Tatyana Deryugina (Twitter: @TDeryugina)

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Posted 25 Jun 15 by arbelos in Musings on Economics

Taylor Swift has been enjoying her market power in the music world lately, pulling her music from Spotify last November and, most recently, standing up to Apple over its proposal to pay no royalties for songs that Apple Music users listen to during a free three-month trial period. In response to Taylor’s public denouncement of Apple (coupled with her pulling her new album from the service), Apple backed down, promising to pay royalties during the free period as well. So did Taylor Swift score one for the music industry? I say “yes” and “no”. Here are the two ways of looking at this (I’ll start with the counterintuitive “no”).

“No”: What ultimately matters is the total amount of compensation the average artist receives. While it may be tempting to conclude that all artists will now earn more from their music, that isn’t necessarily the case. Apple has not finalized its terms with the artists and the effect of this policy change may be to lower the overall royalty rate. If this happens, artists whose music gets played a lot by people who sign up and then leave when the free trial is over will win; artists whose music is played a lot by paying customers may very well end up with lower payments than they would have received under the original agreement. Will this kind of offsetting effect actually happen? That depends on how much market power Taylor Swift  v. Apple have. Which brings me to my next point.

“Yes”: Taylor Swift is incredibly popular, giving her a lot of market power. If negotiations with Apple were artist-specific, she could certainly negotiate a great compensation package for her songs. But it seems pretty clear from what I've read about the negotiations that there are at least some terms that apply to everyone. To the extent that (a) there are common terms for all artists and (b) Taylor can affect those terms, her actions did indeed raise all artists’ profits. And, of course, there is the question of public relations. Ultimately, both Apple and the music artists are counting on subscribers for revenue; if the negative PR generated by not paying artists during trial periods costs Apple a lot of paid subscribers, it may be better to pay more, period.

The overall point of this post is similar to that of the previous one: it’s important to pay attention to the total compensation package, not just individual parts.

Posted 18 Jun 15 by arbelos in Musings on Economics

Yesterday, the California Labor Commission decided that Uber's drivers were employees, not independent contractors. Articles all over the web, including this one from Business Insider, claimed that this could "dramatically change Uber's business model". For example, if drivers are contractors, Uber doesn't have to withhold income taxes or pay for drivers' expenses. So this ruling seems like it could be a big deal, right?

Some of the differences between a contractor and an employee are superficial, and while they may affect administrative practices, they may only have a trivial effect on Uber's bottom line. Why? Because compensation for a job is multi-faceted, and making compensation more generous in one way will enable a company to make it less generous in another way. Going back to the examples above, making Uber withhold income taxes should have little to no effect on its expenses because independent contractors have to pay income taxes as well. Similarly, drivers will demand more compensation for a job where they have to pay for their own car maintenance and insurance than for one where those expenses are paid for them. So the parts of the ruling that simply shift costs from drivers to Uber shouldn't make a big difference.

Now some of the differences between employees and contractors are more meaningful. For example, it's much easier to fire a contractor than an employee, and, according to Business Insider, employees may be entitled to an hourly wage, whereas independent contractors are not. In this case, the shift is not just in who pays for things, but in how variable employees' earnings versus Uber's revenue is. If Uber pays drivers a regular hourly wage and takes in any revenue the drivers bring in, then Uber is taking on more risk than the employee. Employees might prefer that system because it lowers their earnings variability and even be willing to work for a lower wage on average. In this case, Uber's revenue can actually increase (and, at the same time, become more variable). However, this loss of flexibility might actually harm Uber if it generates higher swings in its revenue than it can weather.

Posted 14 Jun 15 by arbelos in Musings on Economics

Last week, I received the following email about an awesome new organization:

Dear Colleague,

All of us who publish in scientific journals know the frustrations of the peer review process: endlessly waiting for an uncertain outcome.

We have built a website aimed at changing this situation. At www.scirev.sc researchers can share their experience with the review process and select an efficient journal for submitting their work.

We already received more than 1000 review experiences, which are freely available on our website. They provide information on the duration and quality of the different phases of the review process and help you select an efficient journal to publish your work. An overview of all reviews is available at www.SciRev.sc/reviews

As a corresponding author of a scientific paper, your experience is of great value to other scholars in your field. We therefore invite you to visit our website and fill in the short questionnaire with questions about the duration and quality of the review process. You also can rate the overall quality of the experience and provide a motivation for your rating.

Any experience is important, even a direct rejection (we once waited three months to hear that the journal was not interested).

Looking forward to receiving your review(s).
Janine Huisman & Jeroen Smits

P.S. If you like our initiative, tell your colleagues about it. The larger the community of researchers who share their review experiences, the more useful SciRev becomes to all of us.


