Are You Ready for Some Royals Baseball?

From Yahoo's Big League Stew:

You might have heard this apocalyptic news and run for the hills already, but ESPN will choose to momentarily acknowledge the existence of the Kansas City Royals this year by featuring them on Sunday Night Baseball for the first time since 1996.

Meanwhile, of the 12 games announced so far, the Yankees and Phillies each figure into three of them, while several other teams make repeat appearances.

The decision to repeatedly feature the same marquee teams reminds me of how many people grocery shop: we like to think we are open to a wide variety of things, but each time we shop is a separate event, and each time we usually end up buying the same old tried-and-true items. While some would argue for a more diverse featuring on the sports' weekly premiere showcase in order to expose the nation to more of the league's lesser-known players, on any given weekend, Yankees/Red Sox will be a winner (up to a saturation point), while Royals/Orioles is bound to be a bomb. 

Another view from the Stew:

The cynic in me — sorry, Conan — is claiming that ESPN will have their trucks out west for the Cubs-Dodgers game the following week anyway. It would also seem that it doesn't mind burning a spot on the Royals since the game falls on Independence Day and ratings are likely to be very low no matter who's playing that night.

Why Do Online Firms Let Customers Get Away?

One of my professors described the concept of lock-in in a recent blog post as such:

This seems to me well explained by the standard econ concept of lock-in, where the costs of switching rise with the tenure of a relation.  Before you form a relation, you want to project high switching costs, while once you are locked in, you want to project low switching costs.

In many situations, customers are forced into keeping existing relationships with companies because it's too much of a hassle to switch. Cable companies can lure customers away with great introductory rates, but many will be reluctant to switch when the rates reset, as it means wasting yet another day waiting for a different cable guy to show up. A recent college graduate can be lured to a new job with a high starting salary, but once he's put down roots and enrolled his children at the local schools, it will be hard for him to leave for a different job in protest against meager annual raises.

While this certainly is not true of all of them, many online firms behave the opposite, making it extremely easy for customers to leave. You can set Gmail to automatically forward all incoming mail to another address, which requires effort from Google's servers without any chance at earning advertising revenue if you never have to log in again. If I want to ditch Blogger or WordPress, there are options to export the entire blog, including comments, elsewhere (WordPress even extols its users to "go easy on it," as the process is very "resource intensive"). However, my friend points out that your links to prior posts will no longer go to the right place, nor will links throughout the Web to your old material.

The above-mentioned products, unlike the offline examples cited in the first paragraph, are not things that you pay for, but your increased use of them results in more profit for the companies in the form of advertising or brand building. So why are they making it so easy to leave, sometimes at great expense to themselves?

The classic lock-in dynamic isn't quite the same for ad-supported online products. The cable company wants to attract you with low rates and then lock you in with high rate when you are reluctant to switch. An employer might want to attract you with a high starting salary but then offer you paltry raises when you've committed yourself to the company (noted, however, that you could retaliate by working less diligently). But for ad-supported products, I would think that an ad impression to a frequent visitor of the site would count just as much as one to a first-timer (though sites that require log-ins will be able to target the established user better and thus charge higher ad rates).

The offline examples also involve more substantial fixed costs. Recruiting, hiring, and training a new employee is costly, as is moving to a new city to take a job, so it's not in either party's interest to constantly be threatening each other and trying to renegotiate. With a free blog or an e-mail address, the stakes are lower, and Google doesn't have much incentive to hold hostage an e-mail account you're never going to check anyway (and it may even generate goodwill and your use of its other products if it makes it easy to leave).

For both online services I've mentioned, exporting all of your content can serve another purpose: backup. However, the big online players already do extensive online backups, and service outages are extremely rare, so any effort by the user is likely redundant and a waste of the server's resources.

Lastly, if some customers know early on that they will have a way out, they'll be more likely to try a new e-mail host. Yet signing up for an account takes minutes, and it's unlikely that most people would even think to research it, and the vast majority will never care.

Price Discrimination, Even at Southwest Airlines

The airlines have been very adept at price discrimination. They get passengers to pay more for first-class seating and baggage checks, not to mention the endless tinkering with ticket prices based on when you're flying and how far ahead you buy your tickets. 

Southwest Airlines has historically been a different bird. Only a few years ago did it offer business-class seats (for nearly twice the price on some routes), which include priority boarding and a free adult beverage; before that, it was first come, first serve. It doesn't charged for checked bags, as its commercials celebrate. Boarding is based on checkin time, and customers don't have assigned seats.

Recently, however, it has introduced an EarlyBird Check-in program. For $10, customers can get an earlier boarding slot without having to win the race to check in online. The only benefits: less time waiting in line (though more time waiting in the plane for everyone else) and increased access to overhead bins (though this is not as much a concern as it is on other airlines, because customers can check bags for free).

