David Gerard

Author: David Gerard

The Prisoners Dilemma and Corrupt Figure Skating Judges

The Olympics are upon us, and economists of many stripes are gathering to watch the figure skating, dish about the routines and outfits, and speculate which judges are corrupt. Fortunately, one of our own, Eric Zitzewitz of Dartmouth, has been gathering data to give us the low-down on the corruption problem. Ray Fisman discusses the research in a recent Slate piece.

The 2002 Winter Games in Salt Lake City were tainted by a figure skating scandal in which judges from five countries allegedly colluded to deliver victory to a Russian couple over a pair of Canadians…. [Economist Eric] Zitzewitz found that the “home judges bias” added nearly 0.2 points to skaters’ scores (on a six-point scale), often enough to boost their ranking by at least one position. [H]aving a countryman on the panel helped a skater not just through the direct effect of that one judge’s scoring–the home-country judge also convinced others on the panel to inflate their scores.

What was the solution? Well, perhaps paradoxically, it was to make judges anonymous and set up the classic prisoners dilemma situation. In other words, if we agree to give each other’s skaters inflated scores, then I need to be able to observe what score you give to ensure that you are keeping up your end of the bargain. Absent that, your strategy should be to “defect” from our agreement because your skater certainly benefits from the rival’s lower score.

Was that the effect? In a word: No.

The home-country bias gets even worse when anonymous judges can hide from a scrutinizing press and public, despite the barriers that anonymity may create for effective backroom deal-making. The home-judge advantage under the new system is about 20 percent higher than in the days of full disclosure. (Zitzewitz can’t say how much of this increase in bias is from the home-country judge himself, and how much from others he’s persuaded to go along with him; how each judge has scored a performance–and which judges’ scores are counted–are kept secret.)

Fascinating either way. Perhaps they should find figure skating judges from countries that don’t have any serious figure skaters?

On the Enforcement of Private Customs

Any economist with an understanding of institutions (the “rules of the game”) will tell you that a rule, even a public law, doesn’t mean anything if it isn’t enforced. So a big question concerns what it means to be a rule — are informal norms and customs legitimate?

I was thinking about this as I got this piece of news from my old stomping grounds:

Longtime Pittsburghers know the unwritten code of saving parking spaces with a chair, and the tradition is in full effect after a storm dumped 20 inches of snow on the city last weekend.

Neighborhood justice can be swift — like in Squirrel Hill, where someone cleared a spot on Hobart Street and left a chair, but the chair was later moved and another car parked there. That car somehow became buried in snow, and a sign left at the scene said, “Now yinz know not to break the rules.”

Here’s the story.

I disagree with the story on one front: you don’t have to be a longtime “yinzer” (a.k.a., a person with Pittsburgh roots) to know about the consequences of violating “the chair” rule. After my first few months there, I realized that people kept chairs specifically for the purpose of blocking off parking spaces.

Well, now yinz know.

Schumpeter Day Tea, That Is

The folks over at Organizations & Markets remind us that it’s Schumpeter Day again (where does the time go?). The nation-wide celebrations commemorate the birthday of the prominent economist, who plied us with such memorable lines as this:

The process of Creative Destruction is the essential fact about capitalism … it is not [price] competition which counts but the competition from . . . new technology . . . competition which strikes not at the margins of profits . . . of existing firms but at their foundations and their very lives.

The Economics TBA / Schumpeter Day High Tea at 4 p.m. today (along with “Reading Days”) will serve as a kick off for the Innovation and Entrepreneurship Reading Group. We will begin blogging the text later this week.

See you at 4

Update: The tea was once again a resounding success, with the student faculty ratio of better than 3:1. I still think offering caffeine could boost our numbers.

Don’t Forget the Monday Economics Tea, 4 p.m.

Following the success of the inaugural Economics TBA, we will be breaking out the hot beverages and cookies once again this coming Monday at 4 p.m. (Caffeine available upon request).

This should work out splendidly for you with classes running until 4:20, as I’m certain that both the water and the conversation will be heated by that point.

See you there!

