Tuesday, November 30, 2010

Will Groupon become Googlepon?

The online coupon company, Groupon, won't likely change its name, but an article in my news feed caught my eye today -- Google Said to Near Agreement to Buy Groupon for $6 Billion. The article paints the acquisition in a sour light, suggesting that Google will be overpaying for Groupon:

Google would use the purchase to benefit from surging demand for coupons, sent via the Web, that offer discounts on everything from dinner cruises to dental exams. Groupon’s strategy is easy to copy, fueling concern that Google wouldn’t be able to wring a high enough return on its most expensive acquisition, said Colin Gillis, an analyst at BGC Partners.

“If you overpay for anything, it will be a controversial buy,” said Gillis, who has a “hold” rating on Google and does not own its shares. “Groupon’s business is subject to mimicry.”

The concern that Groupon can be easily mimicked has been out there for a while. Mimicry has been tried, yet no company has done it successfully. My friend, Evan Miller, was so impressed with Groupon's business potential earlier this year (April 15) that he wrote that Groupon's valuation was in excess of a billion dollars, "Call me crazy, but I think a billion is too low."

Evan's piece is great if you want to understand why Google is interested in buying Groupon. The best thing about it is that he wrote these words more than 7 months in advance of public talk of an acquisition of Groupon by Google:

So despite the fact that the world’s largest search engine and a popular coupon mailing list appear to be as closely related as Barack Obama and Dick Cheney, the core business model is essentially the same. I imagine the market potential for Groupon must be comparable to the market that Google has discovered for its search ads, but of course the two companies are not in competition. Google helps people find businesses they know must be out there, whereas Groupon helps people discover businesses they never knew existed. The two companies are complementary.

Seems like a winner to me. For more of Evan's writing on Groupon, check out his guest post and his more economics-laden analysis of the economics of Groupon. Enjoy the reading. As Evan is an excellent writer, I have a hunch you will.

Athletes, Unions and Ownership

In today's post at Economix, Catherine Rampell wrote about how giving ownership stakes to professional athletes can be a successful tax strategy.
This summer we wrote about how tax considerations might have figured into a decision by LeBron James to leave the Cleveland Cavaliers and join the Miami Heat, since Florida does not have personal income taxes. There is, however, an even more advantageous tax strategy that he missed out on entirely.
To make this point, she points to a Wall Street Journal article by Fay Vincent. Here's a key excerpt:
My question is why sports figures are not taking steps to generate tax-favored income by bargaining to get ownership interests in their teams. Imagine how much better off old-timers like Mickey Mantle and Roger Maris would have been if they had been able to obtain even tiny shares of the Yankees franchise in 1961. In today’s context, it is true enough that the tax rate on capital gains income may soon rise to 20 percent — but that’s still far below the rates levied on top income earners.
What I find interesting about this proposal is not the tax advantage, but the incentives advantage of player ownership. Giving athletes an ownership stake in their teams might be a great way to align players' and owners' interests in long-term negotiations. On balance, I'd expect this to be in the interest of both players and owners.

For example, if marquee players in the NFL had some non-trivial ownership stake, they would reap some of the benefits of the proposed 18-game (instead of the current 16-game) season. If this is such a tremendous opportunity from the owner's standpoint, maybe a little slice of the ownership pie is enough to convince the players that it is worth playing an extra 2 games (subject to some concessions, of course).

If player-ownership is such a great idea, why hasn't it taken hold? I see two reasons off the top of my head.
  1. Players having an ownership stake in the team might disrupt the hierarchy of the team, which can affect the performance of the team. On a typical team, owners usually step into conflicts between marquee players and coaches as a third-party arbiter (either demanding that the two work it out, firing the coach, or trading the player). Successful franchises are able to balance the demands of high-profile players and team hierarchy.
  2. A more cynical reason that player-ownership hasn't taken hold is that player-ownership (if it is a good idea) is not good for the players union. Most American professional sports organizations have a players union, which would stand to lose if players and owners can find a more efficient way to bargain on amicable terms. With unions taking the lead in these contract negotiations, it is no wonder that unions don't propose a contracting solution that -- in the long term -- could reduce the role of unions in professional sports.
If my cynical reason is correct, unions probably raise my first objection to player ownership whenever it comes up in these negotiations.

