Sunday, January 29, 2012

Simple Pricing versus Price Discrimination

On a shopping trip yesterday, I had a chance to see JC Penney's new pricing scheme. Here's a picture of one of their displays:

As a big marketing push, JC Penney is doing away with the standard complicated pricing schemes of department stores. The store had no XX% off signs and no hidden promotions, just prices that you would pay at the register. Even stranger, all prices were in whole dollar amounts, making it easy to compute the pre-tax bill before approaching the register. Is this a good idea? It certainly has its appeal, but there are reasons that complicated pricing is the norm.

Coupons, special programs and the varying percentage discount at department stores attract a particularly price-sensitive demographic of consumers. At the same time, consumers who do not respond to price will just grab whatever they want to purchase (no searching for discount racks, hence, less likely to get the deals). From this standpoint, the typical smoke-and-mirrors pricing strategy can be used for price discrimination, a classically profitable strategy that involves charging different groups of consumers different prices.

On the other hand, pricing with smoke and mirrors has costs. Just think of all of the paper and ink wasted on coupons, the resources devoted to devising the next discounting scheme and the administrative costs of implementing the markdowns (repricing racks, making sure everything scans at the register, etc.). Even if you can generate more revenue, maybe the costs of price discrimination are too great. Perhaps this is why JC Penney is going toward simpler pricing.

This discussion of price discrimination costs and benefits neglects to mention hat consumers do not necessarily like to be swindled -- and that may be how smoke and mirrors pricing feels. Alternatively, arithmetic-oriented consumers might love the numerical puzzlers that 30-20-10 pricing affords, or possibly, consumers like the excitement of not knowing the price before paying (who doesn't love a surprise discount?).

In the end, it's possible that JC Penney is just betting that more people want to shop at a store with straightforward pricing, but it is interesting to think about the economic conditions that set the table for such complicated pricing at department stores.


UPDATE: JC Penney has coupled their in-store pricing with some rather annoying advertising.

Wednesday, January 25, 2012

Bleg an Assignment Bleg

Greg Mankiw posted a bleg (a blog post designed to elicit feedback/advice) that started with this fantastic line:
I need some help from the growth empiricists out there. If you aren't one of them, stop reading. Continuing will be a waste of your time.
As someone who has read some of the empirical growth literature to which he refers, but has not contributed, I still found the post to be really interesting.

More to the point of the post, as someone who is currently teaching a course for undergraduates entitled Honors Econometrics (technically: Introduction to Econometrics: Honors), wouldn't a guided replication of one (or parts of all) of the papers Mankiw links in his update (one, two, three) be a cool assignment?

Friday, January 20, 2012

Romney's Taxes

From my Google reader, here are two interesting perspectives on Mitt Romney's 15 percent tax rate.

First, from Steve Landsburg:
To understand Mitt Romney’s tax burden, you have to compare him to his doppelganger Timm Romney, who lives on a planet with no taxes. In the year (say) 2000, Mitt and Timm both earned (say) a million dollars. Timm invested his million dollars, saw it double over the past decade or so, and cashed out his investment this year, leaving him with two million dollars. Mitt, by contrast, paid 35% tax in 2000, leaving him with $650,000. He invested it, saw it double, and cashed out last year, paying 15% tax on the $650,000 capital gain. That leaves him $1,202,500, which is about 60% of what Timm’s got. In other words, the tax system costs Mitt almost 40% of his income.
Second, from John Cochrane:
If you made money in dollars, paid taxes, then went to Canada and got $1.20 Canadian, it would make no sense to say "you made 20 cents of income, we'll tax it." It makes no more sense to pay taxes again on money that is moved over time. We decry that Americans don't save enough, the Chinese, the trade deficit and so on. Well, if you want people to save more, stop taxing it.



Make it three. Here is Mankiw:
All of these calculations are static. They ignore the general-equilibrium effects that arise as the true burden of taxation is shifted by behavioral responses. In essence, these calculations are made under the implicit assumption that factors of production are supplied inelastically, so the tax stays where legislators put it. Of course, that assumption is implausible, especially in the long run. True general-equilibrium tax incidence is very hard, and as far as I know, reliable estimates on it are not readily available.

Monday, January 16, 2012

An attractive research question?

