EclectEcon

More Evidence of How Unnecessary AntiTrust Cases Often Are: Microsoft

Remember those massive antitrust cases against Microsoft? Think of all the scarce resources devoted to prosecuting Microsoft and used by Microsoft to defend itself. I opposed those cases for two reasons:

1. Microsoft dominated only when their products were better than others. I switched to Word because WordPerfect for Windows was horrible. I switched to Internet Explorer (and then FireFox, Chrome, and Safari) as they got better than Netscape and Mosaic (?).
2. Competition is very powerful. Apple is making huge inroads into the PC market. Google is dominating Microsoft in many areas. And operating systems for tablets and smartphones are leaving Microsoft in an unenviable position of trying to catch up.

Also, see Winners, Losers, and Microsoft by Stan Liebowitz.

According to Motley Fool (though not in these words), these two points are important for understanding the future for Microsoft, its strengths and its weaknesses.

The rise of tablets and smartphones has shaken up the once dominant “Wintel” PC paradigm. In an attempt to re-establish its supremacy, Microsoft (NASDAQ: MSFT) designed Windows 8 to be a hybrid operating system, useful on a variety of platforms.

But Windows 8 adoption has been poor -- consumers seem baffled by the changes. Meanwhile, Windows tablets are selling poorly, and Windows Phone remains in fourth place. Can Microsoft turn things around, or should the company cut and run?

Windows 8 has failed

Microsoft released Windows 8 last October. The new version of Windows was the biggest redesign of the operating system since Windows 95. Unfortunately, consumers seem baffled by the changes, and Microsoft’s hardware partners have been public in their disappointment.

There are two ways to keep industries competitive in the long run without resort to antitrust laws that are often ineffective (and frequently downright anti-competitive themselves!):

1. Promote free trade. Don't let fat-cat monopolists use trade barriers to enhance their monopoly power.
2. Promote easy entry into industries. Don't let the fat cat incumbents bribe politicians into making rules/laws that inhibit competition from new entrants.

And always remember the sad truth that most antitrust policy can be summarized this way:

1. You must compete.
2. You must not win.

Scarcity, Economics, and Medical Care

One of the first things we do in introductory economics courses is try to make the point that because humans seem generally to have unlimited wants but because there are limited productive inputs, we are condemned to live with scarcity. Like it or not, we cannot have all we want of everything. We must make choices somehow.

This fact of human existence is crucial for understanding the problems we will increasingly face in the realm of medical care. As we move toward increased use of gubmnt programmes to provide the care, not everyone will be able to receive all the care they might want. This problem of scarcity will most often be stated as a problem of not being able to afford the medical care, but it really stems from a problem of scarcity: when customers don't have to pay directly, they want more than they would otherwise, and getting all the productive inputs to provide all that care (i.e. attracting them from alternative uses) is extremely costly, involving painful trade-offs. 

So we have to have a mechanism for deciding who gets the medical care. We must have some sort of rationing scheme. Some people might urge the use of the market to make this decision. Others might urge the use of co-pays and limits on some types of insurance to decide. Others openly recommend letting doctors, committees, and bureaucrats decide (aka death panels?).  But we have to acknowledge that not everyone will ever get all they want. Choices must be made somehow.

You may not like that reality. You might think people should behave differently. But the sad fact is that scarcity necessitates our making such choices. There is no way around it.

We see this problem now with cancer patients in the US. From the Washington Post, 

Cancer clinics are turning away thousands of Medicare patients. Blame the sequester.

... Oncologists say the reduced funding, which took effect for Medicare on April 1, makes it impossible to administer expensive chemotherapy drugs while staying afloat financially.

Patients at these clinics would need to seek treatment elsewhere, such as at hospitals that might not have the capacity to accommodate them.

It may seem that the sequester and a cut in funding for medicaid/medicare have caused this problem, and I suppose in the short-run that's right. But in reality, the problem is a much greater quantity demanded at current prices (zero!) than is supplied. 

The problem is an old one that economists have presented endlessly: whenever the gubmnt sets a price of zero and tries to guarantee that everyone who wants something at that price can have it, then shortages emerge. And then, to try to fix the problem, the gubmnt must decide how to ration the product. 

In this case the rationing is left to medical facilities. And they, quite understandably, are choosing to decline to treat those patients for whom the costs of treatment are extremely high. 

Whether we want to acknowledge it or not, these are death panels. These are groups of people deciding who should or should not receive treatments. 

Cypriot Theft

From the NYTimes,

Under an emergency deal reached early Saturday in Brussels, a one-time tax of 9.9 percent is to be levied on Cypriot bank deposits of more than 100,000 euros effective Tuesday, hitting wealthy depositors — mostly Russians who have put vast sums into Cyprus’s banks in recent years. But even deposits under that amount are to be taxed at 6.75 percent, meaning that Cyprus’s creditors will be confiscating money directly from pensioners, workers and regular depositors to pay off the bailout tab.

I was first told about this situation yesterday by MA who sent me some early information.

It looks to me as if the Cypriot banks lost buckets and buckets of money by "investing" (actually speculating) in what they thought were low-risk mortgage-backed securities up until 2008. Then, in an effort to "stablilize" (i.e. bailout the owners of) the banks, the Cypriot gubmnt bailed them out, all in the name of protecting the depositors.

This sounds much like what happened in Ireland and threw their economy into such a spin. In order to reassure international investors, the gubmnt guaranteed deposits in the banks and in the process also guaranteed the bondholders of the banks. In Ireland, the gubmnt was able to fund the operation through increased taxes, spending cutbacks, and additional gubmnt bond issues. 

Cyprus doesn't have these options. The size of their bailout was about the equivalent of a full year's GDP for the country, and they simply could not raise taxes or cut spending enough to cover the bailout.

So they called on the IMF for help. And, no surprise, the IMF looked at the situation and saw no feasible way for the gubmnt to cover any loans the IMF might make to help them out. 

