clear message that comes out of all of this. Whatever motivation the restaurant has for rationing sales, it is never optimal to allow unfettered resale of tickets. That only undermines what you were trying to achieve. Now Grant Achatz and Nick Kokonas understand that but they are forced to condone the Craigslist market because by law non-refundable tickets must be freely transferrable. But the cure is worse than the disease. In fact refundable tickets are your friend. The reason someone wants to return their ticket for a refund is that their willingness to pay has dropped below the price. But there is somebody else with a willingness to pay that is above the price. We know this for sure because tickets are being rationed at that price. Granting the refund allows the restaurant to immediately re-sell it to the next guy waiting in line. Indeed, a hosted resale market would enable the restaurant to ensure that such transactions take place instantaneously through an automated system according to the same terms under which tickets were originally sold. Someone ought to try this. Restaurants, touring musicians, and sports franchises are not out to gouge every last penny out of their patrons. They want patrons to enjoy their craft but also to come away feeling like they didn’t pay an arm and a leg. Yesterday I tried to formalize this motivation as maximizing consumer surplus but that didn’t give a useful answer. Maximizing consumer surplus means either complete rationing (and zero profit) or going all the way to an auction (a more general argument why appears below.) So today I will try something different. Presumably the restaurant cares about profits too. So it makes sense to study the mechanism that maximizes a weighted sum of profits and consumer’s surplus. We can do that. Standard optimal mechanism design proceeds by a sequence of mathematical tricks to derive a measure of a consumer’s value called virtual surplus. Virtual surplus allows you to treat any selling mechanism you can imagine as if it worked like this 1. Consumers submit “bids” 2. Based on the bids received the seller computes the virtual surplus of each consumer. 3. The consumer with the highest virtual surplus is served. If you write down the optimal mechanism design problem where the seller puts weight $\alpha$ on profits and weight $1 - \alpha$ on consumer surplus, and you do all the integration by parts, you get this formula for virtual surplus. $\alpha v + (1 - 2\alpha) \frac{1 - F(v)}{f(v)}$ where $v$ is the consumer’s willingness to pay, $F(v)$ is the proportion of consumers with willingness to pay less than $v$ and $f(v)$ is the corresponding probability density function. That last ratio is called the (inverse) hazard rate. As usual, just staring down this formula tells you just about everything you want to know about how to design the pricing system. One very important thing to know is what to do when virtual surplus is a decreasing function of $v$. If we have a decreasing virtual surplus then we learn that it’s at least as important to serve the low valuation buyers as those with high valuations (see point 3 above.) But here’s a key observation: its impossible to sell to low valuation buyers and not also to high valuation buyers because whatever price the former will agree to pay the latter will pay too. So a decreasing virtual surplus means that you do the next best thing: you treat high and low value types the same. This is how rationing becomes part of an optimal mechanism. For example, suppose the weight on profit $\alpha$ is equal to $0$. That brings us back to yesterday’s problem of just maximizing consumer surplus. And our formula now tells us why complete rationing is optimal because it tells us that virtual surplus is just equal to the hazard rate which is typically monotonically decreasing. Intuitively here’s what the virtual surplus is telling us when we are trying to maximize consumer surplus. If we are faced with two bidders and one has a higher valuation than the other, then to try to discriminate would require that we set a price in between the two. That’s too costly for us because it would cut into the consumer surplus of the eventual winner. So that’s how we get the answer I discussed yesterday. Before going on I would like to elaborate on yesterday’s post based on correspondence I had with a few commenters, especially David Miller and Kane Sweeney. Their comments highlight two assumptions that are used to get the rationing conclusion: monotone hazard rate, and no payments to non-buyers. It gets a little more technical than usual so I am going to put it here in an addendum to yesterday (scroll down for the addendum.) Now back to the general case we are looking at today, we can consider other values of $\alpha$ An important benchmark case is $\alpha = 1/2$ when virtual surplus reduces to just $v$, now monotonically increasing. That says that a seller who puts equal weight on profits and consumer surplus will always allocate to the highest bidder because his virtual surplus is higher. An auction does the job, in fact a second price auction is optimal. The seller is implementing the efficient outcome. More interesting is