The Next-Gen DVD War is On!

It seems that there will be no reconciliation between the two competing next generation DVD formats. According to Yahoo! (through /.), talks to unify the HD-DVD and Blu-Ray standards have ended, without a resolution. "The market will decide the winner."

This, of course, will lead to a format war in the VHS/Betamax vein. One of these formats will lose big, and consumers will lose as some delay purchase to see which format wins, some early adopters will choose the wrong format, and even those that choose the winning format will suffer through more limited software selections as a result of the format war. Bad news all around.

The strange thing about this is that it implies an incredible lack of risk-aversion among the parties involved. Obviously, neither wants to agree to use the other side's format, but it would seem that (in expectation) everyone would be better off if they flipped a coin to pick a standard and then agreed to split all of the licensing revenue 50-50 between the two format owners. Instead, someone will get (essentially) everything of a smaller pie, and the other will get (essentially) nothing. And the parties have agreed to play this game, rather than split the big pie down the middle.

iTunes Music Pricing

Over at Marginal Revolution, there's a discussion of Apple's uniform pricing for songs (99 cents per song). Tyler Cowen finds this pricing behavior peculiar, and posits some possible explanations. Let's look at them:

1. The confusion and resentment costs of different prices might be blamed on Apple. But surely we see different prices in many other retail arenas.

2. Perhaps Apple is solving a status game problem. If everyone else is selling for 99 cents and your song sells for $1.20, yours looks special. Music companies might set prices too high, not taking into account the lower demand for iTunes, and music, more generally.

3. Could Apple be enforcing music company price collusion, while receiving implicit kickbacks in the rights agreements? This would require the complainers to be in the minority.

4. Apple makes much of its money on hardware, especially iPods. Low song prices cross-subsidize the hardware, to some extent at the expense of music companies. That said, some music companies wish to charge lower not higher prices.

5. Hit songs are kept at artifically low prices to discourage people from moving into the world of illegal downloads.

6. Price is a signal of quality and Apple doesn't want to admit it carries "lemon" songs. But won't demand for the hits go up?

7. Uniform pricing is a precommitment strategy for a durable goods monopoly game.

Let's see:

• #6 just isn't believable. Even if price is a signal of quality, uniform pricing as a solution would have to mean that "low-priced" songs make up a bigger fraction of sales at iTunes than "high-priced" songs; otherwise differential pricing would be better. Plus, come on, really?
• #7 and #4 may or may not be valid, but they are arguments for low prices, not uniform prices.
• I've never heard of a "status game problem" (#2). Whatever it is, if it's a problem, then it's a problem for anything that prices differentially. What's special about MP3s? Also, I don't see why music companies would price too high. (Nor do I see what that has to do with the "status game.") Raising the price of a song would send some iTunes customers to purchase other songs instead, which the record company may not internalize, but Apple would. So the record companies would raise price too little, not too much. (And that's again an argument for low prices, not uniform ones.)
• Of course, there's another externality the record companies don't internalize- iPod sales (#4). But, as already stated, that doesn't explain uniform pricing.
• #3 could be, I guess. But as the author points out, this could only be the case if the complainers were in the minority. (Or if it wasn't implicit, and they all agreed to complain to deflect suspicion. But now I think we are giving them too much credit...)
  
• #5 also seems to be an argument for low prices, not uniform ones. A comment at Marginal Revolution argues that the "price" of all pirated downloads is the same (just time and effort), and so a uniform price for legit downloads is just set to the necessary differential. That argument sounds good, except it's not true. It's easier and quicker to download popular songs on file-sharing networks, so if this was the reason, we should see lower prices for more popular songs on iTunes.
• So that just leaves #1. We do see differential pricing in many other retail areas, but there are also lots where there is uniform pricing, also against immediate intuition. (Movie theaters, candy bars at a convenience store, and flavors of ice cream within a brand are some examples.)

My gut is that it has to be #1. Customers are likely somewhat annoyed by differential pricing (especially if that pricing is variable over time, which relates to #7 above), and it seems unlikely to me that the gain Apple would get be varying song prices by 10-20 cents either direction would yield far greater profits absent that effect on customers. So if the potential gain is small, and enough customers would be put off, then uniform pricing would be rational.

And, of course, there is probably something to the gimmick of pricing at 99 cents that appeals to customers and to Apple as a marketing tool.