One option, for the Cypriot gubmnt to repudiate their debt, surely was considered. But debt repudiation would hurt the banks in the rest of the EU, and those banks and gubmnts likely lobbied the IMF to seek some other alternative. 

And that is when they settled on taxing deposits. This policy is horrendous. It is designed to steal wealth from large-depositor Russians who have tried to hide their money in Cyprus, but it will also hurt Cypriot businesses and people who have used the banks to save for (and plan for) their retirements, educations, etc.

My first reaction is "Since when did bondholders ever have a guarantee that their bonds would be repaid in full?" Ask the bondholders of pre-nationalized General Motors; ask bondholders of the Greek gubmnt. Why should bondholders of Cypriot gubmnt bonds or of Cypriot banks be protected from their inability or unwillingness to perform a fairly simple due diligence examination? A bond is not a guaranteed safe investment. Nor should it be.

My second reaction is that not only are Cypriots trying to drain their limits at ATMs, where total withdrawals until Tuesday are limited, but to the extent possible they will be using the internet and other options to prepay their credit card debts. I know that if I had $10K in the bank there, I'd try to put it on my paid up credit card balance and forego the interest income I might have earned in the bank to avoid the tax. But I don't know to what extent this is possible. 

In the end, I wonder if this will really happen. The parliamentary vote that was to have been taken today has been delayed until tomorrow. 

It was all started in the name of "protecting depositors" in banks that lost a lot of money several years ago. That sure seems ironic.

Related articles

Depositors burned, bondholders saved, a modern European bailout

Bailout Cuts Cyprus Bank Accounts, Withdrawals Barred

A look at Cyprus' decision to tax depositors

Cyprus parliament delays vote on bank deposits tax

The Cyprus precedent

I Smell Shortages, Lineups, Hoarding, Etc.

News like this is so depressing. Why won't people learn from experience (if not from economists)?

A group representing two-thirds of Argentina's supermarkets agreed to keep prices steady until the first of April.

The move comes days after the International Monetary Fund (IMF) censured Argentina for issuing inaccurate economic data.

The government says inflation is below 11% but economists say it is double.

Analysts have accused Argentina specifically of understating the rate of inflation since 2007 in order to keep interest rate payments on its debt low, and to flatter the political regime.

Some economists think the annual inflation rate could rise as high as 30% this year.

The supermarket agreement covers every item in all of the nation's largest chains.

They include Walmart, Carrefour, Coto, Jumbo and Disco.

Argentina's commerce ministry has asked consumers to monitor prices in the chains.

Next up: watch for cries about dirty speculators, calls to shoot hoarders, and extensive allegations about black markets and cronyism. There's a perfect model in Venezuela.

And seriously, the only way to deal with rampant inflation is to reduce the rate of growth of the money supply. If the gubmnt is printing money to fund its deficits, then deficit reduction will be necessary too.

Update: For more see this from Forbes.

Related articles

Argentina Freezes Supermarket Prices Amid Spiralling Inflation

Argentina freezes prices to break inflation spiral

Argentina pegs supermarket prices

Argentina freezes prices to break inflation spiral

Big Gubmnt and Cronyism, the case of electric cars

Argentine Markets Freeze Prices for 60-Days Amid 26% Inflation - Bloomberg

Prima Facie Evidence of a Lack of Competition:the case of e-books

Have you noticed how expensive e-books are? There might be a good reason, according to the US Department of Justice: collusion to fix prices (via MA).

Penguin has settled with the Department of Justice in the e-book price-fixing case brought against Apple and five publishers this year. Three of the other publishers involved: Hachette, Simon & Schuster and HarperCollins — have already agreed to settle.

Penguin and Macmillan were holdouts, insisting that the case had no grounds. "We did not collude," said Macmillan CEO John Sargent in April, when the DOJ brought its case.

They may not have colluded, and unless there is "smoking gun"-type evidence, we may never know for sure. However we do know from all our theoretical models that if the e-book industry were competitive, prices would tend to reflect the costs of publication. But when e-book prices exceed the prices of paperbacks for the same titles, and when paperbacks are more costly to produce, it's an indication that competition is not driving prices down to even approximately reflect publication costs. 

Higher prices for e-books probably reflects price discrimination across different consumers with different price elasticities of demand. But that type of price discrimination can occur only when there is a lack of competition.

What Legal Issues Are Involved with Snow-Stomp Art?

I had intended to do more work on my most recent snow-stomp art, depicting champagne being poured from a bottle into a champagne glass. But just as I was finishing the glass, a long-time resident of the condo building where we live (and in front of which I did the work) came out onto his balcony and asked me what I thought I was doing.

I explained with a big smile that I had made a bottle in the snow down the hill (which he could not see from his low balcony) and was now making the glass into which the champagne was being poured.

He informed me in a very officious manner that the condo doesn't own the hillside (where the bottle is); that is public property. He then asked if I had city permission to do that? 

Me: I'm just walking in the snow, making a design.

Him: And you know this part up here is owned by the condo. You have to get permission from the condo board to do anything.

Me: I'm just walking in the snow, making a picture for people to enjoy.

Him: But we have a person who is in charge of the landscaping here. You need to get board permission if you are going to change anything.

[etc. etc.]

Me: Oh. Okay.

and I left. 

I can't imagine there is any legal bar to my doing the snow-stomp art. And I can't imagine I need anybody's permission to do it in a public park or on the lawn of the condo where I live. Maybe if I had designed some sexually explicit erotica, it would be a different story; and maybe he objected to the depiction of alcohol use on the condo lawn; but I doubt it.

Quite frankly, I think he just objected to anyone having fun.

Is Canada More Violent Than the US?

