Category: Microeconomics

Will New Technology Help People Escape the “Sports Tax”?

Today’s exercise in everyday economics: Brian Stelter and Amy Chozick making the case that cable and satellite TV subscribers are paying a “sports tax”  (ht: Jennifer R.). Writing in the New York Times, they say:

Although “sports” never shows up as a line item on a cable or satellite bill, American television subscribers pay, on average, about $100 a year for sports programming — no matter how many games they watch. …

Publicly expressing the private sentiments of others, Greg Maffei, the chief executive of Liberty Media, recently called the monthly cost of the media empire ESPN a “tax on every American household.”

Patrick Flynn personifies the consumer challenge. He and his wife, who pay Comcast $170 a month for television, Internet and a home phone in Beaverton, Ore., are keenly aware that part of their bill benefits the sports leagues that charge networks ever-increasing amounts for the TV rights to games. Save for one regional sports channel, he said, none of them are worth it. …

But there are also millions of viewers like Russell Tibbits, of Dallas, who says, “If you eliminate sports channels from cable packages, I literally would not own a TV.”

Sports channels apparently make up a sizeable chunk of subscription costs. The authors report, for example, that ESPN earns about $4.69 monthly for each subscriber, while the next closest channel is TNT at a mere $1.16.

Given the limited number of channel bundles that cable and satellite services typically provide, the relatively high cost of sports channels creates the possibility of significant cross-subsidies. The sports-agnostic end up covering some of the costs of the sports-obsessed.

Of course, the reverse can also be true. Russell Tibbits may watch only sports channels, but he’s helping pay for AMC, Lifetime, and TNT, too.

For that reason, both sports fans and non-fans may prefer more choice about which channels they pay for. This “a la carte” discussion has been around for years, but Stelter and Chozick highlight a new factor. Changing technology make it make it easier for subscribers to get around current subscription models:

Soon, though, there may be an Internet alternative — something that was heresy until recently. Distributors like Dish Network are talking to channel owners about creating virtual cable providers that would stream channels over the Internet instead of traditional cables. That would break up the bundle of channels that subscribers have grudgingly accepted for years and allow subscribers who don’t like sports to avoid paying for them.

“They’re aggressively looking for ways to offer a lower-cost package of channels without sports,” said the chief executive of one such channel owner, who insisted on anonymity because the talks were confidential. “There may be a market in America, whether it’s 10 or 20 million people, that would be very happy to have 50 or 60 channels but not ESPN.”

By streaming the channels online, old distributors like Dish or new ones like Google could do an end run around the contractual commitments and market dynamics that effectively force them to carry sports channels now.

Why Are Restaurant Dinners Pricier Than Lunch?

Over at Quora, restaurateur Jonas M. Luster explains why he charges more for items at dinner than at lunch:

  • Lunch isn’t prepared and served by my A-team. Many times waiters and cooks have to prove themselves during lunch before being allowed on the dinner line. This means I pay less in payroll.
  • Lunch doesn’t usually serve a full menu. The menu is optimized for faster production and oftentimes smaller portioned. Smaller menu means less storage, smaller dishes mean less storage, and faster turnaround means less secondary storage costs (hot/warm holding, etc.)
  • Lunch diners spend an average of 45 minutes from entry to exit, dinner guests take over twice as long. This means faster turnaround during lunch hours, which either means more covers or less staff needed. Both saves me money.
  • Lunch guests don’t want/need candles and expensive bottles of water. They want food. We cater to this by dropping down to the bare bone of fine dining hospitality, removing fluff.

Last, but not least, lunch is a competitive market. We compete with in-house cafeterias, the dirty water hot dog cart, chain restaurants, and delivery businesses.

More answers here.

Cuddle in Coach, But Don’t Get Too Comfortable

Yesterday’s Wall Street Journal had a fun article about Air New Zealand’s latest innovation: Cuddle Class. As “the Middle Seat” columnist Scott McCartney describes it:

Steve Metz of Houston cuddled up with his wife Jackie and slept as they flew to New Zealand on a small futon. This flying couch wasn’t in a private jet or even a high-priced business-class cabin. They snuggled in coach.

“I don’t sleep well on planes, but I actually slept a good five hours,” said Mr. Metz, aboard a 13-hour Air New Zealand flight from Los Angeles to Auckland recently. “It’s no king-sized bed, but we made do.”

“Cuddle class” is an innovative seat design that has given coach passengers the first real opportunity to lie flat for sleep on long flights. To create the extra space, three seats in a row have fold-away armrests and a padded foot-rest panel that flips up and locks into place. Two passengers take up three seats and pay an average of half the cost of the third seat, typically an extra $500 to $800 for an overnight flight.

