Monday, June 30, 2008

Price of a Movie Ticket Compared to a Video Game

Today on Grinnell plans, someone asked why in comparison to movies tickets are video games so expensive. For example you can see the new Indiana Jones movie for $10-$12 or you can purchase the Lego Indian Jones video game for $40. As the person who asked the question points out the budget for top video games is about 1/10 to 1/5 that of a top movie.

The price difference is caused by a couple of things. First, there is a strong
connection between both movies and video games in the type of good they are. In some sense a movie studio or video game company has a monopoly on any movie or game, but there are many movie and video game choices so it is not quite a monopoly. Economists call this monopolistic competition, which just means at some point a video game company or movie studio has to worry about competition if they price the product too high.

So now how is price determined? Prices will be influenced by the number of people willing to buy it at a given price (demand) and the cost of production. However, for movies and video games most of the cost are up front. Once a video game is developed another copy can be produced for the cost of the packaging and the CD, probably a couple of dollars. A movie at a movie theater is a little different in that there is the cost of running a theater and the employees, but once a theater is running the cost of one more patron is low. Video games companies will maximize the difference in the money coming in from sales and the cost of making another CD. As long as they make profits the game’s development cost should not impact price.

On the demand side I think there is another factor at play. Although I have not played video games regularly, since a brief minor addiction with Grand Theft Auto and MLB 2006. I do know that someone who buys a video game will likely play it for more than the couple hour run time of a movie. In that sense the price per hour of enjoyment may be lower than the movie.

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Thursday, June 26, 2008

Don’t be a Shirk! Monitored Behavior.

I guess like most people I goof off a bit (perhaps a bit too much) during the day. Between reading blogs, the NY Times, baseball stuff ect., I take breaks throughout the day. However, over the last two days I hardly took any. What changed was I was in Madison Wisconsin jump starting a project on fair trade coffee. With my former Ph.D. advisor and a grad student, we transformed a data set to get some summary statistics and started formulating ideas for future papers. To transform the data the grad student and I sat side by side working on two computers editing different parts of the data. She helped me with some Spanish and we helped each other with coding issues. Sitting right next to each other though I didn’t want to shift from having STATA (my data program up) to the NY Times or my e-mail because she was working hard and that would not be fare. I talked to her about this result and she felt the same.

This is a classic economic example of a common good. Often when people work together on a project that all will share in the results, people do not work as hard. You probably know this if you did a group project in school. Not working as hard as you could in economics is called shirking. One way to prevent shirking is to monitor behavior and another way is to feel a sense of duty to the group, which usually comes out of repeated interaction.

This is clearly a common good, since we both can use the data once it is together. Monitoring in this case was easy since both of our screens were in view of the other and I have known and been friends with the grad student for almost 6 years.

Perhaps I should have brought her back to California this summer so I can keep up working hard on the other hand I do enjoying shirking.

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Friday, June 20, 2008

Fertility Age and Income

Time magazine features an article on Gloucester High School in Gloucester, MA where there has been a sharp increase in teen pregnancies from 4 to 16 out of 1,200 students. The story has a strange twist in that it appears the growth in pregnancy is due to a pact formed by 8 of the girls to get pregnant. One of the reasons pointed to in the article for this pact was that Gloucester is a blue color fishing town with poor economic prospects.

The age at which mothers have children is strongly related to income prospects. A more global perspective from this graph at Gapminder, shows that as GDP per capita (income) rises the number of teen births decreases. In Africa, there is about 1 birth for every 10 women under 19 per year, while it is a little less than ½ that in the United States (.4 births per 10 women). So Gloucester was still below the national average this year.

This negative relationship between income and having children young is generally explained by if women have more prospects economically, then giving up some of those prospects through pregnancy seems less attractive. Interestingly though the US is a bit above where you would expect in terms of the number of teen pregnancies given our GDP per capita. My guess is this is due to a combination of culture, inequality, and availability of contraceptives.

h/t to broadsheet at

Or if you prefer a map of fertility see the below.
Adolescent Fertility Rate (Births per 1,000 Women Aged 15-19)

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Thursday, June 19, 2008

Perot and his Charts are Back

Before Al Gore and his PowerPoint presentations there was H. Ross Perot and his charts. For those of you who don’t remember Perot ran as an independent for President in 1992 and 1996 on a platform of deficit reduction and being anti-NAFTA. The deficit problems highlighted in those elections seem to have disappeared from the media attention, although discussion about Medicare and social security seem to be around from time to time.

Perot is back and trying to bring the perceived problems of the deficit to the national spotlight. Perot has created a website to highlight the national debt, health care, and social security problems. I have not had a chance to explore the website too much, but I think these are worthwhile issues, and as an economist I appreciate a good chart.

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Tuesday, June 17, 2008

What does middle class mean in the developing world?