"Ironman" at the blog Political Calculations links to a number of comparisons and concludes that yes, Canada is more violent than the US (observing along the way, "At least Canadians are polite, eh? Just don't cross them...."). You may want to look into how and why he corrects for demographic differences, but here are some of his conclusions:

We break down the number of homicides per 100,000 by method for Canada and the most demographically-similar-to-Canada portion of the U.S. population, finding that Canada's much more strict laws regulating firearms "saves" about one life for every 100,000 people, although Canadian homicide offenders have adapted to the lack of firearms available to them by making murder more brutal. ...

We find that there's an additional price to be paid for saving that one life for every 100,000 people with strict gun control laws. It turns out that after adjusting for the major demographic differences between the two nations, Canada is a much more violent place than is the U.S.

 

Maybe the US Isn't As Violent As We Think...

Does the US really have fewer violent crimes per capita than the UK, Austria, Belgium, Holland, and even Sweden? Data reported in the Telegraph say it does (h/t Tom Hanna):

 [V]iolent crime in the UK ... increased from 652,974 offences in 1998 to more than 1.15 million crimes in 2007.

It means there are over 2,000 crimes recorded per 100,000 population in the UK, making it the most violent place in Europe.

Austria is second, with a rate of 1,677 per 100,000 people, followed by Sweden, Belgium, Finland and Holland.

By comparison, America has an estimated rate of 466 violent crimes per 100,000 population. 

I don't know if it is sloppy reporting or sly cooking of the data, but I see just "crime" in one place and "violent crime" in another. The article does caution about there being different measures in different countries, so be careful about the results here (and in every other cross-national study!).

But if the data correctly represent the situations, perhaps the rush to judgement about the US, violence, and guns is mistaken.

Related articles

I Used to be Pro Gun Control. If you are, too, please read this

Government: Violent crimes rose 18 percent in 2011

Violent crime drops in most O.C. cities

Price Gouging is Good

One of my former students (and a current FB friend) reminded me that I used to require this article by Karen Sellick in my intro economics courses. He also pointed me to this article by Art Carden which makes similar arguments.

Here's the gist of the defence that most economists make of price gouging:

• Firms that price gouge may lose goodwill, so jacking up prices may not be a wise long-term strategy for many firms.
• To the extent that prices rise during disasters, they encourage suppliers to ship things in from greater distances (with the higher prices signalling that increased transportation and transaction costs can be covered).
• To the extent that prices rise during disasters, they encourage buyers to cut back, to make do.
• To the extent that people expect prices might rise during disasters, that expectation encourages buyers and sellers to maintain larger precautionary inventories. 
• Price gouging eliminates black markets, massive lineups, and the attendant illegal and anti-social behaviours.

Bearing Costs of Living in Risky AreasPeople Respond to Incentives

The Washington Post had a lengthy piece today on measures various people are proposing to prevent such massive flooding as happened in Galveston with Hurricane Ike or as happened along the East Coast with Hurricane Sandy. (link here). 

You know what I liked about the article?

It talked about what cities, states, and regions are contemplating. The article does not include any quotes (that I saw) saying the protective measures are so costly that the Federal gubmnt will have to help out.

There is no reason to ask/require people in Kansas to help pay for these barriers or other measures (just as there is no reason to ask/require New Yorkers to pay to help with tornado relief in Kansas). 

If people want to live in nice, low-lying areas near the shore [yes, Galveston is very nice most of the time!] they should be willing to pay the high taxes required to cover the costs of protection; failing that, they should be willing to pay the exorbitantly high insurance premiums (assuming they could even buy flood insurance) to cover their losses. 

But when others bear the costs of such mega-project protection schemes, the major economic effect is to subsidize the people who own land (and buildings) in the at-risk areas. The result is to induce more people to live in those areas.

After all, "people respond to incentives."

Canadians' Right to Health Care: "The Right to Stand in Line"

David Henderson, in reviewing John Goodman's book on the economics of healthcare, takes a well-deserved swipe at the current Canadian health care system:

These data, plus the fact that Canadians wait so long to see a doctor and to get surgery, help to make another point that Goodman discusses: the supposed "right to health care." When I hear people say that people have a right to health care, I take on the moral issue with moral reasoning, questioning whether health care is something that a person can truly have a moral right to. Goodman does it differently--and effectively. He points out that Canadians don't have a right to health care. How can you say it's a right if people aren't guaranteed to actually receive the health care service they need? The right to get in line for care, which is really all that Canadians are guaranteed, is not much of a right.

When I first moved to Canada over 40 years ago, the health care system was much better for several reasons. We rarely had to wait very long for any service. Two important things happened, however:

1. In an effort to control costs and reduce what people feared would be supply-induced demand, the number of doctors put through the system was actually restricted. It should come as no surprise that we now have shortages of physicians, especially since present-day doctors tend to put in fewer hours, on average, than did physicians back then.
2. Extra billing was eliminated. When I first moved to Canada, doctors were allowed to charge more than the stated fee schedule if they wanted to. Some did (especially if they thought the patients could pay more -- a classic example of the improved efficiency that follows from price discrimination). The elimination of extra billing drove some physicians to the US and induced others, especially newer ones, into the specialties with more lucrative fee schedules, leaving shortages elsewhere. Surprise, surprise: when the price was pushed to zero by the gubmnt, the quantity demanded increased and the quantity supplied decreased.

 

What's the Price Elasticity of Demand for Plastic Grocery Bags? what was the Trono city council thinking?

I love econ-o-geeky questions like this. In Trono, retailers have been required to charge five cents/bag instead of giving them away at the checkout. As a result, usage of the bags fell by 50%. 

So let's see. E = (% change in Qd)/(% change in P)

The % change in Qd is given as 50%, but what's the % change in price, given that it started at zero? Infinite? probably not. Arc Elasticity of demand might be a good stop-gap solution: The % change in P = 5 cents/(avg of beginning and ending price) = 5/2.5 = 2.0.

So in this case E = .5/2 = .25 (ignoring the negative sign for the change in Qd).

Why did it occur to me to post something like this after not having posted anything for a "few" days?

