Why don’t we see more price gouging?

by  Tyler Cowen in

I survived hurricane Isabel, but couldn’t buy a flashlight or the right size batteries, the night before the storm was to come. Merchants let supply run out rather than raise the prices. C.C. Kraemer at TechCentralStation.com tells us that half of all states have anti-gouging laws. More significantly, merchants fear that customers will resent price increases during times of trouble. The testable prediction is that wandering “umbrella merchants,” as I have encountered in Manhattan, will raise their prices when it is raining. They have little reason to fear long-run negative effects on their reputation. I have found this to be true but can cite only two data points in its favor. Twice, when it was raining, I bought umbrellas for $10 rather than for the usual price of $5.

Kraemer suggests that we should allow price gouging in times of emergencies. This policy conclusion need not follow. Since supply is constant in the short-run, higher prices won’t give more flashlights to more people, although in the long run the economy will stand readier with emergency flashlights. Higher prices will allocate flashlights to those people most willing to bid for them, but at the cost of all buyers feeling gouged. After all, not wanting to be gouged is a preference too. And the subsequent decline in trust will eliminate other potential gains from trade.

Arguments by N. Gregory Mankiw and George Akerlof suggest that small costs of changing prices can have large macroeconomic effects. They focus on cases where prices remain too high and output is restricted as a consequence. In contrast, if a firm refuses to raise its prices, presumably it feels that the resulting “resentment costs” are higher than the extra revenue it would reap. First, the price changing costs are not small. Second, if the firm had initial monopoly power, as the Mankiw argument requires, keeping prices lower will not in general lower consumer welfare. (It is a tricky intertemporal problem, there can be cases where contrived ex post shortages pump up ex ante demand for the good, to the benefit of the monopolist and to the detriment of social welfare.)

I would repeal the anti-gouging laws, on libertarian freedom grounds, but I don’t welcome more price gouging as a means of making us better off. Markets are quite willing to gouge us in a wide variety of instances, just try hearing a good jazz show on New Year’s Eve. We should take it seriously when markets are not willing to gouge us. We can also ask whether people would be better off if they had weaker fairness norms, or better fairness norms, that is the next relevant question for assessing the costs and benefits of price stickiness. Just keep in mind that our current norms help keep our suppliers in line and limit their ability to defraud us.

Addendum: I’ve made some slight re-edits in the interests of clarity.

What liberal media?

by  Tyler Cowen in

Eric Alterman’s What Liberal Media? attempted to rebut charges that American mass media have a left-leaning bias. Conservative pundits dominate talk radio, many liberal outlets carry conservative commentators, market-oriented ideas are ascendant in the think tank world, and, I might add, many bloggers have a libertarian orientation. So Alterman’s response has some punch. Anna Schwarz offers a good review of the book, in Jeffrey Friedman’s on-line The Dissident, you might know Jeff from his editorship of and writings in Critical Review, he is an impressive intellectual polyglot.

Schwarz concedes many of Alterman’s points, but does not believe that Alterman has dismissed the charge of liberal media bias. She writes:

Alterman never comes to grips with the fact that the people who cover the news are overwhelmingly liberal. In 1992, an astonishing 89 percent of Washington correspondents and editors voted for Bill Clinton…Alterman acknowledges midway through the book that there might be some merit to his opponents’ arguments: “the overall flavor of the elite media reporting favors gun control, campaign finance reform, gay rights and the environmental movement,” he writes…These are distinctly liberal stances and this admission, by itself, pokes a gaping hole into Alterman’s argument…

My (partial) take: TV broadcasters need a good story, which leads to an emphasis on visible victims who can be interviewed. Media will neglect unseen opportunity costs. This bias often supports a “left-wing” perspective, but not always out of design. The bias also gives extra attention to crime victims. Members of the public often think crime is worse than it truly is, arguably a “right-wing” bias, crime victims get on the news because they make for good stories. We should not forget that media output is demand-driven, and people do not always want their media to reflect their politics.

My question: It is not obvious that reporters have been especially left-wing throughout the history of the American republic. When and how did this start to change?

See also an excellent earlier post by co-blogger Alex.