This sounds a fun innovation, but don’t get too excited:

The sky couch has limitations. To make it fit, Air New Zealand narrowed the aisles in the coach cabin. And since the couch is only about 4½-feet long, most people have to scrunch up to keep their feet from hanging into the aisle. In the middle of the night on a recent flight, it was impossible to walk through the coach cabin without bumping feet and legs hanging out of sky couches. And since it’s still the cheap-ticket cabin, two people have to cuddle closely in only 32 to 33 inches of width for each row, including the seat.

Now what does this have to do with economics, you might ask? Well, Air New Zealand faces a classic problem for any supplier who offers different levels of service. On the one hand, it wants to offer better service to attract more customers. On the other, it wants to make sure that some travelers still opt for higher-priced service. As McCartney puts its:

Air New Zealand doesn’t want to make the couch longer or wider—if it were better, it might start cannibalizing passengers from business-class or premium-economy seats.

So there you have it. Coach air travel isn’t unpleasant just because the airlines want to reduce costs. It’s unpleasant so that some flyers will pony up for better service.

P.S. For more economics of the air, see this post on the Tragedy of the Overhead Bin.

The Behavioral Economics of Leftover Pizza

Jared would be proud of me. Whenever I grab lunch to eat in my office, I head over to Subway for a six-inch Veggie Delite with provolone. Just 280 calories. Yum.

Depending on my mood and workload, I usually gobble down my Subway lunch between 12:15 and 1:00pm.

On Monday, though, I started eating at 11:22.

Like any good economist, I asked myself why. What inspired me to eat an hour early? Did I face some new incentive or new constraint that caused me to eat sooner?

No, I didn’t. Monday was a normal day. No new incentives, no new constraints, no other changes.

Except for one other thing: I brought lunch from home. Two slices of leftover BBQ chicken pizza. Also yum.

Small slices - this pizza will go far

If you are a well-trained neoclassical economist, your initial inclination will be to search for a subtle link between these facts. Perhaps cold pizza tastes better at 11:22 than an hour later. But that’s not true. Perhaps I ate early because I saved on travel time to Subway. No dice; Subway is only 90 seconds away.

Perhaps these facts are unrelated, a mere happenstance. No again. From long experience I can tell you that I always eat lunch earlier when I bring it from home than when I get it at Subway. It’s a law of nature. Indeed, I have sometimes eaten lunch as early as 10:30 on days I brought it to work with me. This is particularly likely if I put the lunch in my desk, rather than in the refrigerator down the hall.

The explanation for this behavior is, of course, psychological or, in the lingo of economics, behavioral. My lizard brain excels at knowing when food is near. And in getting me to eat it. Millions of years of natural selection didn’t favor creatures that wait an extra hour or two before they grab lunch. If the food is at hand, eat it now.

So every time I bring lunch to work, I set off a battle of wills. My rational, patient, busy self who likes to eat around 12:30, and my primordial brain that wants to eat when the eating is good.

That old brain has, if you will, the upper hand. It knows how to get what it wants. All it needs to do is remind me that food is near. I often feel as though lunch is calling to me from my desk drawer or, slightly more faintly, from the refrigerator. But that’s really the lizard brain doing its thing.

Ignoring that voice takes willpower. But that saps the mental energy I need to focus on my work. To shut my lizard brain up, I have only one choice – to get lunch over with. So on Monday I happily started in on my six slices of pizza at 11:22, washed them down with some iced green tea, and got back to work.

Perfectly rational behavior, I should note, given my urges, yet irrational as well measured against my “real” eating preferences. So it goes in the battle between our inner selves.

But wait. Didn’t I say I brought two slices of BBQ chicken pizza from home? How did I end up eating six?

Don’t worry, I didn’t steal a co-worker’s pizza from the refrigerator (if such thefts are a problem for you, please see this post).

Instead, I played along with another feature of my lizard brain. Eating six slices of pizza is much more filling than eating two. So I divided each of the two large pizza slices into three smaller ones. I then got to enjoy eating six slices, not just two.

I realize that sounds kind of insane. My rational, neoclassical side agrees. But it works. Perfectly rational given my urges, yet irrational as well. Such is life.

Note: Pizza photo from Chocolate on my Cranium.

Some Economics of Somali Piracy

Jeffrey Gettleman has penned a fascinating piece about the 388-day ordeal of two British sailors taken hostage by Somali pirates. Writing in the New York Times Magazine, he recounts how Paul and Rachel Chandler sailed off course between the Seychelles and Tanzania and found their sailboat boarded by ten pirates.

Their first order of business? Eating the Chandler’s cookies and using their shower. Piracy is not a glamorous occupation.