Lastly, I wonder if the uniform pricing scheme might have something to do with the fact that songs are not bundled into a virtual "shopping cart" at iTunes, but rather each song is purchased as it is clicked. So customers don't get the chance to overview all of their purchases before finalizing their order; maybe a 99 cent per song pricing scheme allows them to track their spending more easily during a session?

Who is really writing this blog?

It could be a robot. Apparently, some scientists at MIT used a computer program to generate a "scientific" paper and submitted it for a conference. The paper was written grammatically correctly, but was just gibberish generated from a base set of nouns, verbs, computer science jargon, and sentence structures. The paper was accepted, though since then the prank has been revealed and the paper's acceptance has been revoked.

I'm sure an enterprising economist could take it a step further, download some BLS data, run some random regressions, and generate a random paper around those results. Anyone up for the challenge?

Source: /.

TMQ is back

Gregg Easterbrook, the Tuesday Morning Quarterback, is back on ESPN.com's Page 2.

That's good news, because he was always buried on NFL.com and as a result I read TMQ very rarely this past season.

American Dreamz, Take 2

It seems that Entertainment Weekly (a much better barometer of my tastes) has given American Dreamz a B+ rating. And a friend (with whom I have highly correlated preferences) has given it a thumbs up also.

However, America voted with their feet (eyes?) as American Dreamz came it only at #9 on the weekend, with only $3.7 million on 1,500 screens. It's a more limited release than others, but it's still not a great per-screen average.

Let Big Papi hit one out of your backyard

It appears that a charity organization in Boston is auctioning off the chance to play whiffle ball with David Ortiz at your home. And the "game" will be covered by NESN. That's a pretty cool item.

Given that lunch with Theo Epstein went for like $16,000, how much do you think whiffle ball with Big Papi will go for? I gotta think it would be even more than $16,000, if for no other reason than the fact that lunch with Theo was limited to 3 people (I think), whereas a whiffle ball game with David Ortiz could be enjoyed by a lot more people.

(BTW, what would happen if Derek Jeter bid on this and won? Would David Ortiz have to go to his house to play baseball? Could Jeter make him go to Yankee Stadium to play whiffle ball against the Yankees ? Would Ortiz convince other Red Sox to go along with him so he wouldn't be outnumbered? Sounds like a good ridiculous plot device for some stupid movie....)

Tony Vallencourt...

is the name of Adam Sandler's character in the fantastic Saturday Night Live skit "What's the best way?", which was a game show in which New Englanders competing in giving directions. It might have been the least funny skit ever for someone from the West Coast, but as a New Englander, it is my all-time favorite SNL skit, hands down.

Anyway, that's going to be my new online pseudonym.

$40,000 for a tire?

And you thought gas was expensive! (Link below, free subscription required.)

Hmm, I thought it looked good.

American Dreamz, which I thought looked good, gets a horrible review from the NY Times this morning. Here's the front page blurb:

Hugh Grant and Mandy Moore star in this "seriously unfunny comedy," says Manohla Dargis.

You can read the whole review here (free subscription required). Dennis Quaid was on the Daily Show the other night promoting the film. Apparently, he plays a dumb president from Texas, who is controlled by his staff and then has had enough and decides to start reading the paper himself. He disappears from public view for three weeks while doing this, and his staff then sends him to be a guest judge on American Dreamz (American Idol) in order to improve his image. With (apparently) not hilarious at all results.

Still, with Hugh Grant and Mandy Moore, it can't be all bad, right?

Steve Levitt's Bagel Friend

Steve Levitt has followed up the discussion of the bagel salesman that is in Freakonomics with a NBER working paper that uses the meticulous data collected by Paul Feldman, a graduate-trained economist from MIT who has been selling bagels in the Washington, DC area for 20 years. In Freakonomics, Levitt and Stephen Dubner discuss his data in relation to trust and honesty (Feldman leaves the bagels with a box for payment, and then comes back at the end of the day to collect). Here, Levitt focuses on Feldman's profit-maximization behavior. From the abstract:

Using thirteen years of data representing more than 80,000 deliveries, I find that the company is extremely adept at determining how many bagels and donuts to deliver to a particular customer on a given day. In stark contrast, the company appears to price on the inelastic portion of the demand curve for the entire period, thereby foregoing a substantial share of available profits. I argue that these results generalize well beyond this particular case study: firms are likely to be close to the efficient frontier on dimensions for which there is frequent and informative feedback regarding profits, but absent that feedback, systematic deviations from profit maximization are more likely.