Robin Hanson has an entertaining suggestion for dissertation research:
This suggests that studying how physical attractiveness varies with industry, occupation, and position could give us a window into agency failures at work. That is, it could show us where some employees are especially free to choose for their personal benefit, rather than for a larger benefit. Even when they leave clear evidence of this self-dealing. Seems like a project for an enterprising data-gathering grad student.
Of course, a confounding factor is when attractiveness contributes directly to an employee's marginal product: modeling, fundraising and pharmaceutical sales come to mind as possible industries that confound the explanation. In this respect, a job where attractiveness serves little or no useful role -- such as Hanson's government contractor example -- is an ideal setting to unveil possible agency problems.

Sunday, January 15, 2012

Economics and Clairvoyance

John Cochrane has an interesting post in which he concludes:
This story is embarrassing, yes. But it's most embarrassing for the Times and other believers in the idea of clairvoyant, all-powerful discretionary regulators. It's not at all embarrassing if you think Fed officials are as human as the rest of us -- and that safety comes from better rules of the game, not finding just the right soothsayer to run the show.
The rest of the post is worth reading too.

Friday, January 13, 2012

Video Relatedness

Last October, I conducted an inquiry into how my YouTube channel fits into the broader YouTube econ-system. Here's what I did.

First, I compiled a list of all of the videos that were "related" to my videos through the related videos section along the right hand side of each YouTube video page. Usually, there are 20 videos that are called "related" to the one that you are watching. As I have about 95 videos, this list could get quite large (possibly but not likely reaching 95*20 different YouTube videos).

Second, I followed the links to the related videos of that list of videos. Along the way, I collected information about the number of likes and dislikes, total views to date and upload date.

Finally, I followed those loosely related videos to their related videos (one last time for good measure). Once I put everything together, I had obtained a list of 135647 "related videos" (to three levels; most of these links were in the final list; 120506).

Within this set of links, there were many duplicates. Some videos are just more central to the network of videos out there. To better understand what kinds of videos are near mine in YouTube space, I enumerated the top 50 videos (by frequency of occurrence) in this list. Links to these videos now appear in a new tab on this blog called Fifty Educational YouTube Videos.

A couple of comments about these videos.
  1. One would think that starting this process using the videos on my channel would bias this relatedness index toward my own channel's videos. After all, my channel's videos are related in the sense that they're instructional videos made by the same person. How much more related can they be? Surprisingly, only three out of the top fifty videos were mine. In retrospect, these are three of my most popular videos as well. So, it seems that YouTube's algorithm mixes some diversity of experience with relatedness of subject matter.
  2. For the most part, these videos are quite good for learning economics (and some statistics topics), and they are surprisingly on topic. By three levels of relatedness, I was expecting to see a gravitation toward videos that had more popular appeal (like the Boom and the Bust videos) and quirky student economics projects where students act out economics concepts (there's only one in my list of videos).

From a practical standpoint, there's a new tab on this blog devoted to linking to those top 50 videos by relatedness to my channel. They're not all great, but there are some pretty useful videos in there. If you're interested, check them out.

What is funny at the Fed? An Inside Joke

A friend of mine showed me this collection of statements that induced laughter in the 2006 Federal Open Market Committee meetings. My favorite:
MR. HOENIG. Mr. Chairman, I think we have just been to North Dakota. [Laughter]
If you take this out of context, you might think that it wouldn't have been funny if they had just been to Montana. Had they been to North Dakota? Probably not, but what's the inside joke? The full transcript of the meetings provides the answer. In the December 12 meetings, there were exactly five explicit references to North Dakota. Maybe it is funnier in context.

Page 8.
MR. STOCKTON. As I worked my way through a final reading of the Greenbook this weekend, I was reminded of the old joke about the man who is told by his doctor that he has only six months to live. The doctor recommends that the man marry an economist and move to North Dakota. The man asks whether this will really help him live any longer than six months. The doctor says, “No, but it sure will feel a lot longer.” [Laughter] Part 1 of the Greenbook was its usual twenty pages, but with lengthy discussions of motor vehicle mismeasurements, PPI inventory deflator anomalies, income revisions, and footnotes [...]
Page 13.
MR. STOCKTON [still speaking]. I have so much more to say, but I’d better stop here, or you will think that we’ve begun our honeymoon together in North Dakota. Steve Kamin will continue our presentation.
Page 33.
MS. MINEHAN. It’s not fair. [Laughter] Well, to the extent that this sounds like North Dakota, let me just proceed. Despite data from the housing markets [...]
Page 112.
MR. HOENIG. Mr. Chairman, I think we have just been to North Dakota. [Laughter]
CHAIRMAN BERNANKE. I would say we crossed the border. [Laughter] Well, let me try to summarize. [Laughter]
Page 114-115
MR. KOHN. As we get ever deeper into North Dakota here, [laughter] I don’t know what President Stern thinks about this.
MR. STERN. I was going to say that I’m the only one here, on the Committee anyway, who gets there with any frequency, and people have suggested that I should defend North Dakota. But I must say that I felt the joke was apt. [Laughter]
Apparently, this is a case where boredom and tedium is funny. [Laughter]

(HT: Sean G.)