Monday, November 29, 2010

Harry Potter and Specialization

Jeff Ely makes an interesting observation about the main actors in the Harry Potter franchise:
The actors playing Harry, Ron, and Hermione in Harry Potter and The Deathly Hallows are most certainly famous, but almost certainly not because they are talented. They were cast in that movie nearly 10 years ago when their average age was 11. No doubt talent played a role in that selection but acting talent at the age of 11 is no predictor of talent at age 20. The fact that they are in Deathly Hallows is statistically independent of how talented they are.
It is probably true that Daniel Radcliffe was no more talented an actor at age 11 than the typical 11-year-old actor wannabe, but he has gone down a different path over the past 9 years. At age 20, it is unlikely that he has the same relative talent as the 11-year-olds he beat out for the Harry Potter job. In other words, it is because Radcliffe was selected that he became more talented.

If Radcliffe becomes immensely successful in other roles, we can probably attribute this success to his selection to be Harry Potter at age 11. But, that does not allow us to deduce that fame alone gave him the chance at success (as Ely notes in his original post). There is still a role for talent.

Just as the commenters on the original post point out, Radcliffe was given a great opportunity to learn by doing on the set of Harry Potter. As a result, he is much more talented today than he would have been if he hadn't gotten the role. This acquired talent undoubtedly has a payoff, and is likely be the reason you'll see Radcliffe be more successful at acting than the randomly selected 20-year-old.

Sunday, November 28, 2010

The Statistics of Football: Punts versus Field Goals

While watching some (American) football this afternoon, it hit me how strangely kicking performance is measured. Punting and place-kicking are measured differently when tallying the statistics of the kicker. As far as I can tell, there is no good reason for it. More on this at the end of this post. First some background (skip to the regular-sized font if you need no introduction to punting and place kicking).

When punting, the kicker stands 15 yards behind the line of scrimmage (spot of the ball). From that spot on the field, the kicker drop kicks the ball high in the air -- and far down the field -- to the other team. This
punt transfers possession to the other team at the point where the other team fields (and returns) the ball.

For official statistics, the length of the punt is recorded as the distance from the line of scrimmage to wherever the ball is fielded (or stops rolling). Consider a couple of examples:
  1. The line of scrimmage is at the team's own 20 yard line. The punter kicks from the 5 yard line. The ball travels to the other team's 35 yard line (passing own-30, own-40, 50, other-40) where the ball is caught by the other team and returned to the 50 yard line. This is a 45-yard punt because there are 45 yards between the own-20 and the other-35.
  2. The line of scrimmage is at the team's own 45 yard line. The punter kicks from the 30 yard line. The ball travels in the air to the other team's 6 yard line, but then bounces to the 2 yard line where it comes to rest. This is a 53-yard punt because there are 53 yards from the line of scrimmage and the point where the ball rested, but was not returned.
  3. The line of scrimmage is at the team's own 45 yard line. The punter kicks from the 30 yard line. The ball travels in the air to the other team's 6 yard line where it is fielded by the other team. The returner (in an attempt to advance the ball) doubles back, losing yardage. He is eventually tackled for a loss at the 2 yard line. This is a 49-yard punt because there are 49 yards between the line of scrimmage and where the other team fielded it.
  4. The line of scrimmage is the team's own 45 yard line. The punter kicks from the 30 yard line. The ball travels in the air to the other team's 6 yard line where bounces into the end zone (past the zero-yard line). By rule, this is a touchback and the other team get the ball on the 20 yard line. This is a 55-yard punt because there are 55 yards between the original line of scrimmage and the end zone.
Set aside the internal inconsistency in the distinction between (2) and (3). One could measure the length of punts from the point where the kicker kicks the ball. After all, on the 55-yard punt, the kicker actually kicked the ball 70 yards (64 of which were in the air). But, that's not how it is done... at least for punting.

Place kicking is another story. A team will kick a field goal if it believes that its kicker can kick the ball through the uprights on a place kick. If successful, a field goal is worth 3 points. By rule, drop kicking a field goal is not allowed. The ball must be kicked from the ground. The team that is attempting a field goal will snap the ball backwards approximately 7 yards to a holder who positions and holds the ball for the kicker who kicks the ball (hopefully through the uprights).

