Saturday, November 28, 2009

Poll: Replace the BCS. With what?

As I watched the football game between Boise State and Nevada last night, I had several thoughts about the BCS-method of crowning a national champion. Here they are in no particular order:

We already have a playoff in major college football. I'm not talking about the Division I FCS tournament (which is great). I'm talking about the BCS national championship game, a two-team, one-game playoff. The trouble is that when it comes to selecting a playoff field that is so small, we tend to think that more than two teams deserve a shot at winning the championship.

The teams that end up in the championship game do so on the wings of tradition. Only teams from a true power conference can earn enough points to be ranked in the top two by the end of the year. With two weeks left, college football still has six undefeated teams. There might still be five by the time the BCS gets to select its two teams. How can any system select two teams without controversy?

I don't think it is possible, or desirable to eliminate all controversy. And, for that matter...

Expanding the playoff to 4 or 8 or 16 teams would not eliminate controversy. This became even more apparent to me when I was watching the game last night. Boise State will likely go undefeated in the regular season, yet they were in the same discussion as Iowa, Penn State, and Oklahoma State (all ranked worse than 10th). Even an undefeated Boise State team might have trouble getting into a larger playoff field.

What about the 16-team playoff in the Football Championship Subdivision? Is there any controversy about who makes the tournament? You bet. It is called being "Woofed" after the Wofford Terriers, who in 2002 had a tremendous season, but were left out of the playoffs. Just imagine if we had a 6-team playoff and Boise State were left off the list. We might coin a new term for major college football: "Smurfed."

BCS supporters say that they love the BCS because it creates controversy, and the controversy is fun to watch. The case of Boise State shows why that's false. There's plenty of controversy in a playoff. The BCS merely shifts the controversy from the bubble teams (like Boise State and Oklahoma State) to the actual national championship game. To be sure,the Fiesta Bowl means something, but it is less satisfying for fans if that something doesn't go anywhere.

Expanding the playoff would increase (not reduce) competition. BCS supporters sometimes claim that the fragility of the BCS makes the regular season more interesting. Every week matters if a loss ends your national championship hopes. The thought is that this tension makes teams play harder.

That's probably true... for Florida and Alabama, but I am not so sure that it is true for Oklahoma State after they lost their first game... or for Oregon, or Stanford, or USC in the really competitive PAC 10. I doubt national championship dreams had much bite for Ohio State after they lost to USC, or to Penn State after they lost to Iowa... Pittsburgh after NC State or West Virginia beat them .... you get the point. Under the BCS championship, most teams have less incentive on account of national championship dreams.

Expanding the playoff might reduce competition for the very top teams, but you could easily fix that by having a playoff with two first-round byes (for example, with a 6-team playoff). That incentive and the drive to be #1 would probably be enough to keep Florida and Alabama sharp.

After getting off of my soap box, here's my poll of the week:

If you could replace the BCS-method with something, what would you do?

(a) Nothing. The BCS works great.
(b) Replace it with a 4 team playoff.
(c) 6-team playoff with byes for the top two teams
(d) Forget about crowning a national champion. We're all champions from some perspective.

The poll is on the sidebar, and it is open for a week. Please vote early and often. Tell your local spirit squad to vote. I look forward to hearing what you have to say.

Wednesday, November 25, 2009

Price competition with more than one price: The case of banks

In case you haven't noticed, banks are clamoring for your money. Lately, I have been surprised at the variety of ways that banks compete with one another for customers. Here's a sampling of techniques used by the commercial banking industry to attract customers.

Paid referrals from current customers
In June, I wrote about a great deal our bank (ING Direct) was offering: $25 for opening a new account, just so long as you were referred to ING Direct by a current customer like me. ING Direct isn't the only bank that pays for referrals. Here's a list of the deals at our banks.

ING Direct: $25 for the new customer, $10 for each referral.
Citibank: $50 for each referral.
TCF Bank: $25 for the new customer (an additional $100 for signing up for direct deposit), $25 for each referral.

On its face, these banks have stumbled upon a great advertising scheme. They only pay for advertising that works. On the other hand, offering to pay cash to new customers might send a bad signal. After all, what kind of bank would pay their customers just for signing up?

Higher rates for "new" money.
Banks also attract new customers with an eye-catching high rate on a CD for new customers. When most banks were offering 1 percent APY on an 18-month CD, Citibank offered a 2.25 percent APY for new customers. ING Direct did a similar thing a few months ago. I haven't looked at every bank in the industry, but the practice seems to be pretty standard.