The Journal of Economic Perspectives has a spring issue on development economics. This is a great journal to read if you want to learn what’s going in economics, but don’t want to/can’t read a bunch a bunch of Greek letters. The first paper in the issue by Abhijit Banerjee and Esther Duflo uses household surveys from 13 countries (including Mexico, Pakistan, South Africa, and India) to give an overview of what the middle class is like in the developing world. To start with Banerjee and Duflo define middle class as those living off of between $2-10 a day per person. To compare a family of 5 at the poverty line in the US would spend $13 a day per person. I like the Table 2 from the paper (shown in the picture to the right) to give you an idea of the relationship between income and spending. For the most part until people reach $2 a day per person more money goes to more/better food. The percent of income spent on food drop for those earning between $2-4 a day per person and even further for those earning $6-10.

With that extra money households can get increased access to water, more education, and get televisions.

Perhaps the most telling results from their overview is the employment of the different levels of consumption. Those who live off of less than $1 a day tend have temporary employment, while those living off $6-10 a day are much more likely. As the authors put it “Nothing seems more middle class than the fact of having a steady well-paying job.”

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Monday, June 16, 2008

Economics of Disaster Relief: How to Recover from the Floods and Lessons from Katrina

I have been trying to follow the flooding stories in Iowa. I went to undergraduate in Iowa (Grinnell College), which has managed to avoid the floods, but I have fond memories of visiting Des Moines, Cedar Rapids and Iowa City during my time in Iowa. Those three cities have been hit hard. To get an idea of the damage see the Gazette, Cedar Rapids local newspaper.

Over the weekend I began to think about how best to help people recover from a flood. Should government assistance be offered and if so what kind? I’m not experienced enough to give a good answer to that question, but I do have some thoughts.

First, I think most people's inclination would be to provide government help. But from a federal level that would mean FEMA would probably be leading it and after the New Orleans recovery (or lack thereof), I’m guessing people are a little more wary of having the government try to help.

So why has FEMA failed in New Orleans, and what might be learned for Cedar Rapids? A policy brief, which is a short and good read, by Emily Chamlee-Wright and Dan Rothschild* from George Mason’s Mercatus Center suggests five things.

• Make only commitments that can be kept, and do them so as soon as possible.
• Minimize revisions to land use plans, and make these plans both simple and transparent.
• Encourage flexible commercial solutions to housing problems by suspending onerous regulations in the aftermath of disaster. Such regulations are appropriate for everyday conditions, but they often hamper redevelopment after a major disaster.
• Allow for the suspension of some employment regulations to make it easier for jobs to return to disaster stricken locales.
• Unless absolutely necessary, avoid providing goods and services that the private sector can supply.

The fifth one is interesting and not something I had thought about. As the paper says, FEMA came in after Katrina and hired a lot of the local worker and provided substantial unemployment benefits undercutting the ability of local businesses to recover by raising wages.

It is worth noting these lessons as Iowa goes forward with its recovery.
* disclosure I taught at Beloit with Emily and I'm friends with Dan

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Thursday, June 12, 2008

Chuck Norris: Black Belt, Movie Star, and Energy Economist.

Chuck Norris is stepping into the ring to fight high gas prices. He penned an article with a 12 point plan for congress, which boils down to the title “Congress, Get Off Your Gas, and Drill”. Chuck Norris’s plan follows a simple economic principle if you increase supply the price will go down. Of his suggestions most go toward as the title suggested increased drilling in areas were drilling is currently not allowed and building oil refineries.
So would the average economist think this is a good plan? I don’t think so given the strong reaction against cutting the gas tax. When Hilary Clinton and John McCain proposed a gas tax cut, no one could find an economist for it. Economists tend to believe that the externalities of using oil are such that price of oil should be about where it is and taxes shouldn’t be lowered. That is the more oil we use the more pollution and traffic created so cheap oil might not be best.

Economists also note that in the short run prices will rise as people can’t change their gas usage that much. But after a while people move closer to their jobs and buy more fuel efficient cars, so demand for gas starts to decrease. This will bring back down the price of gasoline.

I have not researched Chuck Norris’s proposal individually, so there may be some places increasing supply makes sense, but I think focusing on demand is going to be the key way to solve the gas price problem in the long run.

One final note. Chuck Norris fact, Chuck Norris can eat a free lunch.

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Wednesday, June 11, 2008

Ask the Economist: Why are There So Many Car Commercials?

Yesterday in the comments Nora Rocket asked why are there so many car commercials as compared to other products? This article indicates that is the case as auto dealer ads account for 20-25% of most local TV ad revenue, so car companies really are advertising more. I looked around a bit but I could not find any explanations of why cars advertise more than other products, so here are a couple of guesses.