The uprights are positioned at the back edge of the endzone (which is 10 yards deep). Hence, a successful field goal must travel an extra 10 yards from the yard marker at which it is kicked.

For the official statistics, a field goal attempt's length is measured as the distance it must travel to be successful. Consider a couple of examples:
  1. The line of scrimmage is the other team's 20 yard line. The holder holds the ball at the 27 yard line. This is a 37-yard field goal attempt because the ball must travel 37 yards in the air and go through the uprights to be successful.
  2. The line of scrimmage is the other team's 20 yard line. For some strange reason, the holder holds the ball at the 32 yard line. This is a 42-yard field goal attempt because the ball must travel 42 yards in the air and go through the uprights to be successful.
  3. The line of scrimmage is the other team's 35 yard line. The ball is snapped 7 yards back to the 42 yard line. This is a 52-yard field goal attempt.
A final note on field goal attempts. It doesn't matter if you make it by an inch or make it by 30 yards, the field goal you made is measured as the same length.

Now, you can see how place kickers (kickers who attempt field goals) and punters are assessed differently for the length of their kick. On his resume, a place kicker gets to add 17 yards (for a typical place-kicking formation) to the field position at which he can successfully make a field goal. On the other hand, a punter must subtract 15 yards from how far he can truly kick the ball. Seems unfair to punters.

Why the difference? I can understand that coaches want to know how far a particular punter will advance the ball when changing possession, but for a particular place kicker, they also want to know how far they have to advance the ball to have a good chance at a field goal.

From my perspective, both types of kicks ought to be measured from the line of scrimmage. Adding 17 to the field position seems like unnecessary addition when considering whether your kicker can make a particular field goal.

I'm guessing that field goals are -- in part -- measured this way for consistency across eras. In professional football, from 1932 to 1974, the uprights were positioned at the front edge of the end zone. Back then, there was no adding 10 for the length of the end zone because the ball didn't have to travel through an end zone. When the uprights were moved, the difficulty of making a kick from the 20-yard line changed.

Adding 10 to how it used to be done seems like a natural solution to making the measurement of kicks across eras consistent. Football historians may want to be able to compare the length of kicks in 1969 to length of kicks in 1984. For example, we might want to know if Jan Stenerud kicked a longer field goal in 1984 than his best in 1969.* As long as the measurement of the kicks is consistent, we can make this comparison.

Speculation aside, that still doesn't explain why we don't measure field goals from the line of scrimmage.

*His long in each year was actually the same: a 54-yard field goal. His longest was a 55-yarder in 1970.

Wednesday, November 24, 2010

Begging and Advertising

Last Saturday, I was walking around downtown Chicago (at the corner of Michigan and Wacker) when I came across an unusual sight: A homeless woman begging for money right next to a young woman with an open pizza box who was giving pizza to people who passed by. To me, the most unusual aspect of the situation was that the homeless woman was not eating some of the pizza.

The young woman was advertising the pizza place around the corner (Bacino's). Setting aside the fact that there was a beggar nearby, it is an interesting advertising ploy to give some of your product away to potential future customers. Doing so can provide information about your product to people who wouldn't know about your product, which is one important reason advertising can be effective.

Viewed from this perspective, it is a rational (but heartless) explanation that the young woman would simply say no to the beggar. The beggar was clearly without means to be a potential customer at this restaurant (at least in the near term). From a business standpoint, it wouldn't make sense to waste advertising expenditure on someone for whom there's no pay off.

That caveat aside, I can't imagine that the young woman would say no to the beggar and, as nearly as I could tell, the young woman was giving the pizza away indiscriminately. In my mind, the reason must be that the beggar didn't ask for pizza. If the homeless woman was hungry, why wouldn't she grab a plate? Maybe she was too embarrassed to ask for food (but not money?) or maybe she didn't want food. Then again, if she wanted food, maybe she preferred McDonalds.

Tuesday, November 23, 2010

Temptation and Public Policy

Today is Tuesday. Suppose you want to save some money on Wednesday for something that you can only purchase on Thursday. But, you have a temptation problem. On Wednesday, you cannot resist spending money on frivolous things. Once Thursday rolls around, you have a bunch of frivolous things, and if you caved into Wednesday's temptation, you lack the resources to purchase what you really wanted to buy at the outset.