Southwest has prided itself on treating everyone like equals (or like cattle, as its competitors would argue), but its continual move toward price discrimination is probably good news for both its most price-sensitive customers and its shareholders.

eHarmony Is Ordered to Merge Gay and Straight Sites

eHarmony, which had operated a gay-orientated site separate from its main site, has been ordered to merge the two (Mashable).

As always, legal and ethical considerations should be put aside for an economic analysis. Why did eHarmony believe that having separate sites was in its best interest (the gay-orientated site wasn't even linked from eHarmony's home page)? Who wins and who loses under the new setup?

Surely gay and lesbian users will welcome the change. Some no doubt felt like second-class citizens when they had to use a lesser-known site. In addition, bisexual users had to pay twice to be listed on both sites if they wanted to keep their options open.

Some straights may boycott the site after the change, and some may celebrate the new inclusion of other sexual preferences, but I suspect that the vast majority of users will be indifferent. Advertisers would be thrilled to attract more users (if indeed that's what would happen), but the change might cause some of these to drop the site in order to avoid controversy (though, under the status quo, supporting a site that excluded gays and lesbians is also controversial).

Unless I'm missing something, eHarmony must have been afraid that the defection of straight users would more than offset any gains from being inclusive. Now we'll see if that's actually true (though the site can now partially appease the potential defectors because they know that eHarmony was forced to make this change).

Google Autocomplete: Supply Side Effects

Google's suggestions for "snorkel." Click to enlarge.

When you type into Google "go snor," the suggestion pops up "best places to go snorkeling." Snorkeling is hard to spell (I got it wrong the first time), so many people quickly accept the suggestion.

Google Suggest was an experimental feature before being officially launched in August 2008. As the link suggests, the feature clearly has many benefits to users (especially the poor spellers among us).

The real magic, however, is how it cuts down on the seemingly infinite amount of ways to express a given idea. If there are 20 common ways to search for "snorkeling," Suggest might direct most people to the top 15.

Google also suggests phrases for its AdWords advertisers, who bid for the highest placements for a given set of search keywords. Suggest helps Google act as a middleman between searchers and its advertisers, by allowing them to express the same thoughts in mostly the same ways. Otherwise, an advertiser could have bid on the other 19 snorkeling keywords but would have missed out when I typed "go snorkeling"--a phrase it had not accounted for.

Notice that not every snorkeling-related query goes to the same place:

best snor = best snorkeling in the world
snork = snorkel gear
where should i go sn = (Google doesn't have any suggestions at this point)

But again, "best snorkeling in the world" is now a better keyword for Google, as more people are directed to it than otherwise would be.

iPad? Gee, Why Didn't I Think of That?

Already, there has been grousing about how Apple stole the name iPad from its copyright owner, Fujitsu, which had a product under that name in 2002 [NYT]. The trademark lapsed early last year, but the company reapplied for it.

While the dispute between Fujitsu and Apple centers on the United States, there are other iPads around the world. The German conglomerate Siemens uses the name for engines and motors, while a Canadian lingerie company, Coconut Grove Pads, has the right to market iPad padded bras.

Apple faced a similar spat three yeas ago with Cisco Systems over the iPhone name. The two companies eventually negotiated a settlement.

In addition, Google still cannot offer Gmail accounts under the Gmail name in Germany, because a small German company owns the name there (parodied a few years ago with Gmail Paper).

I'm under the impression that someone will claim the rights to all sorts of ordinary works with "i" and "e" slapped on as a prefix. When the products are obscure, defunct, in an unrelated industry, or not yet developed, the company releasing the new product shouldn't have to compensate the old copyright owner. Any attempt to do so seems like rent seeking at its worst.

Are Targeted Ads in Search Useful?

Among the paid results for "Tiger Woods" is a site called PopEater.com (click photo to enlarge).

Two kinds of results appear when you do a Google search: things that Google thinks are important, and things that its advertisers think are important.


Almost always, Google's unpaid hits are better. The company goes to great lengths to avoid manipulation of its search results, and it is the most sophisticated and comprehensive research tool known to man. With enough time, the best content should rise to the top. 


So why do search ads exist and even enjoy moderate success (a link I found through an unpaid Google hit)? One reason may be that people are in a hurry, so if something in the highlighted advertising box catches their eye, they're bound to click it. Or maybe if they're doing a search to try to buy a camera instead of learning how a camera works, camera ads may be more relevant (though reputable camera companies still comprise the first few unpaid hits).


Consider whether you find the paid or unpaid results more relevant for chat, a celebrity, or a book title.


Can you suggest any counterexamples? If so, please feel free to leave a comment.