1.Franchising: Most local car dealership are affiliated with a major automaker. That means the crazy guy singing or dancing might own the dealership, but someone else makes the cars. In the case of franchising it is important to the local dealer that people know about the brand they are selling products. If you sell Fords, you want people to have Fords on their minds. In fact many franchising contracts stipulate how much should be spent on advertising. In some sense car companies sell both the car and the brand to the franchise/car lot owner. Fast food restaurants are also generally franchised, which may explain their heavy ad buys.

2.Imperfect information: Transmitting these messages is costly. But as opposed to many other products comparing cars purchases is difficult. Include possible finance options and the ability to negotiate on price and comparing is even harder. New car models come out every year, somewhere I recall hearing that the start of new TV shows in the fall was meant to coincide with new car models.

3.People don’t buy cars that often so, they don’t know where to buy them. I’m 28 and have never purchased a car, thanks to parental hand me downs and my wife’s college car. So I have no relationship with any car seller, so I don’t know where to start. Watching local TV you learn all the car dealers, so why not start there. Our Nissan has 135,000 miles on it so sooner or later I'm going to purchase another car, but really I could not name one local car dealer, probably because I stopped watching brodcast TV. I still remember Fred Rickard "we're dealing" and the adress of Graham Ford in Columbus

So those are just three guesses, anybody else got any ideas?

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Tuesday, June 10, 2008

How Many Ounces in a Pint? Restaurants that Short Pour to Save Money

There are 16 oz in a pint, but according to this Wall Street Journal article some restaurants are serving 14oz beers. This problem seemed to be first noticed Jeff Alworth, a Portland, Ore., beer blogger. Taking an initiative Alworth started the Honest Pint Project. He went around Portland drinking beer and measuring the glasses. He then posted his results on his blog showing where an honest pint could be found.

So what are the economics of 14oz beers? It is possible that people do not want a whole pint as a quote from the article points out "Someone who comes in and wants a beer doesn't want a huge glass," says Tanny Feerer, vice president for purchasing at Damon's International. "Fourteen ounces is enough." As a spokesperson for Hooters points out 20 extra beers are gained per keg with the 14oz pours.

If a pint is honest or not depends on if the beer is advertised as a pint or 14oz beer. Either way, some companies have taken the advice of an article published in a British Medical Journal by Brian Wansink, a Cornell University professor that showed customers cannot usually tell the difference and are just as happy with a 14oz beer.

At this point it might be a good idea to follow the British. There if you get a pint in the pub, your glass is certified as a pint and it marked as such. This Wikipedia article on pint glasses is quite informative on the subject.

Economically it could be argued that letting it go as is with dishonest pints might be better if the cost of implementing such a certified pint glass system outweighed the benefit of decreased monitoring cost for people like Alworth and the loss of the consumer enjoyment of those extra 2 oz. But I would rather have my full pint.

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Monday, June 9, 2008

Derrie-Air: What if an Airline Charged by the Weight of Passenger?

Derrie-Air, a new airline, is charging passengers based on their weight. O.K. so the airline is not real instead it is the creation of a marketing firm in Philadelphia, but it raises some interesting economic issues.

If such an airline were socially acceptable, would this type of pricing make sense? Start by focusing only on the passenger. The fares proposed by the website were around $2.00 a lb per trip: so the difference between me and say a former offensive lineman (FOL) could be a couple hundred bucks. My guess is that the FOL will likely chose another airline, that does not charged based on weight. This is a classical case of price discrimination, that is charging two people different prices for the same product. Typically what happens in this situation is that the discriminating firm cannot hold onto a lower price for the preferred customer (light weights), since they lose all the expensive customers.

There are some differences here though. Perhaps light weight people like flying on airlines with other light weight people. As Daniel Hamermesh points out on the Freakonomics blog “Also, heavier people spill over onto their neighbors’ seats, generating negative externalities for the other passengers” It is possible they might pay a premium for knowing the other person will be light.

Those who know the airline industry realize that charging heavier passenger more does happen. Southwest Airlines famously charges customers of size for two tickets. Their FAQ actually strike a nice balance between sensitivity to size issues and economic concerns. My favorite Q&A is
“Why not make your seats wider or add a few wide seats on your aircraft?
Our ongoing goal is to operate a low-fare, low cost airline, and the costs of reconfiguring our fleet would be staggering and would ultimately reflect in the form of higher fares for our Customers. Purchasing two seats on Southwest Airlines is significantly less expensive than purchasing one first class seat on another airline. “

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Thursday, June 5, 2008

Women’s Studies and Economics

The other night I was talking with my wife and the topic of Women’s Studies came up. It got me thinking, what exactly is taught in a Women’s Studies class.