Revisiting the Amazon-Macmillian Fracas

The dust is settling on the, well, the dust up between Amazon and Macmillian over eBook prices. There are some excellent posts from Virginia Postrel, Lynne Kiesling, and Megan McCardle. Some great Industrial Organization topics here, like price discrimination, resale price maintenance, and why entry by Apple here is leading to higher retail prices. (Did he just say entry is leading to higher prices? Yes, he did).

Well, as we try to sort that out, it appears the dust is on the rise again, as a third publisher is demanding the “agency model” in the pricing of e-Books.

The future of the $9.99 e-book is in danger. A third major publisher, Hachette, is going for Apple’s agency model in order to sell e-books for up to $14.99 apiece, the company revealed in a memo to agents.

Following Amazon’s public dispute over e-book prices with Macmillan early this week, Hachette is also seeking a shift to the agency model, which allows the publisher to set the price for the e-book, while the retailer keeps 30 percent of the sales.

I wonder if that “agency model” bears any relationship to the “principal-agent” problem we will be covering in 450 after the break?

Stay tuned.

Shine a Light… Life After Lawrence Edition

It’s never too early to think about what you are going to do after you leave Lawrence. In fact, thinking about what you might do after graduation could well open up some exciting opportunities whilst you are still here in the friendly confines of Appleton.

A week from Sunday, February 14, St. Valentine’s Day, and the last day of the reading period, 25 alumni will be on campus for the Shine Light, More Light on Your Future conference. I strongly recommend that you seize the opportunity to meet our alumni and discuss their career paths and experiences. They are here because they love Lawrence and want to help folks just like you.

Looks like a really solid lineup, including my mentor, Alan Parks! And, there’s probably free food, too.

Continue reading Shine a Light… Life After Lawrence Edition

McOutsourcing in Moscow

Solid New York Times piece on McDonald’s in Russia. To wit:

The company celebrated a different milestone earlier this year by outsourcing the last product — hamburger buns — it had made at a proprietary factory outside Moscow called McComplex. It was built before the chain opened its first restaurant. Nearly everywhere else, McDonald’s buys ingredients, rather than making its own. But in the Soviet Union, there simply were no private businesses to supply the 300 or so distinct ingredients needed by a McDonald’s outlet.

Everything — from frozen French fries to pie filling — had to be made from scratch at a sprawling factory.

McDonald’s is always a good lens through which to view the 118 or so countries where it operates. In the 20 years since McDonald’s arrived in Russia, enough private enterprises have sprung up to supply nearly every ingredient needed to operate one of its restaurants.

Today, private businesses in Russia supply 80 percent of the ingredients in a McDonald’s, a reversal from the ratio when it opened in 1990 and 80 percent of ingredients were imported.

Fascinating stuff. I could probably write an entire final exam around that passage.

There’s No “I” in “Normative Codes of Coduct”

On the heels of our 450 test, there is an interesting post over at Organizations and Markets about some empirical work on Alchian & Demsetz’s team production problem. The issue at hand is, of course, how to enhance cooperative behavior.

We find that neither verbal framing with company cues nor the recruitment test have a significant effect on cooperation enhancement whereas the introduction of normative codes of conduct significantly boosts cooperation. This effect is even stronger when codes of conduct are combined with the recruitment test.

Looks like an interesting piece and a potential future classroom experiment.

No mention of the effects of firing the grocer, however.

Give Me a “TEA”

Don’t forget, the Economics Tea kicks off today at 4 p.m. in Briggs 217. “Free” cookies and discussions of maximizing behavior. If you are reading this, presumably your attendance indicates a well-specified objective function, whereas your absence is due to high marginal costs rather than an information problem.

If you find that amusing, then this will definitely be your kind of crowd.

Did Amazon Blink?

Looks like Amazon might have blinked.

Dear Customers:

Macmillan, one of the “big six” publishers, has clearly communicated to us that, regardless of our viewpoint, they are committed to switching to an agency model and charging $12.99 to $14.99 for e-book versions of bestsellers and most hardcover releases.

