Friday, July 30, 2010

Poll: How much of your own move do you do yourself?

We moved to a new apartment this week. Being just one economist, there is no way that I could move all of our stuff by myself (related sidenote: somehow, I have accumulated 3 large boxes of books). I considered asking my friends -- most of whom also study economics -- to help with the move, but I feared that we would end up talking about foregone opportunities and forgo the moving. So, we hired movers.

I called a couple of moving companies around Chicago. Both cited rates of around $100 / hour for three men and a truck. For our apartment, they moved our stuff in only 4 hours. Not bad for 57 boxes and an estimated 3000 pounds of stuff. It was well worth it to only do the packing and unpacking.

On the day of the move, the foreman of the moving team told me about all of the crazy things that people have his moving company do. For example, he lamented about the customers who don't do a thing to prepare, just having the moving company do the packing, moving and unpacking. My first impression on hearing the man talk about these people who have the moving company do all the moving was to agree. To me, it seemed strange that someone would pay $100 / hour (plus the cost of materials) for the packing stage of moving.

But, the more I thought about it, the more my mind turned up reasons for someone to pay for packing. Maybe the customer was not physically able to handle strenuous exercise. Maybe the customer's time was really valuable (i.e., several days loading boxes would cause him/her to forgo $10,000 in income). Then again, maybe not. That brings me to my poll question:

How much work would you put into your own move?

(a) I'd do the whole move myself with a few friends.
(b) I'd move everything except for heavy furniture
(c) Just the packing. Leave the moving to the professionals.
(d) None. That's what movers are for.

For concreteness, imagine that the move is just across town (so if you did the move yourself, you could make multiple trips). FYI: Our move was somewhere between (b) and (c). I moved about 10 boxes on my own, but for the most part, left the moving to the professionals.

As always, vote early, often and on the sidebar. Tell your friends and moving professionals to vote. But, the poll is only open for a week, so get your mouse moving to the sidebar to select your favorite option. I'm interested in seeing what you have to say.

Wednesday, July 28, 2010

More on the role of innovation from Jon Stewart

After writing today's post, I sat down to watch last night's episode of the Daily Show. Jon Stewart's guest (William Rosen) is the author of a book about innovation called The Most Powerful Idea in the World. For the economically-inclined, this topic is fascinating. Here's the interview:

The Daily Show With Jon StewartMon - Thurs 11p / 10c
William Rosen
Daily Show Full EpisodesPolitical HumorTea Party

My favorite quote from Rosen:
The reason it took so long is not a lack of ingenuity or inventiveness. There's a famous quote from ... that says "The most important invention of the Industrial Revolution is invention itself." The literal meaning of which is obviously false as those steam engines of the 1st century would testify, but invention is a very different kind of activity for those centuries leading up to the 18th century. For one thing, it is a really lousy way to make a living.
As Stewart breaks it down, "Once the idea that ideas could be yours and you could own them, that's what opened the flood gates." Sounds like a great book to me.

Smartphones and innovation

I don't own a smartphone, but I am interested in the technology. Many of my friends have iPhones or Blackberries, and I often see people on the bus using the commute time to check their e-mail and read the news. When I see people make such efficient use of their commute time, it makes me feel a bit left out. After all, I love efficiency and technology.

So, I've been looking into the pricing of smartphones and plans. If you are unfamiliar with the market, the primary cost of a smartphone is not the device itself. To get the most out of smartphone technology, you need a data plan in addition to a voice plan. On the AT&T network, a 200 MB per month plan will set you back $15 / month, while a 2 GB per month plan costs $30 / month. And, that's in addition to a monthly voice and text plan, which runs about $45/month at the low end.

There are a host of different options for these plans. Some networks offer unlimited data, voice and text all for one price (with no breakdown of different options). Other networks let you do family plans with added features for smartphones, and they'll let you customize the plan in a bunch of different ways. Regardless, all networks have their own set of plans, and their own set of phones.

This latter fact is intriguing. The iPhone cannot be used on any other network except for AT&T, which has an exclusive deal with Apple. This exclusive contract has frustrated consumers who might like the iPhone technology better than Droid or HTC, but are in an area that is better served by Verizon (i.e., Montana). Some of the more tech-savvy consumers have circumvented this problem by jailbreaking their phones (unlocking their phones for other networks). For the average consumer, however, these network restrictions are binding and continue to be frustrating.

