Optimal pricing for bread and circuses

A survey (pdf) by Anthony Krautmann and David Berri has found that most fans in many popular sports pay less for their tickets than conventional economic theory would predict.
 
Which poses the question: are team owners therefore irrational?
 
Not necessarily. There are (at least?) four justifications for such apparent under-pricing.
 

Lots of things in the real world are underpriced. Most popular concerts and sporting contests lose some volume of revenue to aftermarket transactions on sites like StubHub and SeatGeek. It's nearly impossible to get a reservation at some of the most popular restaurants in San Francisco like State Bird Provisions. There's a waiting list for NOMA Sydney that's 27,000 people long.

If you were pricing to maximize revenue, to match supply and demand exactly, you'd boost prices or perhaps auction off all the seats. What would NOMA Sydney have to charge until its waiting list dropped to zero? I can't even begin toguess, but would it surprise you if it was well north of $2,000 a head for dinner?

Given all of that, I was curious to see what this author thought might explain football ticket underpricing.

The first argument is that underpricing tickets leaves more revenue to be gathered through ancillary sales like souvenirs or overpriced concessions. Without data, I'm skeptical. My instinct is that concession and souvenir sales are less elastic with ticket prices than hypothesized.

The second point is that it's better to have a full stadium for team morale and to influence the officiating. But again, you could sell tickets via a mechanism like a Dutch Auction and maximize revenue while still filling the stadium.

The other two arguments are more convincing.

Thirdly, higher ticket prices can have adverse compositional effects: they might price out younger and poorer fans but replace them with tourists – the sort who buy those half-and-half scarves and should, therefore be shot on sight. This increases uncertainty about longer-term revenues: a potentially life-long loyal young supporter is lost and a more fickle one is gained. It also diminishes home advantage: refs are more likely to give dodgy decisions in front of thousands of screaming Scousers than in front quiet Japanese tourists.
 

I went to a couple games at the old Chicago Stadium, during Jordan's early years with the Bulls, and that place was loud. When they moved to the United Center and the ticket prices went way up, the crowd felt different. More wealthy, and definitely not as loud. It could just be the acoustics of the new space, but anecdotally, I saw fewer fans standing and screaming. Also, the rise of the smartphone means more of the dead moments in a game are filled with people scrolling on their phones, quietly.

Fourthly, high ticket prices can make life harder for owners. They raise fans’ expectations: if you’re spending £50 to see a game you’ll expect better football than if you spend just £10: I suspect that a big reason why Arsene Wenger has been criticised so much in recent years is not so much that Arsenal’s performances have been poor but because high prices have raised expectations. 
 

It's hard to lower prices. Some sports teams may have done it at some point, but I've never seen it. You can raise prices when the team is good and on the rise, but those prices tend to stick when the team declines, and that's when stadiums start to empty out.

Saison is the restaurant in San Francisco that feels closest to pricing to match supply and demand. When I first moved to San Francisco, I had a meal there for $79. The next time there, the meal price had jumped over $100. Then the next time, it was up to $149. Later I heard the tasting menu had risen yet again to $248. The last time I went, thankfully on some banker's expense account, the price was $398 for dinner.

The dining room is usually full, but it's usually possible to get a table the same week. It feels like they've finally reached a price that about as close as you can get to where the supply and demand curves meet. Since the number of seats and turns is limited each night, perhaps this is revenue maximizing pricing, but the margin of error is razor thin.

My guess is that optimal pricing is somewhere below the price that matches supply and demand perfectly. Always being sold out adds a feeling of exclusivity, and no one knows how sold out you are, so being just sold out may be as good from a perception standpoint as being having a massive waiting list.

At the same time, I have a sneaking suspicion continuing to raise the price of a dinner would actually raise demand at some high end restaurants. There may be some Veblen-like qualities to restaurant pricing.

If the glove kinda fits, do not acquit?

So I wrote down the simplest model I could think of — a model too simple to give useful numerical cutoffs, but still a starting point — and I learned something surprising. Namely (at least in this very simple model), the harsher the prospective punishment, the laxer you should be about reasonable doubt. Or to say this another way: When the penalty is a year in jail, you should vote to convict only when the evidence is very strong. When the penalty is 50 years, you should vote to convict even when it’s pretty weak.
 
(The standard here for what you “should” do is this: When you lower your standards, you increase the chance that Mr. or Ms. Average will be convicted of a crime, and lower the chance that the same Mr. or Ms. Average will become a crime victim. The right standard is the one that balances those risks in the way that Mr. or Ms. Average finds the least distasteful.)
 