The Value of the Stolen Base: Two Economic Schools of Thought

Since the release of "Moneyball" in 2003, Sabermetrics has turned conventional baseball wisdom on its head.

Scouts' hunches, batting averages, and other long-cherished means of evaluating player talent have been replaced by complex statistical tools with names like VORP and OPS (and some that are much more obscure), many of which are founded on solid economic principles. The name of the game now is getting on base and hitting for power, while many traditional tactics and metrics have been criticized, including the stolen base.

The most illustrative critique of the stolen base I have seen comes from the Baseball Prospectus's "Baseball Between the Numbers: Why Everything You Know About the Game Is Wrong." A chapter compares the 1982 season of Rickey Henderson (in which he shattered the MLB record for stolen bases) and the 1986 season of Pete Incaviglia (a plodding outfielder). The book points out that while Rickey's steals helped his team, he got caught so often that he did a lot of damage, too:

The run-expectation tables from 1982 show that Henderson added an extra 22.2 runs to the A's offense with his 130 steals. But the 42 times he was caught cost the team 20.6 runs, meaning that for all that running, the A's gained a total of 1.6 runs for the season. In his first season, Incaviglia stole three bases and was caught twice. He cost his team about half a run. Because Henderson got caught so often, the difference between his base-stealing performance in 1982 and Incaviglia's in 1986 added up to about 2 runs.

Every base stolen slightly increases a team's chance of scoring in an inning, but every caught stealing drastically reduces it (for example, the team goes from a runner on first with one out to the bases empty with two outs). The raw number of bases that a player steals is irrelevant; if he steals successfully less than 75% of the time, he is costing his team runs, on average.

Professor Ben Polak, who taught a game theory course through Yale University's Open Yale program in 2007, has a decidedly different approach. The relevant discussion video is here (about 14:45 in) and the transcript is here (do a search for "baseball" to get to the right spot).

He analyzes base stealing in the context of mixed strategies. The theory behinds mixed strategies is rather involved, but it boils down to choosing one \action against an opponent some of the time and another action the rest of the time. For example, if a soccer player always kicked to the right on penalty shots, the goalie would always dive to the right and thus have a good chance of stopping many shots. So the player would score more points by mixing between kicking right sometimes and left others, even if he can kick right more skillfully.

In contrast, if kicking right always had a higher expected value, no matter what the goalie did, the player should always do it. This is known as a pure strategy.

So, back to base stealing, in which Polak talks to a member of the baseball team who is taking his class:

Professor Ben Polak: You're a pitcher, okay. So he's not going to get on base now, so he's not going to answer this. Suppose you did get on base, pitchers don't often get on base. Let's assume that happens, what might you randomize? There you are, you're standing on base, what might you randomize about?

Student: Whether to steal second or not.

Professor Ben Polak: Right, whether to steal or not, whether to try and steal or not. Stay up a second. So the decision whether to try and steal or not is likely to end up being random. If you're the pitcher, what can you do in response to that?

Student: You can either choose to try to pick them off or not.

Professor Ben Polak: What else? So one thing you can try and pick him off. What else?

Student: You can be quicker to the plate.

Professor Ben Polak: Quicker to the plate, what else?

Student: You can pitch out.

Professor Ben Polak: You can pitch out, what else? At least those three things, right?

Student: Yeah.

Professor Ben Polak: At least those three things okay, thank you. I have an expert here, I'm glad I had an expert. So in this case we can see there's randomization going on from the runner whether he attempts to steal the base or not, and by the pitcher on whether he throws the pitch out or whether he tries to throw, to get to the plate faster.

Because the other team is taking so many steps to prevent a player from stealing successfully, they are worse off in other dimensions. Polak provides the punchline (emphasis mine):

Student: The pitcher has to react differently in pitching when he knows that there's a fast guy on base.

Professor Ben Polak: Good, so our pitcher has to react differently. Let's talk to our pitcher again, so one thing our pitcher said was he wants to get to the plate faster. What does that mean getting to the plate faster? –Shout out so people can hear you.

Student: It means just getting the ball to the catcher as fast as possible so he has the best chance to throw out the runner.

Professor Ben Polak: Right, so you're going to pitch from, you're not going to do that funny windup thing, you're not, thank you, you're going to pitch from the stretch, I knew there was a term there somewhere. I'm learning American by being here. And you're more likely to throw a fast ball, there's some advantage in throwing a fast ball rather than a curve ball. Both actions of which, both having to move more towards fast balls and pitching to the stretch are actually costly for the pitcher.

From game theory's perspective, it's no surprise that base stealers don't add or subtract many runs from a team's total, but the costly actions it requires of the pitcher make a base-stealing threat very valuable. It helps players batting with the runner on base, who can expect more fastballs and pitchouts and thus have an advantage.

