The Economics of "Snakes on a Plane"

I really hope someone Googles that some day and I'm the first hit. Take that, Demand Media!

I just read 50 or so painstaking pages of Bryan Caplan's new book Selfish Reason to Have More Kids, where he goes over seemingly every twins-separated-at-birth study ever conducted and argues rather exhaustively yet convincingly that nature matters a lot more than nurture in terms of how a child develops.

I am five minutes into watching "Snakes on a Plane." In this scene, the dude in the picture above has just said the following to another guy who's tied up in front of him:

I'll make sure to tell your son
all about it.
The reason he gets to grow up without a father
is because of how goddamn noble he was.
Then again, I was raised by a single mom and... (he takes a swing at the guy with a baseball bat, spewing blood everywhere)
I didn't turn out so bad, huh? Whoo!

And my first reaction was: "That probably had a small or zero statistical effect on your upbringing! It's all genetic!"

Yes, the master's degree in econ was totally worth it.

Where Are Today's Aladdins and Lion Kings?

Movies in the Disney vault are only available for sale on DVD at limited times. For instance, if you want a copy of Lion King or Aladdin, you'll have to buy a second-hand copy or one at a huge premium (list price of $50 on Amazon).

No new films have entered the vault since Lion King, in 1994. Why? Some theories:

1) Today's movies are just as good. The Princess and the Frog and Mulan are just as awesome as Cinderella or Beauty and the Beast, but today's entertainment market is so saturated that these movies don't have the network effects of movies in decades past and thus aren't considered classics.

2) Today's movies are worse. You could blame this again on market saturation: Disney nows that a Lion King-esque movie released today wouldn't make much money, so they don't bother creating it. Or maybe there's a greater emphasis now on animation instead of music and overall quality.

3) All the good new Disney movies are Pixar projects (Toy Story, Up), and thus perhaps aren't subject to the vault? The existence of these movies probably refutes my second theory.

4) My view is skewed by being someone of my generation, who will always hold a higher opinion of movies I was exposed when I was young (I notice that I also tend to deify Padres players of my childhood, who by any objective standard were average or worse). Maybe Disney's decision-makers fall victim to the same fallacy, and The Princess and the Frog will become vault material once today's children rise up in the ranks.

Watson's Unfair Buzzing Advantage on Jeopardy

By now you've probably heard about the exhibition Jeopardy! match between the IBM-designed machine Watson and the two most heralded players of the show's history.

After watching the constant frustration on Ken Jennings' face, I was confident that all the players knew most of the answers. It was just a matter of who buzzed in first, with Watson doing so most of the time.

Check out this description of the Jeopardy! buzzer, from Jennings' Web site:

If you watch Jeopardy! casually, it's easy to assume that the player doing most of the answering is the one who knew the most answers, but that's not necessarily true. All three contestants, after all, passed the same very hard test to be there. Most of the contestants can answer most of the questions. But Jeopardy! victory goes not to the biggest brain—it goes to the smoothest thumb. Timing on the tricky Jeopardy! buzzer is often what separates the winner from the, well, non-winners, and the Jeopardy! buzzer is a cruel mistress.

Here's how it works: the buzzers don't get activated until Alex is finished reading each question. If you buzz in too early, the system actually locks you out for a fifth of a second or so. But if you're too late, the player next to you is going to get in first. Somewhere between too early and too late is a very narrow sweet spot, like swinging a tennis racket or a baseball bat. No, that's not right. The Jeopardy! buzzer, she is like a woman. No, that's not it either. All I know is, the more I thought about the timing, the less I could nail it. When I could somehow just Zen out and not think about what I was doing, I would do okay.

Watson won primarily because it had first dibs on every question it pleased. I'm much less impressed by this victory because it involved a machine "hitting a button" much more precisely than any human ever could.

Yes, it's still impressive that the machine can perform so well on Jeopardy!-style questions, but the lopsided final score shouldn't imply that Watson is vastly superior to its human counterparts.

Netflix Pricing Paradox

I'm sure I'm not the first to recognize this (and I'm too lazy to use Google to find out), but Netflix's pricing policy seems a bit odd.

Having one DVD out at a time costs $8.99 a month. The marginal cost of the second DVD is $5 ($13.99 - $8.99). In order, additional DVDs after that cost you an extra $3, $7, $6, $6, $6, and $6.

Usually, businesses give you discounts when you buy in bulk, because their costs are lower. This is reflected in lower-end Netflix plans (i.e., getting 2 DVDs a month costs less than twice as much as getting 1), but why is that fourth DVD (and thereafter) so much more expensive than the third?

