Month: September 2003

The higher the bill, the lower your tip percentage

Two psychologists studied nearly 1000 tips for restaurants, hair salons and with cab drivers. The larger the bill, the smaller the percentage tip. This is consistent with a reciprocal “payment for service” model. You pay the waiter enough to get the job done, but you don’t feel he has to work much harder to bring you a more expensive entree. Or you might simply be feeling poorer, the larger the bill.

Note that the effect levels off for sums larger than $100. After that point larger bills don’t lead to smaller tips in percentage terms. Servers also get bigger tips when they split the bills for large groups. Read here for more detail. Other research shows that servers get bigger tips if they resemble or can mimic the customer.

More confusion at the Iowa Electronic Market?

Share prices this morning at the Iowa electronic market are confusing. The average price for “recall vote share yes” is $.475 and “recall vote share no” is $.490. Sounds simple enough – very close, but Davis survives the recall. But look: “Gray Davis in” is $.40 while “Gray Davis out” is $.632?? Very confident now that Davis will get the boot. Why the radical disconnect between the two markets? Once again, if you have insights, please feel free to mail them in.

Joseph Stiglitz interview

Here is one excerpt:

WIRED: Who deserves the most blame for the crash?
STIGLITZ: I identify three or four culprits. The deregulation movement went too far, too fast. Then I have to give some blame to the Fed. Greenspan gave the “irrational exuberance” speech but didn’t do anything about it. And there was the bad accounting framework, which emphasized stock options and created a series of perverse incentives. Wall Street and Silicon Valley conspired to maintain those bad standards.

Now this bit will enrage some people I know:

STIGLITZ: I don’t like the word deregulation. I like to say “finding the right regulatory structure.”


Problems facing the Euro

Read this good article on the difficulties of maintaining the Eurozone. Here are some of the big problems:

France and Germany, which have the biggest economies of the 12 countries that use the euro, are breaking the strict budget rules governing the currency by running huge public-spending deficits. Growth continues to sputter in the euro zone, while the United States is showing initial signs of recovery. Unemployment has risen to 12.5 million. And the near-record-high value of the currency is hurting competitiveness by dampening exports. Last week voters in Sweden overwhelmingly rejected adopting the euro in favor of keeping their national currency, the krona.

Mom works, child eats

Childhood obesity rates have tripled since the early 1970s. Television, junk food, and fast food are all reasons. A recent study from the Chicago Fed highlights the role of working mothers in this problem. When the mother works, the child watches more TV, eats more junk food, and has fewer good meals at home, thereby becoming heavier. A causal impact is found, however, only for families in the top quarter of income distribution. Could hired nannies bear some part of the blame? The authors also note that schools have a financial incentive to encourage children to eat meals that are not very good for them (an argument for more school choice I might add), click here for more on that topic.

How have newspapers changed since the early 1960s?

1. They devote more space to news, about twice as much.

2. Hard news gets lower priority for space. Business coverage, sports, and special features have all risen in relative prominence, business coverage doubling in percentage terms.

3. Front pages are much more local in their orientation. Foreign stories are down from 20 percent to 5 percent.

4. Female bylines have increased from 7 to 29 percent.

5. Stories are longer.

6. Papers print more letters to the editor.

And what about overall feel?

Papers of the 1960s seem naively trusting of government, shamelessly boosterish, unembarrassedly hokey, and obliging. There was apparently no bottom to the threshold for local news and photos. Writing was matter of fact, and stories were surprisingly often not attributed at all, simply passing along an unquestioned, quasi-official sense of things. The worldview seemed white, male, middle-aged, and middle-class, a comfortable and confident Optimist Club bonhomie. With it came a noblesse oblige sense of purpose. A paper was inextricably woven into its community, a self-anointed major player almost preening with pride and duty.

From a 1999 study by Carl Sessions Stepp, recently republished in Breach of Faith: A Crisis of Coverage in the Age of Corporate Newspapering.

Addendum: Bruce Bartlett adds: “You neglected to note that over the same period, newspaper circulation fell like a rock. Perhaps people would read more papers if they were more like those in the ’60s.”

Small, Medium, Large

Ever wonder why product quality often comes in threes? (Basic, Regular, Premium. Bronze, Silver, Gold. Third, Second, and First Class etc.) When there are only two product qualities consumers are torn between two “extremes,” either of which makes them uneasy. Add a third quality and you create a happy medium. Simonson and Tversky (the cite is in the link below) report that when offered a low-end and a midrange microwave oven consumers chose the midrange 45% of the time. But when offered the same two ovens plus a high-end oven they significantly increased their purchases of the midrange. Even when few consumers buy the premium product the mere fact that it is offered can increase sales of the midrange product. Hal Varian calls this Goldilocks pricing (see discussion beginning at p.10).

