Monday, August 30, 2010

Kindle and iPad: 3G or not 3G?

Given how much risk aversion and the cost of acquiring information affect people's decisions, I wonder whether the makers of the iPad and the Kindle are turning away potential customers by offering both a Wi-Fi only and a Wi-Fi + 3G version of their products.

Both the Kindle and the iPad are gadgets unlike anything else most of us have ever owned, so it's hard for us to know exactly how we'd use them. Whatever the customer decides, he is set up for second guessing.

If he gets the Wi-Fi only Kindle, he might find himself in many situations where Wi-Fi isn't available and 3G would have come in handy.

If he splurges for the Wi-Fi + 3G model, maybe he'll discover that he just uses the Kindle around the house after all and will lament wasting $50 for the 3G option.

It's even worse for the iPad: Not only does the 3G-capable version cost $120 more, it also requires a 3G data plan that runs about $15 a month. Luckily, diehard flip floppers can cancel the data plan at any time, thus cutting their losses somewhat.

Classic economic theory tells us that more choice can only make consumers better off (how can a new choice makes us worse off if the original choice is still available?). But, as I've argued before, perhaps retailers (or regulators) should make decisions for us when the choice is too technical for most people. The book "The Paradox of Choice" suggests that consumers might even be paralyzed by some decisions, to the point of not making the purchase.

For what it's worth, a while ago I happily bought the second-generation Kindle, which only had 3G (you don't really need Wi-Fi if you have 3G) and thus spared me the research and soul-searching required to decide whether 3G was worth the extra money.

Friday, August 27, 2010

Ranked Preferences in Spades

(Those of you who don't know much about the spades card game won't get much out of this post, though a brief recap of the rules is here.)

In spades, you have to choose between two opposing goals--bagging or setting--and often have to switch strategies in the middle of the hand.

Your strategy can change dramatically if one team is close to the winning score, if one team has a high number of bags, or if a player has gone nill. For this example, assume that none of these factors is in play and that your team has bid 7 and your opponents have bid 3.

Your best outcome is taking 11 tricks, which makes your bid and sets your opponents, while taking the minimum amount of extra bags. Twelve or 13 tricks (nearly impossible in real life) are next best, as they also set your opponents but give you a few extra bags.

Next best is 7 tricks. You make your bid while taking no bags. Then you'd prefer 8, 9, or 10 tricks, which give you a few bags but don't set your opponents.

If you get fewer than 7 tricks, you don't make your bid. In this unfortunate scenario, you want to take as few tricks as possible, to maximize your opponents' bags. Zero is the best and 6 is the worst.

In sum, here are the number of tricks you could take, in order of your preference:

11, 12, 13, 7, 8, 9, 10, 0, 1, 2, 3, 4, 5, 6

What makes the game fun is that when you aim for 7 (the fourth best option), you risk ending up with 6 (the worst option). When you aim for 11 (the best), you risk ending up with 10 (the seventh best).

Of course, you must also play in sync with your partner, who may be trying to bag while you're trying to set (or vice versa). And you should be watching which cards have been played, which gives you information on which cards the other players are likely to be holding and thus your chances of reaching your goal. And you may need to take into consideration some of the other things that I've assumed away (if one team is close to the winning score, if one team has a lot of bags, etc.). It can get complicated.

Using a Pitcher to Pinch Hit

Starting pitcher Jason Marquis pinch hit for the Washington Nationals in the fourth inning of last night's game and the fifth inning Monday, grounding out both times.

Marquis has a .201 lifetime batting average, but that comes with a paltry .516 OPS. In other words, he's just as weak a hitter as any other pitcher. Yet manager Jim Riggleman often uses starting pitchers to pinch hit if that day's starter is knocked out early in the game, in hopes of saving his bench players to pinch hit later.

If the Nationals' pitcher is being removed so early in the game, it's likely that he's been struggling and that the team is facing a large deficit. Therefore, Riggleman is sending up a pitcher to hit because it is a low-leverage situation (i.e., the at-bat has a small chance of affecting the outcome of the game).

Or so the thinking goes. Yet I have to wonder if the strategy is flawed.

Suppose the Nationals have five bench players, not including the backup catcher (who is rarely sent into the game, because if the other catcher gets injured and the backup is no longer available, the team is in deep trouble). More often than not, Riggleman's strategy would give plate appearances to Marquis and four or fewer of these bench players, when he could no doubt expect better results from plate appearances from five or fewer bench players instead.

The latter combination would give the Nationals a better shot at being in a close game in the late innings, which would justify the risk of using up all the bench players. A run scored in the fourth inning counts just as much as a run scored in the ninth. A surplus of bench players in the ninth inning does the team no good if it's trailing by four runs. Even if Riggleman does blow through his whole bench, it's unclear that having Marquis possibly pinch hit in the ninth is worse than having him for sure pinch hit in the early innings.