Maybe Netflix figures that subscribers with 3 DVDs and below are people like me and Sharon, who have busy lives and often let a Netflix DVD sit unwatched on our coffee table for a week or longer. We are highly profitable customers, so Netflix will let us have yet another DVD lying around for fairly cheap.

Conversely, it's hard to imagine anyone signing up for 4 or more DVDs at a time unless they fully intend on watching them. These people are signaling to Netflix that they'll be mailing DVDs back and forth with great frequency, so Netflix is anticipating a higher per-monthly-DVD cost and thus charging accordingly.

On a related note: we've had the 2-at-a-time plan before but switched to 1 at a time several months ago. Now that baseball is almost over, we might switch back, but it's interesting how much being able to watch an unlimited amount of Netflix's hodge-podge assortment of "instant" movies makes you reluctant to pay for more DVDs.

"Price Is Right" Perfection

Remember a few months ago when I was wondering if it would be worthwhile for a "Price Is Right" contestant to memorize car prices?

Well, as described by this Esquire article, one contestant did his research and got the showcase price exactly right, thus winning both showcases.

Hat tip again to Neatorama.

How Has the Price of Madden Games Held Stable?

In the middle of last July, I preordered Madden NFL 10 for Wii, paying $46.99.

The Wii version was vastly inferior to the PS3 and X-Box versions, but that's another matter. As far as Wii football went, it was top of the line: new features and updated rosters. It was released right before the NFL season.

It is now the middle of June, 11 months later. The Super Bowl was played four months ago. A new version of Madden comes out in two months. There is probably less interest in football video gaming now, when football isn't in season.

Yet Madden NFL 10 still sells for ... $46.99.

Is anyone else surprised that the price hasn't dropped? Is Electronic Arts maximizing its profits with this price? People can evade the high price by buying used copies of the game or Madden games from prior years (Madden 09, for instance, is only $18.73).

Perhaps EA's stable-pricing policy encourages people to buy the game when it comes out, because they have seen year after year that the price isn't going to drop a few months later. These additional sales could more than offset the sales that EA is losing by not lowering its price in the interim months between seasons.

Can you think of any other goods that behave this way, with new versions coming out every year? What happens to the price of cars the month before the new models come out?

"Seven Pounds": I Told You So!

Friday night, I watched "Seven Pounds" (Amazon and IMDb), starring Will Smith. This blog usually isn't a venue for film reviews, but let me quickly say:

(1) The film is 2 hours and 3 minutes long.
(2) My rating after seeing the first 1 hour and 55 minutes would have been 1 or 2 stars.
(3) My rating after seeing the ending is 5 stars.

Once again, I'm glad that I didn't follow Tyler Cowen's advice to give up on the movie too soon, as I discussed a few days ago.

Oddly, the movie explores the same question I wrote about here a few months ago. However, if you're interested in the movie, I strongly encourage you to see it first before reading too much about it online or clicking this link. But the link is here.

Why No One Besides Tyler Cowen Leaves Movies Early

"Think of all the bad films you've sat through just to get the answer to the nagging question."

So says screenwriter Robert McKee, as quoted in "Made to Stick: Why Some Ideas Survive and Others Die."

One of the professors in my program, Tyler Cowen, is famous for leaving movies early:

"People should be more willing to walk out of movies," he tells anyone who will listen. "Most movies -- they grab you or they don't, and if they don't, just leave. Just go. You have already lost money. Why lose the time?"

If a movie doesn't hook Cowen, he reads a book outside while his wife remains in her seat. Most recent movie they both left: "Greenberg," starring Ben Stiller.

Underlying this behavior, at least how I see it, is the economic maxim of diminishing returns. Basically, for pretty much everything in life, each extra unit is worth less than the one that came before it.

For instance, the first piece of pizza you eat in a sitting is great, while the seventh piece is much less enjoyable. For Tyler, he figures he could stay and watch all 20 scenes of a given movie, but he decides to leave after seeing the first 12 and figures he won't miss much.

But movies usually offer a spike of interest and enjoyment at the end, because the conclusion is so important. Seeing the movie's ending is often worth suffering through the boring middle parts. Even if the ending is predictable, most of us like to see the good guy win or the lovers finally unite.

For example, I definitely sat through some less-than-stellar "24" episodes this season, just to see if Jack Bauer made it out alive and if the sinister Charles Logan got what was coming to him.

Also, I have the unfortunate hobby of following the Los Angeles Dodgers from the East Coast, where most games start at 10 p.m. local time. Contrast how I act if I watch the last six innings of a game versus if I watch the first six innings.

If I begin watching in the fourth inning, I usually just take the current score as given and don't care how we got there. After watching the ninth inning, I feel a sense of completeness, even though I missed a third of the game.

