Month: April 2006

Why are all songs the same price on iTunes?

99 cents, but the deals expire in two months.  Apple insists on keeping a single price across the board.  Why might this be?  Why might the retailer care more about price predictability than the wholesalers?

1. The confusion and resentment costs of different prices might be blamed on Apple.  But surely we see different prices in many other retail arenas.

2. Perhaps Apple is solving a status game problem.  If everyone else is selling for 99 cents and your song sells for $1.20, yours looks special.  Music companies might set prices too high, not taking into account the lower demand for iTunes, and music, more generally.

3. Could Apple be enforcing music company price collusion, while receiving implicit kickbacks in the rights agreements?  This would require the complainers to be in the minority.

4. Apple makes much of its money on hardware, especially iPods.  Low song prices  cross-subsidize the hardware, to some extent at the expense of music companies.  That said, some music companies wish to charge lower not higher prices.

5. Hit songs are kept at artifically low prices to discourage people from moving into the world of illegal downloads.

6. Price is a signal of quality and Apple doesn’t want to admit it carries "lemon" songs.  But won’t demand for the hits go up?

7. Uniform pricing is a precommitment strategy for a durable goods monopoly game.

We must distinguish two aspects of the problem.  First, Apple wishes to control retail prices.  Second, Apple wishes to make all retail prices the same.  Which of these features is more important for understanding the problem?

Here is a proposal for determining prices by auction; no way will we see it.  Here are rumors that the uniform pricing will end.  Note that the Japanese store already has two tiers of prices.  How about keeping the price the same, but bundling hot songs with less desirable ones?  Way back when, we used to call these "record albums"…

The Great State of Northern Virginia

Competitive federalism has many advantages.  Citizens can move to communities that better reflect their preferences for public goods, they can vote with their feet, thereby penalizing poorly performing governments, and they can serve as a salutary example for others by trying out new ideas in governing.   

Yet, in 1789 the United States had 13 states and four million people.  If the number of states had grown as fast as the number of people or if
we in the United States had about the same amount of federalism as do
the contemporary Swiss we would today have about 1000 states.

I think we need more states.  If 1000 sounds extreme why is 50 the magic number?  And why is 50 the magic number when the population is 150 million as when it is 300 million?

James Buchanan (my colleague not the one who was President) once asked, "Who will join me in offering to make a small contribution to the Texas Nationalist Party?  Or to the Nantucket Separatists?"  I side with Jim, in saying sign me up!

Jane Jacobs passes away

Here is a NYT obituary.  Her The Death and Life of Great American Cities is one of the best books I have read.  From the NYT:

In her book "Death and Life of Great American Cities," written in 1961,
Ms. Jacobs’s enormous achievement was to transcend her own withering
critique of 20th-century urban planning and propose radically new
principles for rebuilding cities. At a time when both common and
inspired wisdom called for bulldozing slums and opening up city space,
Ms. Jacobs’s prescription was ever more diversity, density and dynamism
– in effect, to crowd people and activities together in a jumping,
joyous urban jumble.

The Fox News Effect, revisited

Earlier today I reported on a "new" study of how Fox News influences voting patterns; the authors concluded:

We find a significant effect of the introduction of Fox News on the vote share in Presidential elections between 1996 and 2000.

On Wikipedia, however, you can find this link, to a May 2005 version of the paper, by the same authors.  (An alert reader, "MN," pointed me to this.)  Then the authors concluded:

We find no significant effect of the introduction of Fox News on the vote share in Presidential elections between 1996 and 2000.

Hmm…there is much to be said for changing your mind.  Given my motivated dentist and my forthcoming trip to Chicago, I don’t have the time to get to the bottom of this discrepancy, but comments are open in case you can explain how and why the two papers differ.  I am glad I titled that earlier post "Fox News Seems to Matter".

Addendum: Mark Thoma had noted the same a few days ago.

How to motivate your dentist

Sitting in the dentist’s chair yesterday, and knowing I will return tomorrow (don’t worry, it is only root canal work), I realized I had nothing to read.  So I started thinking about the immediate incentives of the dentist, or lack thereof.

I have a very good dentist, but surely there is variation in the willingness of a dentist, across patients, to try harder and do a better job. 