Why is it that AT&T signed the exclusive deal with Apple in the first place? For AT&T, one reason is that these restrictions might stick consumers into expensive, long-term contracts with AT&T when they might prefer Verizon. This suggests that exclusivity between smartphone and network providers is an unambiguous anti-competitive restriction on trade... until you take a closer look at Apple's incentives to innovate.

Especially in high-tech industries, recent innovation has made consumers significantly better off, but how do you properly incentivize the innovation effort to come up with the next iPhone? On one hand, we have a stellar patenting system in the United States, and that system gives market power to the innovator for an extended period of time. Through this market power, the innovator can raise the price to be compensated for coming up with an innovation that sells. In this theory, we get the right amount of innovation in our society when we give innovators the right amount of market power as a reward.

On the other hand, once the iPhone is developed, competitors can innovate their own related product with added features (under separate patents). This "add a feature" competition is less expensive than the original innovation because the leader has to sink all of the failed attempts to see what works (i.e., what features are most attractive to consumers?), while the followers can save effort by observing the leader's successes and failures. If the original innovator thought that this sort of competition would too quickly erode the rewards of market power, the first iPhone wouldn't have been developed in the first place. That's because there wouldn't be enough profits on the table to properly incentivize the innovation.

In light of this theory of patents, how do exclusive contracts give the right incentives to innovate? First, tying the phone to the contract means that the smartphone developer won't be compensated unless it creates a phone worth the exclusivity in the first place. After all, smartphones have become one of the most important hooks into a new plan. If the smartphone is subpar, not many people will sign on with the network. Second, after the original innovation, the exclusivity acts as a buffer from the "add a feature" competition that is sure to follow. If a competitor is going to have a viable competing product, they'll have to produce their own product that's worth committing to an exclusive contract. The result is a market that is ripe for new innovation.

In the smartphone market, this is exactly what we have seen. Over the last five years, phones have gotten better at a torrid pace as smartphone manufacturers have scrambled to make fully-featured devices that make our lives more fun (and efficient). If you take a short view on the industry, you might think that it is a monopoly that makes life hard for consumers, but the long view is one of innovation, investment, and exciting new offerings for consumers. The technology is great, and it is certainly improving.

Who knows? Maybe I have a smartphone in my future. I hope so.

Sunday, July 25, 2010

Learning Economics on a Budget: Part VI

In my last update on my YouTube channel, I posted a series of videos on price discrimination. In an effort to get in touch with the intro of intromediate microeconomics, I decided to post a series of more basic videos on microeconomics. In this update, I give a guide to these new videos.

Let's start with a video on the intuition for why demand curves slope downward. This is pretty basic and intuitive, so if you want a more expansive treatment see the videos I recorded before on this topic (1, 2, 3, and 4).

In this video, I give an example that explains why sunk costs are sunk.

Here's a video that is an application of the equimarginal principle. This is an important application because it is the foundation for deriving a supply curve. Why do competitive firms produce where price equals marginal cost? Watch this video to find out.

The previous video was about how much the firm will produce, but this next one is about whether the firm will produce.

Because firms shut down when price is below the minimum of average variable cost, it is important to find this point on the graph (called the shutdown price). We may also be interested in the price at which the firm makes zero profit (P=Average Cost, called the break-even price). This video demonstrates how to find these points using only some economics and basic algebra.

This video demonstrates how to graph the various cost curves that we work with in studying how firms behave:

Finally, I conclude with a couple of videos where I work with demand and show how to compute elasticities.

I have some other playlists in progress on my channel, so check in if you want to learn some economics. As long as there are new topics to present, I will post new videos.

Friday, July 23, 2010

Poll: How do you beat the summer heat?

It has been a hot summer this year in Chicago. For that reason, I was surprised when my parents told me that Chicago had a heat advisory yesterday. I hadn't kept my eye on the weather, but sure enough, the heat index was 105 at its peak. It just felt like another hot, muggy day in Chicago.

If it feels like 105 degrees outside, it is even warmer in our apartment when we don't continually run our window-unit air conditioning. With such punishing heat, it is hard to do anything aside from trying to stay cool.

So, given that I am unable to think about anything but the heat, here's the poll question for the week:

How do you beat the summer heat?