If I begin watching in the first inning and fall asleep sometime during the sixth, I can't help but wonder how the game ended. The morning after, I inevitably have to look up the final score online. I've missed just as much of the game as in the previous example, but the experience is much different.

Maybe the "he reads a book outside while his wife remains in her seat" part is crucial to Cowen's strategy. After all, it's not so bad to miss the end of a movie if you have someone to fill you in.

Why MLB Teams Have Their Own TV Announcers but NFL Teams Don't

CC photo from anniemack on Flickr.

The above photo is of Vin Scully, who has been the Dodgers' broadcaster since 1950. For many in Southern California, a love for the Dodgers and a love for Vinny go hand in hand. Fans across the nation feel much the same way about their own long-tenured baseball announcers (many of whom are now deceased), whether it be Harry Kalas in Philadelphia, Jack Buck in St. Louis, Harry Caray in Chicago, Jon Miller in San Francisco, and so forth.

But football teams don't have their own exclusive TV announcers. The economics of each sport dictates its broadcasting style, due to differences in national TV exposure and advertising.

For the majority of fans, baseball is a regional sport. Only occasionally do fans see national broadcasts of random matchups on ESPN, Fox, and other channels. Only two teams--the White Sox and the Cubs (and until recently, the Braves)--have anything resembling a regular national TV presence. Only recently could diehard fans follow out-of-market teams through premium services such as DirecTV or MLB.TV. But the local team can be seen day in and day out, so it makes sense for the club to have its own announcers to build a sense of consistency, warmth, and intimacy with the viewers.

Every Sunday during the NFL season, each game is seen in the local markets of the participating teams as well as other parts of the country, often nationwide. In both baseball and football, local broadcasts are blacked out whenever there's a national broadcast. This is because the league earns more money from national advertisers who can reach the most earnest viewers in the local markets, as well as the rest of the country, than each team could earn from local advertisers on its own broadcast. Because every game is seen by fans across the country, there's no room for each team to have its own TV broadcasters.

On the radio, teams in both sports have their own announcing crews. In the playoffs, both sports employ a single TV broadcast for each game. Advertising and national exposure are the rationale for both.

Why I Don't Like Rating Movies or Books

I would probably be the world's worst critic. For most movies or books, my reaction is either "absolutely love" or "absolutely hate."

George Mason economist Tyler Cowen is somewhat famous for his proclivity for walking out in the middle of a movie, if he feels the rest of the movie isn't the best use of his time against whatever else he's doing that day. While I'm not quite this extreme, I like to think I'll give up on movies or books sooner than most.

(In fact, I think this is the main reason many people don't read books anymore. They get stuck with a bad one and aren't willing to give up on it and start another. Instead, they keep with the bad book, and soon enough reading is associated with pain.)

My polarized view of media seems like optimal behavorial, in terms of personal enjoyment. I overlook the flaws of good movies and remember only the good parts. I might end up dismissing some average movies that are better than I think, but after all, they're just average movies. So what if I miss out on a few three-star films?

Chris Anderson's "The Long Tail" discusses how the task of filtering books and movies for quality has shifted from shop owners and distributors to algorithms and the masses of consumers. Before the Internet, it made sense for corporations to decide what we should read or watch, because of the economics of limited shelf space. Now, the availability of movies and books is essentially limitless online, so many sites rely on user ratings to separate the good from the bad.

But does this constant rating make us worse off? When I saw "The Invention of Lying" in theaters, I throughly enjoyed it. My fiancee was pretty shocked by my reaction. Eventually, after further thought, I was forced to admit that the movie was rather flawed in parts.

I often find myself enjoying movies only to receive the Netflix e-mail asking me to rate it, so that future recommendations will be better tailored to my tastes. Then I begin to weigh the movie's pros and cons, and suddenly I like the movie less than I initially did.

A Downside to Niche Culture?

Chris Anderson's "The Long Tail" has some stunning implications about how falling costs to create, distribute, and search for media have changed our world from a "hit-based" culture, where everyone mostly reads the same books and watches the same TV shows, to a "niched-based" culture, where an ever-growing list of interests can be pursued in film, music, and literature.

He notes that, because of competition from cable and the Internet, the top TV show today doesn't draw a big enough audience to make it into the top 10 a few decades ago, even though the population has exploded in the time since. Also, the proliferation of Amazon has made orders of magnitude more books available in one place than anyone could have ever perused at a single brick-and-mortar store, yet 98% of the inventory sells at least one copy every quarter.

