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Michael Ward

Articles by Michael Ward

Hidden Costs of Software Migration

6 days ago

Like many universities, some researchers at mine have sensitive data. Since a data breach would be calamitous, all university computers, laptops and desktops, must be encrypted. We just changed vendors for our encryption software. The new vendor requires a new version of the operating system. This requires backing up all of the data on a computer, installing the new OS and encryption functionality, and then reinstalling the backed up data (more on this in a later post). The process requires each computer user to bring their computer to our IT department and be present to provide log in credentials multiple times. If all goes smoothly (more on this in a later post), the process takes 2-3 hours of both the user’s time and the techie’s time. They estimate that this must be done for 7,000

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“Them Geezers is Bleedin’ us Dry”

26 days ago

… or so claims a colleague of mine. He was referring specifically to their staunch defense of increased medicare spending. He might have been a bit untactful.

I argued that it is likely appropriate to increase transfer payments for the medical care of senior citizens for at least two reasons. First, medical care has increasingly become effective. We have developed more treatments for more conditions and the pace of medical innovation is quite impressive. Or the marginal benefits of a dollar spent here has increased. Second, we are wealthier. We can better afford to subsidize others. Or the marginal cost has fallen.

He grudgingly agreed but claimed this is not enough to account for the increase. When he told me expenditures per medicare enrollee increased tenfold, I was incredulous

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Historical Knockout Auctions

August 6, 2021

The Journal of Political Economy, one of the more prestigious economics journals, gets submissions of interesting economics related anecdotes for its back cover. The most recent issue contained this:Collusive Bidding and Intermediary Profits in Congo a Hundred Years AgoFive
traders, who have hurried up in their cars, were waiting for the market
to open. The region here has not been conceded; the market is free and
the bidding began at once. We were surprised to see it stop almost
immediately. But soon we understood that these five gentlemen were
making a ring. The first carried off the whole crop for seven francs
fifty a kilo, which probably seems a very fair price to the native, who
only recently was selling his rubber at three francs; but at Kinshassa,
where the traders resell

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Price Changes by Product

July 15, 2021

Mark Perry has updated and discusses an important graphic. Follow the link to get further insights but I want to focus specifically on the prices for college textbooks below. It is the only one in which the trend has changed. Why?There are more open source materials available, but I doubt they are widely used. I conjecture that this is due to reduced piracy. It is so easy to scan and post online a PDF version of a textbook that publishers had expected a >50% drop in sales in each successive year of a new edition. (This had also caused a reduction in the time between editions.)However, a few years ago, textbook publishers adopted a new strategy of pushing online textbooks that came bundled with lots of other online material (my favorite textbook included). Among the online material were

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Why Finding a Rideshare is So Difficult in Boston

May 26, 2021

Because the state restricted surge pricing. Boston Magazine has a nice article explaining the market for ride-sharing. A relatively new state law that forbids “surge pricing” during declared emergencies. Surge pricing is a higher than normal price when demand temporarily increases more than supply. The higher price, and higher payment to drivers, was meant to encourage more drivers to participate. Since the pandemic has been declared a state of emergency, surge pricing has been banned for the past year. It is just not worth it for many Uber and Lyft drivers to take on riders anymore. That is, it is not worth it to drive people.  Delivering food is still worth it.Not all of those Uber drivers got off the road entirely—gig workers looking to pick up some extra money have been kept pretty

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The Disneyland Dilemma

April 14, 2021

Some vintage Disneyland ticket books reminded me of Walter Oi’s famous paper "A Disneyland Dilemma: Two-Part Tariffs for a Mickey Mouse Monopoly." He highlighted the two-part tariffs as part of their price discrimination scheme. The simplest rides, appealing to the younger children, such as Sleeping Beauty Castle Walkthrough or the King Arthur Carousel, required only the cheaper A tickets. The best rides, such as the Matterhorn Bobsleds or Pirates of the Caribbean, required the most expensive E ticket. In between, rides could go for a B, C, or D ticket. Already Disneyland is price discriminating based on demand elasticity across rides.Disneyland made convenient ticket books with various numbers of each type available for a discount. There never were enough E tickets. This was an initial

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Gig Workers of the World Unite!

