Long Spots, Short Stripes

Ran into Felix Salmon out at the Kauffman Foundation’s economic bloggers confab. His latest Felix TV breaks the contemporary art market down into two simple metrics: $ per spot and $ per stripe.

Feliz says buy spots. But a word of warning: Damien Hirst seems hellbent on flooding the dot market. Somehow I think the price of a dot will plummet when he releases his painting with 2 million dots.

The Miracle of Chained Kidney Transplants

Most modern markets operate on money. I sell my services as an economist, for example, and use the proceeds to buy Tazo Tea, vacation trips, and a surprising number of Apple products.

But that approach doesn’t transplant well (so to speak) to living human organs. Many people find the idea of markets in organs repugnant. As a result, money-based organ markets are generally outlawed.

As economists often point out, that moral stance comes with a major cost: many people who need a new kidney can’t find one. Humans have two kidneys, but can live healthy lives with just one. So there is the potential for gains from trade between those who need a kidney and those who have one to spare. The challenge is getting enough people to donate kidneys, when it isn’t possible to compensate them with money.

Some good samaritans do donate kidneys to strangers. But that’s very rare. Far more common are people who will donate a kidney to a relative or friend. But those offers often run into a harsh biological reality. Just because you want to give someone a kidney doesn’t mean it will be a biological match.

Enter the kidney exchange. Simple case: Alice may want to donate to Bob but not be a match. Chuck may want to donate to Daphne but not be a match. But if Alice is a match to Daphne, and Chuck is a match to Bob, then can make an exchange. Alice donates to Daphne, Chuck donates to Bob, and everyone is happy. The miracle of a good match in the kidney barter market.

The trick is finding those matches and extending them to larger groups. Today’s New York Times has a moving article that illustrates how far this idea has come. Kevin Sack recounts how the 60 people shown above were linked through a chain of 30 kidney transplants thanks to the efforts of Garet Hil and the National Kidney Registry. The first donor,Rick Ruzzamenti (upper left), is a good samaritan who felt inspired to give a kidney to a stranger. The other 29 donors all donated on behalf of a friend or relative.

What made the domino chain of 60 operations possible was the willingness of a Good Samaritan, Mr. Ruzzamenti, to give the initial kidney, expecting nothing in return. Its momentum was then fueled by a mix of selflessness and self-interest among donors who gave a kidney to a stranger after learning they could not donate to a loved one because of incompatible blood types or antibodies. Their loved ones, in turn, were offered compatible kidneys as part of the exchange.

Chain 124, as it was labeled by the nonprofit National Kidney Registry, required lockstep coordination over four months among 17 hospitals in 11 states. It was born of innovations in computer matching, surgical technique and organ shipping, as well as the determination of a Long Island businessman named Garet Hil, who was inspired by his own daughter’s illness to supercharge the notion of “paying it forward.”

Dr. Robert A. Montgomery, a pioneering transplant surgeon at Johns Hopkins Hospital, which was not involved in the chain, called it a “momentous feat” that demonstrated the potential for kidney exchanges to transform the field. “We are realizing the dream of extending the miracle of transplantation to thousands of additional patients each year,” he said.

The entire article is inspiring.

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 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.

Yahoo’s Self-Inflicted Winner’s Curse

Over at Managerial Econ, Luke Froeb highlights a nice example of the winner’s curse. Like Google, Yahoo uses automated auctions to sell ads. One wrinkle is that some advertisers prefer to pay for impressions, some prefer to pay for clicks, and some prefer to pay only for resulting sales. Yahoo thus needs some mechanism to put these different payment approaches on a comparable footing:

To choose the highest-valued bidder, Yahoo develops predictors of how many clicks and sales result from each impression. For example, if one click occurs for every ten impressions, an advertiser would have to bid more than 10 times as high for a click as for an impression in order to win the auction.

Yahoo was very proud of its predictors, but was puzzled that they systematically over-predicted the actual number of clicks or sales after the auctions closed.

This is the winner’s curse in action. As auction guru (and Yahoo VP) Preston McAfee explains in the paper Luke cites:

In a standard auction context, the winner’s curse states that the bidder who over-estimates the value of an item is more likely to win the bidding, and thus that the winner will typically be a bidder who over-estimated the value of the item, even if every bidder estimates in an unbiased fashion. The winner’s curse arises because the auction selects in a biased manner, favoring high estimates. In the advertising setting, however, it is not the bidders who are over-estimating the value. Instead, the auction will tend to favor the bidder whose click probability is overestimated, even if the click probability was estimated in an unbiased fashion.

McAfee then goes on to explain how Yahoo overcame this self-inflicted winner’s curse, and other strategies to improve auction performance.

Taxi Medallions in DC: Who Would Win and Lose?

Today’s lesson in political economy: the looming battle over Washington’s cab market.

