Here’s a recent appearance on One America News Network where I discuss the global economy, corporate inversions, and everyone’s favorite treat: Hot Pockets.
Price discrimination is poorly understood. Some, including me, think it gets a bad rap. I actually like it. The layman’s definition is charging people different prices for the same good or service. To economics uber nerds, you might hear it described as “taking advantage of different elasticities of demand for the same goods by charging different prices relative to marginal cost.”
Love it or hate it, price discrimination happens quite frequently — more so than most expect.
The first and most important factor in why people don’t like price discrimination is the term itself. Usually, nobody likes being on the receiving end of discrimination — unless it benefits them. Economist types prefer much less harsh terms for the practice, calling it “dynamic pricing” or “price customization.” Thomas Sowell, in his book Applied Economics, makes a very important point here:
Prejudice, bias, and discrimination are too often confused with one another. Each requires careful definition before discussing substantive issues, if those discussions are not to get hopelessly bogged down in semantics.
On the web today, many many pixels were devoted to Amazon and their new “Amazon Mom” program that gives a discount to mothers. The debate was whether people should lie to Amazon to get that discount — since they weren’t “verifying” if your baby was real.
Thought leader Touré shared this pearl of wisdom with us: “If a lie is told to a corporation, it’s not really a lie.” You can play this game at home, like former DC City Council member Kwame Brown did, by lying about his income to a bank. He went to jail, and so could you. Corporations are people, my friend. Vengeful, vengeful people.
If Target can find out people are pregnant through data wizardry, it’s safe to assume Amazon can probably do that even better. Heck, if you’re not buying baby items, I’m sure they’ll notice pretty quickly. I have no dog in that fight, except that I am happy to support price discrimination. Though, you probably won’t go to jail for lying about a fake baby — you’ll just be as bad as people who fake pregnancies.
There is a liquor store I go to in Washington, and because I go there with some frequency, I get special pricing. You, however, pay full price. I go to this store because I liked the pricing and selection before, and even more so now. Unlike Virginia, where my outgoing governor who promised to privatize our horrible liquor delivery system but failed to do so, these stores have decent selection. And because there is competition, you can actually get good prices on booze.
My shopkeeper seems to understand the pricing mechanism quite well. Cleveland’s finest — Great Lakes Christmas Ale — goes for $25 a six pack. Given its scarcity, he knows people will be willing to pay more for that premium product. And because he does this, it stays on the shelves. There was a six pack there this evening. A few years ago, before the secret got out in Washington, my sister and I scooped up five cases of the stuff at a reasonable price. At $25 a six pack, today, our little haul would cost $200 more.
Now, before you conclude that I like discriminatory pricing because it results in me getting cheap liquor, I’ll switch to a few more important examples.
To truly understand the usefulness and benefits of price discrimination, you should try to imagine a world without it.
At Business Insider, Josh Barro observes:
“Discrimination” has negative connotations, but there’s nothing immoral about price discrimination. In fact, it can be an economically useful mechanism. If airlines had to charge the same price to every flyer, a lot of flights would become uneconomical to operate, making both the airline and the passengers worse off.
Indeed, Barro cites but one of many examples where price discrimination serves a necessary function. Without price discrimination, would there be as many flights as there are now? As many routes? Would you be able to afford them? What about $1 Megabus rides, certain types of discounts, or coupons?
Thankfully, we probably won’t have to find out because price discrimination isn’t likely to disappear from the marketplace anytime soon.
Josh Wright writes that “discrimination is likely to result in lower prices, higher output, and increased innovation.” And he would be correct. Without price discrimination, airline output would be markedly lower.