April 7, 2021

Door Dash drivers are trying to beat the algorithm. When a specific meal needs to be delivered, Door Dash’s algorithm will post the gig to available drivers with payment information. If no one accepts, the algorithm raises the compensation level. This is how markets are supposed to clear. What if drivers organize to withhold their services until the rate rises enough? In labor markets, this is the main goal of employee unionization. In business markets, we call it collusion. (It is an open question if these gig workers are employees or independent contractors.) But there are a lot of drivers. It is not clear if you can get enough of them them to commit to this strategy. It is useful to employ moral suasion. The Facebook group #DeclineNow, was formed to share information and encourage

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The Economics of Vending Machines

March 31, 2021

Zachary Crockett at the Hustle has a nice description of the economics of owning and operating vending machines. It is a fascinating look at an industry I would never have known about otherwise. There are about 2 million in operation in the US generating $7.4 billion in annual revenue for nearly 18,000 businesses that own them. Most owners run small operations as sole proprietors but Coke and Pepsi have vertically integrated into owning their own machines. The business scales well which allows for a gig workers type of entrepreneurship. Owners rent space for their machines mostly in manufacturing plants, offices, hotels, and hospitals and typically pay a percentage of gross revenue. The biggest decisions are what to stock and where to locate them.

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Hiring the Right Bridesmaid

March 9, 2021

Jen Glantz is an entrepreneur and founder of the company Bridesmaid for Hire. (There is a market for everything). Lots of people wanted her service and even more wanted fill the role, about 70,000 would-be bridesmaids. How to screen all of the applicants? You might think that having been an actual bridesmaid would be important. As she describes in this article, not so much. Instead, I like to find people who have experience in sales (so they have top communication skills and the ability to read and react to situations), working in high-stress environments (because what wedding isn’t high-stress?), and work well with groups of people (whether they’ve managed teams or worked one-on-one with lots of people before).There are multiple rounds of employee screening to sift out those just in it

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Really Complex Pricing

March 4, 2021

A Chinese restaurant in West Philly called Danny’s Wok has the weirdest pricing structure for chicken wings. The price per additional wing may fall ever so slightly, but will rise every so often so that the average price per wing never falls much. It was so weird, it generated some buzz as many on twitter tried to make sense of it. And at least a dozen people on twitter have tried to describe it. Some of my favorites are from math twitter:Or from folks simply graphing the menu prices.Perhaps, this was not  form of price discrimination after all but merely a clever ploy to get a bunch of free word-of-mouth marketing. Toward this end, it worked wonderfully.

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Vaccine Tourism

March 2, 2021

Lufthansa is eyeing the prospect of flying customers in and out of Moscow for the sole purpose of receiving the Sputnik V vaccine against COVID-19. The offer would include two round trip tickets for the two dosses from various European cities and be priced at about 1000 euros.I was wondering when market forces would enter into Covid-19 vaccine distribution. Most countries are distributing it free to recipients and so have developed a rationing mechanisms. Market mechanisms, like this one, ration by price. Since the wealthy and health compromised would have higher willingness-to-pay, more of them would expected to "jump the line." I suspect the Lufthansa proposal is merely the most overt example of vaccine line jumping and that the wealthy have been able to get vaccinated early by pulling

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Wage Floors move Grocery Workers to Lower Valued Uses

February 3, 2021

The LA Times reports that, when the city of Long Beach imposed $4 an hour additional hero pay, some super markets decided to close instead.Kroger, the owner of Ralphs, Food 4 Less and other retailers, said Monday that it would close two stores in Long Beach in response to city rules mandating an extra $4 an hour in “hero pay” for grocery workers during the COVID-19 pandemic. In addition to the Ralphs, the company will close a Food 4 Less on East South Street. The moves will affect 200 workers. During the pandemic, grocery workers,and other essential workers, are
"heros." They are taking on a greater risk of infection and a larger
share of them are becoming infected. We usually expect wages to include a risk premium. Usually these are the result of the market equilibrating to a higher

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Trying to do Good does not turn out Well

January 25, 2021

At the beginning of the pandemic, the demand for N95 masks outstripped the available supply. Prices doubled overnight to near $7 per mask (and availability was exasperated by price-gouging concerns, see Dying from Protection from Gouging). Two guys from Fort Worth, Texas wanted to save lives. They understood that the solution would require an increase in supply, so they started United States Mask to fill the gap. However, as the Dallas Morning News reported, they may not have appreciated the obstacles they were up against.First, the had to obtain certification. “There’s no guidebook, and it’s not easy. The application process alone is 100 pages long.” But that accomplished, they produced their first mask last October. But that was for federal certification. Even so, there was reluctance

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More Notice and Minor Accolades

January 5, 2021

Woohoo, we have made Feedspot’s "Top 100 Economics Blogs & Websites To Follow in 2021." We come in at number 57. This is a pretty comprehensive list of blogs on just about every field of economics.