when $\alpha$ is between $0$ and $1/2$. In general then the shape of the virtual surplus will depend on the distribution $F$, but the general tendency will be toward either complete rationing or an efficient auction. To illustrate, suppose that willingness to pay is distributed uniformly from $0$ to $1$. Then virtual suplus reduces to $(3 \alpha - 1) v + (1 - 2 \alpha)$ which is either decreasing over the whole range of $v$ (when $\alpha \leq 1/3$), implying complete rationing or increasing over the whole range (when $\alpha > 1/3$), prescribing an auction. Finally when $\alpha > 1/2$ virtual surplus is the difference between an increasing function and a decreasing function and so it is increasing over the whole range and this means that an auction is optimal (now typically with a reserve price above cost so that in return for higher profits the restaurant lives with empty tables and inefficiency. This is not something any restaurant would choose if it can at all avoid it.) What do we conclude from this? Maximizing a weighted sum of consumer surplus and profit yields again yields one of two possible mechanisms: complete rationing or an auction. Neither of these mechanisms seem to fit what Nick Kokonas was looking for in his comment to us and so we have to go back to the drawing board again. Tomorrow I will take a closer look and extract a more refined version of Nick’s objective that will in fact produce a new kind of mechanism that may just fit the bill. Addendum: Check out these related papers by Bulow and Klemperer (dcd: glen weyl) and by Daniele Condorelli. Last week, in response to our proposal for how to run a ticket market, Nick Kokonas of Next Restaurant wrote something interesting. Simply, we never want to invert the value proposition so that customers are paying a premium that is disproportionate to the amount of food / quality of service they receive. Right now we have it as a great bargain for those who can buy tickets. Ideally, we keep it a great value and stay full. Economists are not used to that kind of thinking and certainly not accustomed to putting such objectives into our models, but we should. Many sellers share Nick’s view and the economist’s job is to show the best way to achieve a principal’s objective, whatever it may be. We certainly have the tools to do it. Here’s an interesting observation to start with. Suppose that we interpret Nick as wanting to maximize consumer surplus. What pricing mechanism does that? A fixed price has the advantage of giving high consumer surplus when willingness to pay is high. The key disadvantage is rationing: a fixed price has no way of ensuring that the guy with a high value and therefore high consumer surplus gets served ahead of a guy with a low value. By contrast an auction always serves the guy with the highest value and that translates to higher consumer surplus at any given price. But the competition of an auction will lead to higher prices. So which effect dominates? Here’s a little example. Suppose you have two bidders and each has a willingness to pay that is distributed according the uniform distribution on the interval $[0,1]$. Let’s net out the cost of service and hence take that to be zero. If you use a rationing system, each bidder has a 50-50 chance of winning and paying nothing (i.e. paying the cost of service.) So a bidder whose value for service is $v$ will have expected consumer surplus equal to $v/2$. If instead you use an auction, what happens? First, the highest bidder will win so that a bidder with value $v$ wins with probability $v$. (That’s just the probability that his opponent had a lower value.) For bidders with high values that is going to be higher than the 50-50 probability from the rationing system. That’s the benefit of an auction. However he is going to have to pay for it and his expected payment is $v/2$. (The simplest way to see this is to consider a second-price auction where he pays his opponent’s bid. His opponent has a dominant strategy to bid his value, and with the uniform distribution that value will be $v/2$ on average conditional on being below $v$.) So his consumer surplus is only $v (v - v/2) = v^{2}/2$ because when he wins his surplus is his value minus his expected payment $v- v/2$, and he wins with probability $v$. So in this example we see that, from the point of view of consumer surplus, the benefits of the efficiency of an auction are more than offset by the cost of higher prices. But this is just one example and an auction is just one of many ways we could think of improving upon rationing. However, it turns out that the best mechanism for maximizing consumer surplus is always complete rationing (I will prove this as a part of a more general demonstration tomorrow.) Set price equal to marginal cost and use a lottery (or a queue) to allocate among those willing to pay the price. (I assume that the restaurant is not going to just give away money.) What this tells us is that maximizing consumer surplus can’t be what Nick Kokonas wants. Because with the consumer surplus maximizing mechanism, the restaurant just breaks even. And in this analysis we are leaving out all of the usual problems with