In addition to documenting the personal travails the Chandlers endured during their captivity, Gettleman also reports on the economics of the hostage-taking business. The payoffs, if any, come after months and months of negotiation. So pirates need credits and investors to cover operating costs:

In recent years, as ransoms have climbed, thousands of destitute, uneducated Somali youth have jumped into the hijacking business, and all anyone in Adado knew was that a young upstart named Buggas had taken the Chandlers to a desiccated smudge of a town called Amara, near the coast, and that Amara locals were backing him up. Local support is crucial, because holding hostages — especially for a long period — can become expensive. You need to keep them fed and most important, heavily guarded — so a rival pirate gang or Islamist militia doesn’t rekidnap them. Paul figures it was costing Buggas nearly $20,000 a month to hold them hostage: with around $300 per day spent on khat; $100 a day on goats; maybe a couple hundred more for tea, sugar, powdered milk, fuel, ammunition and other supplies. Then there’s payroll— in the Chandlers’ case, cash for the pirate raiding party and their 30 henchmen who rotated as guards on shore. On top of this come the translators, who charge a hefty fee to interact with the hostages and negotiate a ransom.

Pirates tend to operate on credit — borrowing all these resources from community members or other pirates, who will then get a cut, or in Somali, a sami, once a ransom is delivered. In Amara, rumors quickly began to fly that the Chandlers were rich — possibly even British M.P.’s — and were therefore the ideal sami opportunity.

“People were saying it would take just two months for a ransom and then they would get double,” Aden remembered. “They invest $5,000, they get $10,000 back. That’s a good return, right?”

…

According to lawyers who handle piracy cases, pirate translators tend to be educated men from within the community who work for several different pirate gangs and are typically paid a flat fee, which can reach $200,000 — they are essentially white-collar pirates.

Members of the British Somali community took an active interest in the Chandler’s plight and started leaning on folks back home to release them.

But Buggas and the gang didn’t budge. They needed their money. Their operating expenses were growing daily, and by this point they had many creditors — some of them heavily armed — who were expecting to be paid back.

… [But] Buggas was not actually in charge. … “He was working for three or four investors who were making the decisions.”

In many Somali piracy cases, a committee of investors or creditors fronts the cash for the piracy mission, and it’s up to the head gunman to deliver a tidy profit. But finally it seemed to dawn on Buggas and his creditors that they weren’t going to make much of a profit on this one. Stephen and Ali were negotiating a payment under a half-million dollars, all the Chandler family could afford and, for the pirates, a humiliating fraction of what corporate shipowners typically pay.

The whole article is worth a read, particularly for the description of the key role that Somalis in Britain played. And, of course, all the usual issues about the incentives created whenever ransoms are paid.

What Should Economics Do in the Next Decade?

Over at Economic Principals, David Warsh summarizes 55 short papers about the big questions that face economics. Among the suggestions:

Most popular of the pitches, judging from the number of SSRN downloads, is, Why Don’t People and Institutions Do What They Know They Should?, by David Cutler, of Harvard University  (a pungent exploration of the complexity of aligning incentives within and among organizations); followed by A Complete Theory of Human Behavior, by Andrew Lo, of the Massachusetts Institute of Technology(confront and reconcile inconsistencies across disciplines, complete with summer camps for newly-minted PhDs);  Research Opportunities in Social and Economic Networks, by Matt Jackson, of Stanford University (study the patterns of interaction that most economic models abstract away); and Modeling and Measuring Systemic Risk, by Markus Brunnermeier, of Princeton University, Lars Peter Hansen and Anil Kashyap, both of the University of Chicago, Arvind Krishnamurthy, of Northwestern University, and Lo, of MIT (build network models and collect new and often sensitive data) .

…

In macroeconomics: Randall Krozsner, of the University of Chicago, offered a concise blueprint for improving the dialogue between financial economics and macro, beginning with more attention to economic history. Kenneth Rogoff, of Harvard, described a three-item wish list, including a better cost-benefit analysis of financial-market regulation. Martin Neil Baily, of the Brookings Institution, described a series of fundamental questions and appended a strong brief for evolutionary economics. Ricardo Reis, of Columbia University, suggested investigating more carefully the potential upside of transfer programs such as Medicaid, tuition assistance, disability insurance and early retirement for combating recessions. Glenn Hubbard, of Columbia, called for more modeling and estimation of fiscal policy multipliers “outside of the heat of battle of individual policy debates.” And Herbert Gintis, of the Santa Fe Institute, plumped for more agent-based modeling.

Read David’s entire post for many more.

The Supply and Demand for War

Wars are becoming more common. Writing at History Today, Kathryn Hadley reports (ht: The Browser):

New research by Professors Mark Harrison from the University of Warwick and Nikolaus Wolf from Humboldt University has revealed that between 1870 and 2001, the frequency of wars between states increased steadily by 2% a year on average.