Here's why: the Trono City Council, having had a five cent charge on single-use plastic shopping bags in place, became frustrated with what or was not being done with the $5m revenue from the sales of these bags. So what did they do? They voted to ban all plastic single-use retail shopping bags as of Jan 01, 2013.

What a bunch of doinks (a technical term for econo-idiots).

The 5-cent charge was doing its job. It was discouraging the use of single-use plastic bags, and rather substantially at that. But because the city council was concerned that the proceeds were not going to environmental groups, they got their knickers in a knot, and banned the bags outright. Really. 

So even though the charge operated effectively as a Pigou Tax, councilors have scrapped it because some politically favoured groups were not receiving the proceeds? That is so stupid.

The effect of this outright ban will be two-fold:

1. Those groups will not receive anything as a result of this policy change. It won't make them any better off. 
2. Shops will be forced to switch to paper bags, the manufacture of which creates serious environmental problems and which are far less convenient for consumers.

I wonder if there`s an in-trade bet available for whether they'll reverse themselves. 

This kind of nonsense just piles on the problems of "regime uncertainty". How can people make sensible plans or reasonable future business decisions when politicians like these are running amok?

The Important Difference between Protecting Competition and Protecting Competitors

For decades and probably centuries, businesses have lobbied gubmnts to be free from the vagaries and pressures of competition. A very telling example of this incentive was the Robinson-Patman Act of 1936 in the US which essentially limited the scope for price competition with the goal of protecting neighbourhood stores from inroads being made by chain stores and supermarkets (most of which no longer exist due to changing economic conditions and new forms of competition).

As internet shopping, especially for music and ebooks, has blossomed, once again the former industry giants are concerned about losing out to new business models.... in this case, such firms as Apple and Amazon.

But this article in the NYTimes cogently makes the point that what is important is competition, no matter who provides it. Schumpeterian creative destruction will lead to some businesses failing as others emerge. But the new ones will, in general, be successful only if they offer customers a better combination of products, prices, and service. What needs protection is the competitive process, not the incumbent firms in an industry.

Just as important as ensuring that platforms cannot abuse their dominance is to ensure that the companies that make the products that flow on these platforms — book publishers, say — do not use anticompetitive tactics to benefit one platform at the expense of others. This is the kind of competition that the Justice Department’s civil suit against Apple and the book publishers is meant to protect.

Admittedly, the Justice Department’s case may be bad news for the established book industry. Amazon and other online competitors have squeezed Borders out of business. It is only a matter of time before cheap e-books put an end to hardcover tomes selling for $25. And with Amazon pushing into publishing itself, some publishers could become victims as well.

But what really matters to society is what the case means for the production and consumption of books. That might not be so dreadful.

For sure, if brick-and-mortar bookstores disappear, browsing will die with them. But writers and publishers will have plenty of other ways — think Amazon, Facebook or Google — of letting readers know about their books. [emphasis added]

WikiLeaks and the Economics of Property and Information

Let's get one thing clear: WikiLeaks is not entirely about freedom of expression. It is also about publishing stolen information. It does, however, raise an interesting question about who should have what legal entitlements to do what with intercepted or stolen diplomatic communications. This point is made quite forcefully by Janet Daley in The Telegraph.

In its self-contradictory maintenance of its own untraceable operations, it [WikiLeaks] effectively declares itself to be the only agency in the world that is entitled to secrecy. Its insistence that it is somehow a voice of open and transparent “freedom of expression” is simply absurd: there is no issue here of any individual or group openly expressing an opinion that would otherwise have been suppressed. The only opinion that is implicitly conveyed by WikiLeaks’ exposures is the boringly prosaic anti-Americanism of the average Guardian comment writer.

All that WikiLeaks has done, as its name suggests, is to publish stolen documents that were purloined by a malcontent within the US defence network. As it happens, the leaked material has been almost entirely unsurprising, apart from one rather spectacular own goal in WikiLeaks terms: it turns out that a number of Gulf states have been urging the US to strike at Iran before it succeeds in producing nuclear weapons, and that the US has been resisting this pressure. This tends to undermine both the image of America as trigger-happy warmonger and the idea that the entire Muslim world is united in hatred and distrust of the Great Satan.

 There are, of course, at least two parties involved in the WikiLeaks: those who "stole" the documents and provided them to WikiLeaks; and WikiLeaks itself. WikiLeaks is probably more like a publisher than anything else and will quite possibly be protected under freedom of the press. At the same time, I'm not sure that freedom of the press protects disclosure of "official secrets"; my recollection from The Pentagon Papers escapade of 1971 is that it does in at least some instances (for example, see this); but even if it doesn't, if the only relief is injunctive, it's too late now -- the cat's already out of the bag.

Update: George Friedman of Stratfor has pretty similar views.

Bribes and Efficiency

It has at times been argued by various people that bribes actually make economies work more efficiently. For example, I once met a person in Chicago (admittedly, back in the late 1960s) who claimed that it cost less per square foot to build a building there than in any other major city (implying that bribes greased the bureaucratic gears). 

I've never been convinced by the argument. Bribes involve uncertainty and risk and hence dramatically increase transaction costs. And these higher transaction costs impede efficient exchange and economic growth. 

Here is some indicative evidence supporting this proposition (from The Economist).

It isn't just the corruption and the bribes that are a problem, however. It is the unholy alliance between a bribe-based system and a rigid and complex bureaucracy that impedes growth and development. The only reason (okay, an important reason) bribery is deemed efficient and useful by so many people is that bureaus have been created that erect numerous roadblocks to efficient exchange, and bribes are useful for circumventing these roadblocks.

If so, then one way to promote economic growth is to reduce the size and obstructiveness (if that's a word) of the bureaus that create the incentives for bribery in the first place. But, of course, that is easier said than done. The bureaucrats in these agencies have likely paid for the right to extract bribes from other people; these bureaucrats have a very strong vested interest in maintaining a bribe-based economy. Breaking down these vested interests will not be easy.