I think this is a great initiative to (a) give researchers a better idea of how long journals take and (b) put pressure on journals to be faster with their reviews by creating transparency. Consider joining and tracking your own review experience!

Posted 09 Jun 15 by arbelos in General

I keep a document with a list of topics I want to write about when I have time, such as GMOs, thinking you're a better-than-average driver, and the pros and cons of graduate school in anything. Somehow, I never have the time, but once in a while I get lucky and someone expresses sentiments that are very close to what I wanted to write in the first place. So instead of duplicating their efforts (and possibly doing a worse job!), I will simply re-share such articles.

In this week's installment, we have a great Vox article on why you shouldn't go to law school. Even though much of the article is law-school-specific, everyone considering any type of graduate school should read reason #1 and mentally substitute "graduate school" for "law school": "Law school isn't a solution to your fear of the career abyss." Then, before you get too depressed, read point #2 - "There are other paths across the abyss".

I may have more to say on this topic later, but points #1 and #2 are key for anyone considering graduate school. To be clear, I'm not claiming that NO ONE should go to graduate school. But in my experience too many people go to graduate school because they don't know what else to do with themselves. That's a bad idea.

Posted 05 Jun 15 by arbelos in Musings on Economics

Economists have studied price discrimination (charging people different prices for the same good) for decades. In general, we divide price discrimination into three types. One is “first-degree price discrimination”, where you know someone’s exact willingness to pay for a product and charge them that price. This type of price discrimination is not particularly interesting because in a world with many different individuals, it’s practically impossible to know a person’s willingness to pay exactly. You can come close, however, if you observe a person’s characteristics (e.g., age, gender, income) and you know how willingness to pay varies with such characteristics, on average. This is known as “third-degree price discrimination”, and it manifests itself in student and elderly discounts, ladies’ nights, and so on.

The most interesting type of price discrimination is “second-degree price discrimination”, where consumers self-select into different pricing schemes. A great example of this is coupons. Generally, the more money you make, the more you are willing to pay more for most goods. Thus, stores would love to charge higher-income people more for the same good. Of course, it’s very hard for a store to know how much money people make (and no one will tell you they make a lot of money if they know this means paying a higher price!). Coupons are a great way to get high- and low-income consumers to pay different prices. High-income individuals are generally less willing to spend their time clipping coupons. Thus, a store can get them to pay more for the same good by posting a high price and issuing a coupon that people have to go out of their way to get (mail-in rebates represent a similar idea).

Not to be behind traditional retailers, Amazon has also introduced coupons. In its “Prime Pantry” area (where Prime members can buy individual grocery items and pay $5.99/box flat shipping), many products have coupons associated with them (as of this writing, this and this were good examples). The funny thing is that the “coupon” is a button on the product page. All you have to do to get the discount is press the “Clip Coupon and Save” button before adding the product to your cart. Why doesn’t Amazon simply lower the price of the item and get rid of the coupon? Are people with higher willingness to pay really so lazy or inattentive that they will not notice and/or press a coupon button that’s right there in front of them? I find that hard to believe.

As in my previous post, I don’t have a definitive answer, but I have two guesses (if you work for Amazon and can tell me how often people who see the coupon don’t click on it, please do!):

  1. Amazon wants to offer the reduced price only for a short period of time and consumers don’t like seeing the price of items go up and down frequently (and they don’t perceive the disappearance of a coupon as an increase in the price).
  2. Having a higher price sets people’s expectations about how much they should be paying for the item. Paying less than this “reference price” makes them happier than they would be if the price of the item was simply reduced.

It’s also possible that Amazon hasn’t thought this coupon thing through carefully, in which case you’re welcome, Amazon.

Posted 27 May 15 by arbelos in Musings on Economics

I am an avid Amazon shopper. We currently buy most (non-perishable) household necessities from them, as well as many non-necessities. My overall impression of Amazon is that it is extremely well thought-out. So when I encounter strange phenomena on the website, I assume they are deliberate. However, in some cases it is really hard to see how something is not a mistake.

For example, basic household products like paper towels and diapers are often available in different-sized packages. You would think that a package with, say, three times as many diaper wipe packs, would be at most three times as expensive. However, that is often not the case. For example, as of this writing, a 7-pack of diaper wipes was $10.99, while a 21-pack was $89.99. One jar of diaper cream was $12.80, while a 2-pack of the same diaper cream was $35.75. A 4-pack of OxiClean spray was $20.18, while an 8-pack was a whopping $104.92! It’s very easy to find other examples, so this isn’t some rarity. And this is not like comparing a 2-liter bottle of soda to two 1-liter bottles of soda - the package units are identical, so you can replicate the larger set exactly by buying multiples of the smaller set.