Monday, January 9, 2012

The price of killing cats: $1 million?

This discussion from Robin Hanson at Overcoming Bias is an interesting comment on perception:

Now consider a new Vanity Fair survey:

Questions: Would most people you know kill their favorite pet for $1 million? What about you?
Answers: Most people: Yes (23%) No (72%); Yourself: Yes (11%) No (83%).

Matt Yglesias (Hat tip Sir Charles):

I don’t believe it for a minute. Saying you wouldn’t kill your favorite pet for $1 million is cheap talk. Actually declining an offer of $1 million in exchange for the life of your pet, by contrast, costs $1 million. How many people would really turn that offer down in these cash-strapped times?

Actually, my guess is that if no one you knew had ever taken such an offer, and if you took it you’d be in the news so that most folks you know would hear of it, most of you wouldn’t take the offer. But once a few associates had taken the offer, and such offers weren’t newsworthy anymore, most folks would take such offers.

Instead of asking the question, maybe they should do an experiment to find out how much cat owners would demand as a compensating differential to put their cats put into a slightly riskier job (high-rise construction cats?). If this is the experiment, one might have to divide by nine to adjust for the cats-have-multiple lives theory.

Note: The original article used the phrase "favorite pet," but I read "cat" even though we do not have a pet. I have no explanation for that.

Sunday, January 8, 2012

What would happen if we outlawed lawyers?

A couple of professors of mine from Montana State (Rob Fleck and Andy Hanssen, now both Clemson economists) have a research agenda that uses Ancient Greece as a case study to understand the capabilities and pitfalls of democratic institutions. On the second day of the annual ASSA conference, I was reminded of this research agenda and I saw Andy present their latest paper in their series in an excellent session on Endogenous Changes in Legal Institutions.

Rob and Andy's latest paper examines the case of Athens, the Greek city state that was known as the pinnacle of democracy and commerce. Rob and Andy focus their analysis on a peculiar feature of Athenian democracy: the fact that Athenians banned professional lawyers and they did so deliberately. In other words, defendants defended themselves, plaintiffs brought their own cases and public-interest cases were brought because of civic duty (and when that didn't work out, small monetary rewards were offered). Here is the abstract (paper pdf):
Legal expertise permits detailed laws to be written and enforced, but individuals with expertise may employ their special knowledge to skew decisions in privately beneficial directions. We illustrate this tradeoff in a simple model, which we use to guide our analysis of the legal system in ancient Athens. Rather than accepting the costs of expertise in return for the benefits, as do most modern societies, the Athenians designed a legal system that banned professional legal experts. And this was not because Athenian society was simple: The Athenians employed sophisticated contingent contracts and litigated frequently (to the point that the law courts featured prominently in several famous comedies). Furthermore, the Athenians recognized that forgoing expertise was costly, and where the cost was particularly high, designed institutions that made use of expertise already existing in society, employed knowledgeable individuals who were unable to engage in significant rent seeking, or increased the private returns to collecting publicly beneficial information. Although the Athenian legal system differs in many ways from modern legal systems, it nonetheless functioned very effectively. Investigation of the Athenian system serves to illustrate how important it is for institutional designers to consider legal institutions as a bundle, whose pieces must complement one another.
This is just the latest in a series of fascinating studies. For an overview of their joint research agenda, here is their own description.

Friday, January 6, 2012

First Day ASSA: Highlights

Today was the first full day of the annual economics conference (this year in Chicago!). I spent a full day attending interesting talks. In case you're interested, here are the highlights from my experience (other economists' experience may differ).

At 8 am, I went to a session called New Developments in the Organization of Firms. My favorite paper of the session was a paper called, "Organization and Information: Firms' Governance Choices in Rational-Expectations Equilibrium," presented by Bob Gibbons. The main crux of the paper is that firms shape the market while the market shapes firms. The final part of the abstract sums the paper up nicely:
As in rational-expectations models, some parties may invest in acquiring information, which is then incorporated into the market-clearing price of the intermediate good by these parties' production decisions. The informativeness of the price mechanism a¤ects the returns to speci…c investments and hence the optimal governance structure for individual fi…rms; meanwhile, the governance choices by individual …rms a¤ect the informativeness of the price mechanism. In equilibrium the informativeness of the price mechanism can induce ex ante homogenous …firms to choose heterogeneous governance structures.
Cool stuff.

