New Videos! Starting with One on Gains From Trade…

Sooo…I have a minor confession to make- I’ve established a bit of a cottage industry tutoring students in the course I taught while I was in grad school. Not gonna lie, it’s pretty nice to be seen as an advocate as opposed to the thing between the student and the grade that the student wants, in part because students are more willing to admit what they find confusing to me than to their “real” instructors.

As a related project, I figured it would make sense to create videos for the items that students find to be particularly confusing or challenging. The first one is about gains from trade, since we specifically teach that the “price” of a trade has to be right in order to make all parties better off from trade, but we kind of gloss over the fact that a trade also has to be of a size that makes sense for everyone as well.

Hopefully that was helpful! You can see more information on all of the videos here. If you’re an instructor, you might find the Econ 101 Database, listed under “Other Projects”, to be useful as well.

Update: My customer pool doesn’t appear to be dwindling anytime soon. =P

Yet Another Reason We Need a Consistent Definition of “Money”…

Also, as a related matter, never say “give me all of your money” when mugging an economist.

“So, like, do you mean only M1 or do I need to hand over M2 as well? Are you only counting items officially recognized as currency or are you demanding all items that could function as money? Technically speaking, fiat money has no intrinsic value so is there any chance I can convince you that this is not worth your time?”

(Don’t get it? See here for a brief explainer.)

Just a Couple More Things on Price Gouging and Then I’ll Shut Up (For Now)…

Look, I get it, negative supply shocks suck. They’re not as good as everyone getting what they want at low prices. Sometimes economists are too flippant about high prices as a rationing mechanism. We’ve been over this. I do feel a little like I’m screaming into the void though, especially when I see, um, interesting takes come from places that should know better:

Why Businesses Should Lower Prices During Natural Disasters

Why Businesses Should Lower Prices During Natural Disasters

It helps your customers, which helps your brand.

Source: hbr.org/2017/09/why-businesses-should-lower-prices-during-natural-disasters

I’m sorry, come again? Fine, I’ll reserve judgment until I finish reading the article…



Ok done. What the article is saying without being terribly explicit about it is that companies should engage in completely untargeted disaster charity in the form of low prices since it will make customers so happy that they’ll be super loyal afterwards. Maybe it’s just me, but I’m not going to be terribly loyal to a company that made their stuff cheaper so that it sold out before I could get what I needed. To be fair, the article’s recommendation seems to be that companies both lower prices and satisfy whatever level of demand exists at that price, which at best would be very expensive and at worst logistically infeasible.

While I do get that public relations is a thing and that customers aren’t robots, two things still bug me. First, the article asserts that lowering prices and satisfying demand at the lower price would be a low-cost tactic to generate goodwill, but, unless you’re running a zero marginal cost business, it’s really not. (For example, it’s far cheaper to offer free phone service than free plane flights.) Second, it’s far from clear that the rewards in terms of customer loyalty are strong enough to warrant such an investment- in fact, using Jetblue as an example is particularly bad since it’s pretty well known that part of why airline service is so bad is that many customers focus on price to the exclusion of all other considerations. So sure, maybe it would be a nice thing to do, but don’t pretend like it’s long-term profitable without even trying to estimate the costs or benefits.

Moving on…look, I tried to warn you that below equilibrium prices lead to sub-optimal allocation of goods, but you didn’t listen, and now we have this:

Sneaky car dealer takes free Hurricane Irma garage spaces, city says

Sneaky car dealer takes free Hurricane Irma garage spaces, city says

Hollywood opened its garages so people in flood-prone areas could park for free in a dry spot. Many of the spots were quickly filled with cars with price tags and no license plates.

Source: www.miamiherald.com/news/weather/hurricane/article172272092.html

I really hope this snaps some people out of their fantasy world where low prices get goods to the nice, deserving but perhaps not high income people. I guess it also highlights the need for some sort of non-price allocation rule if you’re not going to allocate via price- straight-up rationing is generally not great, but in this case perhaps require a license plate or local address? Geez. (Sidenote: This is where my parents live and let’s just say they are not surprised by this outcome.) Come to think of it, this is even an example of the lowering of prices that the HBR article recommends, but I’m not convinced that the City of Hollywood got a whole lot of positive PR in return for its largesse.

Last but not least, apparently the small slice of the world that is the economics profession is heartless. *headdesk* I don’t think I particularly like being referred to as if I’m a quirky zoo animal or something. Unless it’s a panda, hen I’ll allow it. (Also, the article actually says that the voucher idea I presented as a joke earlier is actually a thing. GUYS, I WAS JUST KIDDING, IT’S MOSTLY ABSURD. Mostly.)

Spotting (Nearly) True Price Discrimination in the Wild, Tesla Edition…

price discrimination: n. the action of selling the same product at different prices to different buyers in order to maximize profits.