Normally, we expect some price dispersion because there are search costs – you wouldn’t drive to another store to see if something is cheaper there unless you expect it to be much cheaper. But in this case, the prices for both sets are easily visible (you don’t even have to click on the other set to see what the price is). In all the examples above, shipping is free for both sets (though in some cases only for Prime members or orders over $35). And while it may not be easy to recognize that, say, that $43 is bigger than $13.85*3, it’s very obvious that $10.99 times 3 is less than $89.99.

As far as I can tell, only two explanations are possible. One is that consumers are so inattentive that they don’t notice these pricing discrepancies. However, given the size of the discrepancies and the ease with which you can see them, I would be surprised if that were the case (if you work for Amazon and can tell me how often people buy the more expensive version, please do!). The alternative explanation is that sellers are not paying attention to how their pricing compares to Amazon. In all the examples above, the more expensive product is sold by someone other than Amazon (though sometimes Amazon is the one shipping the orders). Perhaps their pricing algorithms are not working as well as they should. Or maybe there’s another, less boring, explanation, but I can’t think of it. Please let me know if you can and watch out for this strange pricing!

Posted 18 Feb 15 by arbelos in General

Matthew Yglesias was kind enough to write about my research on Vox this week. Here is the link.

Posted 19 Dec 14 by arbelos in News

After more than a three-year hiatus (during which I occasionally blogged for the Center for Business and Public Policy), I decided to revive my blog. The honor of the first post goes to this week's threats against the movie "The Interview" and Sony's subsequent decision to cancel the release of the movie.

To recap (skip this paragraph if you've been following the news), Sony made a comedy in which two not-so-competent journalists are set to interview North Korea's Kim Jong-Un. They are approached by the CIA and asked to help assassinate him. I'm guessing North Korea didn't like the plot of the movie. According to the FBI, someone from North Korea hacked into Sony, stealing and subsequently releasing various emails and documents. The hackers also threatened violence in movie theaters that showed the movie, and that's when things started to get ugly. Sony allowed movie theater chains to not screen the movie (usually, they sign contracts for these kinds of things) and all major movie theater chains (along with non-major ones) said they wouldn't screen it. Sony then said they wouldn't release the movie at all (according to them, because no one has volunteered to show it, in theaters or otherwise). Even Obama has weighed in on this, saying Sony's decision was a mistake (Sony responded that it had no choice).

So is there a scenario in which things could have turned out differently? If we apply the basic principles of economics here, it's hard to see how the people making the threat wouldn't have "won" as long as there is even a tiny possibility that it was real (Homeland Security says there is no evidence that it was, but of course it's hard to rule out a 1 in a 100 million chance). Standing up to the terrorists by going to the movie theater despite the (tiny) threat is a public good - you bear the risk if you go, but society as a whole benefits. This leads to a temptation to "free ride" - hope that others go to the theaters while you stay home. But the problem is, many people are thinking this way, and the result is a drop in movie ticket sales (so to be clear, the theory doesn't predict 0 moviegoers). Now if you're a theater, you face a similar problem. You may want to screen the movie to stand up to the terrorists, but you're bearing all the costs of doing so (lost ticket sales) while society bears much of the benefit. So there's the free rider problem again. Theaters could have also put in extra security, but the problem of costs again.

From this point of view, the only way "The Interview" had a chance is if Sony had not allowed movie theaters out of their contracts to show the movie. But I'm guessing that this would have been a huge PR disaster for Sony and perhaps some smart lawyer would have figured out a way for theaters to get out of their contracts anyway. Unfortunately, public good theory predicts that it's very easy for threats to have this effect in all areas of our lives.

Posted 22 Aug 11 by Tatyana in General
From an interesting New Scientist article about a simulated rat that learns:

"The more fundamental issue is that brute-force computation cannot compare with the functioning of a real brain. Human intelligence arises not from logic, but from our ability to respond to ambiguity and adjust to rapidly changing situations. "The idea that human expertise can be formalised in logical rules turned out to be a fundamentally wrong assumption,” says Rolf Pfeifer, an AI researcher at the University of Zurich in Switzerland.”

Even more interesting:

"A brain consumes less power than a light bulb, and occupies less volume than a 2-litre bottle of soda,” says Dharmendra Modha, a computer scientist at IBM.

Posted 29 Jun 11 by Tatyana in News
I just saw a story claiming that TSA agents are developing cancer from working near the body scanner machines and that the TSA is covering it up. Personally, I do wonder about the cost/benefit of the scanners. Of course, cancer "clusters” could be random, and the article didn’t mention anything about statistical testing. It also made the following statement: "Of course, if TSA workers who are merely standing near the scanners are already developing cancer, frequent flyers are also putting themselves in harm’s way by standing directly inside the radiation-firing machines.”

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