“Steadily” might be overstating it, but there is a decidedly upward trend in a graph of their findings (from this paper):

What explains this increase?

Economic growth and the proliferation of borders.

The effect of borders is intuitive: more borders = more potential conflicts. Doubly so, in fact, since the researchers define wars as between separate states. A new border can thus transform a civil war, which isn’t counted, into a war between states, which is.

But why would economic growth encourage wars? Because it makes them cheaper:

In Harrison’s view, political scientists have tended to focus too much on preferences for war (the ‘demand side’) and have ignored capabilities (the ‘supply side’). Although increased prosperity and democracy should have lessened the incentives for rulers to go to war, these same factors have also increased the capacity of countries to go to war. Economic growth has made destructive power cheaper. It is also easier for modern states to acquire destructive power because they able to tax more easily and borrow more money than ever before.

Mark Harrison concluded that: ‘The very things that should make politicians less likely to want war – productivity growth, democracy, and trading opportunities – have also made war cheaper. We have more wars, not because we want them, but because we can.

In short, wars are up for the same reason that our offices aren’t paperless: progress sometimes increases supply more than it reduces demand.

Congestion Pricing Saves Time and Money

The Highway Trust Fund will soon be broke. Gasoline tax revenues haven’t kept up with spending, and it’s likely that demands for new highway infrastructure will grow in the future.

Joseph Kile, head of the microeconomics studies division at the Congressional Budget Office, discussed various policy options to deal with this funding gap in his testimony to the Senate Finance Committee on Tuesday. Most news coverage of Joe’s testimony emphasized his suggestion that taxes based on miles traveled, rather than gasoline consumption, might be a better way to finance America’s highways. After all, miles traveled is, along with weight, the primary driver of wear and tear on the roads. And it’s a decent proxy for the benefit that drivers get from having functioning roads.

That’s an interesting idea, but I’d like to highlight another important point that Joe made: the amount of infrastructure America should build depends very much on how we price it.

If a six-lane highway gets congested, that doesn’t necessarily mean that we need to build new lanes or lay out parallel roads.

We could charge congestion fees instead. That would discourage driving at peak times and thus speed traffic without new construction. That’s what London and Singapore famously do to limit traffic in their downtowns. And it’s something we should more here in the United States.

Joe reports estimates from the Federal Highway Administration (FHWA) that congestion pricing could decrease highway spending needs by 25 to 33 percent:

The federal government spent about $43 billion on highway investment in 2010. To maintain the same quality of highway performance would require an average of $57 billion in annual federal spending in coming years, according to the FHWA. That price tag drops to only $38 billion, however, if we make good use of congestion pricing. Congestion pricing would thus save federal taxpayers almost $20 billion per year; state and local governments would save even more, since they pay for more than half the costs of these projects.

Congestion pricing can make our roadways work better, save Americans precious time, and reduce federal, state, and local budget pressures. That a great combination in this time of growing infrastructure needs and tightening budgets.

Why Free Is a Bad Price

Marco Arment is the brains behind one of my favorite apps. Instapaper allows you to store articles off the Web for later reading; very useful, for example, when I am surfing and come across an article I want to share with my students or use in a future blog post. And the editor of Instapaper periodically shares excellent reads that I might otherwise miss.

Instapaper is currently available for both the iPhone and the iPad for $4.99. As Marco discusses in his blog, however, the iPhone version has sometimes been available for free (but with ads).

Based on his pricing experiments, Marco has decided that free is a bad model. In part that’s because ads provide weak revenues, and it’s expensive to support two versions of the app. In part it’s because the free app cannibalizes sales from the paid version.

But that’s not all. Another problem is that the free version attracts “undesirable customers”:

Instapaper Free always had worse reviews in iTunes than the paid app. Part of this is that the paid app was better, of course, but a lot of the Free reviews were completely unreasonable.

Only people who buy the paid app — and therefore have no problem paying $5 for an app — can post reviews for it. That filters out a lot of the sorts of customers who will leave unreasonable, incomprehensible, or inflammatory reviews. (It also filters out many people likely to need a lot of support.)

I don’t need every customer. I’m primarily in the business of selling a product for money. How much effort do I really want to devote to satisfying people who are unable or extremely unlikely to pay for anything.

Free is a risky price because it allows people to get something without really thinking about whether they want it. That’s why health insurers insist you pay at least $5 to see your doc or get a prescription.  And it’s why DC’s nickel bag tax has been so effective in cutting use of plastic bags.

Kudos to Marco for sharing his results and calling on others to run similar experiments. But I won’t be one of them. Free continues to be the right price here in the blogosphere.