Thursday, August 26, 2010

Perverse Incentives for Pittsburgh Pirates

I've already blasted this Slate article all over Facebook and Twitter, but it's worth posting here as well.

Baseball's revenue sharing system was designed to try to help baseball's poorest teams by forcing the richer teams to pay them millions of dollars a year. However, this weakens a team's incentives to win games and become more profitable, as all additional money earned by winning is partially offset by a drop in income from revenue sharing.

The phenomenon is similar to welfare or unemployment insurance. Someone who collects $400 a month in welfare would only become $600 a month better off by taking a $1,000-a-month job, not to mention the time and effort required to work the job.

Tuesday, August 24, 2010

The Benefits of Drafting Too High

It was as if a big new market-moving Wall Street money manager had sprung into being, and bought shares only in vegetarian restaurants, or electric car manufacturers. With a difference. A revaluation in the stock market has consequences for companies and for money managers. The pieces of paper don't particularly care what you think of their intrinsic value. A revaluation in the market for baseball players resonates in the lives of young men. It was as if a signal had radiated out from the Oakland A's draft room and sought, laserlike, those guys who for their whole careers had seen their accomplishments understood with an asterisk. The footnote at the bottom of the page said, "He'll never go anywhere because he doesn't look like a big league ballplayer."

- Michael Lewis' Moneyball

I am re-reading Lewis' 2004 classic, which explains how the Oakland A's had so much success in the early 2000s despite a paltry payroll because they evaluated players differently. The A's won with misshapen players who couldn't run or field very well but who had a knack for getting on base.

Many of the players the A's were interested in before the 2002 amateur draft didn't see themselves getting drafted until the fifteenth round or later. One could argue that the A's should indeed have waited till these later rounds to draft these kids, because no other team was going to take them anyway.

Instead, the A's called these kids and told them how well they would fit into the Oakland system, so much so that the A's would be selecting them in the first or second rounds. They would be offered a signing bonus that was absurdly higher than what they were expected yet up to a million dollars less than other high draft picks would typically receive.

Either method would help the A's acquire valuable players that no one else really wanted, but it's clear that the latter gave these youngsters a credible reason to believe in themselves and thus devote the effort to becoming big league ballplayers.

Thursday, August 19, 2010

Competing on Easy to Understand Margins

I heard an ad on the radio for United Airlines saying that the company's airline miles are extremely easy to redeem, as there are no blackout dates, etc.

Of course, there's no such thing as a free lunch, so if United miles are easier to redeem than those of other airlines, then they probably are more difficult to earn. However, it requires a lot more research to compare miles at this margin. I would expect consumers to prefer products that are better on understandable margins, even if they are inferior overall once one factors in all the technical details.

For instance, many people would prefer a checking account with no monthly fee to one with a monthly fee, even if the latter has lower overdraft fees or is superior in other ways. Maybe it's a good thing that the government is cracking down on the more obscure bank fees, which could homogenize some elements of banking products that many people don't understand.

Tuesday, August 17, 2010

Transactions Costs: Electronic Checking

For years, I've been seeing advertisements asking me to sign up for ING Direct's Electric Orange checking.

It's supposedly better than other checking accounts and is linked to 35,000 free ATMs. Heck, ING has even offered me $50 to sign up.

What's stopping me? Well, I don't know where any of those 35,000 free ATMs are. I'm sure there are dozens near me--but to find them, I need to consult the online ATM locator.

My current situation, in contrast, is much easier: whenever I see one of those big Bank of America signs somewhere, I know that there's a free ATM there for me.

In other words, the cost of acquiring information on Electric Orange ATM locations is too high. Not to mention that I am mildly locked in with Bank of America anyway, as it also houses my main credit card.

(Or is this just an economist's way of justifying laziness?)

Monday, August 16, 2010

The Decline of Stephen Strasburg Mania

I recently wrote about the absurdly high ticket demand for Stephen Strasburg starts, but it seems like the hysteria has ended.

After an incredible beginning to his career, Strasburg has regressed to the mean a bit, being pulled from one start minutes before the game, spending a stint on the disabled list, and getting shelled against the Florida Marlins. While Strasburg's first few starts were sold out, his appearance Sunday drew a paltry 21,695 fans to Nationals Park.

I like to track prices on StubHub, a secondary ticket market, because it says so much about anticipated demand by the scalpers looking to turn a profit and actual demand by the fans as game time draws near. A few hours before Sunday's game, there were hundreds of tickets under $5 still available (many for only a few cents), as the resellers tried desperately to recoup any small percentage of what they paid for the tickets.

It's hard to imagine the market to see Stephen Strasburg will ever return to its early form, even if he continues to be an incredible pitcher. Ever wonder why many venues don't raise ticket prices, even when they know an event will easily sell out? One reason is insurance: for whatever reason (recession, bad weather, etc.), the venue could have made a mistake and ended up with a half-empty house.