In economics, this is what we mean by facing a commitment problem. One solution to the commitment problem is to contract privately with a supplier of commitment devices. For example, Tuesday I can commit to bear an explicit cost Wednesday for caving into temptation.

Sometimes, however, private commitment is difficult to attain, a fact that has led some economists and policymakers to favor governmental nudges -- i.e., paternalistic policies that impose costs on individuals for caving in to certain temptations. Setting aside the issue of how to decide which temptations ought to be curtailed centrally, if individuals are susceptible to temptation, governmental nudges can improve well being. On this basis, a benevolent government would use nudges to improve overall welfare.

On the other hand, we don't live in a world with a benevolent government. Policies are the outcome of a political process. According to some new research, this fact changes whether we ought to use nudges.* The takeaway point: If individuals are susceptible to short-term temptation, politicians will indulge this behavioral flaw to be elected. Depending on the setting, the resulting policy can be much worse than if the government were constrained from using nudges.

There are some details to be worked out, but the core idea is an interesting critique of the use of behavioral economics in public policy.

*A paper by Alberto Bisin. Alessandro Lizzeri and Leerat Yariv.

Monday, November 22, 2010

The blur between taxes and spending

Greg Mankiw wrote an interesting piece in a New York Times column this weekend. Here is a key excerpt:

Imagine that there is some activity — say, snipe hunting — that members of Congress want to encourage. Senator Porkbelly proposes a government subsidy. “America needs more snipe hunters,” he says. “I propose that every time an American bags a snipe, the federal government should pay him or her $100.”

“No, no,” says Congressman Blowhard. “The Porkbelly plan would increase the size of an already bloated government. Let’s instead reduce the burden of taxation. I propose that every time an American tracks down a snipe, the hunter should get a $100 credit to reduce his or her tax liabilities.”

In his column, Mankiw points out that there is no distinction between the effects of the two policies. They both benefit "snipe hunters" by $100, and at the end of the day, the remaining taxpayers have to pick up the same amount of slack to pay for either program. The two programs are equivalent, yet our political parties act as if there is something fundamentally different between these two proposals. The rest of the article is worth a read.

Thursday, November 18, 2010

Weight Loss Incentives

Fifty days ago, I wrote about some calorie math, explaining why it is easier to lose weight by changing your diet than by working out. At that time, I wrote:
Consider two facts:

1. A person must burn 3500 calories more than he/she consumes to lose a single pound of weight.
2. A 230-lb man (that's me) can burn 184 calories running a mile (Go to the website. Type 230 in for the weight, 8 minutes for the time, and look for "Running 7.5 mph").

That means that I would have to run 19.02 miles at 8 minutes per mile to burn enough calories to lose a single pound. For someone who is out of shape (and looking to get into shape), that seems like a lot of work to go from 230 pounds to 229 pounds.
I wasn't arguing against exercising, but I was pushing against the point of view that exercise is sufficient to lose weight. A good diet is even more important.

Since that post, I went on the "half-muffin diet" and I have been exercising every day. Yes, that means I can't test my own hypothesis. Losing weight was more important to me than distinguishing between ways to lose weight.

How has it gone so far? Fifty days ago, when I said I weighed 230 lbs, I rounded down. I actually weighed 232.2 lbs that morning. Today, I weighed 209.0 lbs, well on my way to my goal of 190 lbs.

As I have an appreciation for economics and incentives, you may wonder if I have used some commitment device to stick to this diet-and-exercise plan. To be sure, I have a healthy appreciation for commitment devices. They can be successful if committing to something is difficult.

But this time, I haven't put money on my weight loss regimen. No side bets. No checks to be cashed if I don't meet my goals. Nothing like Ian Ayres carrot-and-stick approach to maintaining his own weight:
The results are in. I’m happy to report that my eBay auction ended with a winning bid of $282.85. Twenty-three bidders put in a total of 45 bids. The bidders were a mixture of seasoned eBay users (some with more than 150 eBay purchases) and newbie eBay users.
Ayres was reporting on the results of an auction of his "right to regain weight." If in any week, he weighs over 185 lbs, he will fork over $500 for missing his commitment that week. He has committed to this incentive for a year (52 weeks). 49 days ago, I wrote about what I thought about Ayres contract with himself. In short, I like it, but not if he loses himself over the holidays.