rationing such as scalping, encouraging bidders with near-zero willingness to pay to submit bids, etc. So tomorrow I will take a second stab at the question in search of a good theory of pricing that takes into account the “value proposition” motivation. Addendum: I received comments from David Miller and Kane Sweeney that will allow me to elaborate on some details. It gets a little more technical than the rest of these posts so you might want to skip over this if you are not acquainted with the theory. David Miller reminded me of a very interesting paper by Ran Shao and Lin Zhou. (See also this related paper by the same authors.) They demonstrate a mechanism that achieves a higher consumer surplus than the complete rationing mechanism and indeed that achieves the highest consumer surplus among all dominant-strategy, individually rational mechanisms. Before going into the details of their mechanism let me point out the difference between the question I am posing and the one they answer. In formal terms I am imposing an additional constraint, namely that the restaurant will not give money to any consumer who does not obtain a ticket. The restaurant can give tickets away but it won’t write a check to those not lucky enough to get freebies. This is the right restriction for the restaurant application for two reasons. First if the restaurant wants to maximize consumer surplus its because it wants to make people happy about the food they eat, not happy about walking away with no food but a payday. Second, as a practical matter a mechanism that gives away money is just going to attract non-serious bidders who are looking for a handout. In fact Shao and Zhou are starting from a related but conceptually different motivation: the classical problem of bilateral trade between two agents. In the most natural interpretation of their model the two bidders are really two agents negotiating the sale of an object that one of them already owns. Then it makes sense for one of the agents to walk away with no “ticket” but a paycheck. It means that he sold the object to the other guy. Ok with all that background here is their mechanism in its simplest form. Agent 1 is provisionally allocated the ticket (so he becomes the seller in the bilateral negotiation.) Agent 2 is given the option to buy from agent 1 at a fixed price. If his value is above that price he buys and pays to agent 1. Otherwise agent 1 keeps the ticket and no money changes hands. (David in his comment described a symmetric version of the mechanism which you can think of as representing a random choice of who will be provisionally allocated the ticket. In our correspondence we figured out that the payment scheme for the symmetric version should be a little different, it’s an exercise to figure out how. But I didn’t let him edit his comment. Ha Ha Ha!!!) In the uniform case the price should be set at 50 cents and this gives a total surplus of 5/8, outperforming complete rationing. Its instructive to understand how this is accomplished. As I pointed out, an auction takes away consumer surplus from high-valuation types. But in the Shao-Zhou framework there is an upside to this. Because the money extracted will be used to pay off the other agent, raising his consumer surplus. So you want to at least use some auction elements in the mechanism. One common theme in my analysis and theirs is in fact a deep and under-appreciated result. You never want to “burn money.” Using an auction is worse than complete rationing because the screening benefits of pricing is outweighed by the surplus lost due to the payments to the seller. Using the Shao-Zhou mechanism is optimal precisely becuase it finds a clever way to redirect those payments so no money is burned. By the way this is also an important theme in David Miller’s work on dynamic mechanisms. See here and here. Finally, we can verify that the Shao-Zhou mechanism would no longer be optimal if we adapted it to satisfy the constraint that the loser doesnt receive any money. It’s easy to do this based on the revenue equivalence theorem. In the Shao-Zhou mechanism an agent with zero value gets expected utility equal to 1/8 due to the payments he receives. We can subtract utility of 1/8 from all types and obtain an incentive-compatible mechanism with the same allocation rule. This would be just enough to satisfy my constraint. And then the total surplus will be 5/8-2/8 = 3/8 which is less than the 1/2 of the complete rationing mechanism. That’s another expression of the losses associated with using even the very crude screening in the Shao-Zhou mechanism. Next let me tell you about my correspondence with Kane Sweeney. He constructed a simple example where an auction outperforms rationing. It works like this. Suppose that each bidder either had a very low willingness to pay, say 50 cents, or a very high willingness to pay, say$1,000.  If you ration then expected surplus is about $500. Instead you could do the following. Run a second-price auction with the following modification to the rules. If both bid$1000 then toss a coin and give the ticket to the winner at a price of $1. This mechanism gives an expected surplus of about$750.