He also concludes a fantastic blog post with this:
“one lesson of the price discrimination literature that is ignored is exactly how unusual uniform and linear pricing is in the modern economy! The ability and incentive to price discriminate, which requires only the absence of perfect substitutes, is ubiquitous. It is a power held by every restaurant, landlord, corner gas station, supermarket, and small firm in the economy. Because price discrimination is profitable, we can expect firms in our modern economy to invest substantial resources not only in product differentiation, but also in finding methods to price discriminate. These provide no reason for competitive concern. Indeed, I think one could make a plausible argument (though I won’t in this post) that the absence of price discrimination is more worthy of regulators’ attention than its presence.”
I have nothing against the “buy local” crowd, the foraging crowd, or the urban gardening crowd per se. I have no problems with people liking each of the concepts. My complaints and problems with each of the groups stem from absurd and cult-like adherence to each dogma as if it were its own religion, forced on others, or taken to the extreme.
While buying local might be worse for the environment in some cases, or more expensive than mass-produced items shipped from a distance, people should be free to pursue the best course of action they see fit. Even if it means more harm to the environment and their wallet. Urban foraging, provided you’re not stealing from your neighbor — like chefs in local-food-crazed Portland are doing — is a little weird, but if that’s what you want to do, fine.
This recent story I read in Bloomberg Businessweek is an extreme example in buying local, urban gardening and foraging craze — or as I call it, going Authentically Amish (with apologies to the local furniture store.) A half hour outside of Albany, NY is Earlton. Here, there is a restaurant with a five-year waiting list.
The restaurant with the longest waiting list, five-years to be precise, is a small, nondescript, 12-table basement located in Earlton, N.Y ., named simply enough Damon Baehrel after its owner and chef. Its guests come from 48 countries and include such celebrities as Jerry Seinfeld, Martha Stewart and Barack Obama himself. However what makes Baehrel’s restaurant the most exclusive restaurant in the world is not the decor, nor the patrons, some who fly overnight from Manhattan to pay $255 for dinner (before wine and tip), nor the hype (although all the advertising is through word-of-mouth), but the food, which is all cultivated, grown, prepared, cooked and served from and on the property, and where Baehrel is literally the only employee. “I’m the chef, the waiter, the grower, the forager, the gardener, the cheesemaker, the cured-meat maker, and, as I will explain, everything comes from this 12-acre property.”
By that math, if this restaurant is open five days a week, with 12 tables and two people at each averaging $255 a head, Mr. Baehrel is raking in close to $1.5 million a year.
Bloomberg notes that it’s about half that, but still:
This hyperlocal, hyperunderground strategy is paying off. Baehrel won’t provide exact numbers but says he serves a few thousand guests each year and generates annual revenue of at least $750,000.
For foodies, visiting the so-called “Michael Jordan” of the movement has to be a big treat. There are similar restaurant concepts here in Washington.
But it is a cautionary tale of foodie-ism taken to the extreme. A five year waiting list? Must be nice if your last name is Baehrel, but to those wanting to go to a nice restaurant, pay a more modest price, and not have to wait five years, it’s good that the market offers other options.
The world would look a lot more like this if the extremist-type locovores were able to impose their whims on the rest of us, but that’s not likely to happen anytime soon. More likely, the locovores wage smaller, more winnable battles. And what start out as suggestions often become requirements later.
If you are among the Manhattan elite and can afford to pay and wait for such food, I hope it’s worth the wait. And to some, I’m sure it is. Nobody should begrudge Baehrel his success in offering something that clearly has high demand.
As for me, I’m happy to get my corn from where it’s most efficient to grow corn, beef from where it’s best to raise cattle, and my high-fructose corn syrup from the plant best able to deliver a quality product to the Coca Cola bottler near me. Or Mexican coke with that cane sugar. Delicious imports.
So long as the market isn’t unduly inhibited by regulations, locovores and free traders should both be able to enjoy the fruits of the harvest in harmony.
From the ever-expanding “This Isn’t Price Gouging” Department, the New York Post reports:
Passengers are blasting the Uber car-service app for its “surge’’-pricing scheme, which kicked in during the city’s first snowstorm of the season — in one case pricing a short trip across town at a whopping $132.