At 10:30, I attended an interesting discussion on the interface between economics and other social sciences (specifically, theology), put on my the Association of Christian Economists. There were two theologian presenters who were well spoken and two economists (one of whom is Deirdre McCloskey). It was fascinating.

At 2:30, I attended a session entitled Mergers, Acquisitions and Buyouts I, put on by the American Finance Association. My favorite paper of this session was one called "Merger Synergies Along the Supply Chain," which really should have been called "Mergers: Efficiencies or Market Power?" as the discussant Gordon Phillips pointed out.

Finally at 5:00, I attended a spectacular lecture by Roger Myerson (the T.W. Schultz Lecture) on the role of local governments and democracy in promoting economic growth. He posted the slides online, but I cannot find them. In the meantime, here is a related essay on a related topic.

Monday, January 2, 2012

Discretion in the Imperfections

John Cochrane has an interesting post that begins by saying:
I am often asked, "doesn't the financial crisis mean we need more regulation?" It's one of those maddening questions, because the answer is "that's the wrong question," which gets you nowhere.

For regulation is not "more" or "less," something you just pour into a cup until you've had enough like a good beer. Regulation is most of all "smart" or "dumb." Dumb regulations produce the opposite of their intended effects, have all sorts of unintended consequences, or get used for fully intended but pernicious consequences like driving out competition. Smart regulations don't.
Cochrane goes on to describe the differences between regulation by law, rules and discretion, which is an interesting discussion that shines light on how financial regulations differ. One point that Cochrane acknowledges (but does not develop in his post) is the inevitable role of discretion in regulation.

For example, take Cochrane's example of a clear-cut law: obeying the posted maximum speed limit. The law is clear cut, but enforcement of the law is not. To the extent that enforcement is (as Cochrane puts it) "imperfect," regulation of speed limits must rely on discretion.
  • On one level, a solitary police officer is often not able to enforce strictly the posted speed limit. Faced with two speed demons at the same time, the officer must use discretion about who to pull over (and he may favor pulling over the red car or the car that appears to be going faster). This often happens in the state of Illinois on Lake Shore Drive, for example.
  • On a higher level, even the police chief must use discretion about enforcing posted speed limits. Police departments must optimize the patrol of traffic crimes relative to other types of crime. Absolute and strict enforcement of one type of law is often unattainable (and usually not optimal). Hence, the remaining tool of the police chief is to delegate the discretionary enforcement of the law to officers on duty.

Cochrane's point is that regulation by discretion can go wrong because it is often too vague. I think this point is right, but unfortunately, some amount of discretion is inevitable because resources to enforce and define the law are scarce.

As a side note, another quote from Cochrane's post deserves mention.

This is really the basic problem with the Dodd-Frank approach to financial regulation. The Financial Stability Council can simply "determine" you pose a "systemic risk," and that's it. (Yes, there is an appeal process, but without an objective standard, it's hard to see how anyone will beat a "determination.") The Fed can then tell you how to run your business, in any way that it deems appropriate. Imagine what chaos would result if "speeding" were defined simply by the cop's authority to "determine" that your speed poses a "risk to the traffic system."

With regard to the regulation of traffic offenses, we actually don't need to imagine this. The State of Montana used a standard for speeding called "reasonable and prudent" on its Interstate highways from December 1995 through May 1999. Speaking from experience, driving was slightly more chaotic than when there was a posted speed limit, but this marginal increase in chaos from November 1995 to December 1995 driving in Montana pales in comparison to the difference between Montana and Chicago driving.

Sunday, January 1, 2012

On The Power of Clarity

Over the holiday, Roger Myerson posted an interesting proposal at the Cheap Talk blog:
So my radical proposal has two parts. First, our federal, state, and local governments should publish their annual budgets online in a form that any high-school graduate can understand. Second, our public high schools should be required to teach students how to read government budgets.

I know that this may sound impractically idealistic. But I can recommend at least one good textbook: Dall Forsythe’s Memos to the Governor. Written by a former budget director of New York state, this short book offers a good introduction to the standard tricks that have been used to make public spending more obscure.
So this is my radical proposal: Before demanding lower taxes or lower deficits, we voters should demand to be better informed about our public financial system. Then our ability to demand better use of public funds can become a stronger pillar for future growth and prosperity.
The rest of the post is interesting food for thought as is the research agenda by Besley and Persson (pdf) on which Myerson bases his proposal.