Wednesday, April 27, 2011

Unstructured Thoughts on Advertising

Here's an abstract from Becker and Murphy's take on advertising:
Our analysis treats advertisements and the goods advertised as complements in stable metautility functions, and generates new results for advertising by building on and extending the general analysis of complements. By assimilating the theory of advertising into the theory of complements, we avoid the special approaches to advertising found in many studies that place obstacles in the way of understanding the effects of advertising. We also use this approach to evaluate advertising from a welfare perspective. Whether there is excessive or too little advertising depends on several variables: the effects on consumer utility, the degree of competition in the market for advertised goods, the induced changes in prices and outputs of advertised goods, and whether advertising is sold to consumers.
When push comes to shove, that's how I think of the consumer side of the advertising market, but what about the producer side of advertising? For a some products, advertising is a necessary part of the production of the good.

Consider the example of a book. Every book has a cover. The effort and expense that goes into designing that cover can be thought of as advertising expenditure because it affects whether the consumer is willing to buy the book (setting the issue of not judging books by covers aside). I'm not sure if publication companies think of cover design as advertising expense, but it wouldn't surprise me if they did. Even if you spend zero effort on the book cover, that's a choice among an entire array of choice for how much effort to spend on the cover.

Fresh fruit also comes to mind. Producers of fruit undertake a variety of activities that affect both the flavor and the appearance of their product. There must be a margin on which these producers trade how appetizing the fruit looks for how appetizing the fruit is. This tradeoff feels like advertising, but that's a strange approach to studying this tradeoff. It would be simpler to pitch this as the fruit producer's choice of product attributes.

Moreover, it isn't clear whether choosing more attractive fruit (at the expense of making it less delicious) should be thought of as more or less advertising. After all, you can think of this problem exactly as choosing less delicious fruit because it wasn't worth the expense of giving up something on the attractiveness margin. In this setting, "more" or "less" depends on what you think you are advertising.

Part of me thinks that this distinction between "external" advertising (like TV commercials, billboards and so on) and "internal" advertising (like above, contextual elements of the product itself) is arbitrary. For some purposes, it might be better to just think of advertising as an attribute of the product.

Monday, April 25, 2011

Did Greg Mankiw Offer a Free Lunch?

On his blog.
I will take five ec 10 students to lunch at my favorite Chinese restaurant in the square, right after today's lecture. My treat. Send me an email asap, and I will let you know if you are among the first five to respond.
It's not completely free in the sense of opportunity cost (Students would have to cancel their alternative lunch plans), but this is about as close to a free lunch as you're going to get from an economist.

Saturday, April 23, 2011

Is this a good idea?



Shark Tank says yes. He got twice the offer he requested.

Information No One Needs To Know

Here's a followup to Xan's post about information you don't want to know. Here's a funny post at satirewire:
“I find it absolutely outrageous that my phone has been secretly documenting the fact that for nearly the past year, I have been going, basically, nowhere,” said Daphne Coleridge, a receptionist and mother of two in Houston. “This is a map of tedium. Home, school, work, store, home, school, work, store, home… wait… dentist. I stand corrected.”

“With a few exceptions, I’ve spent the last 10 months of my life within 20 miles of the New Jersey Turnpike,” added Caldwell, N.J. resident Brian Porteri. “I’m not so much angry that Apple knows this information, I’m angry that I know this information.”
Where did I find this? Paul Krugman.

Thursday, April 21, 2011

iPad: Destroyer of American Jobs

The iPad is responsible for destroying thousands of American jobs according to Jesse Jackson, Jr:



I came across this video clip from a post by Jodi Beggs and I am encouraged that (as of right now) 589 dislikes > 152 likes on the video... though I am a little concerned that 152 people would like this.

What's Jodi's point? Conceding that Jackson is right that the iPad has destroyed the valuable paper-based industries in America, the iPad is also responsible for creating thousands of American jobs in other industries. It just changes those job titles from "Borders employee" to "Apple employee." I agree.*

Here's another thought to ponder. If the iPad has destroyed all of these paper-based jobs, can you imagine what would happen if the iPencil came along and made pencils obsolete? Imagine the legions of unemployed if that were to happen.**

* I also agree with her point about retraining individuals whose skills become obsolete due to rapid technological change... though I wonder how much retraining is really necessary to go from bookstore clerk to Apple Store salesperson or Best Buy geek.

** I love having an excuse to link to I, Pencil.

Negative Externalities in Picture Form



I made this file while stewing over a comment on my video on externalities, which said "ADVERTISEMENTS IN YOUTUBE ARE NEGATIVE EXTERNALITIES!!!"

No, they're not! Viewers of my videos are not bystanders. I view them as consumers of my videos who are charged a zero monetary price in addition to whatever time cost they expend watching (and avoiding) advertisements. If I place too many ads, I will get fewer views on my videos. I know this and I account for this in my decision of advertising placements (I typically place more obtrusive ads on videos for which I suspect there to be inelastic demand or where I don't mind scaring viewers away too much).

If I take an action that reduces viewer surplus to my benefit, that's not an externality on my viewers any more than a firm raising its price is an externality on its consumers.

If it helps, here's another video on the topic.



Update: My initial phrasing of the post made YouTube advertising sound like a zero-sum game. It is not. Even viewers who are made worse off my advertisements on a given video may be grateful that videos are ad-sponsored (even if they don't like the ads). To the extent there is a greater incentive to produce an ad-sponsored video than one that will earn zero revenue, more and better content will be available for viewers to watch. In other words, ads can make both viewers and content creators better off.