But in Boston, blogger Jessica Gioglio — who bills herself as “The Savvy Bostonian” — shelled out $91 for a 3.18-mile, 16-minute trip from Beantown’s Back Bay to Central Square.
Posting a screenshot of her e-mail receipt, she called the fare “price-gouging” and said, “I’m really disappointed in u guys.”
Uber, much maligned by regulatory fiends and taxi cab sympathizers, has really upset the taxi cabal in many major U.S. cities. Namely by providing better, more convenient service for a more premium price.
Unlike taxicabs, whose drivers can usually only impose a change in prices when allowed by decree from the government (i.e. during a snowstorm, or when gas prices are unusually high), Uber can raise prices to reflect market demand. And users are clearly made aware of this before they agree to take an Uber, as seen below.
The Uber situation in Brooklyn right now is not particularly great pic.twitter.com/OAABfMhDfJ
— Bryan Bonczek (@itsbonczek) December 15, 2013
The Post continues:
The app’s practice of surge pricing is actually designed to help consumers, Uber spokeswoman Nairi Hourdajian insisted Sunday. The higher rates “get more cars on the road quickly when demand outstrips supply, helping to guarantee that New Yorkers can get a ride when and where they want,” she said.
“As soon as demand falls or supply increases sufficiently, prices return to normal.”
Uber cars and their drivers, like everything else, are a scarce resource with alternate uses. Uber is right to raise prices to incentivize more drivers to work than to accept private contracts (as many Uber drivers do in Washington), hunker down with their family, or go out and get supplies for their homes. Just like laws prohibiting so-called “price gouging” during a storm serve as a disincentive for shop owners to stay open, the rules that govern taxi cabs often result in less taxis being available.
Which, in turn, might cause Uber’s demand to surge even higher than it normally would if taxis had greater flexibility to charge market rates.
The resurgence of luddism is something that, while seemingly innocent, is frankly quite troubling. Neo-luddites take many forms these days — from the buy local crowd, the organic obsessed, make-work Keynesians to actual, straight up luddites. (I guess make-work Keynesians are sort of the same thing…)
As I’ve previously criticized the cult-like behavior of some buy local and organic folks, I’ll issue the standard mea culpa: Buying local or eating organic foods is just peachy in my book. Go for it. Go hog wild, but please don’t proselytize your lifestyle choices with clapatrap.
Go to the farmer’s market and buy “local” food from two states away. I’ll get food from Walmart that is even more local, and because they have economies of scale, it’ll be better for the planet than the F-250 that drove 500 miles with your kale (now with a free side of sanctimonious bullet points for lecturing!).
What bothers me about the neo-luddite cultists, aside from their lecturing, is that they don’t just lecture you about your choices, they often want policies to favor their choices.
Here’s a brief hypothetical look into what America would be like if some of these yahoos got cart blanche.
Garlic. Grown pretty much everywhere but Alaska. The U.S. ranks eighth in the world in garlic production.
Agriculture policies are changed, and no longer can you get garlic from Mega-Garlic, LLC. Your garlic now has to be locally grown, organic, and machine free.
This is what that would look like:
These are women peeling garlic in North Korea.
Throughout the rest of world, we have machines that do this. They’re pretty neat actually. They reduce labor costs and increase efficiency.
Even though I think that buying local for local’s sake is dumb, I realize that most people who love buying locally or people who love organic food (as opposed to that inorganic stuff we all normally eat) don’t espouse making their lifestyle choices mandatory for the rest of us. My example, North Korea, is a pretty extreme example. However, some people do think like that.
Many others propose watered down versions of this extreme, which is still pretty bad.
I read with interest a recent piece in Businessweek about an innovate company that has managed to make something akin to a hotel food truck:
This year, Snoozebox Holdings is shipping 40 to 400 stackable containers to house guests at events including Le Mans, the Edinburgh Festivals of plays and concerts, and the G8 Summit. The prebooked rooms are equipped with flat-screen TVs, Wi-Fi, and running hot water.