I have been reading Economicwoman a blog on feminism and economics from an undergraduate student at Toronto University. I’m starting to get a sense of how the two subjects might link from it. One blog (Economicwoman) linked to was Economics-She-Wrote written by Susan Feiner who is professor of Economics and Women’s Studies at Southern Maine University.

The entry (linked here) has an imaginary panel discussion between Women’s Studies and Economics. I enjoyed the post, and think it does a good job of introducing basic economic ideas to Women’s Studies framewok, but I would like to see the reverse.

As someone who writes about gender issue in developing countries (particularly how men and women negotiate household decisions), I wonder what insights Women’s Studies might have for economics, so I hope that Dr. Feiner will write another panel where Women’s Studies is introduced to economists.

Or perhaps you can help this economist out? What ideas from Women's Studies do economists need to know?

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Wednesday, June 4, 2008

An Economist in Wine Country, The Economics of Wine

I’m spending the summer in Palo Alto and this weekend I plan to head out to a winery or two. So in preparation I was reading up on my wine economics. A good place to start is the Wine Economics blog, which has a few good posts on wine and economics. Only wish they would update more often.

Including one post on a recent study they pointed out shows that a wine’s price and its rating are not related in a blind tasting.

“The relationship between the price of wine and our evaluation of it is complex. These recent studies indicate that we shouldn’t let price information influence our decisions, but marketing experience shows that most of us do.”

Another good post discusses the positive impact of news stories on red wine's health benefits on red wine consumption found in a recent paper. The paper’s results suggest 25% of the increase in red wine consumption from 1991 to 1998 in Ontario, Canada is the result of health stories touting wine. The post also provides a nice general discussion about how changes in taste can impact demand.

So Cheers!

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“Free” wireless at Starbucks, we don't want that customer

I like to hangout in coffee shops. In fact being able to work in one is a perk of being a professor. I have found that most independent (or non-Starbucks) coffee shops provide free wireless internet service (if you purchase something). The only exceptions were a small place in Madison, WI that asked .50 and a lot of places in Chicago. But Starbucks has for as long as I can remember charged through T-mobile for their internet. Until now, Starbucks is offering free internet as long as you get a $5 gift card and use it once a month and register your card online.

In theory if offering free wireless is cheap (perhaps $40 a month for the connection, which might be needed anyways) we would expect all coffee shops to compete with each other by offering free wireless. However, by offering wireless I would guess you get customers who stay at tables longer. Perhaps, Starbucks was trying to select customers who would get out sooner, leaving more tables open.

Starbucks looks like they are still trying to do just that with their free wireless. As this article in PC world describes, internet use is limited to two hours a day and you can’t stream videos or call on Skype.

I’m willing to believe that Starbucks is making the choice on restricted free wireless, to maximize their companies profits. This type of limiting shows, that in some cases you might not want certain types of customers (small coffee drinking campers).

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Tuesday, June 3, 2008

Grinnell College Reunion 2008 and Some Economic Thoughts

So this past weekend was my college reunion. I’m six years out of undergraduate, but Grinnell College where I attended does their reunions with three graduating classes at a time so it was like 5 year reunion.

With my new position at Towson University, I have been thinking a lot about comparisons between Grinnell and Towson. The two schools are very different. Grinnell’s student population is less than 1/10 the size of Towson’s. Grinnell is located 1 hour between Iowa City and Des Moines in a town of about 10,000 people. Towson is located in Baltimore. Grinnell is private small liberal arts school with one of the largest per capita (student) endowments of any school in the US. Towson is public and generally dependent on state resources.

One other difference is the price tag Grinnell’s listed tuition is $35,000 a year, while in state at Towson it is $5,000. The Grinnell is misleading though since 90% of students are on financial aid and loans are capped at $2,000 per year.

In terms of outcomes for students. I believe the finding of Krueger and Dale that post graduate income isn’t really dependent on which school you attend, but incomes from different schools vary based on the quality of students who attend these schools. This relationship is well described in an Atlantic Monthly piece “Who needs Harvard?”

If you got to reading this far in this entry and you are not related to me, chances are you went to Grinnell. Most of the readers from this blog come through a Grinnell on line community. The thing that small liberal arts schools like Grinnell do best is foster social capital. But unlike the traditional social capital measured by Putnam or economists, I don’t think it translates into higher income. However, happiness research generally shows spending more times with friends makes you happier. Most of my closest college friends live a plane flight away now. But through Grinnell’s online community I have gotten a lot closer to people who were anywhere from on the fringes of my social circle to I didn’t even know their name at college.

Perhaps the US News and World Report needs a new way to rank colleges. I propose they add a category, percentage of alumni who maintain close friendships to people they met in college or through college networks post graduation. Also although it might be a can of worms, the percentage of alumni who are married/domestic partner with another alumni.

Being able to say yes to both I think tells you a lot more about a college than the percentage of alumni who give.

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