Basically this type of example shows that the monotone hazard rate assumption is important for the superiority of rationing.  To see this, suppose that we smooth out the distribution of values so that types between 50 cents and $1000 have very small positive probability. Then the hazard rate is first increasing around 50 cents and then decreasing from 50 cents all the way to$1000.  So you want to pool all the types above 50 cents but you want to screen out the 50-cent types.  That’s what Kane’s mechanism is doing.

I would interpret Kane’s mechanism as delivering a slightly nuanced version of the rationing message.  You want to screen out the non-serious bidders but ration among all of the serious bidders.

There are a few basic features that Grant Achatz and Nick Kokonas should build into their online ticket sales.  First, you want a good system to generate the initial allocation of tickets for a given date, second you want an efficient system for re-allocating tickets as the date approaches.  Finally, you want to balance revenue maximization against the good vibe that comes from getting a ticket at a non-exorbitatnt price.

1. Just like with the usual reservation system, you would open up ticket sales for, say August 1, 3 months in advance on May 1.   It is important that the mechanism  be transparent, but at the same time understated so that the business of selling tickets doesn’t draw attention away from the main attractions: the restuarant and the bar.  The simple solution is to use a sealed bid N+1st price auction.  Anyone wishing to buy a ticket for August 1 submits a bid.  Only the restaurant sees the bid.  The top 100 bidders get tickets and they pay a price equal to the 101st highest bid.  Each bidder is informed whether he won or not and the final price. With this mechanism it is a dominant strategy to bid your true maximal willingness to pay so the auction is transparent, and all of the action takes place behind the scenes so the auction won’t be a spectacle distracting from the overall reputation of the restaurant.
2. Next probably wants to allow patrons to buy at lower prices than what an auction would yield.  That makes people feel better about the restaurant than if it was always trying to extract every last drop of consumer’s surplus. Its easy to work that into the mechanism. Decide that 50 out of 100 seats will be sold to people at a fixed price and the remainder will be sold by auction. The 50 lucky people will be chosen randomly from all of those whose bid was at least the fixed price.  The division between fixed-price and auction quantities could easily be adjusted over time, for different days of the week, etc.
3. The most interesting design issue is to manage re-allocation of tickets. This is potentially a big deal for a restaurant like Next because many people will be coming from out of town to eat there. Last-minute changes of plans could mean that rapid re-allocation of tickets will have a big impact on efficiency. More generally, a resale market raises the value of a ticket because it turns the ticket into an option.  This increases the amount people are willing to bid for it.  So Next should design an online resale market that maximizes the efficiency of the allocation mechanism because those efficiency gains not only benefit the patrons but they also pay off in terms of initial ticket sales.
4. But again you want to minimize the spectacle.  You don’t want Craigslist. Here is a simple transparent system that is again discreet.  After the original allocation of tickets by auction, anyone who wishes to purchase a ticket for August 1 submits their bid to the system.  In addition, anyone currently holding a ticket for August 1 has the option of submitting a resale price to the system. These bids are all kept secret internally in the system. At any moment in which the second highest bid exceeds the second lowest resale price offered, a transaction occurs.  In that transaction the highest bidder buys the ticket and pays the second-highest bid.  The seller who offered the lowest price sells his ticket and receives the second lowest price.
5. That pricing rule has two effects.  First, it makes it a dominant strategy for buyers to submit bids equal to their true willingness to pay and for sellers to set their true reserve prices. Second, it ensures that Next earns a positive profit from every sale equal to the difference between the second-highest bid and the second-lowest resale price.  In fact it can be shown that this is the system that maximizes the efficiency of the market subject to the constraint the market is transparent (i.e. dominant strategies) and that Next does not lose money from the resale market.
6. The system can easily be fine-tuned to give Next an even larger cut of the transactions gains, but a basic lesson of this kind of market design is that Next should avoid any intervention of that sort.  Any profits earned through brokering resale only reduces the efficiency of the resale market.  If Next is taking a cut then a trade will only occur if the gains outweigh Next’s cut. Fewer trades means a less efficient resale market and that means that a ticket is a less flexible asset.  The final result is that whatever profits are being squeezed out of the resale market are offset by reduced revenues from the original ticket auction.
7. The one exception to the latter point is the people who managed to buy at the fixed price. If the goal was to give those people the gift of being able to eat at Next for an affordable price and not to give them the gift of being able to resell to high rollers, then you would offer them only the option to sell back their ticket at the original price (with Next either selling it again at the fixed price or at the auction price, pocketing the spread.)  This removes the incentive for “scalpers” to flood the ticket queue, something that is likely to be a big problem for the system currently being used.
8. A huge benefit of a system like this is that it makes maximal use of information about patrons’ willingness to pay and with minimal effort. Compare this to a system where Next tries to gauge buyer demand over time and set the market clearing price.  First of all, setting prices is guesswork.  An auction figures out the price for you. Second, when you set prices you learn very little about demand.  You learn only that so many people were willing to pay more than the price.  You never find out how much more than that price people would have been willing to pay.  A sealed bid auction immediately gives you data on everybody’s willingness to pay. And at every moment in time.  That’s very valuable information.