Now, we have less to talk about around the water cooler and more to talk about with Internet groups that share our increasingly diverse interests. I have much praise for richness of experiences that these niches allow us, but I wonder if we are putting too little emphasis on another important margin for entertainment: sharing and discussing it with others we care about.

The world is much more complex than this, but assume that, in 1960, you could only watch "The Andy Griffith Show." Today, in addition "The Andy Griffith Show," you could instead watch Japanese anime on your computer, or any of four other equally esoteric genres. Are we better off in a world where you can watch Japanese anime, which you immensely prefer to Andy Griffith, and can discuss it with friends online? It's now harder to strike up a conversation with a random co-worker or stranger at the bar, as your potential interests have diverged greatly. Cultural memes have a harder time catching on en masse, as only a small portion of the population will recognize a witty line or inside joke from the most mainstream shows. Is there something to be said for the era of greater in-person interaction, even if it revolved around shows that people only watched because there was nothing else on?

Please Rate iPhone App Before Deleting

Whenever you decide to delete an iPhone app, you're prompt to rate it. The only other way to rate apps, as far as I know, is to go back into the App Store and find the app again, which requires a bit of effort and isn't very intuitive.

The app rating process has a self-selection bias, as only those users with extreme feelings about the app are bothering to rate it: either people who are deleting the app off their phones or people who like the app so much that they are going out of their way to rate it. The majority of users are going unheard.

While the rating system seems flawed at first glance, perhaps it's just right for Apple's needs. Apple has recently been on a crusade against pornographic content and apps that offer minimum user functionality. Its App Store has exploded in size so much that it is experiencing diseconomies of scale: there are so many apps out there that users are having trouble telling the good from the bad.

By encouraging a lot of ratings for apps that are consistently being deleted, the ratings quickly reflect these apps' true, poor quality. So while the distinction between 4-star and 5-star apps probably isn't that meaningful, Apple's system accomplishes a much more important goal: helping people avoid the duds.

"The Price Is Right" as Behavioral Economics Lab

Two things I wonder about regarding "The Price is Right":

(1) Misbidding

On Contestant's Row, where four contestants bid for an initial prize and the right to play a game and spin the showcase wheel, it's amazing how often the last person makes inefficient bids.

No matter what the prize you are bidding for, imagine that the first three bids in front of you are $450, $575, and $600.

If you think the item is really worth at least $800, you shouldn't bid $800, but rather $601. Otherwise, you are conceding the range between $600 and $800 to the third player, when there's no reason to do so.

Similarly, if you think everyone is over (remember, in "The Price Is Right," the winning bidder is the one closest to the actual price without going over) but you think the item is worth at least $200, you should bid $1, not $200. This way, you win if the item is priced from $1 as high as $599, but you would all be over, and bidding would start over for new prize, if the item ended up being cheaper than $200.

Yet contestants make both types of bidding errors on a regular basis.

(2) Memorizing Car Prices?

I wonder if it would be worth your while to memorize the prices of all new cars if you're going to be in the audience.

First, we'd have to estimate the chances of you playing a game involving a car, given that you are a member of the audience (using the same conditional probabilities methodology that Book of Odds does, when it calculates things like the odds of a given cow being used to make a football for the Super Bowl).

I don't know the audience size, but only six contestants per show play a game, and only a fraction of those play a game involving a car. So getting to the point where car knowledge would benefit you is remote.

If I had the inclination, I could visit a site like the Price Is Right Blog and see what makes of cars have been involved in games. Then I could research the models and their prices for each of these makes (which might be easier than you think, as each make only has about a dozen new models).

People vary dramatically when it comes to memorization skill. If you can easily memorize 100 or so five-digit numbers (and I certainly can't) and you get in a game involving a car, you're pretty much guaranteed to win. With no such knowledge, let's say your chances of winning are 50%. So, if you're playing a game for a $20,000 car, you've increased your expected winnings by $10,000.

However, because the chances of going from an audience member to a contestant involved in a car game are so small, perhaps such memorization will only increase your expected winnings by a few pennies and therefore won't be worth the effort.

Concerts and Hand Stamps

My hand 24 hours (and a shower and several vigorous hand washings) after a Rodrigo y Gabriela concert at the 9:30 Club in D.C. My fiancee's is below.

"I am never going back to 9:30 Club. Last time, my hand stamp took 3 days to wear off!"

Okay, so no one says that, or would act that way. Economists talk about how higher prices and added inconveniences drive away some marginal customers, but a longer-lasting-than-desired hand stamp from a concert has no apparent downside for the venue. A different kind of ink likely would vanish quicker, but what incentive does the venue have for using it? The disfigured splotches make for great free word-of-hand advertising as people return to work the next day. Heck, some dork might even write a blog post about it.

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.

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.