Rate bumps for staying with the bank or the same type of account.
ING Direct usually offers a "Rollover Bonus" of 0.15 percent APY when your CD matures. That means that if the current rate is 1.75 percent for a 12-month CD, you will earn 1.90 percent. Let me put that percentage number into perspective: On $20,000, that's $30 more than you would otherwise have.

Of course, banks compete on other dimensions. Some provide excellent service. Others offer additional freedom (use any ATM you want). Others even pride themselves on having many locations in your area. But, with the advent of internet banking, "competition on price" is becoming increasingly important.

I haven't worked out the details, but this setting raises the following (potentially) interesting questions:

1. Why do these different pricing/advertising schemes co-exist within the same market?

2. What characteristics of banks (i.e., long-term survival, geographical location, or quality of management) correlate most strongly with strong price competition?

3. What are the consequences for consumers of these banking services? Are we getting anything substantive out of this competition?

4. Do these banks have different welfare effects in different geographic regions?

5. How important is the effect of consumers gaming the system by signing up for many different bank accounts? Why is it not more important?

I'll leave this open ended for now, but I can imagine that these are important questions facing the banking industry. I would be interested in hearing your thoughts on the issue.

** Oh, by the way, I'm still getting paid $10 for each referral for an ING Direct savings or checking account, so feel free to shoot me your contact information if you want $25 and a bank account with lots of benefits (minimum of $250 deposit). I think the savings account gets 1.3 percent APY now, but regardless, it is a decent rate for savings that you can move around.

Saturday, November 21, 2009

Poll: What should I choose?

I am currently taking a course on numerical methods in economics. Among other things, this class has caused me to take a close look at the computers in my life. Our desktop and my laptop are both over five years old. My wife's laptop is nearly five years old. My laptop is in rough shape (that's why I rarely use it), but the other two computers are in tremendous working condition given their old age.

Either of our computers works fine for basic math, word processing and typesetting, but I am starting to run into some constraints. The laptop struggles with my YouTube project, taking about an hour and a half to format each 8 minute video. Furthermore, the numerical methods I am learning in my classes can be a significant drag on computing resources. For any interesting problem, I will need a laptop with some gusto.

Because we'll soon be making one or more computer purchases, I have been learning about the new computer technology out there. Whenever I go computer shopping, I am surprised at how much better the technology is. This time is no exception. Here are some of my findings:

Loads of RAM. None of our computers has over 500 MB of RAM, yet most power-saving Netbooks come with 1 GB of RAM standard. It would be silly to get a laptop with less than 4 GB of RAM because it has gotten so cheap. Moreover, some desktops can be filled with as much as 16 GB of RAM. That's just insane to me.

Dedicated Graphics Cards. Many laptops come with a dedicated graphics card with RAM of its own. The guys at Best Buy tell me that this frees up the regular RAM for other tasks when, say, someone is making another YouTube lecture video for his channel.

Huge Hard Drives. Our five-year-old computers are equipped with about 30 GB of space on our hard drives. It isn't uncommon to hear of people talking about 1 TB or 1.5 TB hard drives. With media making capabilities, computers are needing more space to save our precious videos. It isn't surprising, then, that the hard drives get bigger to serve that demand.

It's all so inexpensive. I found an adequate netbook for $279 that has better capabilities than any of our current computers. On the other hand, $1000 will buy a really slick laptop or desktop that really would upgrade our home computing.

Needless to say, my little excursion into the market has me thinking that we will buy a new computer soon. That brings me to my poll question for the week.

What computer/option should I choose?

(a) The power-saving and hip netbook
(b) A media maneuvering, RAM'ed up laptop
(c) A powerful and monstrous desktop
(d) All of the above.
(e) Wait until next year. The deals will be even better then.

I'm really interested in hearing what you have to say. Also, if you have any technical advice regarding the computing solution you think we should choose, I am interested in hearing what you have to say in the comments. Please vote early and often. Tell your friends and your local Geek Squad to vote. I look forward to reading what you have to say.

Wednesday, November 18, 2009

Carnival of Economic Fun #4

Welcome to the November 18, 2009 edition of the carnival of economic fun. There were plenty of good submissions, and as usual, I screened the submissions so that you are left with the most delightful ones for your reading. Believe me, these seven articles are definitely worth a read.

1. To kick it off, here's an unconventional question: "How do I get laid off?" That seems strange in this economy, but it's a good question. Let Wise Bread tell you why.

Wise_Bread presents How to Get Laid Off by a Step by Step Guide posted at Wisebread.

2. Next up, here's an article on how to save on childcare. It looks like good advice.

MatthewPaulson presents Money Saving Tips for New Parents posted at Fine-Tuned Finances.

3. This next post has some positive attitude for you.

Debbie Dragon presents Get Some Gratitude in Your Attitude posted at Empowering Mom.

