Economists Do It With Models

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You’re Not Wrong, Walter, Consumer Protection Edition…

December 10th, 2014 · 4 Comments

I would like to begin with a few (mostly personal) anecdotes:

I remember one time in NY when my friends and I got in a cab and the driver tried to refuse to take us to Brooklyn. (In case you are not aware, one of the rules for those operating NYC cabs is that they have to take you anywhere in the five boroughs, and people are encouraged to call 311 and report cabs who don’t follow the rules.) He was 100% in the wrong and yet I was somehow the bitch for having the nerve to point it out and make him do his job rather than stand like a sucker on Houston for another 30 minutes at 3am. (My friend gave him a large tip for his “kindness,” and it made me more than a little ragey.)

The other day, I got an email from my apartment building management stating that they are kicking cars out of the garage for two days for cleaning and that we will need to park elsewhere at our own expense. This didn’t strike me as either fair or legal, so i sent a (polite as I could muster) wtf to the building management. Turns out that, because there are two floors to the garage (with one floor getting cleaned per day), they could just have me park on the other floor for one of the days. In fact, they explicitly said that the only reason they tried to kick everyone out for two days was that it was easier for them logistically.

I had a friend in grad school that would put up a web page that linked to all of the textbooks that we used, and he would ask us to buy the books via the links so that he could get the Amazon affiliate commissions. (And, before, you ask, no, I don’t know whether this added up to a reasonable sum of money.)

So, what do these stories have in common? Well…in the first two cases, I felt like I was on the wrong side of a coordination failure, namely that these stories represent cases where it’s not necessarily utility maximizing for one person to raise a stink, but the harm in the aggregate is substantial enough that the lack of protest results in an inefficient outcome (read, bullying by the cab driver and management company with the expectation that people will be too passive or lazy to complain). Not surprisingly, in both scenarios it became pretty clear that I was outside the norm in voicing a complaint, even though I know full well that many people had a reason to complain. (I may have surveyed the parking garage to see how many people didn’t typically move their cars during the day, for example.) Granted, I did ultimately get my way in both scenarios, but having to argue to get what has already been dictated as the proper outcome imposes a psychological cost, especially when one is called a bitch in the process. (Furthermore, it’s not like my complaining kept the non-complainers from getting screwed.) In other words, my dream is to one day live in a world where people internalize the positive externalities of enforcing the rules of markets so that my frequency of raising a fuss can be minimized.

In related news, the third anecdote is about a grad-school classmate of mine named Ben Edelman. You know, this guy:

Last week, Edelman ordered what he thought was $53.35 worth of Chinese food from Sichuan Garden’s Brookline Village location.

Edelman soon came to the horrifying realization that he had been overcharged. By a total of $4.

If you’ve ever wondered what happens when a Harvard Business School professor thinks a family-run Chinese restaurant screwed him out of $4, you’re about to find out.

(Hint: It involves invocation of the Massachusetts Consumer Protection Statute and multiple threats of legal action.)

In this particular instance, I think my friend summed up the situation nicely with one of my all-time favorite movie quotes, located at around the 0:24 mark:

(In case you’re wondering, the Amazon anecdote is in no way relevant, I just thought it was funny and totally something that an economist would do.)

Not surprisingly, the Internet is none too happy with Edelman right now, and that actually worries me quite a bit. Hear me out- yes, Ben could have been more reasonable in his interactions (demanding treble damages in a non-courtroom environment when intent hasn’t been proven is more than a bit much, for example), and, even if he was concerned about the restaurant not pulling the same move on others, a demand to update the online menu would have likely been a better request than the $12 refund. My concern is that non-thoughtful people have a tendency to equate assholery with being wrong, which is a problem if it’s mostly the “asshole” demographic that raises a fuss on principle. By criticizing the what rather than the how, people are sending a message that it’s not okay to protest when the rules of the marketplace get broken, which in turn virtually guarantees that more rules will get broken.

Economists are quick to point out that well-functioning markets are very dependent on property rights, rule of law, symmetric information, and the like, and it’s just as important to be mindful of the fact that such features don’t just appear magically, they often persist because market participants police the behavior of other market participants. (The logistics of a value-added tax are even designed such that firms have incentives to enforce payment among themselves.) Think about it this way- we know that financial markets, to a large degree at least, are kept in check because there are market participants looking to profit off of market inefficiencies and, by doing so, they make the inefficiency disappear. In a similar fashion, markets are kept in check by market participants calling out bad behavior and thus mitigating the bad behavior, but the difference is that such enforcers don’t always have the personal profit incentives for doing so. Therefore, I propose two simple rules for continued market functionality:

1. If you come upon an individual who calls out a rule breaker so that you don’t have to, say thank you. Maybe buy them a cookie to help internalize the externality.

2. If you are going to call out a rule breaker, at least start by being polite. You can always escalate to assholery when you learn that the rule is being broken on purpose and/or the other party is unwilling to fix the error. I believe that’s what economists refer to as “option value.”

P.S. To those pointing out that the overcharge isn’t a problem because Ben can afford it, do you really want to live in a world where it’s ok to screw people as long as it doesn’t bankrupt them? As I’m writing this, I’m forced to confront the reality that it’s entirely possible that many people do. I’m going to go hide under the bed with the cat now.

Tags: Markets

4 responses so far ↓

  • 1 plusECON // Dec 11, 2014 at 2:40 am

    Great thoughts on this! Once I ordered tickets online and opted to pick up my tickets at their office to avoid a $3 mailing fee. When I arrived, the attendant told me there was a $3 fee to pick them up! Naturally, this escalated until I got my $3 waived.

  • 2 Michael // Dec 14, 2014 at 12:58 am

    This is pretty deliberately missing the point; the point is that Edelman is obviously sadistic, not that it’s ok to overcharge people.

    And yes, it’s totally ok to make a single $4 misprint. It just is.

  • 3 Michael // Dec 14, 2014 at 12:35 pm

  • 4 Stuart // Mar 24, 2015 at 7:34 pm

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