Here (I think) is what’s going on: A weak penalty has very little deterrent effect — so little that it’s not worth convicting an innocent person over. But a strong penalty can have such a large deterrent effect that it’s worth tolerating a lot of false convictions to get a few true ones.
 

Steven Landsburg lands on a counter-intuitive conclusion: you should lower your standards for conviction the harsher the punishment.

It seems as if Landsburg's model argues for convicting any number of people who surpass some lowered threshold of evidence for a crime. Several people all seem like they could have committed a crime, so convict all of them, even if only one could have committed the crime. Perhaps I'm misunderstanding the implications, others can help verify Landsburg's model.

Also, how often are there N people who all seem equally guilty of a crime? I'm at a disadvantage here in not having seen Making a Murderer, but perhaps Landsburg's model here applies equally as well to that case as it does to Serial Season 1.

Let's broaden the conversation and bring in Alex Tabarrok, discussing one area in which fellow economist Gary Becker may have been wrong.

Becker isn’t here to defend himself on the particulars of that evening but you can see the idea in his great paper, Crime and Punishment: An Economic Approach. In a famous section he argues that an optimal punishment system would combine a low probability of being punished with a high level of punishment if caught:
 
If the supply of offenses depended only on pf—offenders were risk neutral — a reduction in p “compensated” by an equal percentage increase in f would leave unchanged pf…
 
..an increased probability of conviction obviously absorbs public and private resources in the form of more policemen, judges, juries, and so forth. Consequently, a “compensated” reduction in this probability obviously reduces expenditures on combating crime, and, since the expected punishment is unchanged, there is no “obvious” offsetting increase in either the amount of damages or the cost of punishments. The result can easily be continuous political pressure to keep police and other expenditures relatively low and to compensate by meting out strong punishments to those convicted.
 
We have now tried that experiment and it didn’t work. Beginning in the 1980s we dramatically increased the punishment for crime in the United States but we did so more by increasing sentence length than by increasing the probability of being punished. In theory, this should have reduced crime, reduced the costs of crime control and led to fewer people in prison. In practice, crime rose and then fell mostly for reasons other than imprisonment. Most spectacularly, the experiment with greater punishment led to more spending on crime control and many more people in prison.
 
Why did the experiment fail? Longer sentences didn’t reduce crime as much as expected because criminals aren’t good at thinking about the future; criminal types have problems forecasting and they have difficulty regulating their emotions and controlling their impulses. In the heat of the moment, the threat of future punishment vanishes from the calculus of decision. Thus, rather than deterring (much) crime, longer sentences simply filled the prisons. As if that weren’t bad enough, by exposing more people to criminal peers and by making it increasingly difficult for felons to reintegrate into civil society, longer sentences increased recidivism.
 

It's a great post by Tabarrok. He does give Becker, one of my economics idols, credit.

Let’s give Becker and the rational choice theory its due. When Becker first wrote many criminologists were flat out denying that punishment deterred. As late as 1994, for example, the noted criminologist David Bayley could write:
 
The police do not prevent crime. This is one of the best kept secrets of modern life. Experts know it, the police know it, but the public does not know it. Yet the police pretend that they are society’s best defense against crime. This is a myth
 
Inspired by Becker, a large, credible, empirical literature–including my own work on police (and prisons)–has demonstrated that this is no myth, the police deter. Score one for rational choice theory. It’s a far cry, however, from police deter to twenty years in prison deters twice as much as ten years in prison. The rational choice theory was pushed beyond its limits and in so doing not only was punishment pushed too far we also lost sight of alternative policies that could reduce crime without the social disruption and injustice caused by mass incarceration.
 

The problem with annual reviews in companies is not necessarily with an annual review process but with lack of immediate feedback in between those reviews. The most useful thing I learned from the 10,000 hour rule wasn't that you needed 10,000 hours to become an expert, it was that people improve with deliberate practice if feedback on their work is immediate.

For effective parenting and coaching, shorten the time between performance and feedback, and be consistent.

Information tech and variety

Abstract:      
Using the food truck industry as the setting, we provide direct evidence for how information technology can complement consumption variety in cities by reducing spatial information frictions associated with locally produced goods. We document the following facts: 1) food trucks use technology to overcome a spatial information friction; 2) proliferation of technology is related to growth in food trucks; 3) food trucks use their mobility to respond to consumer taste-for-variety; and 4) growth in food trucks is positively correlated with growth in food expenditures away from home. Taken together, our results illustrate how information technology can provide a meaningful increase in variety for urban consumers.
 

Research paper titled Information Technology and Product Variety in the City: The Case of Food Trucks.

It's not just food variety that's increased thanks to information technology, though food trucks are one of the more peculiar instances. I lived in LA from 2006-2011, and that city's lower flatter, more dispersed distribution of retail and people might have made it an optimal ground zero for the food truck boom.