With Children, Working Can Cost You

A Washington Post columnist reports that she is losing money by going to work, because child-care expenses are so high:

There is the familiar narrative of low-income parents who figure out that it pays more to leave the crummy, minimum-wage job and collect welfare at home than to get child care. And often, when they do work, they deal with substandard child care, erratic work schedules, no sick days, no health care and a host of other horrors.

While the columnist goes on to conclude that quitting in this situation may be short-sighted for long-term career advancement, it does seem to make sense for those in the lowest-paying jobs. In addition to being better off financially, they have more time to spend with their children and don't have to work a stressful job. While welfare has its purposes, this is a keen example of its distortion on incentives.

The solution? Another government program:

One possible solution might come with President Obama's proposal this week to double the child-care tax credit for families earning less than $85,000 and to increase federal funding of programs by $1.6 billion.

So, to encourage people not to abuse one government program, another government program is required to artificially hold down the cost of child care, at the expense of childless taxpayers.

Is File Sharing Worth the Risk of a Hefty Lawsuit?

A woman was ordered to pay $1.92 million for illegally downloading 24 songs, and the verdict has recently been reduced to $54,000, reports Wired. Still, the plaintiff's lawyers aren't exactly thrilled with the latest developments:

Joe Sibley, Thomas-Rasset’s attorney, said in a telephone interview that even the reduced amount of damages is unconstitutionally excessive. It’s a penalty of 2,250 times an assumed $1 cost of a music download.

With this hefty of a penalty, does it still make sense to download music illegally (ignoring ethical considerations for the moment)? In making such decisions, economists often look at expected values. If you buy a song legally, you have a 100% chance of being out a small amount of money (99 cents). If you download the song illegally, you have a very small chance of getting sued and having to pay a very large fine. In theory, assuming the consumer is risk neutral, she should only download if the expected cost is less than a dollar.

Hard numbers for this analysis are hard to come by, as with any illegal activity. According to one widely cited study by the Institute for Policy Innovation, about 4 billion songs are illegally download each year in the United States. A PC World article from 2005 reports that there were 17,000 Recording Industry Association of America (RIAA) lawsuits from 2003 to 2005, a 3-year span. Of course, not everyone who gets sued ends up going to court, but the Wired article notes that most "were settled out of court for a few thousand dollars," so the cost of being sued is still substantial.

These figures are far from perfect, but let's assume that the expected cost of downloading a song is:

(17,000/3)/4,000,000,000 (a rough proxy for the chance of getting sued for each song downloaded)
times
$2,250 (fee per song under the above lawsuit ruling)

Which comes out to about $0.0032 per song, or several degrees of magnitude below the purchase price. Under the original verdict of $1.92 million, the expected cost of an illegally downloaded song rises to 11 cents. However, this figure is not very realistic, as no ordinary defendant could pay such a sum and the appeals courts would almost certainly reduce it.

In either case, we shouldn't ignore the nonmonetary costs of threatened prosecution (getting sued is never fun) or the cost of lawyers. Many people will decide to avoid downloading because of fear or ethical considerations instead of taking the relative "deal" that is music piracy.

Prime Time to Commit Crime

A new state law in California is letting criminals go free earlier with good behavior (from the San Diego Union-Tribune):

The new rules, which are applied retroactively, allow inmates to cut as much as one-half off their jail sentence. They were included in a bill signed as part of last year’s budget package that will reduce state prison populations.

In a recession, people are more likely to be financially (and otherwise) desperate and thus more prone to crime. In addition, they can rationally expect shorter prisoner sentences as states find other pressing needs to spend money on besides housing criminals (according to one source, it costs $79 a day to house a prisoner but $3.50 to keep the criminal on probation).

I wonder if the law (and ones like it) will be reversed once the economy picks up again. Perhaps someone could do an econometric regression to see if mean prison terms are a function of macroeconomic factors.

All-Inclusive Wedding Packages

One of my current main projects has led me to do research on wedding venues. One of the most puzzling things is how many venues list cost per person. Consider this weddings at sea service (we're not using it, but it's a good example). It costs $145 per guest.

Among the items included are the boat rental and the captain. However, these things would cost the company the same amount of money whether the guest list included 50 people or 300. This is known as a fixed cost.

Conversely, items that vary in price, such as food (each additional mouth costs more money to feed), are known as a marginal cost. So why are these lumped together?

Additionally, many venues quote a cost per person but specify a minimum number of guests. This can lead to some strange incentives: as you approach the minimum, inviting an additional person is essentially free, but once you reach the limit, you are paying an extra $145 per guest, even though the direct costs to the venue of that additional guest is a fraction of that.