We have expressed our strong disagreement and the seriousness of our disagreement by temporarily ceasing the sale of all Macmillan titles. We want you to know that ultimately, however, we will have to capitulate and accept Macmillan’s terms because Macmillan has a monopoly over their own titles, and we will want to offer them to you even at prices we believe are needlessly high for e-books. Amazon customers will at that point decide for themselves whether they believe it’s reasonable to pay $14.99 for a bestselling e-book. We don’t believe that all of the major publishers will take the same route as Macmillan. And we know for sure that many independent presses and self-published authors will see this as an opportunity to provide attractively priced e-books as an alternative.

Kindle is a business for Amazon, and it is also a mission. We never expected it to be easy!

Thank you for being a customer.

More on the Amazon-Macmillian Fracas

Excerpts from a very illuminating discussion:

Greed, no doubt, exists on both sides, living as we do under capitalism, but greed alone doesn’t explain the dispute. Yes, Amazon wants to sell e-books for $9.99 or less, and Macmillan wants Amazon to sell them for $15 or less. But as Macmillan’s CEO John Sargent explains, in a statement released today as an advertisement to the book-industry newsletter Publisher’s Lunch, Amazon and Macmillan aren’t at the moment fighting to see who can make more money on a book sale. They’re fighting to see who can lose more money. This is a very peculiar battle.

,,,

Most publishers have until now sold their e-books to Amazon for the same wholesale price that they sell their hardcovers–roughly half the hardcover’s list price. It is up to a retailer like Amazon whether to sell the book to consumers at its list price, as printed on the inside front flap, or at a discount. With e-books, Amazon has usually offered a discount so low that it actually loses money. That is, Amazon buys for $12 an e-book whose hardcover list price is $24.95, and then Amazon sells the e-book to its customers for $9.95.

…

Macmillan has probably been selling its e-books to Amazon at the wholesale price of about $12, and Amazon has been selling them retail for about $10. Macmillan says that it would like to sell its e-books at the wholesale price of about $10.45, and have Amazon sell them for the retail price of $14.95. In other words, Macmillan was offering to earn $2 less per e-book. Amazon, however, insisted that it would prefer to take a $2 loss on each e-book, instead, and became so indignant over the matter that it has now ceased selling any Macmillan titles, print or electronic. Macmillan’s proposal is known as the “agency model” for e-book pricing, and the company probably only dared attempt it because Apple has promised that it will sell e-books for its new tablet on exactly those terms. (Amazon has said that they’re willing to accept the agency model, starting in June, but only if an e-book’s list price does not exceed $9.99.)

…

Thank you, Mr. Shatzkin.

Big Apple Stirs Up Bezos’ Hive

A few months ago we saw Amazon and Walmart and Target engaged in some aggressive price competition in the sale of on-line books. I haven’t heard to much on that front of late, so I assume that the dust has settled and those firms will fight another day. Amazon is back in the thick of things, this time aggressively defending its Ebook turf from the encroachment of Apple and its new iPad.

The book world is all a flutter. Here’s a note from one of friend of mine, who has intimate knowledge of the sordid dealings of the book world (edited for content; these book people drink like journalists and swear like sailors):

So this ebook pricing conflict is getting serious. Amazon has pulled all of Macmillan’s titles from its store — physical, ebook, etc. — in response to Macmillan wanting higher prices for some kindle editions than $9.99. So, for example, you can’t buy any Picador titles. That’s a lot of bestselling books.

[I’m not certain I agree with Amazon’s actions here]. To dictate $9.99 for all books and instill that price point in readers minds as the only appropriate ebook price is just ridiculous — especially when they’re losing money on every kindle edition they sell of a hardcover book.

And this:

So it’s about Macmillan trying to switch over the agency model of pricing, which is what Apple is offering with their new ibookstore. It makes a lot more sense than the distribution model that Amazon uses for ebooks.

Nothing like a good old fashioned price squabble to keep things interesting. I’m looking into the details of this “agency pricing” model and of course will let you know when I find out.

Stay tuned to this space.