Amazon has increased our retail variety expectations. The internet and the web have increased the variety of information we expect to find with a query typed into a search engine. Information technology plus urban density are an intertwined network that overcomes much of the spatial friction of the past, which is why it's so odd to me that it's still so hard to find good versions of so many types of ethnic food in San Francisco.

Gonna make you sweat

If I were to tell you that there was an entire industry that overcharged the vast majority of its customers, but those customers were fully aware they were being robbed, and that was the only way to make the business viable, what would you guess?

If you’re a member of a gym, you will be aware that for the first month of the year the place is horribly packed out with sweaty and unfit people, all the classes are booked up and you can’t get on any of the machines you want. If your interaction with the keep-fit industry is more along the lines of walking past the gym on the way to the cake shop, you might be more aware of the equally curious fact that commercial gyms always seem to have a heavily advertised ‘special’ membership deal going on. Paying the full whack listed rate at a gym is actually a pretty difficult thing to do — much more so than paying full freight rack-rate for a hotel room — unless you do the single most expensive thing you can do in physical culture, and join the gym shortly after the Christmas holidays.

SWEATY BETTY Having seen the books of a gym chain or two, we can tell you that the ‘Sweaty January’ phenomenon is not an urban myth or a joke — it’s absolutely fundamental to the economics of the industry and it’s basically impossible to run an economically viable gym without taking it into account. Usually about 75 per cent of all gym memberships are taken out in the month of January. Not only this, but the economics of the industry absolutely depend on the fact that a very great proportion of January joiners will not visit more than three or four times in total before their membership comes to a floundering flop of weight not lost at the end of the year. The founder of Colman’s Mustard used to claim that his fortune was based on the bit of mustard that everyone left behind on their plate, but gym memberships have really pushed things to the limit when it comes to this model of making people pay for a lot more of the product than they have any likelihood of using.


On the bizarre economics of gyms. The spatial inefficiency of gyms is something I hadn't ever spent much time thinking about.

Human nature being as immutable as it is, most gyms are great investments (other than Bally Total Fitness, which reached too far, too fast). In fact, human nature is so predictable that a company like Planet Fitness can come along and offer memberships for just $10 a month and still not be overrun with people. It's found money.

If you're feeling particularly fitness motivated this month, maybe wait a month and see if the impulse passes along with the January prices.

Santa Claus converts Scrooge with new economics

Noted activist investor Scrooge has changed his mind about Santa Claus.

It is not an exaggeration to say that I have undergone a complete conversion in my view of St Nicholas. Warren Buffett advises investors to seek exceptional managers and I now see that few achieve your longevity.
 
You embodied the new economy before the idea had been conceived. St Nicholas is a global business, receiving signals from far corners of the earth and delivering packets over an integrated network. It works at super-high speed, faster than broadband in South Korea, and knows no boundaries. The internet is antique by comparison.
 
Your lack of interest in profitability struck the traditionalist in me as foolish but I have come to understand the virtues of reinvesting revenues over several centuries in order to dominate your market and entrench your monopoly. 
 
Jeff Bezos, your closest logistics competitor, has copied your tactics but, although Amazon crushes small shops, department stores and big box retailers, it cannot topple you.
 
This has helped you to build the biggest social network in the world, putting Facebook to shame. Everyone includes your messages in cards and parents pretend the gifts they buy for their children come from you — you outsource many deliveries at zero cost. By combining a jolly presence with sophisticated viral marketing, you have expanded your reach everywhere

China's birth rate problem

China has changed its one child policy to a two child policy, but it may not do much to rejuvenate its aging population

"It leads to a drop in the proportion of the productive labor force, which in turn raises the average wage level, making China less competitive in labor-intensive industries," Council on Foreign Relations China expert Yanzhong Huang writes in the Diplomat. "If China is approaching its Lewis turning point, a point at which China would move from a vast supply of low-cost workers to a labor shortage economy, it could quickly lose its competitive edge to other emerging economies that still enjoy significant demographic dividends."
 
But here's the really scary thing for China: It's not obvious that ending the one-child policy will solve its demographic crisis. The one-child policy is not, on its own, the key cause of China's graying population — those include China's growing prosperity and increasing opportunities for Chinese women outside the home. It's not obvious that repealing the one-child policy now would be able to make up for the difference.
 
"As UNC demographer Yong Cai has shown, today, even when fertility restrictions are lifted fertility rates don't rise," University of Maryland sociologist Philip Cohen writes in the Atlantic. "People have few children in China today because children have become too expensive—good schools especially cost too much, and the health care burdens of children outweigh the hoped-for future return of a child to care for parents when they're retired."
 