Apparently India and Mexico are moving in the direction of reducing the importance of paying bribes in their economies, and it will be interesting to see if they can persist in these developments. At the same time, I will be quite surprised if the incidence of bribe-paying doesn't increase in Venezuela. After all gubmnt price controls are another major reason for the use of bribes.

Cobweb Theorems, (Ir)rational Expectations, and the market for lawyers

Cobweb theorems in economics assume that people form their expectations about the future based on what they experienced most recently. For example, if the price of soybeans is high this year, then lots of farmers will plant soybeans next year, driving the price down. And then when the price is down next year, few people will plant beans the following year, and the price will be driven back up. 

As odd as it may seem, empirical support for such myopic expectations is readily available.

• When I was a graduate student at Iowa State University, the department head was Karl Fox. He had gained some notoriety in his younger, pre-computer days for having inverted a 9x9 matrix using a mechanical calculator. He was also a dynamic administrator.
  
  The role of expectations in explaining people's decisions was just beginning to be formalized in the economics profession. When we ask Professor Fox about expectations and agriculture, he smiled and told us that no matter what model people used, they still found that the simple, myopic cobweb model explained supply and demand in agriculture better than any of the others.
  
  
• We saw a similar phenomenon with MBA graduates in finance a few years ago. Students flocked to bizskools and studied Black-Scholes et al 'til the cows came home, all in the expectation that they would each receive multiple job offers paying hundreds of thousands of dollars to start. When the demand for finance specialists fell off, these folks were scrambling for jobs and the demand to study finance diminished somewhat.
  
  
• And now we learn that the market for lawyers is also following the cobweb cycle. This article  presents considerable evidence that  students made decisions to enter lawskool back in the days when lawyers were doing very well. But now, just as they are finishing their degrees and articling, the US economy remains mired in a considerable slump. Many are not finding jobs at all, and many more are taking jobs that are considerably less lucrative than they expected. So what happens? Potential lawskool applicants are concerned and as a result, lawskools are scrambling to recruit new students.

The cobweb models fly in the face of rational expectations. Why did farmers consistently take the current year's price as their expectation for what the price would be in the future (actually, I doubt if they do so much nowadays)? Why didn't at least some of them anticipate that others in the market would respond to the current year's price and alter their planning decisions? Most models of rational expectations would predict that farmers adjust their expectations, knowing the underlying supply and demand conditions, and on average will correctly predict the next season's price. 

But we don't see that type of equilibrium all the time. Instead, we see that people form their expectations for many of their decisions, adaptively: we expect the future to be most like what we have experienced in the recent past. We try to keep in mind other information, but we do, indeed, tend to have somewhat myopic expectations.

With the myriad examples of adaptive expectations, can we stop touting rational expectations models so highly?

Is Regina, Saskatchewan, Really the 3rd Worst City in Canada for Crime?

Maclean's magazine says it is [h/t Jack and BenS]. We haven't noticed it, but maybe we should take a bit more care while we are here?

WORST CITIES PERCENTAGE ABOVE THE NATIONAL CRIME SCORE

1. Prince George, B.C. +90% 
2.  Victoria, B.C. 81 
3.  Regina, Sask. 73 
4.  Saskatoon, Sask. 69 
5.  Fort McMurray, Alta. 68 
6.  Kelowna, B.C. 65 
7.  Grande Prairie, Alta. 64 
8.  Surrey, B.C. 60 
9.  Chilliwack, B.C. 58 
10.  Winnipeg, Man. 57

As Jack says, "Go West, young man....and be mugged." What is it about the western and prairie cities that they have such high crime rates? 

Victoria, BC, ranked second-worst? I thought only old-folk retirees lived there. Are they all pursuing crime as post-retirement careers?

Pricing Convergence in a Duopolyvending machines at UR revisited

A little over a month ago, I posted that at the University of Regina soft drinks sold in vending machines serviced by the Coca-Cola distributor were priced at $2/bottle, while those sold in machines serviced by Pepsi were priced at only $1.75/bottle. The price difference puzzled me:

What really puzzles me, though, is why the prices are different and how long this price differential will last. Are the drinkers of Coca-Cola products such die-hard fans of the products that they gladly pay the 25-cent difference? I can imagine there are some for whom the price elasticity of demand is pretty small, but there must be lots who'd be happy to switch to Pepsi products to save the 25 cents. 

I was prescient (no tarot cards; just plausible economics). Two weeks later, the prices in the Pepsi-serviced machines were raised to $2/bottle. 

One would expect that products which are nearly homogeneous (please, no vehement comments about the differences between Coke and Pepsi; I said "nearly") would have identical prices (or nearly so). I was surprised that the prices weren't the same last month, and I'm not surprised that the prices are identical now.

What I don't know is the dynamic that led Pepsi to raise the prices on their products rather than Coke to lower its prices. From a transaction cost perspective, it makes some sense (Canada has a two-dollar coin) because it cuts down on change making in the machines. 

Do you think there was any communication between the two distributors that led to Pepsi's price increase? If so, that would probably be illegal. But communication wasn't necessary. My guess is that Pepsi said to itself, "Why charge less if Coke is going to meet our lower price? Why not raise our price instead? After all, we won't lose many sales compared with the alternative  of having us both charge $1.75/bottle."

This is classic convergence to a joint-maximizing price. And the simple prisoners' dilemma model needs to be expanded to explain why price raising, not price cutting, is the dominant strategy in similar duopolistic situations.

More on Class Action Awards

As I delete the 25th piece of spam from my e-mail accounts in 12 hours, and as I reflect on some of the feedback I have received on Facebook and in e-mail for this post, it occurs to me that there is a sure-fire way for defendants in class-action suits to reduce their total pay-outs to plaintiffs: disguise the award notices to make them look like e-mail from Nigeria or the Ivory Coast; have the notification website where people register to collect payment be located in the Czech Republic; make some egregious grammar and spelling errors near the beginning of the notice. 

