Month: February 2016
Wednesday assorted links
1. MIE: clothes designed especially for wheelchair users.
2. The market-facilitating role of the Roman state.
3. Martin Gurri and Scott Adams as early understanders of the Trump phenomenon. And using “The Apprentice” to teach a managerial economics class.
4. Canadian Jeopardy protectionism — are anti-spam laws to blame?
5. Time series that move through X-Y space.
6. Does the Caribbean have an economic future?
7. “At the moment, the stress in the financial sector has a clear cause: the energy debt held by banks.“
“Are Choosers Losers?”– the value of control and the propensity to underdelegate
This is one of the more understudied behavioral biases, so I was pleased to see this new paper by Bobadilla-Suarez, Sunstein,and Sharot:
Human beings are often faced with a pervasive problem: whether to make their own decisions or to delegate decision tasks to someone else. Here, we test whether people are inclined to forgo monetary rewards in order to retain agency when faced with choices that could lead to losses and gains. In a simple choice task, we show that even though participants have all the information needed to maximize rewards and minimize losses, they choose to pay in order to control their own payoff. This tendency cannot be explained by participants’ overconfidence in their own ability, as their perceived ability was elicited and accounted for. Rather, the results reflect an intrinsic value for choice, which emerges in the domain of both gains and losses. Moreover, our data indicates that participants are aware that they are making suboptimal choices in the normative sense, but do so anyway, presumably for psychological gains.
I believe this is one reason why individuals can be so tribal, because otherwise they fear losing control to outsiders.
Why don’t better movies cost more?
This is from an email from Ashok Rao:
You might have addressed this. On iTunes – to some extent – they do, though this appears to matter more with something you might call “scale of production” than quality of movie. Avatar is still at $15 compared to $10 for most others mainstream films (with very crappy and very lowbrow comedies sometimes lower).
But in general it seems absurd that westerns that I’ve never heard about cost as much as Harry Potter. Some points:
Does the movie industry – and ensuing bargaining with important agents like Apple – prefer completely homogenized pricing? Certainly it might be negative signaling that “we know this movie is trash” but that shouldn’t matter after the initial critic and audience review cycle is over.
A lot of crappy movies might make for good TV fodder, though the pricing structures are complicated enough that I have no idea exactly where or how this happens.
The comparison doesn’t even need to be on quality. How on earth does Godfather still cost $15 a pop – isn’t it going to be in the public domain soon?
My gut tells me piracy is a key instigator though I don’t know how exactly. Logically I feel it’s just the opposite. The price elasticity of someone who will not pirate to begin with is much lower than someone who will, on average…
Are there multiple equilibria? 1) Given that the price elasticity of non-pirates is low, you can and should charge them similar rates but 2) Given that pirates are highly elastic it makes sense to price quality.
Is the fact that I’m browsing on iTunes at all enough of an information signal to segregate the market?
It appears Netflix is what will change this entirely, and iTunes prices are completely irrelevant because no one plans on buying Sharknado 2 in HD anyway.
The other interesting question (which also requires a finessed understanding of Netflix economics) is comparing the entertainment value of television vs. cinema on the dollar. It appears there is a “timepass” value to both and a completion value for movies (and TV as well, but distributed over n episodes so basically 0).
One season of TV, which might be about 20 hours of entertainment, is frequently only 2x one movie which might be 2 hours of entertainment. Is the “scale of production” and completeness factor enough to justify 10 hours of entertainment? It is also the case that the median show and median movie are converging in parity on the margin, and increasingly on average too. – You would have to watch many hours of TV before reaching a cliff in quality where the marginal movie is dramatically better than the marginal show, versus a baseline of the best show vs. best movie.
If you insist on legal purchases only learning to read subtitles on Hindi movies is also a really cheap hack to amazing entertainment – foreign films otherwise tend to be too highbrow though that might be a rather lowbrow thing to say.
These are of course “demand side” factors, though after a reasonable period of time the supply side should largely be a sunk cost and somewhat irrelevant.
By the way, there is a new app –called Atom — which among other things will help groups of moviegoers receive discounts for movies which are doing less well.
And here is my earlier post on the uniform pricing of movie tickets.
My conversation with Nate Silver
The video, podcast, and transcript are here. Nate of course was excellent, here are just a few bits:
COWEN: What are the differences between forecasting and futurism, and do you have any predictions for the year 2050? They don’t have to be great. They just have to be better than the market. We’ll take a 52 percent prediction and go home and celebrate.
SILVER: I’m mildly pessimistic in some ways.