Who would want to stay in one of those, you might ask? The company, Snoozebox, has already found some markets for its product.
The answer is, mostly, rich people. However, like with most innovations, what starts as a toy or luxury for the rich (telephones, VCRs, televisions, internet) usually becomes pretty affordable and widespread.
Take the devastating tornado that recently ravaged Oklahoma. Or the one in Joplin, Missouri. Housing is one of the most needed commodities in the wake of natural disasters. Could Snoozebox, or its competitors save the day and provide a market-based solution to help people in need?
While the obvious answer is yes, the reality is probably not. Or at least not anytime soon.
Whenever an innovation disrupts the current natural order, vested interests often use the law and politicians in an attempt to stifle competition. Economists call the former “creative destruction” (good) and the latter “rent seeking” (bad).
Creative destruction, in the form of the Uber car service or food trucks, is really great for consumers. Their competition — well established taxi cabals and brick-and-mortar restaurants — don’t see it that way. They get politicians to enforce laws that would inhibit any competitor from setting up shop, and if the laws doesn’t exist for that purpose, those interests usually push politicians to pass them.
Let’s rewind the clock to a day after the tornado hit Oklahoma. You work at Bomblebox, a fictional competitor of Snoozebox. Oklahoma would be an ideal place to offer your services to a populace coping with disaster. Hotels are overbooked, people are cramped in the houses of friends — often far away from the site of their former home. There’s a natural market for the Bomblebox.
Could Bomblebox drive a couple of trucks over and set up shop somewhere? In this hypothetical, it’s unlikely.
Each of the fifty states has their own laws and regulations governing hotels and lodging. And it’s unlikely that a company not already licensed to do business there could get all the t’s crossed and i’s dotted before the window of opportunity closes.
Second, local hoteliers, their trade groups, and other interest groups would probably object. There are a ton of ways they could do this:
Would Bomblebox’s products be up to snuff with Chapter 285 — the part of Oklahoma law that regulates lodging establishments? Is the plumbing consistent with the Oklahoma Plumbing License Act? Is the electricity system consistent with the Oklahoma Electrical Licensing Act? Does each unit “maintain at least one lighting fixture suitable for reading”? Do all the bathroom floors have “impervious floor surfaces?” Is the sewage disposal system consistent with “regulations adopted by the Oklahoma State Board of Health?” I don’t know.
Remember, these laws are for your safety. Created, supposedly, to protect you — but they also often serve to protect the current natural order from competition.
You get the point.
The time and money it would take to ensure compliance would probably guarantee that such a plan wouldn’t get past the research phase. There are a lot of questions to answer just to drive a box that people would pay $400 a night to stay in while watching a race or stay at a festival like Bonnaroo. Put another way, if people are willing to pay that much to stay in a box at a race or a festival, my guess it’s probably good enough for to stay in after the wake of a disaster.
But that’s not how regulation and the natural order operate. Mutually agreed upon and beneficial transactions, even under extenuating circumstances, are often illegal outright. You’re not necessarily free to transact with others as you see fit. While FEMA does provide disaster assistance — think FEMA trailers — some people probably would be willing to pay more, and could afford to get something a little nicer than a crappy camper because for their well being they want the comforts of home.
Let’s pretend for a second that Bomblebox is a Missouri company, and has plans to do business all over the southland to help people recover from disasters, and provide housing during political conventions and festivals.
Could Bomblebox then, had it complied with all the varying laws regulating hotels and motels, go into business? Again, the answer is probably not.
Ill-advised price gouging laws in each of the states would likely prohibit Bomblebox from charging the market rates necessary to make it profitable. And thus, local hoteliers and the government — which also hates competition — would likely object and prohibit the “evil” Bomblebox corporation from helping people at a time when they need it most.