I hate to resort to numbers psychology, but maybe $145 per person for 150 people sounds cheaper than $50 per person plus a $14,250 flat fee to rent the reception hall, even though they are functionally the same. But notice that in the former case, additional guests after the 150 net the venue substantially more profit.

Some places offer all-inclusive packages, while others charge you for every tiny rental, up to the napkins (65 cents per guest at one place we're looking). I'd prefer to be nickled and dimed for every little thing, as the all-inclusive package is likely to contain things that I don't want. However, perhaps all-inclusive operations are cheaper to run, as they don't have to adjust to every whim of their clientele, so they may have good deals as well.

I'm wondering if the industry has an incentive to make it hard to compare venues. Once you research a venue enough to solicit more information, you might begin seriously picturing yourself getting married there. It's to their advantage that you don't see solid price numbers until after you form an emotional attachment.

More Trash, Bigger Bill

A pay-per-volume trash scheme could be coming to Frederick County, MD, according to WTOP.

The details of the program will be worked out with trash haulers, but it looks like county officials favor haulers offering several different trash can sizes, with a higher price for the biggest one.

Recycling would be offered on an unlimited basis, encouraging residents to put recyclables there instead of in trash bins.

The spirit of the program is to improve recycling rates. I will set aside the discussion of whether this is a worthy goal, in order to focus on how the program may be more difficult to implement than some imagine.

Ever since Ronald Coase's "The Problem of Social Cost" (1960) (PDF), economists have increasingly paid attention to the role of transactions costs. Transactions costs are those required to make a transactions outside of the money exchanged. For example, if the only way to get milk is to take the bus for 20 minutes each way, the true cost of the milk is not only what you paid for it but also the bus fare and the value of your time.

Some transactions cost problems I see for the proposed trash program:

(1) How will the city enforce the trash can size? What if residents have already purchased several trash cans from Home Depot or elsewhere? Will the city refuse to service these cans and insist that residents buy city-approved cans? Perhaps the city can give residents stickers to indicate that previously purchased cans have been approved; would garbage collectors have to check for the presence of these stickers every week?

(2) What if the amount of trash you need to throw away varies per week? Do you just have to pay the "big trash can" rate, even on the weeks you don't need it? Do you get the smaller garbage plan and keep the excess trash in your backyard on the weeks you go over? Will the garbage collectors individually document how many of each type of garbage can they collect at each house, and have an accountant bill you accordingly? Do most households even know how much garbage capacity they should buy?

I think that the program will prove to be more hassle than its worth. To steal an example from a professor, this is analogous to why restaurants don't charge for ketchup. Sure, some customers may have to subsidize the "heavy ketchup users," but the costs of monitoring the ketchup disbursement would far outweigh the few cents that would be saved in reduced ketchup consumption.

Domino's Stinks, but Do We Really Want It to Get Better?

Domino's has recently been running an ad campaign saying how bad its pizza is. You can see a long version of the commercial here. The ad begins with claims that the Domino's pizza "tastes like cardboard" and "microwave pizza is far superior." It ends with the new CEO vowing to listen to the complaints and improve. The advertising value of this technique is dubious: The first time I saw the ad didn't exactly inspire me to want to order a pizza, but it has spurred several conversations and led to this blog post. Maybe any publicity is good publicity.

In many industries, cheap, inferior products dominate the industry. Check out the best selling beers in the United States. Taste is a matter of personal preference, of course, but few would argue that Bud Light is the best-tasting beer around. Yet we continue to buy it, and we aren't hounding Anheuser-Busch for a better product.

Everything in life involves tradeoffs. If the pizza is going to be of better quality, it's going to be more expensive. If the pizza is going to be more flavorful (again, a subjective quality), it will have less appeal to the mainstream. In almost every U.S. city, there are fancier pizza options available, yet Domino's continues to make money. There is room in our economy for sellers of subpar pizza, as evidenced by the number of people who buy it. Many people prefer the lowest common denominator, because its cheap price allows them to have money left over to splurge on the things they're really passionate about. We don't need to have the best of everything; it's just too expensive.

Buying Horses With Gold?

Once again from "Buy Ketchup in May":

WHEN IS THE BEST TIME TO BUY GOLD? When the economy is stable. That’s when gold prices are lower. During a recession or a period of economic instability, the dollar decreases in value, and people tend to look to gold as an investment. The demand for gold drives up the price, and it’s not as good a deal then. Some gold investors point out that the value, or buying power, of gold hasn’t changed in more than 200 years. That means if you paid for a horse in the year 1809 with an ounce of gold, you could buy a horse in 2009 with an ounce of gold. (Gold price in 1808: $19 an ounce; in 2009: about $900 an ounce.)