Most of us receiving an e-mail notification like this would just delete it with at best a cursory glance, assuming it to be yet another piece of junk mail.

Nuts. Does this mean I now must actually read through all that spam???

[I expect legal notifications of class action awards must be hard copy, not e-mail; but that will probably change at some point.] 

btw: 8-)

The Center for Class Action Fairness

Have you ever been "represented" (I use that term loosely) by some unknown group of attorneys in class action only to receive some coupons of questionable value while the attorneys receive millions of dollars? I have, at least twice. In one instance, we received coupons good for substantial savings at a nightclub we were planning to patronize anyway. But in another that I vaguely remember we received the offer of coupons worth only a few dollars, and the cost of collecting them and using them would have exceeded their value. 

I once had a colleague on the law faculty who said, "What we need to do is find a class and launch a massive class action suit.... That's where the real money is!"

Finally, finally, someone is taking on these leeches. Ted Frank has founded the Center for Class Action Fairness. His typical goal is to intercede in a class action suit on behalf of the class of plaintiffs, arguing that they should receive more and the attorneys for the class should receive less. Here is one good example:

We had objected to the Lonardo v. Travelers settlement for its disproportionate ratio of class benefits to attorneys' fees. On the eve of the fairness hearing, the parties modified the settlement so that class members who filed claims would get an additional $2 million, all of which would come out of the requested attorneys' fee—no small potatoes when only $2.8 million in claims were made. Still, we're talking about a settlement where the class gets $4.8 million and the attorneys get $4.6 million, so we renewed our objection today..

But Ted Frank's work is often more subtle than just "who gets what share of the proceeds?" He often points out that attorneys form classes solely (or primarily?) to extract fees from defendants, who are happy to settle with plaintiffs' attorneys rather than fight the case in court. The picture he paints all-too-frequently involves an unholy implicit conspiracy between plaintiffs' attorneys and defendants' attorneys to enrich the former at the expense, primarily of the plaintiffs themselves, but almost in conspiracy against the defendants. 

Frank's goal is to rectify this situation. He intervenes in class action suits on behalf of plaintiffs and defendants, attempting to break down that unholy conspiracy.

I have "known" Ted for nearly two decades. I've never met him, but we've corresponded infrequently from the time he was a law student at The University of Chicago. He has given up many very lucrative possibilities in private practice to form the Center for Class Action Fairness. 

And judging from his successes, he almost surely has major leeches law firms that typically have thrived on these class action suits on the defensive. 

Moral Hazard (again? still?), Freddie Mac, and Bailouts

It just keeps getting worser and worser. Freddie Mac is losing more money, owns more foreclosed properties, and is begging for more taxpayer funding. From ABC via Yahoo via Jack,

Freddie Mac is losing money from bad loans it backed, many of them before the housing market went bust. It had $118 billion in bad loans at the end of June, up from $103.4 billion at the end of last year. It owned more than 62,000 foreclosed properties in June, up from about 35,000 a year earlier.

Both Fannie Mae and Freddie Mac have both lost tens of billions of dollars during the past two years and both are asking the government to prop them up. Last week, Fannie Mae requested $1.5 billion after posting a loss of $3.13 billion, or 55 cents per share, in the second quarter.

The politicians and voters may think they are bailing out homeowners and potential home owners by funding these deficits, but there are three other groups who are the major beneficiaries from these bailouts:

1. The management of Freddie Mac and Fannie Mae, who all deserve to lose their jobs and a portion of their pensions. 
2. Home builders who would likely be even worse off without these bailouts. But I suspect the beneficiaries in these first two are small potatoes compared with those in the third group:
3. Creditors of Freddie Mac and Fannie Mae. The people who bought the bonds and IOUs of these organizations correctly guessed the taxpayers would make good on the debts of these two corporations. If the taxpayers hadn't been told by politicians that the taxpayers must bail them out (and watch out for the FHA to be added to the massive subsidy list), creditors would have lost billions of dollars.

Telling creditors they do not have to do careful risk assessments, telling them that the taxpayers will cover any down-side risks, is terribly inefficient and unfair. And bailing them out this time just encourages everyone to be less careful and take too many risks in the future.

Music Business Conference: reflections

I really enjoyed the four papers presented at today's conference, albeit for varied reasons. They told me things I didn't know (Tschmuck's summary, Liebowitz's demolition of the O-G/S study, O-G's vapid discussion of whether we really need copyright [he didn't really say anything that hadn't been said by Arnold Plant, nearly a century ago], and Gardner's presentation of data about file-sharing). The panel discussion that concluded the conference was weak, though (aside from Richard Mollet of BPI who was clearly more knowledgeable than some of the others). 

In the concluding panel, as I mentioned in the previous posting, the panelists mulled over the possibility of creating copyright collectives to deal with file-sharing. That's not what they said, but that's what they were doing. And Liebowitz has written definitively on the topic. He participated some from the floor, but his main point that gubmnts don't set prices right seemed beyond them for some inexplicable reason. Further, it was just plain shocking to me to learn how many people on both sides of negotiations would rather have the gubmnt set the prices (presumably to reduce their own companies' negotiating costs?). 

Little wonder the western world is on the slippery slope toward increased elitist interventionism.

Now, off to a winery (heuriger) for a post-conference get-together. I hope to be tipsy or worse before the night is over.

Live-Blogging the Music Business Conference: part IV (Big Champagne)

Big Champagne provides data about the music business. Eric Garland, founder, made the last presentation.

People are buying more but spending less. Price per unit is declining. YouTube is now the number one place that people listen to music? Wow!

Only 2% of albums sold 5K copies or more in the UK. The number of new platinum albums has declined over the past four years from 35 to just 12. Also, most digital sales are songs, not albums. [makes sense to me]. 

Holy Cow! My Space and YouTube are REALLY big compared with digital sales; and they are dwarfed by P2P.