When there is no incentive at all, perhaps the dentist does not try hard enough to alleviate your pain.  Yes there is long-run reputation, but Daniel Kahneman and others find that the duration of a pain has little bearing on your memory of that pain.  So patient reports, as they are filtered into the marketplace, are an imperfect signal.  Furthermore for any given average reputation your dentist seeks, you still want to receive relatively favorable treatment within the distribution of patients.

You might pay a bonus at the end of the visit, if you thought the performance of the dentist was especially good.  But then the dentist might put you though too little pain.  "Fragmented tooth?  Don’t worry, you can ignore it."

Last year I stopped going to a dentist who put me through too much unnecessary pain while cleaning my teeth.

Perhaps you should pretend you are a dentist yourself?  (Toward that end, here is a dental dictionary.)  Or a lawyer?  Should you talk about the breadth of your social circle?

With my new dentist, I pretend to have no fear.  And at the end of the visit I said what a great job she did.  I expect better performance by supporting her self-image as a good dentist and I find high-powered incentives difficult to apply.

But might I improve on this approach?  Comments are open…

Fox News seems to matter

Does media bias affect voting? We address this question by looking at
the entry of Fox News in cable markets and its impact on voting.
Between October 1996 and November 2000, the conservative Fox News
Channel was introduced in the cable programming of 20 percent of US
towns. Fox News availability in 2000 appears to be largely
idiosyncratic. Using a data set of voting data for 9,256 towns, we
investigate if Republicans gained vote share in towns where Fox News
entered the cable market by the year 2000. We find a significant effect
of the introduction of Fox News on the vote share in Presidential
elections between 1996 and 2000. Republicans gain 0.4 to 0.7 percentage
points in the towns which broadcast Fox News. The results are robust to
town-level controls, district and county fixed effects, and alternative
specifications. We also find a significant effect of Fox News on Senate
vote share and on voter turnout. Our estimates imply that Fox News
convinced 3 to 8 percent of its viewers to vote Republican. We
interpret the results in light of a simple model of voter learning
about media bias and about politician quality. The Fox News effect
could be a temporary learning effect for rational voters, or a
permanent effect for voters subject to non-rational persuasion.

Here is the link and paper.

Negative charity

Buried away in a tiny Telegraph column this week was a reference to one of the best academic studies
to emerge in a long time. Doctors in a Scottish hospital have looked at
the hidden costs of charitable parachuting, to the health service in
particular, and published the results in the journal Injury (the link
is to the abstract unless you or your institution subscribe). They
found that the injury rate was 11% and the serious injury rate 7%.
Minor injuries cost the National Health Service £3751 on average and
serious injuries £5781.

As the average parachutist raised all of
£30 (this is just a day out after all) each pound raised for charity
cost the NHS £13.75. Every one of the charitable types who feels
terribly virtuous raising money for charity in this way is actually
preventing the health service treating the sick.

Here is the link, and thanks to Matthew Sinclair for the pointer.  Can you think of other comparable examples of negative charity?

Addendum: Jeff Ely directs my attention to this example; buy and drink some water, so that Starbucks will donate money to address the water shortage (in other countries).

Where should you send your kid to college?

Attendance decisions are due May 1, so what should you do?  If parents (and their children) are loaded with biases, is behavioral economics useful? 

I suspect the core bias is parents wanting to feel they have done everything possible to help the kid, rather than maximizing the kid’s (or the world’s) expected return.  This will lead parents to ignore the upsides of risky courses of action.  Who wants to send the kid to the wrong school and feel guilty for the rest of your life?  But if the school works out especially well — your kid wins a Nobel Prize rather than your kid "merely" receiving tenure at an Ivy League school  — the parents are not so much happier.  "More pride" is only a little better than "pride," and most of your kid’s accomplishments you will overvalue and exaggerate anyway.  So parents put too much stress on the possible downside and not enough weight on the potential upside of a choice.

If your kid is very smart and takes plenty of initiative, maybe you should send him to a large school with lots of resources.  He will be able to hook up with the interesting people and they will have a better choice of peers.  If your kid has true intellectual upside, those extra resources will yield a very high return.  Even if Middlebury gives a better undergraduate education than Harvard, the best undergraduate senior economics major at Harvard will have a bigger head start in his or her career.

That being said, if you follow this advice you probably will regret it.  It is not geared toward the median case or the modal case.  Perhaps you already are upset at this blogger for suggesting that your kid should be a sacrificial lamb, offered up to the altar of scientific progress.  Or perhaps you (and your kid) feel flattered.

