Washington Post consumer columnist Margaret Webb Pressler writes:

I also got a huge response about the growing use of buy-one-get-one-free promotions, or BOGOs, as they’re called in the industry….Shoppers don’t understand why retailers offer this kind of promotion when it’s no better for customers and no more profitable for stores than a half-price sale.

On the contrary, BOGOs can be much more profitable for stores than a half-price sale. To see why, assume that you value your first pizza of the night at $15.01 and the second at $5.01 and let’s say it costs the store $2 to make each pizza. If the pizza store has a buy-one-get-one-free offer at $20 then you will buy two pizzas and the store will have profits of $16 ($20-$2-$2). But if the store sells pizzas for half price, $10 each, you will buy just one pizza and the store will have profits of just $8 ($10-$2). The BOGO doubles the store’s profits!

Carefully designed BOGOs increase profits because they let the firm price more flexibly, what economists unfortunately call “price discrimination.” At $20, the BOGO is equivalent to charging $15 for the first pizza and $5 for the second. Notice that these prices are ideal for the firm since they are the maximum the consumer will pay – any more and the consumer won’t buy.

Although BOGOs may make consumers worse off they generally increase total welfare because the price on the last unit sold is pushed closer to marginal cost and because of this output expands. Even if the efficiency gain from price discrimination goes mostly to firms don’t forget that firms are owned by people too!

For more on price discrimination see Hal Varian’s classic, Differential Pricing and Welfare.

Laurence Kotlikoff, whose work I mentioned in my post, The U.S. Government is Bankrupt, had some very strong words in response to Greenspan’s recent testimony on social security.

It’s nice that Alan Greenspan is finally prodding our politicians to address the nation’s long-term fiscal problems. But he’s using a feather, when a cattle prod is what’s needed. Whether or not Greenspan knows it, our country is in worse long-term fiscal shape than Brazil. Once financial markets absorb this fact, interest and inflation rates will soar and there will be economic hell to pay. Greenspan’s proposed cuts in Social Security are trivial relative to what’s needed and perpetuate the myth that we can finance the baby boomers’ retirement with minor fiscal adjustments.

Senators Kerry and Edwards — along with President Bush — are fixated on the next election and ducking their responsibilities to the next generation. Like previous politicians who’ve failed to address our long-term Social Security, Medicare, and Medicaid problems, they are simply children masquerading as adults. What’s needed are real statesmen to propose and enact the radical and extremely painful reforms required to ensure our nation’s fiscal solvency.

For more, see Kotlikoff’s forthcoming book with Scott Burns, The Coming Generational Storm (prologue here, chapter 1 here)

Hat tip to Greg Ransom of PrestoPundit.

…Maybe it’s a sign of the times — or just a gimmick — but celebrities, athletes and high-powered business executives who want protection from potential rape or other sexual charges can now obtain consent forms for their would-be partner to sign, acknowledging the pair is about to engage in consensual sex.

“This really is for someone you don’t know,” said attorney Evan Spencer, who wrote the one-page, “pre-sexual agreement” form for Colorado-based Protect Condoms Inc. “If you’re a professional athlete on the road, and you encounter someone you don’t know, certainly a person who is a man of means will want to be protected by something like this.”

The company has sold more than 4,000 forms at $7.99 each, according to president Nelson Banes. The standard consent forms are one-page documents to be signed by two parties, both of whom agree “to engage in any and all sexual acts legally permissible under state and federal law with consentee,” according to the Protect Condoms form, which includes two condoms in its package.

Here is the story. This link will bring you back to previous installments of Markets in Everything.

A new essay from Clay Shirky is almost always blogworthy. Recently he offered up his treatment of VOIP. Here is his entree into the topic:

“When” could still be a very long time, however. The incumbent local phone companies — Verizon, SBC, BellSouth and Qwest — have various degrees of interest in VoIP, but are loathe to embrace it quickly or completely, because doing so means admitting to everyone — shareholders, regulators, customers — that both monopoly control and artificially high voice revenues are going away. (The fact that this is true does not much lessen the pain of saying so.) As a result, they will likely try to convince regulatory agencies, both the FCC and the states’, to burden competitive VoIP firms like Vonage with additional costs and rules, while delaying their own offerings.

Complicating this de facto Plan A, however, is the fact that VoIP isn’t a service, it’s just a set of protocols, meaning that competitors don’t have to set themselves up as upstart phone companies to deploy VoIP. If Plan A is “Replace the phone system slowly and from within,” Plan B is far more radical: “Replace the phone system. Period.”

Here are two excellent paragraphs:

The official tradeoff in current telecom regulation is service guarantees in return for monopoly control. Over the decades, though, a third part of the bargain has arisen. Phone companies tolerated high taxation as well, in part because it guaranteed continued freedom from competition. As a result, telephony is treated as a vice instead of an essential service — the taxes and surcharges on a phone bill are more in line with the markup on alcohol and tobacco than with gas or air travel.

However, monopoly control, essential for the current bargain, is ending. The cumulative threats of competitive local phone companies, the decrease of second lines due to DSL and cellphone use, and now VoIP have made the old deal unsustainable. The rise of a competitive market seems conceptually simple, but most parts of the US have had a phone monopoly for longer than they’ve had indoor plumbing, so the possibility of phone service without the incumbent phone company is hard for many observers to understand.

The bottom line:

I can’t do better than to quote Clay:

With railroad bankruptcies in the 1940s, no one thought that the tracks would be ripped up and sold for scrap. Similarly, the question of whether the incumbent phone companies can survive if VoIP pops the bubble of voice revenues is separate from the question of whether the wires in the ground will continue to exist. Someone will sell data transmission over copper wires, but there’s no reason it has to be the existing phone companies, in the same way that someone still runs trains from St. Louis to Chicago, but it isn’t the B&O Railroad anymore.

Clay makes blogging easy, though arguably less fun. Just quote him and say yup, yup, and yup.

Read this proposal.

“…the U.S. government [is] effectively bankrupt”

“…when rational gloom sets in, the U.S. economy will likely ‘go critical.'”

“…the decline and fall of America’s undeclared empire will be due not to terrorists at our gates nor to the rogue regimes that sponsor them, but to a fiscal crisis of the welfare state.”

Who is making these wild statements? Is it a “not-to-be-trusted”, liberal economist like Paul Krugman or Brad DeLong each of whom have warned of an impending “fiscal train wreck” and “fiscal catastrophe”? No. The statements are from Laurence Kotlikoff, one of the world’s most prominent economists, and Niall Ferguson, one of the world’s most prominent historians – both are whom are considered to be conservatives (more on that shortly).

Kotlikoff and Ferguson base their gloomy forecast on a study commissioned by Paul O’Neill before he was booted out of the administration. The study says the following: we know that there will be a deficit this year and one next year and probably one after that – suppose we add up all the future deficits and surpluses for as far as we can see and discount these to present value. What do we get? The answer: 45 trillion dollars of debt.

We do not have 45 trillion dollars. What then can we do? Here is why conservatives should not ignore the warnings of Kotlikoff and Ferguson, even when they deride similar pronouncements from Krugman and DeLong, because Kotlikoff and Ferguson argue that taxing ourselves out of this mess is not a desirable option. Instead, they argue that we must a) “discipline Medicare spending” (this was written before the prescription drug plan passed!) by eliminating “entirely the traditional fee-for-service option and giv[ing] all Medicare participants a voucher to purchase private health insurance.” and b) “privatize social security.”

Kotlikoff and Ferguson are not optimistic about the political viability of these actions, hence the opening quotes.

I worry when intelligent people on both the right and left start to talk about the U.S. “going critical.”