Tom Peters where are you?

by  Tyler Cowen in

Remember Tom Peters? The 1996 Guinness Book of World Records listed him as the world’s most highly paid management consultant. His In Search of Excellence was one of the earliest mega-hits among management books, you might recall that he flirted with various Hayekian ideas about the market as a discovery mechanism. Today’s Financial Times looks at Peters today and asks, quite literally, whether he has lost his mind. It describes a Tom Peters seminar as “a combination of Billy Graham and Sid Vicious.” Peters admits to being proud of the inconsistencies in his thoughts, but to my mind the FT evinces no evidence of real craziness. Several years ago Fortune magazine raised the same issue, I cannot find an on-line copy but again I am waiting for the smoking gun.

Make up your own mind, visit Tom’s web site. Be warned that not all of it is rigorous, consider the following:

An Aussie reporter asked me recently about the origins of “Re-imagine.” I answered in terms of war & peace & commercial effectiveness alike. The following leapt from my lips, and I was intrigued by what I’d said. Dangerous, I well know; and it may wear off. But herewith, not a bad rationale, at the highest level of abstraction, for what we’re about and the possible importance thereof…

Tom admits that he was overoptimistic about Silicon Valley — at least he will admit he was wrong — and says that the increased difficulty of valuing intangible assets is behind the recent corporate scandals.

File sharing helps some music labels

by  Tyler Cowen in

No, I am not one of those people who thinks you can fund an entire music industry through the sale of T-shirts. But file-sharing appears to have been a boon for some indepedent labels, which otherwise have a hard time getting their music to customers. Here is a money quote:

Today he [Mr. Egan] says – seemingly counterintuitively – his label simply would not exist without file-sharing services like Napster and its successors KaZaA and Morpheus.

Even as the major labels of the music industry pursue file traders for copyright infringement through lawsuits and the court of public opinion, Vagrant and many other independent label owners cheer them on. File sharing, these owners say, helps their small companies compete against conglomerates with deeper pockets for advertising and greater access to radio programmers.

“Our music, by and large, when kids listen to it, they share it with their friends,” Mr. Egan said. “Then they go buy the record; they take ownership of it.”

The New York Times offers the full account (registration required).

Smuggling amongst the Amish

by  Tyler Cowen in

“A smuggling ring operated for several months in Ohio’s largest Amish community, transporting hundreds of illegal immigrants from Mexico and Guatemala, investigators said.” So notes Cnn.com. It says something about the power of good institutions that it still makes economic sense to smuggle workers into a community that limits its use of modern technology.

One man’s vice…

by  Tyler Cowen in

Here is a new blog devoted to the economics of public policy for the vices, namely the regulation of drugs, gambling, and prostitution, see vicesquad.blogspot.com. I am reading a bit in here, but overall the perspective rings sympathetic toward various methods of legalization or decriminalization. Click here if you wish to read about the attempt of Los Angeles to ban lap dancing.

Here is the blogmeister’s self-description: “My name is Jim Leitzel and I am an economist and co-chair of the public policy concentration in the undergraduate college at the University of Chicago. For the past five years I have taught a course on vice policy, and I have recently started to write a secondary text for the class.”

Thanks for Peter Boettke for the pointer.

The new Robert Putnam book

by  Tyler Cowen in

Robert Putnam has a new book out, with Lewis Feldstein, Better Together: Restoring the American Community. I started writing a short review of it, which ended up morphing into a look at Putnam’s oeuvre more generally, most of all his renowned Bowling Alone. The bottom line: I admire the quality of Putnam’s work, but am not convinced by his arguments that “bowling alone” is a growing problem. Click here to read my piece.

Herd behavior and dominant strategies for mice

by  Tyler Cowen in

Mice, taken collectively, are not very good at escaping from a crowded room. They act pretty much as humans do, namely they all crowd toward the door and few get out very quickly. Each individual mouse appears to make a rational calculation of a sort. The mice do best, and adopt some form of queuing behavior, when the door is large enough to let only one mouse through at a time. Researchers suggest that humans may exit a crowded more quickly, the smaller the door, which limits the crush toward the exit. For more information read this article from New Scientist.