This is a plate of green curry chicken that I ate at a KFC in Chiang Mai. (Sorry about the shoddy phone-photos.) It cost 59 baht (about $1.90), it was delivered to my table by a waiter, and it wasn’t surprisingly good, or not bad considering, but legitimately excellent. Think this is an unfair comparison? Even setting aside all the local adaptations, like the baby pearl eggplant (those aren’t peas), fresh chili pepper, and lashings of canonical green curry, the chicken alone was crisper and juicier than any I’ve ever had at a KFC in America. That chicken thigh was split open, dusted in whatever magical substance they use to give it that scaly crust, fried to a crackle, and sent right to my table without ever seeing a heat lamp. Wendy: There’s chard on your face. Ray: Chard? Wendy: The greens. It’s chard right? I think the server said it was chard. I think he said something like “embellished with pearls of chard.” Ray: Better than shards of pearls. Wendy: Anyway there’s a pearl on your chin, you might want to wipe it off. Oh hey, how was that new exhibition you went to? Ray: Ah yes, the Alpha-Beam Installation. Wendy: What was that? Ray: You’ve heard of I-beams right? Well, this guy built massive steel beams with cross-sections for every letter of the alphabet. Wendy: Q-beams. Ray: And P-beams, and Z-beams, etc. And punctuation beams. The semi-colon beam was an engineering feat in itself. Wendy: Cool. Ray: Yeah right, and he wrote poetry with his beams. Gargantuan, industrial poetry. A single haiku took up the space of football stadium. Wendy: I love it. Ray: I guess, but come on how is that art? Wendy: Oh, don’t be such a douchebag. Ray: Listen, it may sound cliche, but really anybody could have done that. Even I could have done that. I’m no artist, and if I could have done that, it’s not art. Wendy: But you didn’t do it. On the other hand, he did. Because it’s art and because you are not an artist. Ray: Ok, I’ve heard that one before, but I’m telling you that argument just doesn’t work. Sure I didn’t make alphanumeric pillars and arrange them into rhymes and sure I never would have dreamed of doing something like that but that doesn’t make him any more of an artist than me. Think of the thousands of other self-styled artists working in obscurity picking completely random things and not using them for their intended purpose. One of these guys gets plucked out of his basement and placed in an art museum handing out free cheese and wine to 7 of his friends from high school. It’s not enough to point out that he did it and not us. Because there’s a thousand things we did and he didn’t. Your argument gives me no way of distinguishing between a world where this guy has some innate ability to sense which particular non-functional scrap of architecture has the power to move people and a world where everybody is repeating pre-school art projects and one gets picked at random to fill up a vacant wharehouse. Wendy: You would be such a bore if it weren’t for the hilarious food on your face. If you’ve ever sat down at a pub to a plate of really good fish and chips—the kind in which the fish stays tender and juicy but the crust is supercrisp—odds are that the cook used beer as the main liquid when making the batter. Beer makes such a great base for batter because it simultaneously adds three ingredients—carbon dioxide, foaming agents and alcohol—each of which brings to bear different aspects of physics and chemistry to make the crust light and crisp. The CO2 escaping from the frying batter makes for a light texture. This effect is enhanced by the low surface tension, (which in the glass makes the foamy head), keeping the bubbles in place for the duration of the cooking process. And the alcohol evaporates faster than water so that the crust sets quickly reducing the risk of overcooking. The story is in Scientific American. I was walking along, and I saw just this hell of a big moose turd, I mean it was a real steamer! So I said to myself, “self, we’re going to make us some moose turd pie.” So I tipped that prairie pastry on its side, got my sh*t together, so to speak, and started rolling it down towards the cook car: flolump, flolump, flolump. I went in and made a big pie shell, and then I tipped that meadow muffin into it, laid strips of dough across it, and put a sprig of parsley on top. It was beautiful, poetry on a plate, and I served it up for dessert. Here’s one of the thorniest incentive problems known to man. In an organization there is a job that has to be done. And not just anybody can do it well, you really need to find the guy who is best at it. The livelihood of the organization depends on it. But the job is no fun and everyone would like to get out of doing it. To make matters worse, performance is so subjective that no contract can be written to compensate the designee for a job well done. The core conflict is exemplified in a story by Utah Phillips about railroad workers living out in the field as they work to level the track. Someone has to do the cooking for the team and nobody wants to do it. Lacking any better incentive scheme they went by the rule that if you complained about the food then from now on you were going to have to do the cooking. You can see the problem with this arrangement. But is there any better system? You want to find the best cook but the only way to reward him is to relieve him of the job. That would be self defeating even if you could get it to work. You probably couldn’t because who would be willing to say the food was good if it meant depriving themselves of it the next time? A simple rotation scheme at least has the benefit of removing the perverse incentive. Then on those days when the best cook has the job we can trust that he will make a good meal out of his own self interest. He might even volunteer to be the cook. But it might be optimal to rule out volunteering too. Because that could just bring back the original incentive problem in a new form. Since ex ante nobody knows who the best cook is, everyone will set out to prove that they are incapable of making a palatable meal so that the one guy who actually can cook, whoever he is, will volunteer. It may help to keep the identity of the cook secret. Then when a capable cook actually has the job he can feel free to make a good meal without worrying that he will be recruited permanently. It will also lower the incentive for the others to make a bad meal because nobody will know who to exclude in the future. Even if there is no scheme that really solves the incentive problem, the freedom to complain is essential for organizational morale. Well, this big guy come into the mess car, I mean, he’s about 5 foot forty, and he sets himself down like a fool on a stool, picked up a fork and took a big bite of that moose turd pie. Well he threw down his fork and he let out a bellow, “My God, that’s moose turd pie!” “It’s good though.” If you read this piece you might come to believe, as I have, that by spending your days and nights observing the patterns of life in a White Castle you could become enlightened, an artist, a social critic. And fat too. 7:12 p.m. 8/13/10. How White Castle Explains Aesthetics. The interior of White Castle #100034 feels a little cramped. It is not a welcoming dining space. The kitchen and staff areas are encased in bulletproof glass. You sit on benches made of lacquered plywood and consume your onion rings ($1.72) on melamine tables the color of muggy summer skies. It is meat-locker cold. The bathrooms are also cordoned off by bulletproof glass and you have to gesture (through more glass) at someone in the kitchen to buzz you in.  Out of the 11 occasions I ate at WC, only once was I asked “to stay or to go?” and given a meal tray; every other time my food came in a paper or plastic sack.