(a) Crank up the AC
(b) Ice cream, lots and lots of ice cream
(c) Go out on the town or to some coffee shop (to use their AC)
(d) Go to a water park or fountain and get drenched.

As always, the poll is open for a week. Vote early and often (and on the sidebar) and tell your friends to vote. If it is hot where you are, do your best to stay cool. If you have some beautiful summer weather, enjoy some of it for me. Regardless, I'm anxious to hear what you have to say.

Wednesday, July 21, 2010

Commercials and On Demand Viewing

I often watch television shows after they have aired using the On Demand feature provided by our cable company. Aside from convenience, On Demand viewing presents many fewer commercials than live television. For example, a half-hour live Jon Stewart is about 20 minutes On Demand. The 150-minute Lost finale was only 120-minutes On Demand.

So, why the difference? I see two reasons, but there are probably many more (chime in with comments if you have some good ones):
  1. On Demand viewing attracts additional viewers to watch a show who would not watch it if it was only available live. On Demand does this by being more convenient, and an important dimension of this additional convenience is limited commercial interruptions. Hence, On Demand is offered with fewer commercials than live TV. This idea parallels the market expansion motive to price discrimination. Like senior discounts at the movies, this option expands the market by giving the more advertising-sensitive consumers less advertising to wade through.
  2. When people watch a show On Demand, they can fast forward through the commercials. This fact is obvious, but it has important implications for the incentives of advertisers. Almost surely, placing five minutes of ads at each commercial break is going to drive most people to fast forward through the commercials, reducing the exposure of those advertisements. This reduces reduces the value of the ads relative to live TV, which most people can't fast forward.* To make the most of the advertising opportunity, it is optimal for whomever sells the ads to reduce the number of commercials. With fewer commercials, fewer people will skip the ads (even though they have the opportunity), and the remaining ads have more value.
The logic to this second point is compelling, but I'm sure there are plenty of competing explanations. I wonder if Comcast experimented with its On Demand commercials to determine the number it sets. It would be interesting to see how quick people are to fast forward through the commercials.

Personally, I don't fast forward through my On Demand commercials, but then again, I enjoy commercials much more than the typical person.

* To cite some advertisements, maybe Old Spice man or Dos Equis man can fast forward live television. Without using superhuman capabilities, there's TiVo and DVR. Still, not everyone has these technologies.

Friday, July 16, 2010

Poll: Why do students struggle with math?

About five years ago, my advanced calculus professor told me that everyone has a threshold level of math where they just cannot get it. According to him, many people stop studying math because they reach a point of abstraction where it no longer makes sense. In other words, much of math ability is innate. Or, to the extent that it was conditioned by our environment, we were imprinted with a certain level of math ability a long time ago, and no matter what we do today, we can't change it.

In my past teaching experiences, however, I have run into quite the opposite. Students report that math does not make sense, but they say this because they're frustrated. They want to give up, but not because they are incapable. It is because they're bored, uninterested, or embarrassed. When they say, "I can't get it," what they really mean is that it is inordinately difficult to concentrate on something so frustrating. Given enough time and persistence, my experience tells me that these students eventually get it.

Then again, I haven't taught advanced calculus, and my advanced calculus professor was one of the smartest guys I have met. I respect his opinion a great deal, so I'm conflicted.

That brings me to my poll question of the week:

Why do students struggle with math?

(a) Some people are not good at math.
(b) Bad preparation.
(c) No interest / time.
(d) English is more interesting

As with all polls, this one is open for a week. So, vote early and often (on the sidebar -->). For the law of large numbers to kick in, I need lots of you to vote, so tell your friends and neighbors to vote. I'm interested in seeing what you have to say.

Tuesday, July 13, 2010

Why poor people pay more to ride the bus

The Chicago Transit Authority (CTA) has a discount program for tourists and commuters. For just $5.75, a tourist can ride the bus as many times as he wants in a 24-hour period. After three rides, the pass pays for itself (each ride costs $2.25 if you pay in cash) For $14, the same deal applies, but for 72 hours. And, the longer the pass, the better the deal.

The deals are better for frequent users. For some seasoned commuters, the $86 ride-as-much-as-you-want-in-a-month pass can be paid using pre-tax dollars. And, that's a great deal.* For others who are intensive users of the transit system, there are permanent transit cards that offer a 25-cent discount on every fare. Then, transfers (hopping on the next bus in the commute) are just 25 cents. These discounts add up.