COWEN: What’s the biggest source of your pessimism?
SILVER: [laughs] There’s probably some survivorship bias in the United States, and thinking about how our way will persevere forever and ever and ever. We were talking backstage about how you go to Asia and I go to Asia — not as often as you. If you want to feel optimistic about civilization, then go there.
And:
COWEN: You’re a fan of baseball, and I’d like to ask you, of all the different baseball records, which is the one that is most impressive to you, or the most a statistical aberration, and try to stay a bit modern. We both know in 1889, Hoss Radbourn won 59 games.
Start with [Owen] Wilson’s — was it 36 triples in 1912? That, and up through the modern age. What’s the most statistically impressive baseball record, and why?
SILVER: I think the biggest outlier is the number of intentional walks that Barry Bonds drew. I forget what year it was, 2001, where he had like 161 intentional walks, and the next closest player is 50?
And:
COWEN: Singapore. Overrated or underrated?
SILVER: Underrated except by you.
There is of course much, much more, including remarks on the candidates and the elections, as well as My Bloody Valentine and more on sports too, prediction markets as well, the weather, and why so few professional athletes have come out as gay. Recommended.
Pay by the word — China innovation of the day
Consider China’s largest online/ebook publishing company, Yuewen Group, which has over three million digital books in its catalogue. More notable than the scale here however is how the company monetizes: Chinese readers can pay per every 1000 words (sort of like by chapter), and have been able to do so for more than half a decade.
Not only does this micro-transaction model encourage more readers to sample more e-books while providing instant revenue to writers (who can begin selling a book right after the first chapter is completed), the collected data can help TV producers make series-optioning decisions at a more granular level. But the unintended consequence of all this is that authors with extremely popular books never want the story to end, changing the narrative significantly. Over time, it could even change the act of storytelling altogether; it’s not unlike what’s already happening in the U.S. with shows like Game of Thrones or with binge watching/streaming leading to an entirely new genre of entertainment.
More broadly speaking, Yuewen is also an example of how Chinese and Western users monetize differently across multiple tech categories. For instance, less than 20% of Tencent’s (the creator of WeChat) revenues come from advertising compared to over 95% for Facebook’s revenue. In fact, most large consumer mobile companies in China (and elsewhere around the world) do not rely on advertising as their primary source of revenue; they focus on transactions instead. Chinese internet companies have therefore experimented with numerous non-advertising business models including in-app or in-game fees, other microtransaction models, free-to-play, and more. For a U.S. company that was previously monetizing only via ads, studying its Chinese counterpart could reveal alternative ways of generating revenue so it’s less dependent on advertising as many U.S. internet companies are.
The Connie Chan article, which focuses on tech innovation in China, is interesting throughout. And don’t forget this:
In fact, 4 of the top 5 free apps in the U.S. Google Play store tools category are apps that originated in China. This isn’t just happening in the “invisible” tools category; right now, 3 of the top 10 free apps in the photography category on the U.S. Google Play store are also made in China.
Recommended. And who is this Connie Chan, and why don’t we know more about her?
Tuesday assorted links
1. ““When economic development happens, metal scenes appear. They’re like mushrooms after the rain,” says Roy Doron, an African history professor at Winston-Salem State University.” Link here.
2. New interview with Elena Ferrante.
3. Who are the globally known famous people and what do they do?
4. When will global aging drive interest rates back up again? Hint: later than you might think.
5. Mesmerizing mass sheep herding (short video, drone, model this). And mesmerizing mass human herding (photo, recommended).
6. Economic Report of the President (big pdf).
7. Kareem on political correctness, a good piece.
The Good News on the FDA and ANDAs
Yesterday, I pointed out that generic drug prices are falling. So what accounts for the small number of large price increases in the generic drug market? It’s a combination of market shenanigans, supply shocks, and FDA delay.
The markets where price increases have been large tend to be relatively small. Daraprim, for example, is only prescribed some 8-12 thousand times per year in the United States. The small size of these markets is no accident. Keep in mind that whatever one may think of Shkreli, he did show a kind of entrepreneurial genius in scouring the universe of drugs in the United States to select one where monopoly power could be so effectively exploited. Shkreli found a market where 1) the total size of the market was low so there wasn’t much competition but 2) the drug treated a serious illness and 3) there wasn’t a good substitute so the value of the drug to the small number of patients was very high.