4. This next post on elevator pitches draws an unlikely connection with pickup lines. The goal? Be memorable.

Angel Taylor presents 3 Steps to an Effective Elevator Pitch posted at Angel Taylor's MLM Profits Blog.

5. This next article discusses the dangers of attributing correlation to causation in the context of credit cards and spending. This reminds me of my Macy's card posts. Fun stuff.

Darwin presents The Truth About Rewards Credit Cards – But, Is it Really True? posted at Darwin's Finance

6. Zombies? Stock market? Put them together and you'll get this next post. What can Zombies teach us about the stock market and investing?

Soo-Young presents 10 Things Zombieland Taught Me About Stock Market Investing posted at Bullishness.com

7. I don't know if I would go to the same extreme of decluttering my place (I personally like some level of clutter), but this next post has some interesting suggestions.

Jake presents Get rid of everything you own posted at Your Best Weekend.

I hope you enjoyed this carnival. Just like ABC's television programming schedule, the carnival of economic fun will be taking a break for the holiday season. I will return with another carnival some time early next year, but for now, stay fun and enjoy life.

Saturday, November 14, 2009

Poll: What is your Michael Jackson ticket reservation price?

About a month ago, I read an interesting column in Tim Harford's Dear Economist series. A reader who had no nostalgia toward Michael Jackson (but had bought a ticket for an upcoming performance) was offered a choice between a refund or a memento concert ticket, which he could sell to someone else. He asked:
I presume the future value of any one ticket will depend almost exclusively on the choices of the other 799,999 fans. To the non-nostalgic fan, who wishes only to see the best financial outcome, what would be your advice based on a game theory analysis?
Tim Harford gave a wonderfully clear answer that explains mixed strategy equilibrium in game theory. Harford concludes:
Every fan will be happy to randomise, because every fan will know that either way, he or she will get something of equivalent value. I realise all this sounds implausible, and it is. Game theory makes demanding assumptions about human rationality that may not apply to grieving fans. I would pay closer attention to research in economic psychology that suggests people are very unwilling to part with an item once they feel a sense of ownership. A non-nostalgic fan should go for the refund.

Although Harford does not make this explicit, it's probably true that there are different types of people out there, each with a different level of nostalgia for holding the Michael Jackson memento. In this case (and with a smooth distribution of types of people), only one fan type will be willing to randomize. That's the fan who has the "right" level of nostalgia. And, that right level of nostalgia is determined by supply and demand.

One way to express this nostalgia is to ask each individual (independent of market conditions) what price would make him just indifferent between holding the ticket and selling it. This reservation price will probably differ across individuals, but it will convey the distribution of types. People with a reservation price of $0 are the non-nostalgic types, whereas people with very high reservation prices are the nostalgic types.

Now, let's return to Harford's example. Like Harford, let's suppose that 100,000 memento tickets* is the equilibrium quantity. In this case, who are the 100,000 people who accept the ticket instead of the refund? They're the ones with the highest reservation prices, or the lowest levels of nostalgia. No psychology or irrationality required.

That brings me to my poll question of the week:

What's your Michael Jackson ticket reservation price? (pick the closest number)

$0
$25
$50
$100
>$1000

Please vote early and often. Tell your friends and fans to vote. The poll is open for a week. I look forward to seeing what you have to say.

*Note: Like Harford, I punted on completely spelling out the equilibrium conditions. Really, the marginal type has to be indifferent in equilibrium. One could express this indifference mathematically, but this is a blog.

Wednesday, November 11, 2009

Plants versus Flowers

In previous posts, I discussed how our houseplant's life is a good metaphor for our turbulent economy, a metaphor for creative destruction, and how we purchased a temporary friend for him to brighten up our apartment.

Today, our houseplant (Bob) has an economics lesson to share. In my last houseplant post, I asked a question that I left unanswered about the cost of houseplants relative to cut flowers:
Without consulting a price guide, do you care to guess the relative prices of the two types of household foliage?
Here's the answer: Purchasing our houseplant cost us about $5; the bouquet of flowers in the pictures cost about $15. Before we got into the houseplant market, I would have guessed that the prices were the opposite. After all, houseplants are durable; cut flowers are doomed to an early death. All else equal, people will pay more for longer-lasting goods, right? Given this line of reasoning, I was surprised at the difference in prices.

It's not surprising that houseplants last longer than cut flowers. Houseplants are alive, whereas the cut flowers are dead (or slowly dying). What's surprising is that cut flowers cost more at the store. Basic economics affords two convenient explanations for the higher price: the demand for cut flowers is higher (or at least less responsive to price increases), or it costs more to produce fresh cut flowers.... or both.