(Read all of my posts on this book here.)

The best time to buy gold is not the focus of this post (though people often flock to gold during recessions because it is a "safe" asset, driving up the price). I was more interested in the comment about how much gold is required to buy a horse. Gold is indeed a stable asset. As a counterexample, if you held all of your money in dollars, you risk devaluation through inflation; if the government prints a lot more money, your dollars can't buy as much as they could before. Because we can't create more gold, there is no inflation risk. In fact, much of monetary history has revolved around the gold standard.

The nominal value of gold has risen about 4,600% in that 200-year span, according to the book. That sure sounds impressive, but the price level has also risen at a similar rate. So now your ounce of gold can get you $900 instead of $19, but that amount of money can still only buy one horse. It has the same "purchasing power."

Gold is indeed cheaper in a booming economy, but it is a poor bet for long-term economic growth, as it foregos any interest you could have made had you invested the money elsewhere. If you invest in other assets, such as stocks and bonds, you can expect a substantial real interest rate over such a long period. The average annual real interest rate from 1950 to 2008 was 6.8%. Assuming that this was about the same over the 200-year period, $19 invested in stocks in 1808 would be worth $9.8 million today, through the magic of compound interest. Now that could pay for quite a few horses.

Why Is Filing Taxes Still So Hard in the Internet Age?

The New York Times has an interesting column arguing that because the federal government already has a lot of information about your earnings (through W-2's and the like filed by employers), why can't it fill in some of (or all) the blanks on your online tax return? The columnist argues:

Requiring taxpayers to file returns without being told what the government already knows makes as much sense “as if Visa sent customers a blank piece of paper, requiring that they assemble their receipts, list their purchases — and pay a fine if they forget one,” said Joseph Bankman, a professor at the Stanford Law School.

Indeed, such a system would save substantial headache for millions of taxpayers every year. Why doesn't it already exist? Maybe it is the result of a lack of innovation on the government's part. Or maybe the tax preparation industry has sufficient lobbying clout to discourage such efforts; after all, the harder and more inconvenient it is to file taxes, the more profit these firms can expect to earn, as taxpayers turn to them for help.

However, I can think of two legitimate reasons this is not done:

(1) For the conscientious taxpayer, a form that is already filled out may lead to oversights. Because I have to start from scratch every year, I make myself a list of the jobs I've had in the past year, the interest income I've earned, my charitable giving, etc. If the norm were for taxpayers to glance over a prefilled form every year, many of these things may be overlooked.

(2) More importantly, many people are tempted to evade taxes. Taxable income falls into two categories: things the IRS knows about, and things that it doesn't. Under the current system, the taxpayer isn't sure what the government knows, so he should err on the side of reporting everything. If he omits some income that he doesn't think the government knows about, and he's wrong, he could be subject to hefty fines if this is discovered in an audit. This threat of being caught is enough to keep many people honest, even if the odds of punishment are low. However, if the government prefills a tax return, it is showing its hand. If the taxpayer notices that certain income has been omitted, what incentive does he have to report it? The government has admitted that it does not know about this income, and it likely never will. Therefore, the government collects more money under the current system than it would if tax returns were prefilled. However, the magnitude of the collection is important: if the current system collects only an additional $1 million in tax a year, the cost to taxpayers is not justified. H&R Block has an annual income of around $4 billion a year; this number is just for one firm, and all of that money wouldn't be saved under the proposed system, but it helps us understand how many resources are required to sustain the current tax filing system. Clearly, the increase in tax receipts as compared to the proposed system would have to be substantial to justify the additional expenses on tax preparation services. It is unclear how the IRS's budget would be affected under either scenario.

D.C. Bag Fee, or What We'll Do to Save 5 Cents

Beginning Jan. 1, grocery stores and several restaurants must charge customers 5 cents for a plastic bag. By informal measures, this has cut bag usage by over half, with some bit of consternation. The Washington Post reports many people awkwardly lugging groceries to their cars, sometimes dropping their items a few feet from the store.

Normally no penny-pincher, she now maps her day's travels to avoid having to shop in the District; she has abandoned her beloved neighborhood grocery store, Harris Teeter on Capitol Hill, in favor of stores near her Virginia office -- even though she pays an extra 2.5 percent food tax there. And twice she has unwisely carried an armload of bagless food out of D.C. restaurants, with calamitous results.

As alluded to in a prior post, many times in life, it makes sense to pay a small fee to avoid a major inconvenience. Perhaps drying our clothes on outside clotheslines would save electricity, but all of us bear the trivial expense of running the dryer because it saves us so much time. You would think that paying a few cents for the convenience of a bag would be a similar no-brainer, but it's causing a lot of stress for locals.