Three members of DC’s City Council (Marion Barry, Harry Thomas, Jr., and Michael Brown) want to require every taxi to have a medallion. The number of medallions would be much smaller than the number of cabs on the streets today.

As I noted a few months ago, this proposal would harm consumers more than it would help drivers. With fewer cabs on the road, it would be harder for passengers to find a ride and easier for drivers to turn down what they perceive as undesirable fares. If medallion prices rise, it may also make it easier for taxi drivers to lobby for higher fares in the future. All of that adds up to fewer cab trips.

The sponsors reportedly have close ties to some taxi drivers, so it isn’t surprising they favor drivers over consumers. What is interesting, however, is how they would favor some drivers over others.

The favored? Drivers with two or three decades on the road who are DC residents. In short, long-time incumbents who can vote.

The disfavored? Drivers with less experience or who live outside the district. In short, entrants and those who can’t vote.

This favoritism shows up in several ways in the proposed legislation:

  • Medallion prices. Under the proposal, initial medallion prices would vary by a factor of ten. A DC resident with 30+ years experience could buy a Class 1 unrestricted medallion for $500. A DC resident with 20+ years experience would pay $1,000. A non-resident with 20+ years would pay $4,000. Other qualifying drivers – if I am reading the proposal right, these would be DC residents who have filed DC income taxes for at least five years – would pay $5,000.
  • Right to purchase medallions. DC residents have priority over non-residents for most medallions, and priority further depends on seniority.
  • Property rights. Under the proposal, most medallions would become the buyer’s property and could be assigned or sold in the future. That means the driver would get the benefit of any price appreciation in the future. But that isn’t true for one category: Class 5 medallions that would be created for non-resident drivers who don’t get Class 1 through 4 medallions. Those medallions are not property and cannot be transferred; once the driver stops using them, they would be gone, and the number of taxis would decline further. (By the way, the price of Class 5 medallions is not specified in the legislation; instead it is left up to the Taxicab Commission.)

Bottom line: The proposal is a classic illustration of how the regulatory system might be used to favor (a) an organized group (taxi drivers) over a non-organized one (consumers), (b) incumbents over entrants, and (c) residents over non-residents.

The Rising Risk of Antibiotic Resistance

Scary theme of the week? Rising antibiotic resistance.

Megan McArdle highlighted this challenge in her presentation at the Kauffman bloggers event on Friday; if you have a moment, check out her chart at the 2:00 mark, showing that resistance to new antibiotics has been developing faster and faster.

You’ll hear more about resistance later in the week, as the World Health Organization will make make it the focus of Thursday’s World Health Day. It’s also the subject of a helpful overview in this week’s Economist.

Antibiotic resistance isn’t new. Indeed, as the Economist notes, Alexander Fleming identified this threat in the 1940s. But it appears to be getting worse. Evolutionary pressure combines with market failure to speed the creation of resistant bacteria:

Convenience and laziness top the list of causes of antibiotic resistance. That is because those who misuse these drugs mostly do not pay the cost. Antibiotics work against bacteria, not viruses, yet patients who press their doctors to prescribe them for viral infections such as colds or influenza are seldom harmed by their self-indulgence. Nor are the doctors who write useless prescriptions in order to rid their surgeries of such hypochondriacs. The hypochondriacs can, though, act as breeding grounds for resistant bacteria that may infect others. Even when the drug has been correctly prescribed, those who fail to finish the course are similarly guilty of promoting resistance. In some parts of the world, even prescription is unnecessary. Many antibiotics are bought over the counter, with neither diagnosis nor proper recommendations for use, multiplying still further the number of human reaction vessels from which resistance can emerge.

In economics lingo, there is an externality. If I take an antibiotic, I get the health or psychological benefits. But I also increase the odds of a new resistant strain of bacteria developing, particularly if I don’t take the drug appropriately. But patients and doctors often don’t take that risk into account when deciding whether and how to use an antibiotic.

That’s a tough problem to crack. The standard economist playbook says we ought to disseminate better information and strengthen incentives so that patients and doctors take these risks into account. Better guidelines for prescribing doctors, perhaps, along with better ways of monitoring and rewarding patients for taking the drugs appropriately. One might even consider a Pigouvian tax to discourage antibiotic use, although that raises a host of concerns of its own.

In addition, we could try to expand the supply of new antibiotics.

That raises the usual questions of how best to encourage innovation through patents, prizes, government-subsidized R&D, changes to the drug approval process, etc. But even intelligent policy can’t overcome nature itself. As the graph from the Economist suggests, the potential pool of antibiotics may be drying up.

Thanksgiving Reading

So many fascinating economic issues, so little time to blog.

Here are some of the fun items that I would have discussed in recent days if I had infinite time:

Have a wonderful Thanksgiving.