Regardless of the discount type, the only way to get discounted fares is by using some sort of prepaid transit card, yet I frequently see the poorest patrons paying by using crumpled wads of cash. At the same time, relatively well-to-do students, commuters and tourists who know what they're doing** pay with cards, assuredly getting discounts on their bus fares. How can this be? Where's the humanity?

My explanation is that the CTA is pricing based on cost.*** The people who save through the discount program are the people who ride the bus the most often. It would be a significant hassle to ride the bus if everyone (especially heavy users) paid with cash. Each stop would last twice as long (which costs the CTA directly in gas). Hence, it's a good idea to try to get people who use the bus a lot to use a fast and easy-to-swipe card. Not enough people will switch to the card for its convenience if the card were the more expensive option. Hence, the cards come with hard-to-ignore discounts.

To the guy at the front of the bus with the crumpled 1-dollar bill and the hand full of coins, this isn't much consolation, but at least it is an explanation.

* If you don't understand why this is a great deal. Imagine that you receive a weekly paycheck that would have been $86 in a no-tax world. After tax, you would get less (maybe around $60). The opportunity cost of the pre-tax $86 is what you would have to give up. So, the government program saves the seasoned commuter (in this example) $26 per month.

** Some tourists have no idea about the transit cards and how much they can save them. Also, these same tourists don't know that the bus does not make change. These tourists are also the type who have only 20-dollar bills on them. So, they end up paying much more.

*** Pricing based on cost is distinct from price discrimination, which I discussed a few posts back. Price discrimination occurs when the firm sells the same item that costs the firm the same at different prices to different consumers.

Saturday, July 10, 2010

Poll: What will be the effect of .xxx domains?

Daniel Hamermesh at Freakonomics wrote an interesting comment on the welfare implications of requiring .xxx domains for pornography sites:
It would improve consumers’ welfare if all porn sites were to use the .xxx suffix: Those customers who want to see porn sites could find them even more readily; those who don’t (and parents) could filter them out more easily. I’m not sure porn purveyors would be better off, though: Perhaps they imagine that some potential customers who might otherwise be ensnared into entering porn sites and purchasing wouldn’t find and enter the .xxx sites. If given the choice, will managers of porn sites want to use these domain names? If they believe the ensnarement argument, it would be a bad strategy for them to adopt the .xxx suffix.
Without offering too much comment, that brings me to the poll question of the week:

What will be the effect of .xxx domains?

(a) No effect
(b) Porn profits will decrease
(c) It will be easier to search for porn
(d) Porn profits will increase

As with all polls, this one is open for a week. So, vote early and often (and on the sidebar). Tell your friends to vote, and please don't filter this poll from your children. Unlike .xxx domains, it is appropriate for all ages.

Wednesday, July 7, 2010

Economics is useful: Bathroom Edition

A friend of mine alerted me to this passage in David D. Friedman's online Price Theory text:

A second simple example of economic thinking is Friedman's Law for Finding Men's Washrooms--"Men's rooms are adjacent, in one of the three dimensions, to ladies' rooms." One of the builder's objectives is to minimize construction costs; it costs more to build two small plumbing stacks (the set of pipes needed for a washroom) than one big one. So it is cheaper to put washrooms close to each other in order to get them on the same stack. That does not imply that two men's rooms on the same floor will be next to each other (although men's rooms on different floors are usually in the same position, making them adjacent vertically).Putting them next to each other reduces the cost, but separating them gets them close to more users. But there is no advantage to having men's and ladies' rooms far apart, since they are used by different people, so they are almost always put on the same stack. The law does not hold for buildings constructed on government contracts at cost plus 10 percent.

Ironically, another counterexample to this law occurs on the second floor of Rosenwald Hall at University of Chicago (home of the economics department). The women's bathroom is across from the stairwell, while the men's bathroom is down the hall (on the other side of the hallway).

Saturday, July 3, 2010

Independence Day Poll

Happy Independence Day. I hope you have great weather for however you celebrate the holiday. That brings me to my poll this week:

How do you celebrate Independence Day?

(a) Fireworks
(b) Parade
(c) Cookout / BBQ
(d) Golf/ something else

As always, the poll is open for a week, so vote early and often. Tell your friends -- American and non-American -- to vote. I look forward to hearing what you have to say. Regardless, have a safe and happy holiday.