There's probably some truth to both stories. On the cost side, unsold cut flowers die without contributing to the flower store's bottom line. This is a significant cost that flower companies factor into their supply decisions and prices. On the demand side, cut flowers are a wonderful surprise to bring along on a date, but nothing says creepy commitment like a potted plant on the second date. On its face, flowers seem to have a bigger market.

What do you think? Is it surprising to you that houseplants cost less at the store? Do you have other reasons to rationalize the difference in prices?

Saturday, November 7, 2009

Poll: On the effects of competition

When I picked up my copy of the University of Chicago Maroon, I was surprised when I read this:
University Market will close December 13, the store said yesterday, after the University raised the store’s rent 50 percent over the past two years, according to co-owner and manager Kirsten Esterly.
For those of you unfamiliar with Hyde Park-Chicago, University Market is a tiny grocery store and deli within walking distance of University of Chicago. They have great deli sandwiches, and I love going there for lunch. At first, I was disappointed because I would miss those sandwiches, but I read on. Here's paragraph six:
The deli’s popular made-to-order and pre-made sandwiches will be available at the Medici Bakery next door, although the menu will be smaller, Esterly said. The market’s other unique offerings, such as specialty beverages, fresh fruit cups, and deli salads, will also be available at the bakery.
Great! The only product I buy from University Market will still be available, but I couldn't help wondering what the rent had to be to drive the University Market out of business.
“Our rent has been raised significantly and we just decided it’s not in our best interest to keep on with rent that high,” Esterly said. The space is approximately 20 by 65 feet, and would have cost about $52,000 a year if the Market had accepted the University’s new lease, according to the numbers given to the Maroon.
That's over $4000 per month, which seems high at first glance, but the property is commercial real estate, which might mean that $4000 per month on 1200 square feet is about right. I'm not sure, but there have been plenty of reactions to the news.

This week's poll is to see what your reaction is (quotes in the comments or text of the article):

Which quote best describes your reaction to the University Market closing?

(a) "good riddance. overpriced everything and a refusal to cooperate with the university or give any discounts to the students that account for 95% of their business."
(b) no downside. "If the deli's going over to Med Bakery I don't really see what the downside of this is. The deli was what made UMarket appealing...otherwise it was like BartMart without the discount or flex dollars."
(c) "this is horrible! it's the only place I can get groceries that isn't the 8-billion-dollar Bartlett store"
(d) Puzzled. “I would have thought they made a lot of money,” said Moschini, who visits once a day to buy lunch. “I guess I’ll have to pay the University for my food now.”

Vote early and often. Tell your friends to vote. The poll will be open for a week. I look forward to seeing what you have to say.

Wednesday, November 4, 2009

Should a government hide its taxes?

Last week, Ian Ayres wrote an article at the Freakonomics blog entitled A Defense of Irrational Taxation? where he argues that people don't respond to tax hikes that are less obvious.
The “out of sight, out of mind” effect suggests that policies to lower salience taxes might reduce consumption distortions. I find it liberating to buy goods in foreign currency when I have difficulty converting the price into dollars. So to begin with, sales tax rates that are nice round numbers, like 10 percent, are likely to be more distortionary (than rates with many decimals) because it is so easy calculate the tax burden.

Ayres cites a study by Amy Finkelstein, which demonstrates that E-Z Pass tollways charge significantly higher tolls than tollways where drivers can only pay cash. Finkelstein interprets these higher toll rates as the effect of lower salience of costs.

In my reading of the paper, Finkelstein shows how hidden (or low-salience) taxes can give governments an incentive to raise rates significantly, but this is not the main idea that Ayres takes away from reading the paper. Ayres' takeaway point is: At a given tax rate, lower salience means less distortionary effect of the tax rate. That's probably true, but a key point of Finkelstein's analysis is that the tax rate isn't given.

The analysis of the distortionary effects of tax salience on tollways also teaches us about other types of taxes. For example, sales taxes are annoyingly salient because they force math on people every time they make a transaction, but a value added tax (essentially a consumption tax that requires no math at transaction time) is less salient.

Taking Finkelstein's tax salience lessons to the sales tax versus VAT debate, Ayres would say that a VAT is less distortionary because on account of being less salient. But, that's only true for a given tax rate. Finkelstein's findings suggest that the VAT rate would be higher than a comparable sales-tax rate, and higher tax rates generate bigger distortions.

In short, irrational taxation (taxing by increments of Euler's number) is a cute idea, but we cannot forget that tax rate decisions are a political process. I am not sure we should give our government officials another incentive to raise taxes.