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December 11, 2020

Dozens of State’s AGs and my former employer, the FTC, claim that breaking up Facebook, Instagram and WhatsApp is in the social interest. Common ownership of these multiple social media platforms is said to stifle competition. But are these platforms substitutes or complements?How do they compete? Users pay nothing; advertisers pay to reach these consumers. The job of these two-sided platforms is to package groups of users to potential advertisers. Who uses the platforms and how they use them differ across users. Advertisers, seeking ever narrower customer niches, benefit from their ability to target the distinctiveness of each platform. A commonly owned FB/Insta/WhatsApp has an incentive to maintain these distinctions. Competing platforms would tend to position themselves to "steal"

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Hospital Cost Containment Gone Awry

November 19, 2020

Or installment #753 on unintended consequences. In a new paper in the Journal of Political Economy, Diane Alexander studies how physicians responded to a new bonus program for reducing total hospital costs. From her abstract:Doctors respond to the bonuses by becoming more likely to admit patients whose treatment can generate high bonuses and sorting healthier patients into participating hospitals. Conditional on patient health, however, doctors do not reduce costs or change procedure use. These results highlight the ability of doctors to game incentive schemes and the risks of basing nationwide health care reforms on pilot programs.Designing an appropriate incentive scheme is difficult.

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Airlines are Sunk Costs

October 15, 2020

Demand for air travel fell during the pandemic, like a lot. It fell to about 5% of the previous year in early March and is still at 30%. And it won’t get back to 100% for at least a year, maybe two or three. Assets are going to have to leave this industry.The physical assets are very industry specific. There is little else you can do with an airplane but fly it. This is a risk one takes when one invests in airlines. Subsidizing these does not help since these assets are sunk costs. Human capital is also very industry specific. There is little use for most pilot, flight attendant, and airplane mechanic skills for a years. For many, this human capital is now worthless. Fortunately, humans are more fungible than airplanes. They can acquire new human capital. Perhaps we want to help them out

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A Cheap Fast COVID-19 Screen

August 28, 2020

Currently, those infected with COVID-19 can infect others a week before they know they are infectious. Suppose they knew a few days earlier. They could isolate themselves before they infect too many others. Current tests are too expensive, take too long to process, and are too few for this to work. But now recent emergency authorization will allowed Abbot Labs to supply a $5, 15 minute test. Abbott plans to produce 50 million per month, more than double the capacity of current tests.This test is has a higher false positive rate, requires a larger virus load, and is only approved for symptomatic cases. This last requirement is likely to be relaxed (or flaunted). This test is likely to be used as a screen.Kristian Andersen, an infectious-disease researcher at Scripps Research, noted that

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Fashion as a Sunk Cost

August 24, 2020

Marketplace has a recent story on excess retail inventory. Due to the pandemic,  people are not shopping for the latest apparel in nearly the expected numbers. This inventory represents a fixed and sunk cost with low opportunity cost. Options include: Holding onto it until next season since this season. Usually, the value of fashion items depreciates quickly but who knows this year as no one has been able to "be seen."Sell it off to a deep discounter. You may get less than you paid for it, but that is more than nothing. Do not commit the sunk cost fallacyBurn it. That is what Burberry did, though it faced a backlash because of it. It may be profitable to destroy it even if its value is positive because doing so maintains the exclusivity of the brand.Because manufacturers have more

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Negotiating with Ransomware Thiefs

August 12, 2020

Jack Stubbs has an interesting Twitter thread on negotiations after a ransomware attack. It was also picked up by Reuters. Its seemed very professional. They initially demanded $10 million but settled for $4.5 million, pretty close to the midpoint between disagreement values.HT: Marginal Revolution

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Globl Value Chain Responces to Trade Wars and Pandemics