Another view is that most people overestimate the intelligence of their kids.  Too many parents obsess over Harvard when they should be wondering about Podunk U..  That point is well-taken, but being a fan of overoptimism, I find the first story more plausible.  So look at the total endowment of the school, not the per capita endowment.

Your thoughts?  Don’t focus on general advice for parents, tell us what you think the relevant behavioral bias is, how to correct for it, and distinguish between returns for students, parents, and the broader world. 

My favorite things New York City

1. My favorite demographic charts: Track population changes by borough.

2. My favorite NYC dining guide blog: Click on the categories on the top row of the blog to see the whole thing.

3. Favorite neighborhood: To live in?  Manhattan is getting so uncool.  I will pick the corner of Hudson and Barrow, which is near W. Houston and the West Side Highway, just north of the Saatchi building.  There it still looks and feels like the New York City I grew up with (from New Jersey, that is).  But when will I have the money and the courage to try?  The Upper East Side bores me and the best food is in Queens; neither is suitable for real life.

4. Favorite book about: Waterfront: A Walk Around Manhattan, by Philip Lopate.  I am surprised how few people know this one.  Compulsively readable, and it makes me want to write a comparable work.  But "A Drive Around Fairfax"?  No way.

5. Favorite dim sum: Oriental Garden, in Chinatown, Elizabeth St., make sure to arrive early.  Don’t forget Flushing, especially if you have time to kill at LaGuardia.  The juicy pork buns at Joe’s ShanghaiJackson Diner is still great Indian food though it is not the revelation it once was; the competition has caught up with it.

6. Best lunch bargain: Nougatine, the bistro attached to Jean-Georges.  Get the venison with green chiles for its amazing mix of textures and heat.

7. Favorite Seinfeld episode: How about Master of His DomainSoup Nazi is overrated and in fact I don’t even like it.  The one where Jerry and Elaine try to be together again is another favorite, plus Show Within a Show.

8. Favorite free activity that even most New Yorkers don’t do: Browse the auction displays at Christie’s and Sotheby’s, especially before the major auctions in May and November.

Movies, music, literature?  Not today.  You might as well try "My Favorite Things Not in New York" for an easier task.

War & Peace & War

The core theses of this book are straightforward:

1. Some societies face multiethnic frontiers, and they respond by developing higher levels of cooperation.  You have to bind together to clear out and kill those Indians.

2. Eventually the result is empire.

3. Empires decay.  They wallow in luxury and the preconditions behind their previously high levels of cooperation go away.

4. The ability to cooperate is the key variable in human history.

So argues Peter Turchin — a professor of ecology — in his recent War & Peace & War: The Life Cycles of Imperial Nations.  Imagine Jared Diamond’s method extended into the formation of empires and the origins of war, with a dose of Hari Seldon, and you have this book.

In addition to the broader theses, Turchin takes on why Europe stayed disunited after the collapse of the Carolingian Empire (disunity was the default setting), why the eastern and western parts of the Roman Empire took such different courses (the Eastern Empire was largely a new creation), why the fall of the Roman Empire has earlier roots than you think (the frontier changed in nature), and why the Russians have been so obedient to tyrannical rulers (egalitarian structures, combined with a frontier).  The author does not shy away from bold claims, nor does he give much attention to possible counterexamples; try his other books for further support but don’t expect your doubts to be resolved.

Some of the sentences scare me: "Cliodynamics predicts complex dynamical behavior for historical empires, with shorter cycles embedded within longer cycles, and so on [sic]." 

If you judge a book by its vulnerability to criticism, this one makes for easy pickings.  But Tolstoy wasn’t crazy, Ibn Khaldun is more important than you think, and Turchin will tell you why.  Recommended, especially for those who like fearless and speculative minds.

Why don’t we have tax futures?

Some of the earliest and most popular prediction markets (per se) have been linked to elections, but predicting tax rates is much more to-the-point in terms of financial risk-sharing.  The
existence of such markets would also frame the operation of the
government in a way that would encourage fiscal responsibility, and
give dispersed interests some recourse against inefficient spending.

Here is the full post.  It is suggested that everyone wants to hedge against higher marginal rates, thereby making the market one-sided.  But doesn’t somebody benefit from taxes going up?  Thanks to Chris F. Masse for the pointer.