Monday, April 18, 2011

A First Lesson in Producer Theory

Remember when you were a kid and starting your first lemonade stand? You were sure to make loads of money in this enterprise. What was the first decision you made?



Did you deliberate long and hard about the price you would set? Did you take the market price as given and (from there) decide on the optimal quantity? Or, better yet, did you try to locate at the optimal spot in the neighborhood?

For some related thoughts, consider these two videos. I haven't yet done one on where to locate.

Sunday, April 17, 2011

The Generation 1 iPhonograph (1950)

Xan reports on an interesting newspaper scrap from 1950. In my view, the most interesting find in the article:
How far we've come. Our definition of "portable" has been refined considerably. And size aside, note also that an iPhonograph would not be "handsome"...it would be iPretty. (Not sure I consider this an advancement).

By the way, if you're wondering how much $30 was in 1950, take a clue from the fact that the buyer could opt to pay in less burdensome installments of $5/month.
According to an inflation calculator I found online, this "iPhonograph" cost more in 1950 than the iPhone would in 2010 dollars (iPhone 4 16GB is $199)


Why look a horse in the mouth?

To inspect its teeth. Apparently, this is an effective way to see if the horse is undesirably old (... of course, of course).



On the other hand, if that horse is a gift, that's just bad manners.

Friday, April 15, 2011

Information about Information

Xan writes a thought-provoking post on optimal demand for information. The post has many quotable passages, but here is just one highlight:
More generally, if someone knew everything, and they cared about you, and you knew (somehow) that you could trust them, then they could tell you exactly what was best for you to hear. You would get all the benefits of them finding the optimal solution for you, without being burdened by the information that was necessary in order to find it, information that might prevent you from attaining the goal.
To answer Xan's concluding question. The post is clearly clear. It is a must read. Here are some thoughts that I had after reading Xan's post.

The possibility that we will be exposed to "bad information" is why Shanna and I don't watch the local Chicago news. It is good information in the sense that it informs us, but we have decided that for most things that go reported in the local news, we are better off not knowing.

Xan's post reminded me of a lecture by Gary Becker on Huntington's disease. The driving question: Should I get tested if I know I am susceptible for a disease I can do nothing about, or am I better off not knowing? Without knowing your taste for information, the answer is not clear. It's great question and it was wonderful being reminded of this string of ideas.

For consumer products, credible third-party reviews might approximate the benevolent person Xan discusses. But, this "information about information" is imperfect, and that just kicks Xan's can down the road. There's no perfect substitute for gathering information through experience, but Xan makes an excellent point. Experience may give us information that makes us worse off.

Saturday, April 9, 2011

Correlated Preferences

Update on my last post: I have encountered a link to this xkcd in four places now.
  1. Once in my feed. I subscribe to xkcd precisely because it consistently provides cartoons that appeal to the quantitative nerd like me.
  2. One in an e-mail from a friend of mine in the UChicago economics department. He thought I would appreciate it because of my teaching
  3. Another time in a post at Economists Do It With Models, who talks at length about publication bias.
  4. Finally, I came across this post from Russ Roberts, who reminds us to count the number of tests.
Each post is a different perspective on the cartoon. The paper on taking the 'con' out of econometrics is a classic on economic research methodology. It was nice to be reminded of this.

Of note, in her post on the topic, Jodi Beggs casually links to this other wonderful xkcd on being someone's statistically significant other.


With data like that, he should probably reject the null hypothesis.

Monday, April 4, 2011

Cramming and Motivation

Xan poses an interesting question about the timing, structure and predictability of exam dates:
The problem is that cramming for an exam does not seem to promote retention. Knowledge gained through cramming follows a sharp peak that drops off steeply on both sides. If that's bad, then why don't we see more exams that are given at some random time? Instead of "the exam will be given on day t," why not "the exam will be given randomly on one of these 3 dates"? If retention really is better accomplished by not cramming, then in fact spreading the possibility of testing over a few weeks may actually make it worth learning the material more deeply, rather than just cramming repeatedly.
This is an interesting observation about the learning-by-cramming process. Students do not retain much if cramming is their method of preparation. In my experience, too many students cram, rather than smooth learning over time. As Xan points out, maybe randomized testing dates would give the crammers the better incentives for real learning.

Then again, the problem with cramming isn't just the timing of studying, but also its content. To cram, a student masters replicating material by rote, rather than cultivating a deep understanding of the concept. Rote memorization is easier while understanding is more rewarding. As a result, extrinsic motivation is better at getting people to memorize whereas intrinsic motivation is better at getting people to go for deep understanding.

Wanting to do well on the exam is a natural impulse, but this impulse is also extrinsic. For this reason, I expect that there will always be cramming as long as there are exams. But, there will be less cramming for the exam on topics that were motivated really well intrinsically. For the same reason, there will be less cramming done by "good" students because they are the ones who are beacons of intrinsic motivation.

Sunday, April 3, 2011

Macro, short samples, time series plots

On April 1, Paul Krugman posted the following time series plot of the employment-population ratio in an effort to say that the labor market isn't good (no joke).



A day later, Greg Mankiw posted a time series plot that grabbed my attention (if only because I felt like I saw it before):


The implication isn't that Mankiw thinks the labor market is great, but extending the time frame for the plot gives another perspective -- as it often does.

Friday, April 1, 2011

Exciting Happenings at Google

Gmail Motion:



Jobs at Google:

Ever wonder how Google knows your thoughts instantly when you type a search?



My favorite one of these was Gmail Paper.