Profits and an Independent Press

by  Alex Tabarrok in

He who pays the piper, picks the tune. In China, that moral has proved to be a surprising link between economic reform and political reform.

More than a quarter century after China launched economic reforms while continuing to restrict political freedom, the government still owns and controls all of the country’s newspapers and television stations. But journalists have fought off party censors in one sensitive subject area after another, and they are waging a daily battle for even greater freedoms.

This push is driven in part by economics. In a sweeping industry overhaul, the government is withdrawing subsidies from state media outlets, holding them responsible for their own profits and losses and opening the door to private investment. The market has led newspapers to set aside propaganda and deliver stories that readers are actually interested in. Many have turned to gossip or entertainment, but there is also a financial incentive to produce a scarce commodity: journalism that challenges the government.

That’s from a very good Washington Post story about a courageous newspaper editor in China, jailed for questioning the local police.

Markets in Everything – country edition

by  Alex Tabarrok in

Kansas City radio station Mix 93.3 FM, which threatened its listeners to play Billy Ray Cyrus’s “Achy Breaky Heart” continuously until the station had met their goal of $20,000 to contribute to the travel expenses of Courtney McCool’s (U.S. Olympic Gymnast) family.

The station started with $6,000 and raised $14,000 in a little under four and a half hours, during which they played the song 48 times in a row.

I am surprised it took that long.

Thanks to jaded economist Craig Depken.

Econ Journal Watch II

by  Alex Tabarrok in

The second issue of Econ Journal Watch is now out. EJW is fast becoming one of my favorite journals (I am an advisor but cannot claim responsibility for the excellent content). Lots of good stuff including:

Economics in Practice: Stephen Ziliak and Deirdre McCloskey examine all the American Economic Review articles from the 1990s, and present systematic evidence of the abuse of statistical significance.

William Davis uses survey evidence to argue that a large portion of professional economists falsify their preferences about economics.

Daniel Klein establishes that Journal of Development Economics authors and editors have extensive ties to the World Bank, the IMF, the UN etc., and asks how such ties affect the character of the field.

Government Sues to Raise Drug Prices

by  Alex Tabarrok in

The headline in the NYTimes read “Schering Case Demonstrates Manipulation of Drug Prices.” The article continued:

A $345.5 million settlement by Schering-Plough yesterday to resolve a government Medicaid investigation provides a detailed glimpse into how drug companies can manipulate prices to overcharge state and federal programs.

Government officials have taken a keen interest in how drug makers price and market their drugs in recent years, and the settlement is the latest in a series reached with large drug makers over accusations that they have overcharged Medicaid. Last year, Bayer paid $257 million and GlaxoSmithKline paid $86.7 million to settle similar allegations.

Now you probably think this article is about how drug firms acted collusively in order to raise prices, right? Nope, read carefully and you will see that intense competition from Allegra caused Schering to reduce the price of Claritin. Great! Not according to the Feds. The price reductions violated Medicare’s Most Favored Customer clause which requires pharmaceutical manufacturers to give Medicare the lowest price they offer any other customer.

Most Favored Customer/Nation clauses are routinely analyzed in game theory texts as ways for firms to tacitly collude to raise prices. The idea is simple – it’s easier to commit not to compete if lowering price for one customer means lowering prices for all customers. Indeed, this is precisely why the antitrust authorities often sue to prevent firms from using MFC clauses. The evidence supports the theory, after the MFC clause was introduced pharmaceutical prices rose.

The US Attorney may think that “we’re fighting to keep the costs of health care down for everyone,” but in truth by reducing competitive pressures to lower prices they are helping the pharmaceutical firms to maintain a cartel.

Addendum: Put it this way, now that the government has successfully sued the firms for reducing prices do you think a) the firms will now cut the price to Medicare to match the rebates or b) stop giving rebates?

Osama by November?

by  Alex Tabarrok in

There’s nothing like an election to concentrate the mind, or so says The New Republic.

This spring, the administration significantly increased its pressure on Pakistan to kill or capture Osama bin Laden, his deputy, Ayman Al Zawahiri, or the Taliban’s Mullah Mohammed Omar, all of whom are believed to be hiding in the lawless tribal areas of Pakistan. A succession of high-level American officials–from outgoing CIA Director George Tenet to Secretary of State Colin Powell to Assistant Secretary of State Christina Rocca to State Department counterterrorism chief Cofer Black to a top CIA South Asia official–have visited Pakistan in recent months to urge General Pervez Musharraf’s government to do more in the war on terrorism….

This public pressure would be appropriate, even laudable, had it not been accompanied by an unseemly private insistence that the Pakistanis deliver these high-value targets (HVTs) before Americans go to the polls in November….The New Republic has learned that Pakistani security officials have been told they must produce HVTs by the election. According to one source in Pakistan’s powerful Inter-Services Intelligence (ISI), “The Pakistani government is really desperate and wants to flush out bin Laden and his associates after the latest pressures from the U.S. administration to deliver before the [upcoming] U.S. elections.”

Dumb Delta

by  Alex Tabarrok in

E-Loan offers customers a choice of processing their loan paperwork in 12 days using all-domestic workers or 10 days by bringing on some workers in India, 85 percent choose the quicker turnaround.

Delta is now considering something “similar,” charging a fee to have calls handled by U.S. agents. What genius came up with this? You don’t need to be a behavioral economist to predict that framing the deal this way just won’t fly. Instead, offer your customers a new option; lower prices if they choose to use overseas agents. Or, as Gary Leff suggests, offer the customers shorter wait times. “All our US agents are busy right now, would you like to be directed to an overseas agent for immediate service?”