 Another problem is that pirates are very efficient at providing music on P2P before it is released. And the search engines help everyone find the sites quickly.

Great evidence that "popular is popular", i.e. the best selling albums are also the ones most downloaded. We cannot use this fact as evidence that file-sharing has no impact on sales.

Live-Blogging the Music Business Conference: part III (Oberholzer-Gee)

Felix Oberholzer-Gee kicks off the afternoon session. He begins with a graph showing the phenomenal growth in P2P that began about the same time album sales declined (cf Liebowitz's first slide).

In contrast to Liebowitz, he asserts that concert revenues are important.

Again, as this morning, O-G points out that Liebowitz's results imply that more than all of the decline in album sales is due to downloading [sounds devastating, but of course it isn't because the sampling effect leads to a positive effect. The net effect is negative]

Summarizes a 2009 study by Hong showing that once control groups are corrected for, then Napster accounted for 20% of the decline in album sales. Still important, but nothing like 250%. 

O-G seems to be backtracking.... he presents a table showing wide confidence intervals for his estimates. Most researchers don't talk about the lower bounds of confidence intervals, and this is refreshing. But it is a cya strategy, too.

Discusses complements even more.... "If you go home tonight and have a good internet connections, thank file-sharers; they are the reason we needed faster internet." Funny. That certainly captures the problems and effects I've experienced when teaching at Herstmonceux.

He shows increased revenues to artists in Sweden over the years 2000-8. What explains that?

O-G presents the data that include iPod sales: He says he does so to show the effect of complementarity. "For everyone else, content is free." and that drives the demand for iPods. 

Sounds to me as if he's saying that indeed file-sharing has had a big impact on music sales.

Says people will produce without intellectual property rights. Examples are garage bands, wikipedia, open-source software. 

Now Liebowitz responds:

  In Sweden the artists were worse off in total if an inflation correction is applied to that result.

  O-G sidesteps and doesn't address that. Typical Liebowitz deals with the data and facts while O-G slides. But very well.

  O-G also caved on data about performing rights issues. 

  Both O-G and Liebowitz have been much more polite this afternoon. But I expect there are two reasons for this: First, Liebowitz cooled off. Second, O-G seems to have completely caved in on everything his conclusion: "therefore we need to get rid of copyright." Huh??

My summary: O-G admits Liebowitz is right, but waves his hand to explain why copyright should be abandoned. Very disappointing and intellectually vacuous.

Live-Blogging the Music Business Conference: part II (Liebowitz)

During the question session after his own presentation, Tschmuck declined to conclude what the effect of file-sharing has been on music sales. Not surprisingly, he called for more research.

-------------------------

Trying to summarize Tschmuck's paper as he presented it didn't work very well. I may try to summarize Liebowitz when he is finished.

Liebowitz began by showing a massive decline in record/album sales since 1999. [I expect Steve Levitt could use instrumental variables to show it's the result of abortion law changes.]

He next listed reasons put forward for this decline and already started belittling the work of O-G/S. 

One VERY telling point was that most O-G/S results cannot be replicated using the same data and the same techniques.

But Liebowitz's main point is that the O-G/S technique of using German school vacation days as an instrument to avoid the simultaneity bias is incorrect and/or meaningless. He further points out that Big Champagne's data contradict those of O-G/S.

Liebowitz couldn't possibly get through all his slides in the time alloted. His conclusion took O-G/S to task for misrepresenting previous studies. It was quite amusing as he presented assertions by O-G/S and showed what the papers actually said. It looks as if O-G/S did some pretty scandalous things.

Wow!

Addendum: O-G is in the audience and was asked to respond. He pretty much avoided all of Liebowitz's critiques. 

But sparks really flew when O-G tried to go off on tangents to cover other materials. Understandably, Liebowitz was upset because it took a bunch of time (and, O-G had notably refused to be on the panel with him). 

I wonder how much time Liebowitz will have to comment on O-G's paper this afternoon....  

Live-Blogging the Music Business Conference: part I

Tschmuck's paper is what he calls a typology: classifying studies by type It is very thorough and my brief summary below doesn't do it justice. He starts by summarizing Liebowitz's theoretical work. The summary seemed adequate.

Next he addresses Bayaan's work, employing game theory concluding that legal methods to fight file-sharing makes people worse off. 

Curien/Moreau are next urging that piracy is better for consumers to offset monopoly power and that artists make money from tours.

Peitz et al: talk about sampling benefits of file sharing. [Liebowitz has his work cut out for him.]

Tschmuck argues that the theoretical models of oligopoly and monopolistic competition need to be improved.

-----------

Next he addressed survey-based studies, beginning again with Liebowitz's work showing that file-sharing led to a decline in music sales.

Boorstein used survey data, too, and criticized Liebowitz's work, but Liebowitz extended the data and Boorstein's results were reversed!

Zentner: file-sharing reduces the probability of sales by as much as 30%. used tonnes of European data. Concludes a likely reduction in sales was actually 7.8%

Chi: says she found a positive, not negative effect, but it was questionable [Tschmuck's tone revealed his skepticism].

Andersen/Frenz found a positive effect, too. 

A Dutch study found that P2P file sharing eroded the profitability of album sales but boosted the profitability of concerts. [seems obvious to me. Note: This is at best a 2nd best result.]

Tschmuck's comments on this section seem reasonable for the most part.

-----------

Survey data of users

Bounie et al: explorers who sample vs. pirates who don't buy. Nothing clear.

Rob and Waldfogel: downloaders buy less but that increases consumer welfare.

Lee: a price study of price elasticities of demand

Leung: found negative impact on music downloads when punishment for illegal file-sharing is more severe.

Huygen et al: again found that file-sharing reduces record sales but said it is more than offset by concerts and merchandise sales. [if so, then record companies and artists should not be fighting file-sharing; the fact that they are makes me skeptical of these approaches]

Oops I missed a couple here.