So, what did I do to lose weight if there isn't a commitment device involved? Although I haven't put money on the line, I have done one thing that Ayres has done in his own weight-management quest. I have made my weight fluctuations more salient to myself. And, that has made all the difference (for me).

Since September 27th, I have been weighing myself daily and recording my weights in a spreadsheet. This has been an incredible source of short-to-intermediate feedback on how my weight loss has been going, and if you're planning to lose weight, you should do something like this to track your progress. In my opinion, short-to-intermediate term feedback is an excellent input to achieving a long-term goal.

Of course, Ayres has taken his progress-tracking to a rigorous new level. He has a Wifi-enabled scale that automatically posts his weight to Twitter. My scale isn't as fancy as his, but I expect that it will keep helping as long as I keep stepping on the scale.

Wednesday, November 17, 2010

Learning Economics on a Budget: Part VII

It has been almost four months since I have posted an update on my YouTube channel. Since then, I started a playlist website, where I organize links to my videos into units (to make the content on my channel easier to navigate).

I have also uploaded some new videos to the channel, including most of an intromediate-level treatment of general equilibrium and a couple of other miscellaneous topics.

In this video, I introduce the idea of an endowment economy budget constraint, which is foundational to the idea of general equilibrium.



This next video in the series describes the essential aspects of the Edgeworth Box and demonstrates how to find a competitive equilibrium graphically:



The next video in the series describes the idea of Pareto efficiency and demonstrates how to find Pareto efficient allocations in an Edgeworth Box.



The most recent video on general equilibrium/ Edgeworth Box economies explains how to think about The Coase Theorem in the Edgeworth Box.

The Coase Theorem + Edgeworth Box video builds on previous knowledge of The Coase Theorem (at least in a naive sense) and Externalities. Before going to the full-blown Edgeworth Box treatment of The Coase Theorem, you may want to watch these earlier videos.

First, my video on externalities and welfare:



Second, a simple numeric example to illustrate the Coase Theorem:



With the foundation of the previous videos in this post, you can fully appreciate what I do in the Coase + Edgeworth video:



As I plan to post more videos on the analysis of Edgeworth Box economies, you may want to subscribe to my channel to receive updates from YouTube.

In the meantime, I also posted videos on some other topics:

Price Ceilings and Price Floors:



Introduction to Game Theory:



Introduction to Oligopoly:



Finally, you may notice a change with these videos: now there are ads on (or before) my videos. This is because I recently became a YouTube partner, and I earn a few pennies here and there as people watch my videos. Those pennies are nice, but the fact that people have found my videos helpful is even better.

If you know someone who would benefit from the videos on my channel, pass a link along to them. If acquiring economic reasoning has a positive externality, telling them about my videos might just be a Pareto improvement.

Monday, November 15, 2010

An example of price discrimination

I took this picture yesterday while shopping for groceries at Costco.


This is an interesting example of pricing, not only because it is price discrimination, but because it fits into the description of more than one type of price discrimination.

On one hand, Sullivan's Steakhouse (using its partnership with Costco) is bundling the two gift certificates together in a quantity discount. This is second degree price discrimination. Here's how it works in this example:

If you commit to buying two $50 certificates, you get $50 for the price of $40 on each one. As long as this menu of prices induces people to sort into high and low demand types, Sullivan's knows that the ones who go for this deal have higher demand. They can get away with charging a lower per-unit price to high-demand individuals because they'll make it up on volume. And, they know they'll make it up on volume because only a high demand individual will go for this deal.

On the other hand, Sullivan's might also be using its partnership with Costco to screen the type of customer who gets access to this deal. Because you need a membership to get into the building and to pay at the register, Sullivan's knows that you are a Costco customer if you go for this deal. Moreover, it is likely that Costco customers are more sensitive to price changes, and it makes sense to offer Costco-specific price discounts. In other words, Sullivan's segmented the market and charged different prices to different segments of the market. That's third-degree price discrimination.

For a more textbook discussion of these types of price discrimination, see my videos on the topic.