The word crave is everywhere—customers are called Cravers, the menu subdivisions are Sandwich Cravings, Drink Cravings, etc.—and cravings are immediate, short-lived. You satisfy them and then they’re gone.

I personally have never been to a White Castle.  And now I think I must go.

(Toque tweak:  The Browser.)

From an article in the Boston Globe:

He’s a sought-after source for journalists, a guest on talk shows, and has even acquired a nickname, Dr. Doom. With the effects of the Great Recession still being keenly felt, Roubini is everywhere.

But here’s another thing about him: For a prophet, he’s wrong an awful lot of the time. In October 2008, he predicted that hundreds of hedge funds were on the verge of failure and that the government would have to close the markets for a week or two in the coming days to cope with the shock. That didn’t happen. In January 2009, he predicted that oil prices would stay below $40 for all of 2009, arguing that car companies should rev up production of gas-guzzling SUVs. By the end of the year, oil was a hair under$80, Hummer was on its way out, and automakers were tripping over themselves to develop electric cars. In March 2009, he predicted the S&P 500 would fall below 600 that year. It closed at over 1,115, up 23.5 percent year over year, the biggest single year gain since 2003.

He’s not such an outlier:

To find the answer, Denrell and Fang took predictions from July 2002 to July 2005, and calculated which economists had the best record of correctly predicting “extreme” outcomes, defined for the study as either 20 percent higher or 20 percent lower than the average prediction. They compared those to figures on the economists’ overall accuracy. What they found was striking. Economists who had a better record at calling extreme events had a worse record in general. “The analyst with the largest number as well as the highest proportion of accurate and extreme forecasts,” they wrote, “had, by far, the worst forecasting record.”