The article quotes Dan Ariely, a behavioral economist and author of "Predictably Irrational":

Because plastic bags have always been free, Ariely said, shoppers have come to see them as a kind of entitlement. Adding even a tiny fee is an affront to what they cherish as the natural order of things. "When it goes from zero to even a very small charge, it can feel very bad," he said. "It creates a very small financial burden but a very big emotional reaction."

Economic theory tells us that a tax should have the same effect regardless of whether it's the customer or the business sending it in (see here for a more extensive discussion (PDF)). However, this situation would have been much different if firms were taxed. I'd imagine they would suck up the 20-cent hit to their profit margins for each customer instead of getting a reputation for inconvenience. That way, the D.C. government would collect a lot more tax money but hardly make a decent in bag consumption. I wonder what the government would prefer: more tax revenue, or the use of fewer bags?

I've often been fascinated by how "free" is a drastically different price than some nominal amount, even if people can easily afford it. I'll likely have more on this topic in the future.

UPDATE 02/08: I've written more on this topic here.

Get a $25 Gift Card for Only $27!

I've been known to arbitrage eBay, especially when it comes to gift certificates and stamps. I'm willing to pay $24.50 for a $25 gift certificate, even if it requires waiting a few days for the item to come in the mail. Yes, I'm that cheap.

However, there are many gift certificates on eBay that consistently selling for MORE than face value! I've particularly noticed this with Amazon gift certificates (I would do a screen grab, but I'm pretty sure that this is a constant phenomenon, so whenever you click this, you'll see many auctions bid up to above face value, especially if you sort by "ending soonest").

This was discussed a few years ago on Marginal Revolution (see the comments), but I have yet to find a satisfactory answer. The best is:

"I am far enough from an Old Navy that the gas there would exceed the $2."

That's true in some circumstances because of transactions costs: You'll pay slightly more for the convenience of getting something mailed to you instead of going to the store. But this can't be the case with Amazon. Amazon gift cards are available in many forms: you can print them, get them mailed to you, buy them in a store, or just send someone a digital redemption code. It's hard to see why someone would choose to pay more money than face value and deal with the hassle and delay of eBay. Maybe there's some international consideration I'm not seeing, but I would think that getting something through eBay would be just as hard/easy as getting something through Amazon in any country.

The other best answer in the MR comments: "Stupidity."

I've e-mailed a few of the Amazon gift certificate sellers. Only response so far:

"I have no idea why they end up selling for more. I sold a $25 Amazon card for about $46 but then it came back as unauthorized so I don't know if it was really unauthorized or not since paypal still found in my favor as far as I acknowledge."

So, my theory is that it's either an awful lot of stupidity or an awful lot of scamming. Either could be a big black eye for eBay.

UPDATE 5/8: Another theory.

Unintended Consequences: Free Checking and Overdraft Fees

From the New York Times:

Banks earn billions in overdraft fees, money that helps pay for free checking.

A chunk of that revenue will disappear when some consumers elect not to sign up for the opportunity to spend more than they have. This week, Bank of America said that $160 million in overdraft fee revenue had already disappeared, because of changes it made in its policies ahead of the new federal rules.

Yesterday, I briefly mentioned loss leaders—or products that business lose money on in hopes of making it back somewhere else. Free checking is a good example. A checking account costs the bank money (they have to process your transactions, provide ATMs and banking centers, allow you online account access or mail you statements, etc.), but they are willing to give these services away because it may lead to you becoming a customer for more lucrative products. Maybe you'll take out a mortgage with the same bank, generating thousands of dollars in interest payments. You might stay at your current bank out of sheer convenience or laziness instead of shopping around for a better interest rate.


For many low-income customers, the banks relied on a significant percentage of them occasionally spending more money than they had, triggering hefty overdraft fees. Recent legislation would require customers to opt into overdraft protection (otherwise, their transactions will be denied if they don't have enough money). When the government makes it impossible for a business model to profit, it ceases to exist. Without those overdraft fees, free checking is likely to become a thing of the past.

Why Are Matinee Movies Cheaper?

More from "Buy Ketchup in May":

Movie tickets are cheaper early in the day—between late morning and late afternoon—because theaters want to attract people who haven’t eaten lunch or dinner and will fill up on popcorn, candy, and soda. The amount of money these theatergoers save on matinee tickets pales in comparison to what they spend on food and drinks.

(Read all of my posts on this book here.)

The amount of money a movie theater makes from concessions is irrelevant. A theater doesn't need to make the same amount of money from hungry matinee moviegoers as it does from full evening moviegoers. The matinee prices are lower because it's better to have butts in the seats than have the theater empty during the day. A slim profit is better than no profit.