Is love predictable?

by  Tyler Cowen in

The advent of Internet dating has led rapidly to a search for better matching results, as detailed by a recent story. After all, reductionists may wonder just how many dimensions the problem can have. Consider the following:

[Researchers] decided to employ computer technology to find a few “simple, logical rules” that make up, well, the recipe for love. For help on the technical side, they turned to Michael Georgeff, director of the Australian Artificial Intelligence Institute. During his work on a NASA project at Stanford Research Institute, Georgeff had developed a methodology to teach Space Shuttle Discovery computers how to anticipate unexpected problems. Working with Thompson and Hutchinson, he applied the same principles to the design of dating software, employing many of the statistical methods common to social science research. “Say you score a 3 on the introvert scale, and a 6 on touchy-feely. Will you tend to like somebody who’s practical?” Using Georgeff’s software, Thompson and Hutchinson then developed an online quiz. Match.com, the highly popular online dating site, began using weAttract.com’s software this year to give users a rough sense of what proportion of the dating population might be attracted to their particular array of personality traits.

The new algorithms are designed to measure not only initial attraction, but also how well the would-be couple can live in harmony. Ten thousand people a day are signing up for eharmony.com, which also tries to do some simple lie-detecting. According to some accounts 30 percent of on-line daters are in fact married, and often lying about that fact.

Meredith Hanrahan, at Matchmaker.com, invokes a market metaphor:

If you want to buy a car, you get a lot of information before you even test-drive,” she says. “There hasn’t been a way to do that with relationships.”

Perhaps one web-dating entrepreneur put it best:

“Everyone is high maintenance. The trick is finding the precise sort of maintenance you need.”

Is Larry Summers reshaping Harvard?

by  Tyler Cowen in

Yes, say many observers. His pro-science, back to the basics stance may make him one of Harvard’s most influential Presidents. And he is not backing down when faced with faculty opposition. Read this article from The Boston Globe, thanks to Instapundit for the link. Read here and here for my two previous blog posts on Larry at Harvard, with links to other commentary.

Addendum: Here is a recent (and brief) address by Summers on economics and morality, he stresses the ability of markets to conserve on altruism. Thanks to Doug Irwin for the pointer.

Things I had not known about taxonomy

by  Tyler Cowen in

The Swede Carl Linnaeus, a father of modern taxonomy, “spent much of his leisure time penning long and flattering portraits of himself, declaring that there had never “been a greater botanist or zoologist…””

Today the world has about 10,000 active taxonomists. It takes eight to ten years to train a good taxonomist. It is commonly believed that the world has a severe shortage of taxonomists, although economists might challenge the use of the word “shortage” in this context.

Logging a new species costs about $2000 per species.

Each year about fifteen thousand new species are recorded. Insects alone offer possibly as many as 100 million undiscovered species.

As of 2002, there were no full-time taxonomists in Africa.

Kevin Kelly’s (Wired magazine) All Species Foundation has not made much of a dent in these problems. And taxonomy is not nearly as web-based as you might think.

I don’t think it follows, as scientist Koen Maes suggests, that “It’s not a biodiversity crisis, it’s a taxonomist crisis!” Still, we know less about species and their numbers than I had thought.

All this is taken from Bill Bryson’s recent and entertaining A Short History of Nearly Everything, chapter 23. Thanks to Yesim Yilmaz for the pointer.

What have we learned about income distribution?

by  Tyler Cowen in

I’ve been reading the new book The New Geography of Global Income Inequality, by sociologist Glenn Firebaugh. The data work is intensive, here are a few things I have learned:

1. Knowing what country an individual lives in explains about 70 percent of the observed variation in income across individuals (p.11).

2. If we could magically eliminate all income inequality within nations, the world’s total income inequality would shrink by at most one-third. Most of the relevant inequality is across different nations (p.11).

3. Global income inequality is falling, contrary to what many critics charge (pp.17-18). So the world’s poor are catching up to the world’s rich (p.18), on average.

4. Most poor countries are not catching up, most of all Africa. The world’s poor are catching up, on average, once we weight countries by population. The growth of China, and to a lesser extent, India, has driven the improved prospects of the poor and the decline in cross-nation inequality (passim).

5. If we compare the United States to Western Europe, there is considerably less inequality within the United States.

As you might surmise, I found this book to be excellent and highly instructive. It reads more like an extended article than a book, but nonetheless it delivers on the substance.

Addendum: Daniel Drezner offers some interesting remarks, with links, on Paul Krugman’s recent writings on inequality.

Subsequent addendum/clarification: Firebaugh (p.193) writes: “average income is much more unequal across nations in Western Europe than across states in the United States.” He does not (and could not) argue that “within a single nation equality” is less in Europe. Here are Gini coefficients for the various European nations and the United States.