What about renting (or selling) house-like version of the Bomblebox? At first glance, that might appear to be a better option.
But, again, the complex web of laws and regulations would make that difficult, and in addition to hoteliers, the competitors of the natural order (RV makers, prefabricated home makers) would likely throw in a monkey wrench to complicate things.
In my lifetime, we’ve seen creative destruction move at an amazingly fast pace. The days of radio-dispatched cabs that come because of a call from your home phone or payphone are over. We’re in the Uber era now, where my smartphone will get me a black sedan in mere minutes. Instead of having to go and wait in a long line to get a Georgetown cupcake, food fad fetishists can be satisfied by a 3 minute walk to Farragut Square where multiple food trucks offer similar (and often better) products with shorter lines and often at lower prices. Or, if you really have your heart set on Georgetown cupcake, Seamless can deliver it for you.
Generally speaking, our regulatory system and laws are outdated. Uber is discovering that first hand across the country, most recently in Los Angeles. The byzantine shackles of a outdated laws and regulations that keep cities (like my hometown of Cleveland) from returning to their former status of greatness exist all across the country in various degrees.
What keeps them there is politicians who cater to the special interests, and who see themselves as wizened sherpas of the regulatory Mt. Kilimanjaro rather than people whose job it is to make their constituents’ lives easier through good policy, not political dependency.
Going forward, the cities and states that recognize the burdensome constraints of outdated regulations and laws are the ones that will prosper. They’ll have the Ubers, the food trucks, and — when times are tough — people willing to provide innovative solutions to help them in their time of need. Their citizens will lead happier, better lives, and bounce back from adversity faster than their friends in the cities and states whose leaders who let archaic policy and outdated thinking rule the day.
Few people argue for no regulations at all, but the people who think that deregulatory advocates believe this are often the very politicians who say “everything is fine.” Odds are, it’s not. And the joke’s on you if you believe them.
From The OK Disaster Scam Prevention Packet, as prepared by OK Attorney General E. Scott Pruitt’s “Public Protection Unit”
Most states have laws that purportedly protect people from evil “price gougers” in the wake of man-made or natural disasters. Some are toothless and silly, affording publicity seeking politicians to give themselves some good press, while others are draconian or invasive.
One point to consider is that price gouging laws do nothing to address or fix the shortage of a certain commodity due to either high demand or diminished supply. They’re not a solution.
These laws impose a “finder’s keepers” marketplace, where those conveniently situated to suppliers can hoard much needed goods at what are effectively below-market rates, rather than a market-based economy where buyers and sellers can decide what prices they’d like to charge or the price they’re willing to pay.
Oklahoma’s law seems especially pernicious because it restricts the ability of prices to rise by 10% not just for the immediate time after the disaster, but for 30 days after – and for “dwelling units, storage space and goods related to home repair and restoration”, 180 days after.
While big-box stores like Home Depot and Lowe’s have the size and scale to absorb potential losses from such a prohibition, it’s doubtful that your local mom-and-pop hardware store will escape as unharmed.
Of course, there are individuals who would try and skirt the law, and that’s not hard to understand because it is a bad law. Jim’s Hardware could mark up all items by 55% immediately before the disaster, and presumably be able to better absorb the price shocks they’d experience afterwards. However, you can bet that your local “consumer reporter” would be all over that in about a New York minute.
Lastly, even if price gouging laws do result in savings before the shortages occur, it’s worth asking whether, on net, the prosecution of violators if price gouging laws ends up costing taxpayers more than the money the few who were lucky enough to stock up on D-Batteries and bottled water saved?
Put another way, can you put a price on feeling good that you weren’t “ripped off” — even if you are living in the dark and thirsty? Will that round out the balance?
Could it be that these laws harm more than they help?
Here’s a good video on the topic:
In this podcast, we talk about the minimum wage and President Obama’s proposal to raise it $9 an hour.