Update: This stuff is so delicious I just want to take a big bite out of it. It appears to be more of a market power argument than a transaction costs argument. And it appears this may well have all come to a head with or without the iPad.

Thanks to my source, “The Big Stick,” for the tips.

The Rise and Fall of Investment Banking: Theory of the Firm Edition

For those of you taking a break from trivia to study for a 450 Exam, Daniel Gross gives a broad brush account of the importance of ownership structure and agency issues. Here’s the basic argument: (1) investment banks go public (i.e., allow members of the public to buy ownership shares); (2) raising equity capital allows banks to expand and compete with international considerations; (3) growth in size correlated with a growth in clout, whereby banks effectively “captured” regulators; (4) growth in size led to acute agency problems, whereby management plundered shareholders a la Berle and Means.

Whew, that was fast.

Reading Group (?): Innovation and the Gales of Creative Destruction

A number of faculty members have formed a reading group for issues of innovation and entrepreneurship. Fittingly, it is called the Innovation and Entrepreneurship Reading Group.

Our first book is Thomas McCraw’s award-winning Prophet of Innovation: Joseph Schumpeter and Creative Destruction. Schumpeter is a central figure in entrepreneurship and innovation scholarship, and is closely associated with the idea that entrepreneurship drives economic growth. He describes innovation as a “perennial gale of creative destruction,” whereby new ideas and products destroy and displace the status quo. Hence, innovation is not unambiguously good thing, as by its very definition it creates classes of winners and losers.

Schumpeter provides the conventional framing of the innovation process as a triumvirate — invention, innovation, and diffusion. Invention is simply the development of a new idea or technology. He argued that inventions were not the story, and that innovation was associated with creating value of the idea. By this definition, innovation is not restricted to technological phenomena. An organization can be innovative by restructuring or doing things in a different way, provided, of course, that there is some value added.

If you are interested, check The Moodle for more information. Or you can contact me directly. I would be happy to spend some time with any student or group of students interested in discussing the book.

Market Failure and Drug Approval

Here’s a question for you true believers out there, is there a market failure rationale for FDA approval of pharmaceuticals and medical devices? And, if so, what is it?

Well, that’s exactly the question that Daniel Klein and Jason Briggeman of George Mason University asked more than 300 economists with expertise in health economics, the FDA, information and uncertainty, and regulatory policy.

They asked you, too, and you can check it out by participating in this 25-minute interactive exercise.

For those of you without 25 minutes, here’s a snippet:

Due to pre-market approval, drugmakers face costs, delays, and uncertainties that suppress the development of new therapies. Famous studies of the introduction of beta-blockers showed that many tens of thousands of American deaths could be attributed to the delay between approval in Britain and in the United States. Scores of other drugs have been delayed that plausibly would have saved many other lives. But pointing concretely to delays in the approval of well-known drugs can only illuminate a potentially larger problem: the extra costs and uncertainties imposed by the pre-market approval process may prevent the development of many drugs. Those losses–of not-developed drugs, of wouldhave-been benefits–are impossible to identify or quantify, but they are no less real.

I would be very interested to hear your thoughts both before and after your take the survey.

This Means You!

Peter Temin has a new NBER paper on one economic historian’s view of the current debacle. Here’s the abstract:

This paper discusses parallels between our current recession and the Great Depression for the intelligent general public. It stresses the role of economic models and ideas in public policy and argues that gold-standard mentality still holds sway today. The parallels are greatest in the generation of the crises, and they also illuminate the policy choices being made today. We have escaped a repeat of the Depression, but we appear to have lost the opportunity for significant financial reform.

Let me know how this one turns out.

The Citizen Kane of Macro Battle Rap Videos

Do you find that your friends lose interest when you start discussing the nuances of Keynsian and Hayekian views on boom-and-bust cycles? Well, this might be just the video to help you get your point across.

The messages seem to align with my admittedly-limited understanding of macro theory, and I’m pretty certain Russ Roberts knows more about these issues than I do. And it has received critical kudos from Alex Tabarrok.

Catchy, too.

I’ll look forward to hearing this blaring in 120 and 320 in the coming years.

Enjoy!