This is a fantastic paper, as the data set is really well suited for seeing how well a firm (Feldman) does in maximizing profits. Although the discussion of optimal pricing in the paper is simplistic (Levitt has to ignore dynamic concerns and customer attitudes towards him, as well as any real analysis of how higher prices would affect the payment rate), it really highlights the way people price in real-life. And it's hard to refute Levitt's argument that pricing is below what would be optimal. (The main argument here is that revenues and profits go up after the price increases that do occur.)

I had a student once that owned a coffee shop, and he told me that he had really only raised his prices once. That price increase was in response to an increase in his rent (a fixed cost, that theoretically shouldn't affect pricing at all, let alone be the only reason for it). I was able to get him to admit eventually that the price increase also corresponded to a price increase (and rent increase) for a nearby competitor too, which allowed me to salvage the lesson on fixed prices not affecting prices, but I think it's pretty clear: firms often times lack (or ignore) the data to make "optimal" pricing decisions.

Sox Talk

So, after just over two weeks of play, the Red Sox have baseball's best record at 11-4, which means that after tonight's game, the season will be 10% over. Now, while that's clearly a lot better than being 4-11 (or 7-7 like a certain team to the southwest), it doesn't really mean much at this stage. It's not unlike being sent to Hollywood on American Idol; it's a good first step, but there's still plenty of work left. (The Royals, on the other hand, did not make it past Simon, Randy, and Paula. Maybe they too can end up w/ a cameo on Arrested Development.)

It's been a good start, and while the Sox haven't faced a real tough schedule to this point, it's come with encouraging signs that Curt Schilling seems to be healthy, that Keith Foulke is at least partially restored, and that Mike Lowell is not dead. Best of all, though, is that it has come despite Manny Ramirez hitting like Hanley Ramirez (who, ironically, is hitting like Manny Ramirez). Hopefully Manny coming around can make up for the fact that we are going to have to start playing some better teams than the D-Rays and Orioles. We'll see what happens after tonight when the Red Sox play their next six games at Toronto and Cleveland.

Oh, and there's this (not baseball) courtesy of Reuters.

Gas Prices

There's a new gas price chain letter going around with a magical way to lower gas prices. We've moved passed the "don't buy gas on this day" scheme, and are now onto this:

"For the rest of this year, DON'T purchase ANY gasoline from the two biggest companies (which now are one), EXXON and MOBIL. If they are not selling any gas, they will be inclined to reduce their prices. If they reduce their prices, the
other companies will have to follow suit. "

You gotta love crazy ideas that people come up with to move prices. This scheme at least might possibly hurt Exxon and Mobil, but why in the world would other companies lower their prices too, expecially if all the consumers who would have bought Exxon or Mobil are now buying from them? Just crazy. We could get lower prices at Exxon and Mobil (with a price wedge representing the non-E/M premium), which would be great news for any consumer who is not crazy enough to follow this plan and thus will still buy from E/M (like me).

I've got to wonder if the people who starts these emails are serious, or if they are just trying to see how many (crazy?) people will pass it along, thinking it might work.

Arbitrary Rulings

Sometimes, it seems, courts are able to put economics to use and come up with reasonable answers. Other times, it seems that they are just pulling things out of thin air. I came across this today, which discusses an Australian decision on the licenses that schools should pay for photocopies. This comes as a result of Australia's "equitable remuneration" standard as opposed to a market-based standard like the hypothetical negotiation standards in the US and UK. Anyway, here's the highlights:

The Tribunal therefore proceeded to determine a base rate of 4 cents per page, from which rates appropriate to specific categories of works were calculated.

In the case of artistic works and poetry, the Tribunal set a rate of 8 cents per page, on the basis that when copying such material, usually the whole of the work is taken.

A rate of 6 cents per page was set for plays and short stories on the basis that when these works are copied, it is less likely that the whole of the work is taken, however what is copied is likely to be “the ‘heart’ or substance” of the work.

Finally a rate of 40 cents per page was set for the copying of works onto overhead transparencies, slides, and permanent display copies. This rate reflects the fact that such copies allow a work to be viewed by many students at a time, as well as the enduring nature of these particular types of copies.

How much do you think lawyers billed over the course of this dispute, just to have an answer come out of thin air like this?