Us and the heart of civilization

by  Alex Tabarrok in

Blogging about the convention, William Saletan hits on a profound point. It’s not just Democrats, however, the framing of “us” and “them” is perennial and it’s the expansion of “us” that is at the heart of our civilization.

Obama, like other speakers at this convention, complains about “companies shipping jobs overseas” and workers “losing their union jobs at the Maytag plant that’s moving to Mexico.” At the same time, Obama holds himself out as a symbol of a diverse, welcoming America. How can Democrats be the party of diversity at home but xenophobia abroad, the party that loves Mexican-Americans but hates Maytag plants in Mexico, the party that thinks Obama’s mom deserves a job more than Obama’s dad does? I understand the politics of it. But what about the morals?

More on the Patriot Act

by  Alex Tabarrok in

Orin Kerr at Volokh disputes my one-liner on the Patriot Act (reprinted here).

The USA Patriot Act has so far been used to fine PayPal $10 million dollars in an effort to crack down on internet gambling, it’s been used to intimidate a New York artist’s collective, and most recently to shut down a Stargate fan site.

I invite readers to read Kerr and follow up on the links I provided. Kerr’s defense is, not suprisingly, one crafted by a lawyer. It consists of the following. Point 1 is accepted as correct. On point 2, Kerr concedes that the artists were intimidated and that the Patriot Act was involved but he says we shouldn’t blame the Patriot Act as other laws could just as easily have been used. Oh, now I feel better. On Point 3, Kerr agrees that the Patriot Act was used to gather information that was used to shut down the web site but thinks it unfair to say the Patriot Act shut the site down. Ok, I give him this one. I should have written the Patriot Act was used to help shut down a Stargate fan site.

The lawyer’s vice is to miss the forest for trees. The point is that laws passed for one purpose are often used for other purposes not originally intended (RICO, anyone?). (Some of them may even be legitimate, I’m not claiming, for example, that the Stargate fan site was legal). In this case, the Patriot Act and the general increased willingness to defer to law enforcement have not to my knowledge led to many arrests of terrorists but have been used for all manner of other purposes.

Double Jeopardy Disaster

by  Alex Tabarrok in

Getting a new drug or medical device approved by the FDA is a long and expensive process. The FDA is risk-averse and pays much more attention to the risks of approving a bad drug than to the risks of failing to approve a good drug. As a result, every economist who has ever written a serious analysis of the FDA has come to the conclusion that less regulation would mean more new drugs and more saved lives. (See FDAReview.org for more information. Gary Becker offers a recent statement.).

Approval, however, does not end a firm’s problems because even then it faces the risk of a debilitating lawsuit. Consider how bizarre this is: A team of statisticians, physicians and medical researchers pores over years of clinical data to pronounce a product safe (always noting that this means safe relative to the product’s expected benefits) and then a jury of 12 randomly selected Joes and Janes second guesses them, awards plaintiffs billions of dollars and drives the firm into bankruptcy. This has happened more than once.

FDA approval ought to be a “safe harbor.” Many states already have laws along these lines but they have been weakly enforced. The Bush administration’s efforts to limit lawsuits against firms that have passed FDA approval is a therefore a necessary and welcome piece of common sense. This doesn’t mean that you can’t sue a drug manufacturer. If the manufacturer lies to the FDA or to your physician or if they don’t produce the drug according to specification then by all means sue away. Every drug, however, has side-effects and every drug works differently in different people. That means that there has to be some sort of cost-benefit test to decide if a drug should be marketed. There is an argument for using tort law instead of the FDA to do this test – an argument that gets weaker the more out out-of-control the courts become – and there is an argument for using the FDA instead of tort law but there is no argument for adding tort law on top of FDA regulation, that is a double jeopardy disaster.

Lance Armstrong Game Theorist

by  Alex Tabarrok in

Armstrong’s victory in the Tour de France is a testament to his awesome physical skills but he and his team should also be credited with a sound understanding of game theory. Game theory arises in the tour because it’s important to take advantage of the draft created by riders in front. The dynamics of draft alone are fairly simple but add to this that the leader is not necessarily winning, the use of teams, the many stages, the different terrain etc. and you have a very complex strategic space. Correspondent Stephen Tuel writes about one episode of strategic biking:

The 18th stage was an excellent example of game theory at work. Lance Armstrong and the peloton were a few minutes back of a breakaway group of 6 riders (none of whom were a threat to the top of the overall standings since all were over 1 hour behind). Reading the various news reports and between the lines it appears that Armstrong’s team, US Postal, was doing all the work at the front of the peloton and the team of the closest competitors, T-Mobile, were loafing. (The crucial strategic variable in bicycling appears to be the effect of wind resistance, especially on the flat and on downhills–whoever is at the front has to work harder, and whoever is following can choose to conserve energy or share the effort.)

Armstrong and another rider (also over 1 hour behind in the overall standings) left the peloton, caught up with the group of 6, and helped them build a bigger lead. Once the lead started stretching, the T-Mobile team moved back to the front of the peloton and started taking their turns at the lead to help catch the breakaway group. Armstrong and his collaborator then relaxed, let the group of 6 go on (one eventually won the stage) and rejoined the peloton. By moving up with the breakaway group, Armstrong changed the payoffs which were letting the T-Mobile team slack off. Presumably, the continuing threat kept them working their share through the rest of the race.

See also this paper on strategic driving in NASCAR.

Addendum: Educated Guesswork and Evolution Will be Blogged chime in with another theory, Armstrong wanted to punish another cyclist for extra-curricular reasons. Interesting.