In addition, Shkreli knew that he had at least a 3-4 year window of opportunity to exploit monopoly power. To compete with Daraprim a competitor would have to submit an Abbreviated New Drug Applications (ANDA) to the FDA. Despite the name, Abbreviated, it costs at least five million dollars to go through the process and right now there is a backlog of nearly 3,000 ANDAs at the FDA’s Office of Generic Drugs. In recent years, it has taken 3- 4 years to get a generic drug approved. The cost is too high and the delay too long.
(I am focusing on the standard route to market entry and ignoring the possibility of importation or compounding which I discussed earlier. I’m also ignoring that Daraprim is unusual in that it was approved in 1953 before the current FDA system of safety and efficacy trials, and the FDA is being absurdly cagey about whether they would allow a simple ANDA for Daraprim. I may write about that in a future post– see here for a related case.)
So what’s the good news? In 2012 Congress passed the Generic Drug User Fee Act (GDUFA). Modeled after the very succesful PDUFA, the act earmarks fees paid by generic drug manufacturers to the FDA’s Office of Generic Drugs. As a result of those fees, the FDA has hired more reviewers and they are rapidly reducing the backlog. That’s the first piece of good news.
A second piece of good news is that FDA delay isn’t the only cause of the backlog. Another cause of the ANDA backlog was an unexpected increase in the number of ANDAs. I would have been much more worried if the number of ANDAs had decreased. Despite new user fees and some increase in regulation the increase in submissions is evidence that the US generic market is competitive, vibrant, and profitable.
The generic drug market in the United States has been very successful. We are constantly told, for example, that US pharmaceutical prices are the highest in the world and that is true for patented drugs but generic drug prices in the US are among the lowest in the developed world and most prescriptions are of generics.
We can address the price hiccups in the generic market by opening up to more world suppliers, speeding up the ANDA process and keeping costs of entry low. Overall, however, we shouldn’t let the price hiccups detract attention from the fact that the generic drug market is competitive, vibrant and thriving and we want to keep it that way.
China fact of the day
WeChat had more mobile transactions over just Chinese New Year than PayPal had during 2015…
According to WeChat, owned by digital media business Tencent, 420 million people sent each other lucky money via the app’s payment service on the eve of Chinese New Year. According to WeChat, it has seen a total of 8.08 billion red envelopes sent so far for Chinese New Year, eight times more than last year.
To put this into context, according to PayPal it made 4.9 billion transactions in 2015 (half of the number of transactions made on WeChat just for Chinese New Year) and only 28 per cent were made on a mobile device.
Here is the article, hat tip goes to Erik Brynjolfsson. Do not underestimate the potential for Chinese innovation in information technology!
What I’ve been reading
1. Jonathan Bate, Ted Hughes: The Unauthorised Life. Fun, lots of sex for a serious book, and it makes you appreciate the diversity of human beings.
2. Ted Gioia, How to Listen to Jazz. Delivers what the title promises, in short, readable form; this book is good for either the jazz lover or the beginner. I am a big fan of pretty much anything Ted Gioia does, and this book has not broken the streak. By the way, here is Gioia on Ortega y Gasset and his continuing relevance.
3. Albert Camus, The Stranger. Worth a reread, especially if you grew up with something other than the Matthew Ward translation. Surprisingly current in its orientation and interests.
4. L. Jon Wertheim and Sam Sommers, This is Your Brain on Sports: The Science of Underdogs, the Value of Rivalry, and What We Can Learn from the T-Shirt Cannon. I enjoyed this book and found it reasonably analytical. There is a “home court” advantage even during hockey fights, and having sex before a big game doesn’t seem to diminish performance.
5. Joshua Gans, The Disruption Dilemma. A very good introduction to the game theory and institutions of “disruptive innovation,” the book also dispels many myths about that concept.
6. Nathaniel Hawthorne, The Blithedale Romance. I’m surprised this novel doesn’t attract more ongoing attention, even if some of the final plot choices seem a bit strange or forced. It is a brilliant critique of utopianism, socialism, Romanticism, and also philanthropy. I kept on thinking Arnold Kling should read it. In any case it is a marvelous story, a good read, and chock full of social science. You’ll find one controversial reading of the story here (jstor), a panoply of speculative hypotheses here (pdf).
China markets in everything
Nor has it yet dissuaded a Chinese company from producing Trump brand diapers.
By the way, here is a 2000 passage about Trump:
Oddly enough for a man who all but lives in the media, Trump has no public relations to speak of. In a day when even petty tycoons protect themselves with platoons of spokespeople and media people, he relies only on his longtime assistant Norma Foederer and returns most reporters’ calls personally, making him one of the most accessible businessmen anywhere. How ironic a man of his statue and money has to prove himself to the world everyday. Donald Trump is a very goal-driven person and I believe will always resurface no matter how his investments turn out. Trump summed his future in these few words, “Anyone who thinks my story is anywhere near over is sadly mistaken.”