Hong: says Napster might have led to a 20% drop in sales to young people (a huge segment of the market).

similar results from Peitz et al. 

Empirical studies:

Tanaka found no effect on CD sales in Japan. Used instrumental variables [ugh]. 

Bhattacharjee: concluded file-sharing had no impact on chart survival. [so?]

Blackburn: well-known artists suffer from file-sharing. Less well-known don't. 

O-G/Strumpf: no effect of file-sharing on sales. Used instrumental variables very questionably.

Overall, a reasonable summary with a great list of references. 

Live-Blogging the Vienna Music Business Research Days

I interrupt my travels today to attend a conference in Vienna on the music business, specifically on file-sharing, new technologies, and the adaptation of intellectual property law to these new technologies.

Background: a few years ago, Felix Oberhauzer-Gee et al published an article in the Journal of Political Economy asserting that file-sharing has had no impact on the music business. On the face of it, this conclusion seems worse than implausible. Beyond the implausibility, it turns out that their research had many errors, mistakes, and misrepresentations. These problems were made clear by Stan Liebowitz. Both Oberhauzer-Gee and Liebowitz are here at the conference. This should be fun.

Opening remarks are going on now. The first presentation is by Peter Tshmuck, conference organizer, who will provide a review of literature concerning music file-sharing. How he presents this should also provide some insight into his own views on the O-G - L controversy.

"I'm from the Gubmnt, and I'm here to help you...."

Every time I hear or read about people recommending that we need more gubmnt regulation to control greedy, selfish behaviour, I think of stories like this one:

WASHINGTON – Staff members at an agency that oversees offshore drilling accepted tickets to sports events, lunches and other gifts from oil and gas companies and used government computers to view pornography, according to an Interior Department report alleging a culture of cronyism between regulators and the industry.

In at least one case, an inspector for the Minerals Management Service admitted using crystal methamphetamine and said he might have been under the influence of the drug the next day at work...

The report cites a variety of violations of federal regulations and ethics rules at the agency's Louisiana office. Previous inspector general investigations have focused on inappropriate behavior by the royalty-collection staff in the agency's Denver office.

This is just one of the latest examples of the selfishness and greed of gubmnt regulators. Another that frequently comes to mind in our area is the case of the gubmnt employees who drank on the job and essentially caused the Walkerton water tragedy a decade ago by falsifying water safety tests.

In both cases, employees became careless in their sinecures to the point of criminal negligence. And in the case of the ongoing Gulf oil spill, it appears that even more than criminal negligence was involved.

When this type of regulation does not work, what do most people see as the remedy? More regulation! Here is another option: how about if regulators are found negligent, they are held personally liable? How about the Koebel brothers in Walkerton lose their life savings? And how about the regulators in the gulf lose theirs, too? I.e., how about placing more emphasis on tort-negligence and less emphasis on gubmnt regulation?

A standard response to my questions is that people will not take these jobs if they must bear such risk. That strikes me as a fine result. People will be induced to assume these risks by taking these jobs only if they are paid more. And knowing that they face the loss of their life savings, they will exercise diligence and care in their daily work. 

As is clear, I am not saying there should be no regulation. I am not that much of a libertarian. But I am concerned that gubmnt regulators can shirk responsibilities with little regard for losses they or others might suffer.

On a broader scale, it looks as if the gulf oil spill might be an extreme example of Regulatory Capture:

Regulatory capture occurs when a state regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is a form of government failure, as it can act as an encouragement for large firms to produce negative externalities. The agencies are called Captured Agencies.

[R]egulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture refers to when this imbalance of focused resources devoted to a particular policy outcome is successful at "capturing" influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented.

Regulatory capture theory is a core focus of the branch of public choice referred to as the economics of regulation; economists in this specialty are critical of conceptualizations of governmental regulatory intervention as being motivated to protect public good. ... The theory of regulatory capture is associated with Nobel laureate economist George Stigler, one of its main developers. The risk of regulatory capture suggests that regulatory agencies should be protected from outside influence as much as possible, or else not created at all. A captured regulatory agency that serves the interests of its invested patrons with the power of the government behind it is often worse than no regulation whatsoever. [emphasis added]

Stupid Attempts at Insider Trading

Behaviour like this deserves more than injunctive relief just because of the stupidity involved, not to mention the criminal intent.

"One year for being stupid."

Andre Dawson and the Hall of Fame

Andre Dawson was just elected to Baseball's Hall of Fame. Those of us who watched him when he played with Montreal Expos enjoyed watching him. And there is no doubt he was a VERY good player.

And yet, as many sabremetricians will sure point out, Dawson's performances probably contributed less to his teams' winning percentages than did the performances of Bert Blyleven or Tim Raines or even possibly Jack Morris (I really am having hard time understanding why Robbie Alomar got so many votes).

Let's face it. There is one important reason that Dawson was elected to the MLB Hall of Fame, and it is the same reason he won the National League's Most Valuable Player Award in 1987 despite there being other likely more suitable candidates. Leading up to the 1987 season, Dawson made it clear that because of his ailing knees, he no longer wanted to play on astroturf but with his free agency would seek a contract with a team that had a natural grass outfield. He was especially interested in signing with the Chicago Cubs, but this was 1986-87, and no one would sign him to a contract. No one, despite his potential contributions to a team. 1987 was, it turned out, a year of collusion among MLB teams, and most free agents found no takers other than their original teams (at monopsonistic salaries).

To deal with this collusive situation in the 1987 MLB, Dawson essentially signed a blank contract, gave it to Dallas Green (then general manager of the Cubs) and told him to fill in the numbers. This gesture, plus his overall good performance that season, helped Dawson win the hearts of fans and sportswriters. And it was this gesture that put him over the top in the MVP balloting that year and in the Hall of Fame balloting this year.

Without that action, Andre Dawson would be another very good player just on the cusp of being elected into the Hall of Fame. With it, he became a hero to many who were disgusted by the collusive behaviour of the MLB owners.