August 4, 2020

Amni Rusli has a longish piece, "Supply Chain Resilience," dissecting much of what we know about how current global value chains are being affected by the US trade wars and by the Covid-19 pandemic. It deals with relative labor costs, automation, sufficient human capital, risk, and politics. One tidbit:Resilience is not only about reliability but also about redundancy and the ability to rebalance load away from stressed supply chains. This is too big a task on a local level but it is easier to carry out with large global networks of supply system. Consequently, this will create strong incentives for incumbents to consolidate.These ideas are only touched on at various places in the text, but are not explicit. Diseconomies of scale and scope often lead to outsourcing some aspects of

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Low-Powered Incentives Kill Sales

August 1, 2020

Jim Halpert from "The Office" discovers that he has met his annual commission cap. Any additional sales yield zero commissions. Gabe from corporate tries to rationalize the new policy.[embedded content]

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High-Powered Incentives Kill

July 29, 2020

In the just published article, "The Perils of  High-Powered Incentives: Evidence from Colombia’s False Positives,"Acemoglu, Fergusson, Robinson, Romero, and Vargas investigate incentivizing the military.

We investigate the use of  high-powered incentives for the Colombian military and show that this practice produced perverse side effects. Innocent civilians were killed and misrepresented as guerillas  (a phenomenon known in Colombia as “false positives”). Policymakers (and managers) should anticipate that incentivizing an outcome enough will alter behaviors to attain the outcome both by the desired methods and by methods antithetical to the organization. Perhaps, though, for managers the perverse consequences result the deaths of innocents less often.Without incentives, we should

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Private Label Products

July 21, 2020

Adam Keesling at Napkin Math has an informative write up on "How Costco Convinces Brands to Cannibalize Themselves." Costco’s private label, Kirkland, will contract with a branded company to supply a product for Costco under the Kirkland brand at perhaps a 20% discount on the wholesale price. That way, consumers can choose from the branded product and, usually on the shelf beside it, the same product at a 20% lower retail price. Hypothetical P&L statements provide an explanation as to why this a supplier would agree to this. Essentially, the supplier is outsourcing the marketing of the product to Costco. These products are marketed under the Kirkland brand so the supplier’s marketing expense is drastically reduced.

There are two reasons why it works out. First, most customers don’t know

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Musk Games High Powered Incentives

April 30, 2020

The Daily Mail reports that Elon Musk has seemingly joined the chorus demanding the end to COVID-19 related lockdowns. But it also reports that he was about to get a large payout from Tesla linked to its stock price. Shares, which had been depressed, rose 10% just ahead of its quarterly report.

Maybe he really believes this, but he sure has an incentive to feign belief.

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Lockdowns vesus contact tracing

April 28, 2020

Mulligan, Murphy, and Topel* have a thoughtful policy piece on "Some basic economics of COVID-19 policy." It combines a number of economic concepts (e.g., fixed costs versus marginal costs, option value, externalities, capital depreciation (physical and human)). Essentially, it compares the relative strengths of the policy alternatives of Large-Scale Social Distancing (LSSD) versus Screen, Test, Trace and Quarantine (STTQ). From their summary:
Our analysis indicates that the features of a cost-effective strategy will depend on both current circumstances and how we expect the pandemic to play out. Some elements are common, such as the desire to use STTQ rather than LSSD when infection rates are low, and shifting the incidence of disease away from the most vulnerable. These apply whether

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Dying from Protection from Gouging

April 1, 2020

David DiSalvo has a write up at Forbes on his experience trying to obtain N95 masks during this pandemic. Federal and state officials say they are "scouring the globe" for PPE while some medical professionals are going without. Here is his summary.
Millions of N95 masks have been available throughout the U.S., Canada and the UK during the pandemic, according to brokers trying to sell them.
The high price point per mask, driven by extreme demand, has
contributed to an overwhelmed reaction among potential buyers,
especially in the U.S.
Scrutiny surrounding these deals is high because of ongoing scams
and claims of price-gouging, both of which are triggering emotionally
charged reactions and fear of making deals.
Millions of masks are being purchased by foreign buyers and are

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How to Limit Hoarding

March 25, 2020

Usually, retailers want to sell as many units to a customer as possible. And we should want them to. But currently there is a social imperative against hoarding key supplies. Some retailers are willing to forgo additional profits to pursue this social goal. The Meny supermarket in Denmark set the price of a bottle of hand sanitizer at kr40 ($5.73) but two bottles at kr1000 ($143) each.

Hat tip: Carpe Diem blog

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