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 outRead More »
Articles by [email protected] (Michael Ward)
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 thatRead More »
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 moreRead More »
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 RevolutionRead More »
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 ofRead More »
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]Read More »
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 shouldRead More »
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 knowRead More »
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.Read More »
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
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
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 blogRead More »
The “ban the box” (BTB) policies limiting an employer’s ability to learn about job applicants’ criminal records are intended to improve employment outcomes for those with criminal records, with a secondary goal of reducing racial disparities in employment. However, since employees with a criminal record tend to have more workplace problems, it is valuable to employers to develop other screens to weed out these applicants. One possible screen is to reducing hiring among the demographic groups that include more ex-offenders.In "The Unintended Consequences of “Ban the Box”: Statistical Discrimination and Employment Outcomes When Criminal Histories Are Hidden," Doleac and Hansen recently investigated this issue by examining the outcomes in about one hundred jurisdictions enacting theseRead More »
Like most people with vision problems, I get my eyes checked (services) by an optometrist. Consumers like me could get eyeglasses or contact lenses (products) from an optician, but often our optometrists’ vertically integrate into the product to provide "one-stop shopping." Such a vertically integrated optometrist may want to blunt competition in the complementary product by steering consumers to their own products. One way to do this is to not release prescription information. This effectively ties the product to the service. How much more can optometrists earn from such a tying strategy?Norris & Timmons recently examined what happened when The Fairness to Contact Lens Consumers Act (FCLCA) of 2004 required the release of prescription information to patients. They compared states thatRead More »
A merger between two large Philadelphia law firms led Sam Wood at the Philadelphia Inquirer to investigate why. It seems there have been quite a few law firm mergers recently.
It does not look like firms are trying to eke out efficiencies through scale economies.
“There are really no economies of scale,” said Tom Clay, a legal-industry consultant at Altman Weil. “Bigger firms are more expensive to run. The only way they save money is through a smaller real estate footprint. Anyone who tells you different is either ignorant or lying to you.”
But there may be scope economies.
Firms want to expand their geographical scope. They want to offer clients more specialized practices and increase profits.
Practices in other geographical places are complementary to existing practices. AndRead More »
The recently enacted General Data Protection Regulation (GDPR) allows EU citizens various privacy protections, including the ability to opt out of data collection schemes. In a new paper, Aridor, Che, Nelson, and Salz find that a sizable fraction of the population, presumably those who are more sensitive to privacy issues, does opt out. How does this affect those that do not? They become even more "persistently trackable" because those who opt out now do not generate as much noise on those remaining.
Further in keeping with this hypothesis, we observe that the average value of the remaining consumers to advertisers has increased, offsetting most of the losses from consumers that opt-out.
Hat tip: Marginal Revolution
Two trends in how Americans celebrate Valentines Day seem to be at odds with each other. The National Retail Federation reports a steady decline in adults who are participating (51% in 2019 versus 63% in 2009) but a steady increase in average spending ($162 in 2019 versus $103 in 2009).This would be consistent with high quality suitors sending a stronger signal to their romantic partners so as to further differentiate themselves from low quality suitors. It seems to be working because the drop in participation suggests that low quality suitors are dropping out of this arms race.* This is consistent with the unhinging of the market or sex from the market for marriage.*Poor Mrs. Ward will reap only a fraction of this amount. But the quality of her suitor was revealed so long ago thatRead More »
Michael Farmer cautions advertisers to be aware of the hidden costs of exploiting online and social media. Advertisers in traditional media, such as print, radio or TV, were familiar with what a campaign entailed. But the online scopes of work expanded into "banner ads, email marketing, Facebook posts, Instagram posts, mobile marketing efforts, and website development." The big advantage of online campaigns is the near instantaneous and increasingly granular feedback that can inform the refinement of campaign messaging to different niches. This advantage, though, requires exponentially more interaction between the client and the ad agency.
Agencies and their clients are overwhelmed by the need to communicate and deal with one another — to plan, obtain approvals, carry out work, calculate
A new paper by Reimers and Shiller documents the effects of Pay-How-You-Drive (PHYD) insurance. The idea is to use telematics to monitor driver behavior and to reward better drivers with discounted premiums. While Progressive initiated monitoring driver behavior for insurance purposes, other companies are getting in on it too. Reimers and Shiller cleverly exploit the staggered rollout across states to observe company profitability and driver fatalities.First, they find that the first mover earns a profit boost. But this is temporary and dissipates with entry. That is, PHYD offers no sustainable competitive advantage to the first-mover. This seems to meet our expectations as there are few barriers to other insurers implementing PHYD systems. But profit erosion with four or five firms alsoRead More »
The city of Oakland recently voted unanimously to bar landlords from conducting background checks before renting to tenants.