This is, of course, the definition of price discrimination that I give to my classes. In practice, however, this notion of “same product” isn’t quite as simple as us instructors would have you believe. (Is anything ever, really?) We know that early-bird discounts at restaurants are generally considered price discrimination, as are higher prices for airline tickets purchased at the last minute…but is dinner at 4pm really the “same product” as dinner at 7pm? If you look at what economists file under price discrimination, we could probably expand the definition to “selling different versions of a product at different prices, where the differences in prices largely aren’t driven by cost differences.”

As such, when I was looking into the purchase of a Tesla (I was feeling fancy ok) and saw that the longer-range battery added an extra $3,000 to the price, I remember thinking to myself “heh I bet that’s mostly a price discrimination thing since I’m guessing it doesn’t cost an extra $3,000 to make a better battery,” but I certainly wasn’t expecting this:

Elon Musk auto-magically extends the battery life of Teslas in Florida to help drivers evacuate

Elon Musk auto-magically extends the battery life of Teslas in Florida to help drivers evacuate

Normally the upgrade costs at least $3,000.

Source: qz.com/1073742/hurricane-irma-tesla-auto-magically-extends-the-battery-life-of-vehicles-in-florida/

Wait, what? First, I guess I should point out that this is a nice thing to do. But…you mean to tell me this whole time you were just sandbagging some of the batteries???? That’s…bold, among other things. I hope the warm fuzzies you get for this gesture outweigh whatever customer fury may be heading in your direction…(personally, I can’t decide whether I would be more irritated if I had or hadn’t paid for the better battery) Granted, even this isn’t “true” price discrimination, narrowly speaking, since the lower-priced Tesla doesn’t come with the same functionality from the driver’s perspective.

People typically aren’t thrilled when they hear the phrase “price discrimination,” since they seem to assume it’s just another fun way for a company to rip them off. Not all of these customers are wrong- it’s entirely possible that some customers pay higher prices than they would otherwise if a company decides to price discriminate. That said, it’s almost always the case that price discrimination results in lower prices for some customers, and it’s even possible that price discrimination results in lower prices for some customers without subjecting any customers to higher prices. Let’s look at a simple example to see how this could be the case:

Willingness to Pay
Customer 1 $10
Customer 2 $4

(Assume for simplicity that whatever good this is doesn’t cost anything to produce.) Without price discrimination, the company can either sell 1 unit of the product to Customer 1 and make $10 or sell 2 units (1 to each customer) at $4 each and make $8. Given these numbers, the company isn’t going to be willing to lower the price to sell to Customer 2, since it would have to lower the price to customer 1 as well. But Customer 2 is willing to pay more than it costs to produce the product (i.e. nothing), so this seems inefficient- what if there were a way to give a lower price to Customer 2 without lowering the price to Customer 1? In that case, the company could sell to Customer 1 for $10 and to Customer 2 for $4 and make $14. In this case, price discrimination made the company better off, gave the company the incentive to sell to more people, and didn’t raise the price to anyone. Boom. (As a related observation, I don’t generally see companies jack up their regular prices once they start offering student discounts so…)

Of course, Customer 1 might be annoyed that someone, somewhere is getting a better deal than he is, but I’m not sure what to do about that. This discussion also makes me wonder how many people complain about the possibility of price discrimination even when they’d be in the group to benefit from it. In related news, this might be why I have Uber pick me up at the 7-11 down the street, so next time maybe we’ll talk about how price discrimination doesn’t work if people can fake being in the low willingness-to-pay group.

Does Discussing Carbon Taxes Count as Talking About Climate Change?

One of the things I do in order to make my writing as helpful as possible is to try to time topics with associated current events- makes sense to talk about something when it’s on people’s minds, right? By that same logic, I’m a little suspicious (read, a lot suspicious) of people who say that hurricanes are not a time to talk about climate change, especially since warmer ocean temperatures do in fact have an impact on hurricane severity. So let’s talk about climate change, sort of.

On one hand, engaging in activities that are not environmentally friendly is not evidence that one doesn’t believe in climate change (though I guess you can’t rule it out either), it’s just evidence of self interest, and it’s why there’s opportunity for centralized coordination regarding how to mitigate the effects of climate change. Here’s more:

No, Taking My SUV to the Gym Doesn’t Mean I Deny Climate Science, but It Doesn’t Mean I Shouldn’t…

No, Taking My SUV to the Gym Doesn’t Mean I Deny Climate Science, but It Doesn’t Mean I Shouldn’t…

If you follow politics news, you’ve probably noticed that there’s a lot of discussion regarding whether our elected leaders “believe in…

Source: medium.com/@jodiecongirl/no-taking-my-suv-to-the-gym-doesnt-mean-i-deny-climate-science-but-it-doesn-t-mean-i-shouldn-t-108e584a9ea2

On the other hand, fleeing a hurricane zone actually does mean that you don’t believe that a hurricane is fake news, since the self-interest logic doesn’t apply in the same way. Nor does this:

I think this is a good time to remind everyone that only costly signals matter. In related news, I could use any help you can give on arguing against this logic:

Never thought I’d be fighting a war against Bayesian updating, but here we are.