I have yet to hear of a country that's been able to reverse its birth rate decline with cash incentives. I hope one country succeeds just so we get a sense of the price at the indifference point.

Are we more than our ideology?

After predicting he could guess most of an economist's positions after hearing just one of them, Russ Roberts takes a crack at guessing Noah Smith's positions on a variety of policies, and Smith grades him.

Smith is always interesting, and often unpredictable, and those are of course correlated.

Stricter Gun Control: Probably not. I grew up in small(ish)-town Texas, where tons of people had guns and there weren't any shootings that I ever heard of (though probably some accidents). Canada has relatively high gun ownership and very little crime, including few mass shootings. Brazil has a small fraction of the gun ownership we have, and much higher crime. Meanwhile, we've had a huge drop in crime in the last two decades with no real increase in gun control. Let's try to replicate that success before we start disarming the populace. I will admit that my stance on this has wavered recently, in light of the rash of mass shootings, but I still don't think gun control is likely to have a huge effect.
 

Noah's post-mortem is worth a read. I especially like this:

I think this exercise shows a number of different "failure modes" of attempting to model people's policy positions based on an assessment of their ideology. For example:

...

4. People disagree on the facts, not just on values. In general, people with heterogeneous priors about the state of the world will fail to reach agreement even after seeing all of the same evidence. And when people form their policy positions, they consider efficacy of policies, not just whether the intended effect would be a good thing. Russ probably didn't bet that I would be pessimistic about the efficacy of taxing the rich, the usefulness of the ACA's tax credits, or the effectiveness of gun control. He also probably underestimated my uncertainty about the effect of Obamacare on health costs, the usefulness of education spending, and the employment effects of minimum wage hikes.

Crime and punishment

Longer sentences didn’t reduce crime as much as expected because criminals aren’t good at thinking about the future; criminal types have problems forecasting and they have difficulty regulating their emotions and controlling their impulses. In the heat of the moment, the threat of future punishment vanishes from the calculus of decision. Thus, rather than deterring (much) crime, longer sentences simply filled the prisons. As if that weren’t bad enough, by exposing more people to criminal peers and by making it increasingly difficult for felons to reintegrate into civil society, longer sentences increased recidivism.
 
Instead of thinking about criminals as rational actors, we should think about criminals as children. In this light, consider the “Becker approach” to parenting. Punishing children is costly so to reduce that cost, ignore a child’s bad behavior most of the time but when it’s most convenient give the kid a really good spanking or put them in time out for a very long time. Of course, this approach leads to disaster–indeed, it’s precisely this approach that leads to criminality in later life.
 
So what is the recommended parenting approach? I don’t want to get into a debate over spanking, timeouts, and reasoning but one thing all recommendations have in common is that the consequences for inappropriate behavior should be be quick, clear, and consistent. Quick responses help not just because children have “high discount rates” (better thought of as difficulty integrating their future selves into a consistent whole but “high discount rates” will do as short hand) but even more importantly because a quick response helps children to understand the relationship between behavior and consequence. Prior to Becker there was Becaaria and in Beccarian theory, people must learn to associate crime with punishment. When responses aren’t quick, children, just like scientists, have difficulty learning cause and effect. Quick is thus one way of lowering cognitive demands and making consequences clear.
 

Alex Tabarrok on what Gary Becker got wrong about crime and punishment. A great post with lots of broadly applicable wisdom.

I try to apply the same principle of quick, clear, and consistent to the feedback I provide to my teams at work. Much of white collar work, including product management, tends to have slow feedback loops. Often the time between when you come up with an idea and when it ships and elicits feedback from consumers is months. That means very little of that work falls into the category of deliberate practice. Post-mortems, if they even occur, take place long after the key decisions were made.

Some of that is unavoidable, but much of it just requires a change in habit as managers. If you have feedback to share with a team member, share it as soon as possible. Someone didn't lead a meeting as efficiently as possible? Grab them right after the meeting for a quick chat. Have a presentation ready? Practice on someone as soon as possible and gather their immediate feedback.

The higher the cadence of these practice and feedback loops, the more rapid the improvement. Not all such work can be transformed into deliberate practice, but the amount that can be is non-trivial.

For most people, delivering feedback at such a cadence does not feel comfortable or normal in a white collar work environment; it feels paternalistic, even arrogant, and it still does not come naturally to introverts like myself. Certainly many aren't ready to receive notes at such a cadence, either. Much of this may stem from underestimating the amount of rapid feedback and deliberate practice one spends time on in other crafts, like music, sports, cooking, and so on. Going to an arts school helps. I've never received as much feedback as frequently as I did in my undergraduate creative writing classes or in film school.