But this mistake would be perpetually punished: it's not much fun to see a sporting event or concert surrounded by a sea of empty seats, which serve as a reminder that other people no longer think that this event is much fun. It's difficult to convince yourself that attendance is down because of the economy and not because the team sucks or baseball is boring. Today's attendance can very much be a factor of yesterday's attendance, which has such a large influence on how people perceive an event.

(A nod goes to Russ Roberts, who discussed many of these ideas in his class a few years ago.)

New iPhone: Direct to Me from China

If the above screenshot is accurate, then Apple has shipped me the new iPhone 4 directly from China, via FedEx.

My initial thought was that it would be cheaper and easier for Apple to ship a bunch of iPhones together in one box from China to somewhere in the U.S. and then have someone (or some machine) dismantle the box and mail the phones within domestically, instead of paying international shipping for each phone.

However, because Apple isn't doing it that way, I have to assume that its approach is cheaper.

I find that odd.

Perhaps the per-phone domestic shipping price is not much lower than the equivalent international shipping price? Perhaps U.S. labor is astronomically more expensive than Chinese labor? Or perhaps this is a stopgap solution, as Apple is trying to fill a huge backlog of iPhone orders (I waited three weeks for mine)?

Sunday, August 8, 2010

I Don't Get the Gold Rush

Wikipedia says that the population of San Francisco increased from 500 to 150,000 between 1847 and 1870, largely because of the Gold Rush.

It's hard for me to imagine that there was enough disposable income and demand for such a luxury good during those days to support the work of so many people. In other words, who was buying all of that gold?

Or was gold used mostly as a currency at that time, so finding a few ounces of gold was like finding $1,000 in cash?

Wednesday, August 4, 2010

Why Not Sell Newsweek for Scrap?

The Washington Post Company recently sold Newsweek for $1 (source).

The magazine has recently been losing about $30 million a year, so the purchase is analogous to buying a $99 iPhone and paying $2,000 to use it, in the form of AT&T bills.

One has to wonder why the magazine wasn't just shut down outright. Surely it has some assets worth selling--such as real estate, printing presses, and office equipment--that would have netted the Post Company thousands if not millions of dollars.

Perhaps these sales wouldn't cover Newsweek's debt obligations. If that's the case, Sidney Harman did the Post Company a huge favor.

(In fairness, I realize that I argued the opposite point in February when GM shut down its Hummer brand.)

Tuesday, August 3, 2010

Stealing More by Stealing Less

Another great observation from William Easterly's "The Elusive Quest for Growth": centralized corruption will do better than decentralized corruption, both in terms of the country's productivity and the amount of money swindled.

If a government has too many corrupt officials all acting on their own accord, they will each "overfish," soliciting high bribes to maximize their own take without consideration for the well-being of other solicitors. Their victims, under constant threat of bribe solicitation, will spend considerable resources to avoid paying.

However, if solicitation can be handled in a central way, the victims may instead find it worthwhile to generate income and accept paying the more reasonably sized bribe.

Bribes are a form of taxation on income. Under centralized corruption, the effective "tax rate" is lower.

Easterly's point is the same as that put forth by the Laffer curve. The Laffer argument is that a government will collect more revenue with a tax rate of 30% than a tax rate of 90%, as the latter will ruin any incentive to generate income in the first place.

Monday, August 2, 2010

Trapped Inside During Snow? Make Some Babies

The Washington Post has an amusing story about whether there will be a surge in births in the D.C. region come September, which would be about 9 months after the snowstorms that paralyzed the region for days on end:

Outside, the white December snow piled higher. Relentlessly higher. Inside a Laurel home, a woman watched "Dexter" reruns while her boyfriend played "Batman: Arkham Asylum." They grew restless. They looked at each other.

"Once a day," Gineen Glenn, 27, admitted on a recent Tuesday.

"Twice a day," interjected John Cargo, 28.

No denial from Glenn, who is expecting to give birth to their first child, a boy, in early September. "You lose track of the days," she said, giggling. "It's just dark."

So it was during the historic snowstorms in December and February that folks trapped indoors searched for ways to relieve the boredom. Nearly nine months later, the things some residents did seem to be breeding results.
The story notes that the connection between natural disasters and copulation has been speculated about for decades, with several statisticians arguing that there is no real effect.

Count me among the skeptics. It's safe to assume that the amount of sex increases when there's few alternate activities available, but more sex does not necessarily mean more pregnancies.

Many couples have sex for years without getting pregnant, because they use the proper contraception. There's no reason to believe that the use of contraception would drop during the snowstorm.

Unless people are far less responsible than I give them credit for, couples are either trying to have a baby or they're not. The presence of the snowstorm and any increased sex it might bring about shouldn't be a factor.

And even if many children are "accidents," there are plenty of opportunities more or less evenly distributed throughout the year for them to be conceived.