Here’s Episode #20:
This afternoon, I watched a live broadcast celebrating the 10th anniversary of Sim City 4, an excellent and fun game to play. I tweeted that I was watching this broadcast, which in addition to celebrating SC4, promotes the upcoming Sim City title to be released next month.
A few of my friends started g-chatting about how cool the video was. It was well produced, interesting, and revealed a lot about what went into making the new Sim City an improvement over SC4.
While Sim City 4 isn’t perfect, people who play it tend to realize its flaws, but do so anyway because it is fun. I realized that I tend to be friends with these people, because they’re analytical thinkers. After all, doing well at SC is kind of like succeeding at defeating a simulated, changing puzzle. People who hate Sim City and do not think analytically, well, aren’t usually my friends.
One of the developers pointed out how in the new game, people have to get to hospitals instead of being magically beamed health based on their proximity to a facility like in SC4, no matter if they lived on an unconnected island across the way. In short, the new game is a little more realistic.
In talking with a friend, I wondered whether the CVS-like stores in the new SC will have minute clinics — a market reaction to flaws in our current health-care delivery economy. We concluded this is unlikely.
As an advocate of open markets, that bothers me about Sim City — in the game, the only way people receive education, healthcare, garbage removal, protection from fire or crime, is basically through your (the government’s) doing. Of course, that’s not the way the world actually works.
In Sim City 4, for example, one of your earliest perks is that you’re asked whether you’ll grant a denomination lacking “House of worship” the ability to exist. I don’t know anyone who says no to the church, but had I not built a school, how am I to know the church wouldn’t have built one? Or a private-sector actor? If I didn’t build a money-sucking university, how am I to know the Jesuits wouldn’t build one, complete with a hospital? Or that both might exist, along with the University of Phoenix or the University of Southern California.
When I build a residential district in a high-end part of town, how am I to know the residents won’t form their own Home Owners Association — replete with private trash, snow removal and security? You get the point.
In real life situations, the market responds. One of the beauties of unintended consequences is that good things often come from them. (Some also bad.) Of course, nobody who has played the game extensively would argue that SC4 lacks unintended consequences.
What does excite me about the new Sim City is that trade is a much more important part of the game, whereas in SC4, it’s more of a last minute add-on. Trade, of course, is important for any society and economy. The actions that people take in the online version of the game will impact neighboring cities. In the broadcast, we’re told that you can sell water (like in SC4) to your neighbors, but you can essentially make it so that you’re exporting polluted water if you want. This will make the interactivity quite interesting to be sure.
Is Sim City perfect? No, the amount of work that it would take to replicate the market as it exists in real life in a video game would be exceedingly difficult, practically speaking, not possible. (Which might explain why Keynesians have such a difficult lot in life.) Then again, Sim City is just a game. A fun one at that.
One of my least favorite new proposals from last night’s State of the Union was the proposed increase in the federal minimum wage. Now, I don’t support minimum wages because I don’t think the government should be able to tell individuals what they can ask in recompense for their labor. That’s my underlying reason for opposing them.
But, today, the pundits and advocates are out duking out whether raising the federal minimum wage to $9 is a good thing. I don’t think it is, but regardless that it’s bad policy, people will be out arguing nice-sounding supposed benefits from such a change and others its harrowing unintended consequences.
However, one of the arguments I read was a tad confusing to me. In The Week, Harold Maass writes:
A 2011 Federal Reserve Bank of Chicago study found that minimum-wage workers increase spending by $2,800 a year for every $1 increase in the minimum wage.
The National Employment Law Project’s Christine Owens says this is a good thing. But the math is confusing.
If you work 40 hours a week, every week of the year, a minimum wage increase of $1 an hour will net you an additional $2,080 before taxes.
After taxes, you’d net about an additional $1,913. Yet, increasing the minimum wage by $1 increases people’s spending by $2,800? Huh?
This does not appear to a very beneficial reason to increase the minimum wage.