Supporters say the measure will help ensure residents released from prison are able to reintegrate back into society, hold down a job and provide for their families, instead of adding to Oakland’s homeless population. But some landlord groups worry the measure will sacrifice residents’ safety.
Sure, in the short-run ex-felons will be on a more equal footing relative to law-abiding renters. But it is hard to imagine that, on average, they are not worse tenants. That they are more likely to be late with rent, cause faster depreciation of they property, and possibly make other tenants more uncomfortable. Landlords screen out these higher cost individuals with aRead More »
Michelle Rhee’s tenure as Washington DC’s Chancellor of Public Schools was controversial mostly because she instituted reforms designed to hold teachers accountable for classroom performance. This episode provides the backdrop for studying the role of high-powered incentives linked to multiple measures of teacher performance. The effectiveness of one of these reforms have recently been analyzed by Thomas Dee and James Wyckoff in their paper "Incentives, Selection, and Teacher Performance: Evidence from IMPACT." So how did it do? From the abstract:
Our RD [Regression Discontinuity] results indicate that dismissal threats increased the voluntary attrition of low-performing teachers by 11 percentage points (i.e., more than 50 percent) and improved the performance of teachers who remained by
Outsourcing is fraught with perils. You give up some control over product quality and your supplier has different incentives. That is what happened when the Chinese businessman, Tan Youhui, sought to take out a competitor, Wei Mou. Not having the requisite skill set himself, he hired a hitman. But the hitman outsourced it to another hitman for half the contract value. Who then outsourced it again. Who then outsourced it again. Eventually, the fifth in the chain became incensed at how much the value of the contract had fallen, which eventually led to the police finding out about the plot.Read More »
I love this screenshot I recently came across. Even crows respond to incentives.Read More »
Mark Perry at AEI keeps generating insightful graphs. This one commemorates that the number of breweries in the US has increased to its highest level ever. There is more information about one of my favorite industries here.
To me, the interesting thing is trying to understand why we observe such a stark decline in the number of breweries for 100 years and then a rapid increase over the last three or more decades. Some insights from others’ research include:Before 1900, the minimum efficient scale had been quite small with average cost rising sharply. Most cities supported multiple breweries and, because the product spoiled quickly, most breweries only served a single city.
In the late 19th century, the geographic scope of the market increased when spoilage was reduced due to increased
Last week I got to attend the always enlightening annual ZEW ICT Economics Conference. One of the Keynotes was from the always insightful, Catherine Tucker. In one part of her talk she related that her team conducted an experiment to place a generic ad for a STEM educational program on social media only to find out it was shown much more often to men/boys than women/girls. Algorithmic bias, right!?Digging a little deeper, they discovered that their bid lost out on the ad auction for females more often because others would bid higher. Ads are placed based on the results of real time auctions for "eyeballs." It turns out that men are cheap (pun intended). That is, women control so much more discretionary spending that they are more heavily courted by advertisers with higher auction bids.Read More »
The BBC posted a story a week ago "Beer ban leaves German neo-Nazi rock fans thirsty." Right-wingers descend on this town for a ‘music’ festival that the local courts have deemed something more.
The Dresden court justified its ban on alcohol at the festival by saying "the event has an obviously martial and aggressive character", and there was a risk that alcohol could make violence more likely.
Townsfolk worried that the attendees would simply purchase from the local grocery stores and so bought more than 200 crates of beer in the town’s supermarkets. Festival attendance fell by half. That is changing the game to obtain more desirable results.Read More »
Principal/Agent Problem: Your "employees" can be bribed by those they are supposed to protect you against.Read More »
There have been reports that industry concentration has been rising in the US. If so, firms will tend to have more market power that allows them to set higher margins. If so, those lazy antitrusters need to wake up and protect competition.But it all turns out how you define the market. As my students all know, markets can be defined in relation to three dimensions: product characteristics, level of geography, and unit of time. A new paper by Rossi-Hansberg, Sarte, and Trachter examines the data at a more local level. While national concentration measures are rising slightly, more local measures are declining. This is consistent with ever more competition (although there have been claims that product differentiation is increasing).
Perhaps the antitrust bureaucrats can go back to theirRead More »
Even Dolphins will game an imperfect reward system.
I think of this is less an indictment of capitalism and more an indictment of a poorly thought out incentive system.Read More »
Finding ways to move assets to higher valued uses.Read More »