OPEC, Iraq and Taxes

OPEC unexpectedly announced a cutback in production today. I wonder if the administration tacitly encouraged the cutback? At the very least, I suspect that they are secretly pleased. The increase in oil prices will mean greater funds for rebuilding Iraq – funds that the administration is having difficulty getting Congress to approve. Unlike a tax, the increase in oil prices does not require Congressional approval.

Smart credit cards: markets in self-constraint

The bottom line is simple:

Researchers at the University of Pennsylvania have one-upped “smart” credit cards with embedded microchips: They’ve developed a technique that lets ordinary card users program in their own spending parameters…The technology could let employers better manage spending on corporate cards or permit parents to get teenage children emergency credit cards usable only at locations like car repair shops, hotels or pay phones.

Programmable credit cards could let cardholders limit expenditures, for instance, to $100 a day or to spending only on certain days or at certain establishments, Gunter said. The programmable card’s added layer of security could also help cut fraudulent online use of credit cards, which has grown into a significant problem for consumers and industry. The same technology could be used in cell phones that use a smart card, Gunter said, to provide owners with ways to regulate the use of the phone by others.

For the full account click here.

What caused the London power blackout?

Today’s Financial Times offers an interesting Op-Ed (registration and subscription required), here are two bottom lines:

First, since the 1990s the rate of investment in the British electricity grid has nearly doubled.

Second, British electricity is more reliable than ever before:

The halcyon days when ‘things were better’ never existed. Since privatisation, the number of power cuts has fallen by 10 per cent and the duration of those cuts has fallen by nearly a third.

OK, the author is Callum McCarthy, chief energy regulator in the UK, and he presumably has a vested interest in defending the status quo. And I don’t understand his convoluted take on overcapacity and price history, as I read McCarthy he is committed to both high and low prices at the same time, these equivocations make me more skeptical about his conclusions. Still, his perspective deserves wider circulation.

Are stock traders just random?

Nature reports this new article on the stock market, which purports to show that trader behavior might simply be random. I haven’t read the whole piece yet, but I worry when it characterizes the mainstream view as suggesting that all traders are fully rational. I don’t consider myself an advocate of the efficient markets hypothesis, but the notion is more modest than that. Still, anything published in Nature is newsworthy.

More on price gouging

Click here, here (scroll through, their archives aren’t working), and here to read some responses to my earlier post on why we do not see more price gouging.

I agree gouging should not be illegal, the question is why the refusal to gouge persists when gouging is legal. Here are some possibilities:

1. People are just irrational, gouging would be an improvement over shortages.

2. Gouging would violate fairness constraints, break down our trust in business, and lower the overall gains from trade.

The above links discuss these options. Last night I was pondering another hypothesis, to be sure it has some holes, but since the absence of gouging is often a puzzle, let us look more closely.

3. Non-gouging is a form of price discrimination that raises long-term profits, for reasons that have nothing to do with fairness constraints.

I was first pondering the case of airlines. It is sometimes argued that airlines keep coach quality low deliberately, to raise the demand for business and first class tickets. I don’t know if this is true, but an analogous argument can be made in the intertemporal context. If flashlights are scarce when a storm comes, the pre-storm demand for flashlights will rise. Conversely, if the flashlight market clears when a storm comes, fewer people will stock up on flashlights in the first place.

Assume that right now flashlights cost $5 (laugh at this number if you want, I haven’t bought a flashlight in ages). If prices cleared the market every period, flashlights might cost $20 when there is a storm, and $4 otherwise. Both the wealthy and the careless might hold off on flashlight purchases, knowing they can always get one at the last minute, if they need to. So fewer flashlights are sold up front. By keeping flashlights scarce during a storm, the store forces people to invest in a flashlight now as a form of insurance against not being able to get one later. This might raise the overall demand for flashlights. In similar fashion, perhaps sports arenas (another classic venue for non-market-clearing prices) may not wish to give everyone the option of showing up at the last moment to purchase tickets.

What are some of the holes in this argument? First, the store must have some market power (but note that most plausible explanations of sales and coupons require this same assumption). Second, the numbers need not work out in favor of keeping the price steady. Third, why would this effect hold for flashlights and not for all commodities? Fourth, I can think of gouging cases where this argument would not apply. I recall a peanut butter shortage about twenty years ago, and the market did not clear, it is hard to imagine that this encouraged people to stock up on peanut butter.

Still, the absence of price gouging is a puzzle, and we need to look at all available explanations. Intertemporal considerations might be part of a broader understanding of the phenomenon. Perhaps market-clearing prices don’t boost profits as much as we would otherwise expect.

Addendum: Gary Leff offers an instructive post on the pricing of airline seats, more generally check out his excellent travel blog.