Tatyana Deryugina (Twitter: @TDeryugina)

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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 22 Jun 11 by Tatyana in Musings on Economics
Last month’s Journal of Economic Behavior & Organization has an interesting article titled "Hayekian anarchism”. I’m reposting the abstract below, but here’s the punchline: "Hayek should have been an anarchist.”

Posted 22 May 11 by Tatyana in Books
I just finished reading "Poor Economics” by Abhijit Banerjee and Esther Duflo, both MIT economics professors. The book was amazing and I highly recommend it. In summary, it is an excellent, evidence-based discourse about the behavior of the poor and the policies that work and don’t work to improve their lives. Abhijit and Esther cover how the poor make decision about how much to save, eat, and spend on their children’s education, why so many poor households run businesses but don’t become rich, and how political institutions can be improved.

Posted 11 May 11 by Tatyana in Movies

Following a friend’s recommendation, I sat down and watched "Inside Job”, a 2010 documentary by Charles Ferguson about the role of the financial sector in the recession. At least that’s the neutral way of putting it. It would be more accurate to say that "Inside Job” is about how the financial sector (plus some academic and government helpers) caused the recession. The interviewer was impressive in that he seemed to succeed in annoying many of the people who disagreed with his views. I expected the movie to be more neutral, but it definitely felt more like a Michael Moore documentary than like a Discovery Channel one. That said, the line-up of people that Charles Ferguson interviewed (I assume it was him) was impressive, from John Campbell and Dominique Strauss-Kahnto Glenn Hubbard, Elliot Spitzer, and Paul Volcker.

Posted 03 Apr 11 by Tatyana in Musings on Economics
Someone forwarded me an article about a controlled study that found that people who went up escalators were more charitable than those who went down escalators. I am amazed at how easily psychologists find statistically significant effects from trivial-seeming things while economists struggle to get them for big picture things, like the effect of job training on earnings or the effect of tutoring programs on grades. The psychology studies I’ve seen typically have fairly small sample sizes (50 people in the control and 50 people in the treatment is not uncommon) and don’t do anything extreme to the treatments. Yet the effects are often large and statistically significant.

Posted 05 Mar 11 by Tatyana in Musings on Economics

I was watching an economic analyst a couple of days ago giving predictions and describing most pressing concerns for today’s economy. She was particularly concerned about rising gas prices and referred to it as "inflation” several times. At first, I cringed. I was taught to think that inflation was an overall increase in prices. If only oil prices go up, that’s a real price increase, not "inflation”.
  Of course, we do know that oil prices affect transportation costs. And given how global our economy is, that might cause the price of many goods to increase. Inflation is defined as "a general and progressive increase in prices”. Well, "general” is in the eye of the beholder. We’re certainly not going to measure the price of every good and come up with an inflation index based on that. Because inflation is computed using a particular basket of goods, a rise in oil prices might (and probably will) lead to an increase in the inflation index.

But I do wonder about those goods left out of the computation of the inflation index. If we included every good, would the inflation rate over the past 30 years be vastly different?

Posted 03 Mar 11 by Tatyana in Musings on Economics

I recently had a debate about unions with someone who knew slightly more about the state of the economic literature on the topic than I did. I know close to nothing about union economics specifically. Nevertheless, I hope that I am qualified to use general economics to shed light on what’s going on in Wisconsin and with public sector unions elsewhere.

The simplest way to think about unions is as having some market (monopoly) power. In other words, they are able to negotiate higher salaries/benefits than if each individual bargained for him or herself. Putting aside the benefits to the unionized and employed workers (which are clearly positive), what can be said about social welfare as a whole?

Posted 25 Feb 11 by Tatyana in Musings on Economics

…me! I have officially confirmed that I will be starting as Assistant Professor at the University of Illinois at Urbana-Champaign next year. The job market was a truly unique and surprisingly fun experience, but I am glad it’s over for many reasons:

  1. I have a great job with great colleagues!
  2. I get to catch up with my classmates and others I haven’t seen in months.
  3. I started running regressions again this week, for the first time since December or so.
  4. Yesterday, I went to the gym for the first time in about a month. It hurt.
  5. I get to eat my own food in my own home. I never thought I’d say this, but by the end of it all, eating out was no longer exciting.
  6. I can focus on this whole graduation business now.

Good luck to everyone who’s still in the process of figuring out where they’ll be next year!

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