Intro to Price Discrimination



Second Degree Price Discrimination (from a different perspective from above):



Third Degree Price Discrimination

Wednesday, November 10, 2010

Happy Meals and Bundling

Jeff Ely wrote an interesting post on the economics of San Francisco's decision to de-bundle the Happy Meal. He concludes:
So I don’t think that economic theory by itself has a lot to say about the consequences of the Exiled Meal. The one thing we can say is that McDonald’s doesn’t want to be forced to unbundle. Putting constraints like that on a monopolist can sometimes improve consumer welfare and sometimes reduce it. It all depends on whether you think McDonald’s increases its share of the surplus by lowering the total or raising it. The SF City Council, like most of us one way or the other, probably had formed an opinion on that question already.
Ely was responding to a post by Joshua Gans at the Harvard Business Blog that argued that the Happy Meal ban (no toys with fast food) could make us less healthy. Here's the key phrase:
That's what happens if McDonald's makes their Happy Meal healthier. The even worse outcome could be that McDonald's simply removes the toy altogether and competes solely on the bad stuff. That means more bad stuff in all meals and all kids eat worse.
Here's another thought: If all kids would eat worse, conditional on going to a fast food establishment, health-conscious parents may go to fast-food joints less frequently. Without the toys to attract kids to fast food, they would face less resistance in choosing a healthier option. Then again, I'm not sure this is a choice that city councils should make. It seems to me that parents (or maybe the kids) know best.

Sunday, November 7, 2010

Obamacare Strategy

Here is Sandeep Baliga on the Republican strategy of repealing Obamacare:

In the minds on most voters, the healthcare law in an unknown unknown – most of its provisions have not gone into effect and non-experts (and even experts?) have not read the bill fully. There was never a really serious discussion of the law in the main stream media so citizens just know various buzz words (“death panels”). The huge uncertainty made the law unpopular with voters and it gave Republicans an electoral advantage.

If the Republicans clamor to repeal the law, the Democrats can point to he features of the law that will be popular with voters (no denial of coverage for pre-existing conditions, kids can stay on their parents’ policies till they are twenty six..). The law will go from being an unknown unknown into known unknown/known known territory.
I think this is a nice description of the political reality of the health care bill.

Tuesday, November 2, 2010

Why online education won't replace classroom education

In a post on the economics of Facebook, Ed Glaeser explains why technology cannot replace many valuable in-person meetings:
Indeed, Mr. Zuckerberg’s decision to move to Silicon Valley reminds us of a great paradox. The technology industry has, more than any other sector, the ability to connect over vast distances. Yet that industry is often associated with a single place. The resolution of that paradox is that even with e-mail and the Internet, face-to-face meetings remain the best way to communicate really complex ideas.
In a separate realm, this is exactly the reason why I consider my YouTube channel to be an excellent classroom supplement, rather than a classroom replacement.

Monday, November 1, 2010

Hospitals and Specialists

Today, I attended an interesting seminar given by David Meltzer (seminar paper here). The discussion centered on the role of specialization in the medical field. Meltzer brought up two competing theories of specialization. Both are interesting in their own right.

Specialization is limited by the extent of the market.

Larger economies admit a greater degree of specialization, which through greater dexterity and repetition allows us to become more productive in our specialized fields. Applied to the medical field, one could argue that greater observed specialization is due to a greater demand for medical services. This is a reason that is often given for urban medical centers having a greater concentration of specialists than rural hospitals.

Greater specialization may occur if it is relatively less costly to coordinate with others.

Providing medical care is complicated. This complexity (much like the complexity of the greater economic system) demands that the provision of medical care be divided among various doctors, nurses, nurse practitioners and the like. As it becomes less costly to coordinate between people performing different tasks, it may be efficient to divide the provision of medical care more finely into sub-tasks.

Indeed, this is what Meltzer and Chung document. Over the past 20 years, there has been a dramatic rise in the number of hospital specialists -- doctors who assist with the day-to-day hospital care of patients. These doctors fulfill an important role in helping to coordinate care of patients from various specialists at the hospital site.

More interestingly, Meltzer presented evidence that these "hospitalists" fulfill this role because they can quickly learn medical technologies by seeing a large volume of patients, and "hospitalists" pass this learning on to others in their teams, improving the quality of medical care beyond their own patients.