As a professor last semester discussed, it's helpful to think about whether fixed costs (what the firm has to pay regardless of how much is sold) or marginal costs (what the firm pays every time it sells something) are more relevant to a particular industry. For movie theaters in the afternoon, the vast majority of the costs are fixed; whether or not you show up, the theater will still have to pay the salaries of the ticket takers and concessions staff, the rent for the building, the electric bill, and everything else. Because theaters are almost never sold out during the daytime, it's in their interest to accept money from you and show the 11:15 a.m. screening to six people instead of five.

The only marginal cost of consequence (it also technically costs money to print your ticket, etc.) is the fee that the theater must pay the movie distributors. But once that cost is covered, anything else can help pay for the fixed costs or be reflected in the year-end profit. In other words, it's a win for the theater. For example, if a theater had to pay the distributor $3.75 every time someone saw a movie (I have no idea what the actual number is), then anything $3.76 or above is a profit, on the margin. Theaters can typically charge more than this because the market will bear it, especially in the evenings (also, it would take an awful lot of 1-cent ticket profits to pay for all the fixed costs).

A journal article titled "Spatial competition in retail markets: movie theaters" (JSTOR) gives a good overview of how movie theaters have to split ticket profits with distributors, while keeping concession profits for themselves. A similar mainstream discussion is here.

As for why snacks and food cost so much, it doesn't matter if the theater is already making a killing after you buy your ticket or if it's just scrapping by. Anytime there is only one place to buy food, you should expect monopoly pricing.

Incidentally, I saw a neat example of marginal analysis in the same spirit just a few days ago.

Disclaimer: The above analysis could be completely flawed, if matinee tickets are indeed a loss leader, meaning that the theaters have to pay the distributors more per ticket than they receive from customers, hoping to make up the difference and then some through pricey concessions. From my research, there doesn't seem to be any indication that this is the case.

The Rationale, and Should You Really Fly at Noon?

"Well I can't pass up a much needed refresher in Greg's application of econ to everyday life. Let's talk about the game theory of gift giving this time."

So wrote a friend in a reply to a recent evite.

It's no secret that I like to make economics analogies in casual conversations. I'm working on my master's degree at George Mason University, so I often have econ on the brain. In an effort to spare my friends, I'm now attempting to channel some of this ranting into the wild abyss that is the Internet.

I am a disciple of the "Freakonomics" movement. I tell people it's the most expensive book I've ever read, as it partially inspired me to get into an out-of-state graduate program (approximate tuition cost=$30k, not including the time required). Hopefully something will come of it, besides arming me with annoying conversation topics and teaching me the inner workings of exchange rates.

This blog, like "Freakonomics," will focus on the economics of everyday life. You won't find analyses of credit default swaps or the dynamic stochastic general equilibrium model.

I'm going to begin with a series of comments on a pretty entertaining book called "Buy Ketchup in May and Fly at Noon," by Mark Di Vincenzo. Some of the book's themes are:

(1) Buy stuff when other people aren't. This is the classic "buy a winter coat in June" philosophy, or buying seasonal products right after their appropriate seasons.

(2) Do stuff when other people don't want to. The titular example of flying at noon is a case in point. People want to fly either early to get to their destinations as soon as possible or after they get off work.

(3) Think like a retailer. By exploiting supply-side effects, you can get a cheap piece of furniture right before the new models come, for example. The author also says to get to garage sales and swap meets at the end of the day, when the vendors likely will want to get rid of merchandise instead of packing it around for another day.

The advice is amusing, but it's important to remember the old economist adage: "There's no such thing as a free lunch." While a lot of these tips will save you money, you may be "paying" more on other margins. For instance, it's a huge pain to buy Christmas decorations the day after Christmas and then store them for a year. It's a drag to waste half your morning waiting for your flight when you could have gotten to your destination sooner. It's a risk to get to the swap meet at the end of the day, as many items might no longer be available, and food items won't be as fresh. The book duly notes many of these concerns.

This reminds me of the ongoing debate at my apartment. I like the instant access and convenience of Kindle books (I can read a few pages on my phone while riding the subway, even) and don't mind paying the $8 or whatever per book. My fiancee, in contrast, will always try to get books from the library, even if it means adding half an hour to her commute, having to walk in the cold, checking with the library several times over the phone to make sure that the books she requested are really there (the e-mail notices have lied to her more than once), and making a note on the calendar to renew the books on a certain date. So, while the books are "free" in terms of money, they are more expensive in the aggregate (at least to me) when you factor in the time and the hassle required to get them.

As a side note: I've been on a bit of a blog kick the past few weeks. I have recently been exposed to Google Reader, a product I highly recommend. It's like a custom newspaper, based on RSS feeds, of items you're interested in from various sources. I've also started a blog of a very different nature with my fiancee.