But it’s not a bad gig:

Thanks to everyone who suggested restaurants.  I went to three:

1. Rootdown Denver.  The clear favorite.  Loud, trendy, waitstaff heavily tattooed.  Small plates for under \$10 each.  I had beet gnocchi, carrot and thai red curry soup, some other stuff. All great.  I was lucky to find a seat at the bar otherwise I would have waited a long time.  So definitely you need reservations. The best part of my dinner was that I finally found a bar that serves a mythical cocktail:  The Aviation.  I have been looking for this for a decade.  It was fantastic.  Thanks for the pointer Dan!
2. Osteria Marco.  Fine but typical Italian.  I had pizza.  I’ve had worse. They served by the glass a blend of Dolcetto, Barbera, and Nebbiolo from Langhe. That was something new for me, and I liked it.
3. Tastes Wine Bar.  A little depressing because I was the only person there. But the food was somewhat adventurous and good.  The wine was fine, but not the kind of varied selection I would have expected from a place that calls itself a wine bar.  The menu listed a sauvignon blanc from the Loire and when I ordered it to start with, I was told that they were out and tonight they were substituting a Sauv Blanc from Colorado!!  I did taste it. Once.

Its a shame I didnt make it to the Fluid coffee bar that Jacob Grier suggested. I was going to stop there on Sunday before going to the airport but Denver got hit with a snow storm and so I got on standby and headed to the airport early to make sure I got out of there before the flights were cancelled.

I arrive there this evening, hungry.

Bad review < Good review < No review at all:

S. Irene Virbila, the L.A. Times’ restaurant critic for the last 16 years, was visiting Red Medicine restaurant in Beverly Hills on Tuesday night when she was approached by managing partner Noah Ellis, who took Virbila’s picture without her permission and then ordered Virbila and her three companions to leave, refusing them service.

Ellis posted her picture on the restaurant’s Tumblr site, explaining that she was not welcome there.

The LA Times food blog has the story.  Other blogs have the picture.  The Times is undeterred.

The Times will continue with its plans to review Red Medicine. The restaurant was chosen for review, Parsons said, because of its pedigree –- Ellis has worked in the past with noted chef and restaurateur Michael Mina. And, Parsons added, “We had hopes that they would be doing interesting things with Southeast Asian food. We will still review them.”

You may have heard that the Michelin guide has been bestowing many stars on Japanese restaurants.  So many that Europeans are suspecting ulterior motives.

The generous distribution of stars has prompted a snarky backlash among some Western critics and celebrity chefs, whose collective egos can be larger than acroquembouche. Some have said Michelin is showering stars upon Japan in an attempt to gain favor in a brand-conscious, France-loving country where it wants to sell not only culinary guides, but automobile tires.

Many Japanese chefs, especially in the Kansai region, say they never courted this attention. Even a single Michelin star can be seen as a curse by the Japanese: Their restaurants are for their customers. Why cook for a room full of strangers? Even worse: crass foreigners.

“It is, of course, a great honor to be included in the Michelin guide. But we asked them not to include us,” says Minoru Harada, an affable young Osaka chef. His Sakanadokoro Koetsu, a fish restaurant with a counter and 10 seats, just earned a single star, its first. Loyal customers have sustained the restaurant over the years, he says, adding: “If many new customers come, it is difficult.”

And with the upcoming realease of Michelin’s guide to Tokyo, Japan may soon be the most spangled restaurant nation in the world.

From the latest issue of the Journal of Wine Economics, comes this paper.

The purpose of this paper is to measure the impact of Robert Parker’s oenological grades on Bordeaux wine prices. We study their impact on the so-called en primeur wine prices, i.e., the prices determined by the chaˆteau owners when the wines are still extremely young. The Parker grades are usually published in the spring of each year, before the wine prices are established. However, the wine grades attributed in 2003 have been published much later, in the autumn, after the determination of the prices. This unusual reversal is exploited to estimate a Parker effect. We find that, on average, the effect is equal to 2.80 euros per bottle of wine. We also estimate grade-specific effects, and use these estimates to predict what the prices would have been had Parker attended the spring tasting in 2003.