Monday assorted links
1. An economist’s rational road to Christianity? (from Eric Falkenstein)
2. Pirates no longer have much interest in stealing oil. And Bernanke on oil and stock prices.
3. Clay Shirky’s observations on how social media have changed politics.
4. Anatole Kaletsky on why Brexit won’t happen. I tend to agree, but you can build the opposing case if you read Shirky on America and switch over the context.
5. When did American military planners start believing they could hold back a Soviet attack?
6. An excellent Gavyn Davies piece on the split within the Keynesian camp. And some reasons why it is hard to recover past output.
The Good News on Generic Drugs
Who could resist the story of Martin Shkreli and Turing Pharmaceuticals? Shkreli is like a villain straight from central casting; having made millions, perhaps fraudulently, as a hedge manager, he turned to pharmaceuticals where, as CEO of Turing, he bought up the marketing rights to Daraprim (pyrimethamine), a drug used by pregnant women and AIDS patients (natch), and jacked up the price from $13.50 a pill to $750 a pill. Not content with monopolizing pharmaceuticals, Shkreli also aimed to monopolize hip hop music. Shkreli on his own was a great story but add some big price increases for a handful of other generic drugs and Shrekli became an irresistible lead to a story about seemingly widespread increases in generic drug prices.
If we dig deeper, however, the big news about generic drugs is good news. Generic drug prices are falling. Three recent studies of generic drug prices all point in the same direction. Express Scripts, a large prescription drug manager, found that:
From January 2008 through December 2014, a market basket of the most commonly used generic medications decreased in price by 62.9%.
In an excellent overview the Department of Health and Human Services concluded that:
…drug acquisition costs fell for a majority of generic Medicaid prescriptions measured by both volume and total generic expenditures.
Finally the AARP studied the prices of generic drugs used by older Americans and found that:
Between January 2006 and December 2013, retail prices for 103 chronic-use generic drugs that have been on the market since the beginning of the study decreased cumulatively over 8 years by an average of 22.7 percent.
— The cumulative general inflation rate in the U.S. economy rose 18.4 percent during the same 8-year period.
Patented drugs are increasing in price so to evaluate the benefit of price decreases for generics it’s important to know that between 80 to 90 percent of all prescriptions in the United States are for generic drugs.
Tomorrow: The Good News on the FDA and ANDAs.
Why is there a lesbian wage premium?
Marieka Klawitter of the University of Washington looked at 29 studies on wages and sexual orientation last year.* On average, they found a 9% earnings premium for lesbians over heterosexual women, compared with a penalty of 11% for gay men relative to straight men. This discrepancy has been borne out by research on America, Britain, Canada, Germany and the Netherlands. Even after adjusting for the fact that lesbians are on average more educated than straight women, and less likely to have children, the gap persists.
Note the evidence suggests lesbians are not more competitive than non-lesbian women, and lesbians receive no wage premium in the public sector. Here are some possible hypotheses:
…they work more hours per day and weeks per year than straight women, on average (see chart). Over time this could translate into more experience and better chances of promotion. There is a clue in a paper from Nasser Daneshvary, C. Jeffrey Waddoups and Bradley Wimmer of the University of Nevada, which finds that lesbians who have previously been married to men receive a smaller premium than those who have not.
Finally, it could be that in same-sex couples women do not feel obliged to do as much childcare or housework, giving them more freedom to fulfil their potential in the workplace. Lesbian couples tend to work more equal hours, even when they have children, and several studies find that same-sex households share chores more evenly than heterosexual ones.
That is all from The Economist.
Africa risk of the day
…seems entirely manageable. Here is The Economist:
Flying on a passenger jet in Africa is now about as safe as it would have been to board a European or American one about two decades ago. And the best African airlines are almost as safe as their global counterparts, says the International Air Transport Association (IATA).
Propeller planes still lag somewhat behind…
Sunday assorted links
1. Do markets think central banks still can move markets?
2. Annie Lowrey calls for revitalizing welfare as we knew it.
3. Divorce laws and the economic behavior of married couples. And do women receive less for their eBay sales than do men?
4. Excellent Tom Wainwright piece on how economists would approach the problem of addictive drugs. His forthcoming book Narconomics looks very good, I put in my pre-order.
5. A college degree is especially useful for appreciating Ben Carson.