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 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 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.”

Posted 13 May 11 by Tatyana in General

A recent study has found that women born in the spring are more likely to be anorexic than women born in the fall. You can see the results graphically here.

The authors seem quick to attribute this to gestational factors. But there are two other more plausible explanations I can think of first. One is that women who are born in the spring face more looks-based pressure in school and are more likely to develop the disorder. Perhaps being the smallest/largest/medium kid in your class has something to do with it. Second, I would be surprised if the season of birth is completely random. Some parents undoubtedly plan when they want their kid to be born. How do we know that it isn’t parental characteristics that contribute to this? It’s plausible that gestational factors affect the development of this complex disorder, but the environmental/selection factors above are way more plausible.

Posted 26 Mar 11 by Tatyana in News

I was looking at lists of hobbies (for a research project, of all things) and found some pretty "exotic” ones that I decided to share. I picked them mostly because they sounded obscure, interesting or unusual, not to make fun of them.

Click to find out what each hobby involves:

Know any other obscure hobbies?

Posted 08 Mar 11 by Tatyana in News

The Economist recently published an article about the relationship between loneliness and health. As you may have guessed, lonelier people are less healthy. The authors of the study even identified a pathway through which this may operate: a decreased activity in the virus-fighting genes in the lonely people and an increase in the bacteria-fighting genes. The latter can lead to a chronic inflammatory response if loneliness is chronic, subsequently reducing your chances of survival.

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 23 Feb 11 by Tatyana in General
It seems like everyone is giving their opinion on what’s happening in the Middle East. Instead of offering my opinion on the unrest in Tunisia, Egypt, Lybia, and Bahrain, I will offer my opinion on everyone else’s opinion: the variance in what could happen is pretty large and most people making specific predictions will be wrong. Imagine you’re drawing a ball from an urn with 55 red balls and 45 white ones. If you had to guess the color of the ball that will come up, you will guess red. But there’s a 45 percent chance you will be wrong.

Posted 18 Jul 10 by Tatyana in News

Soon after the oil spill happened, I sold my BP stock as I saw it plunge below $50 a share (from $60 a share just a week ago). Sadly, I lost money, but I was pretty happy a few weeks later when it dipped below $40. As I saw it plunging further, I started wondering whether it made some sense to buy it back again. I decided that if it got below $30, I would buy more shares. Lo and behold, I am the proud owner of BP stock again (I bought it for a little under $31), and it’s looking like a good idea right now – BP closed at $37 on Friday and the oil spill looks kind of sort of contained. Now I just have to hope that (a) the cap stays in place and (b) there are no hurricanes coming through that region.

Of course, this is how I imagine amateur day traders are born. You make a few good calls and all of a sudden it seems like making money on the market is pretty easy. Luckily, my broker charges commission for trades. Otherwise, I would probably be trying to beat the market left and right and would most likely fail. Or would I?

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