Note that the €2.80 number is the effect on price from having a rating at all, averaging across good ratings and bad.  You do have to buy some identifying assumptions, however.

This morning I was on my own for breakfast so I looked around and saw heirloom tomatoes from the garden, a jar of artichoke hearts with a few left after last night’s chickpea salad, and chive oil which I made last week as a lobster marinade and have put to good use in various applications since.

So I made an omelette.  (I am a devotee of the Alton Brown omelette method.)  And then I ate it.

Tomatoes are about the only attribute these two have in common, so the choice comes down to personal preference. Heinz is spicier, with distinct Worcestershire notes. Market Pantry has mostly tomato flavor, which comes through precisely because it’s not as spicy. The flavor differences are apparent straight from the bottle or with fries.

With that conclusion, summarized briskly in workmanlike prose by journalists you’ve never heard of, Gladwell’s Grand Unifying Theory of Ketchup–which he was allowed to present in painstaking detail (and 5,000 words) in the nation’s most prestigious magazine–simply turns to air.

The background is in the Globe article.

Jean Tirole has written the best theoretical analysis I have seen of the role of government intervention to revitalize frozen asset markets.  The key idea in this paper is that investors need to finance their next project and are unable to do this by selling their “legacy” assets because adverse selection has frozen the market.

A government buyback of these toxic assets attracts the bottom tail.  The government of course is losing money on all of the assets it buys.  But the payoff is that it rejuvinates the market:  private financiers will now step in and buy the assets of those who refused the government offer.  It’s a surprising result but ex post its pretty easy to understand.

If the government is offering a price $p$ for the legacy assets, then the value of the marginal asset sold is equal to $p + S$ where $S$ is the value of going forward with the newly funded project.  Investors with legacy assets worth just more than that refuse the government’s deal.  Now private financiers can get them to accept an offer them a price a bit higher than $p$.   And this is profitable for the financiers because the assets have value $p + S$.  This proves that the market for private finance will become unstuck.

All that was required was that the government price $p$ was high enough to allow those who accept to finance their project and earn $S$.  (Tirole points out that this is an argument that buybacks must be of sufficient scale to be effective.)  This value $S$ becomes a wedge between the value of refinance to the investors and the value of the legacy asset to financiers.

The paper then goes on to study the optimal intervention when the market is not restricted to simple buybacks. The optimal scheme is a mix of buybacks and partial transfers of legacy assets that keep “skin in the game” to reduce the downstream adverse selection problem.  The government is trying to minimize the cost of the intervention by spurring as much activity as possible from the private finance market.

This paper is worth studying.

We planned to have a quick bite at the cafe before spending the afternoon at the California Academy of Sciences, an aquarium/science museum in Golden Gate Park.  But when we walked in we knew right away that we would be spending at least as much time in the cafe as in the museum.

Freshly prepared fast food from many cuisines.  It’s San Francisco on a plastic tray.  We had tofu and cauliflower curry with brown rice, an hierloom tomato salad, barbecued ribs, carnitas tacos, Pho, steamed pork buns, and blackberry agua fresca.  This fed 7 of us and cost about 70 bucks.  With more time we could have doubled that.

The stalls are organized by cooking style rather than cuisine.  “Steamed,” “Slow-Cooked,” etc.  Many of the stalls have cooks stationed behind who will prepare the food on the spot.  Here’s the guy making the tomato salad:

Be careful to skip the first cafe you see from the entrance to the building.  It’s inviting because it has terrace seating but your resistance is rewarded.  There is a sit-down restaurant downstairs which will be our dinner destination the next time we come (without kids.)

The museum?  Brilliant.  It has a rain forest.  The aquarium dominates Chicago’s Shedd despite being only 1/8 of the size.  We spent 3 hours there and didn’t even make it to the planetarium.  Next time.

Unlike the first bottle, the second must be profound. In selecting, you are obliged to demonstrate sophistication without descending into foolishness. Nobody wants to hear your reflections on the beads of dew you observed on the leaves of Pinot Noir vines when bicycling through the Côte d’Or in ’92. Save your ruminations on imaginary nymphs frolicking in the fields. And for goodness’ sake, do not talk like some early-twentieth-century English fop, describing the bottles you decide against as guttersnipes. Never mention Bacchus. Ever.