How Apple plays the pricing game

Next time you're sitting at an airport bar and hear two businesspeople debate whether Apple is a technology or design company, chime in: "Nope. What Steve Jobs sells is pricing." 

Pricing? You bet.

Jobs is a master of using pricing decoys, reference prices, bundling and obscurity to make you think his shiny aluminum toys are a good deal. Apple's Sept. 1 announcement of new products was a classic example.

The popular iPod Touch media player has been revamped at three price points - $229, $299, and $399 - all costing more than the iPhone, which does everything the Touch can plus make phone calls.

What gives? Watch Apple, and you can learn pricing tricks for your own business.


Read the full story here

Does drinking in college affect your grades?

To some people, the following conclusion should be filed under “Duh.” But even they might appreciate the empirical rigor undertaken by Scott E. Carrell, Mark Hoekstra, and James E. West in a new working paper called “Does Drinking Impair College Performance?

"This paper examines the effect of alcohol consumption on student achievement. To do so, we exploit the discontinuity in drinking at age 21 at a college in which the minimum legal drinking age is strictly enforced. We find that drinking causes significant reductions in academic performance, particularly for the highest-performing students. This suggests that the negative consequences of alcohol consumption extend beyond the narrow segment of the population at risk of more severe, low-frequency, outcomes."

Full story and the link to download the paper here.

Updated: The sceptical environmentalist changes his mind

The world's most high-profile climate change sceptic is to declare that global warming is "undoubtedly one of the chief concerns facing the world today" and "a challenge humanity must confront", in an apparent U-turn that will give a huge boost to the embattled environmental lobby.

Bjørn Lomborg, the self-styled "sceptical environmentalist" once compared to Adolf Hitler by the UN's climate chief, is famous for attacking climate scientists, campaigners, the media and others for exaggerating the rate of global warming and its effects on humans, and the costly waste of policies to stop the problem.

But in a new book to be published next month, Lomborg will call for tens of billions of dollars a year to be invested in tackling climate change. "Investing $100bn annually would mean that we could essentially resolve the climate change problem by the end of this century," the book concludes.

Examining eight methods to reduce or stop global warming, Lomborg and his fellow economists recommend pouring money into researching and developing clean energy sources such as wind, wave, solar and nuclear power, and more work on climate engineering ideas such as "cloud whitening" to reflect the sun's heat back into the outer atmosphere.

Read more here.

and for the Copenhagen Consensus (very interesting project) here.http://www.copenhagenconsensus.com/CCC%20Home%20Page.aspx

Another interview is here

"I'm not saying that climate should drop off the page. I'm simply saying, right now we seem to be obsessed with pretty much the only solution that we have conclusively seen doesn't work and that the economists have very clearly pointed out is a very poor way of tackling the problem. At some point, we have to ask ourselves, do we just want to keep up the circus of promising stuff but not actually doing it?
For every dollar you spend on traditional carbon policies -- even if you do them well -- the benefits could be measured in just a few cents. That's a poor deal! If you invest dramatically more in research and development of green energy technology, however, for every dollar you spend you can probably avoid about $11 of climate damage. We can do 500 times more good if we do it right."

the demand curve for gold

From the Freakonomics blog:

"We’ve had some old unwanted gold jewelry lying around for a long time. With gold at $1,237 per ounce, we figured it was time to sell it. We are a living movement up the supply curve of gold.
The local jeweler who bought the gold says we are hardly unique—but the pattern of supply has been interesting."

To read what the pattern looked like, click no the link above.

When Value Judgments Masquerade as Science

By the Kaldor-Hicks criterion, a public policy is judged to enhance economic efficiency and overall social welfare — and therefore is to be recommended by economists to decision-makers — if those who gain from the policy could potentially bribe those who lose from it into accepting it and still be better off (Kaldor), or those who lose from it were unable to bribe the gainers into forgoing the policy (Hicks). That the bribe was not paid merely underscores the point.
That is quite a mouthful. As the economist Steven E. Landsburg explains it bluntly to students in “Price Theory and Applications” :

In applications, the Kaldor-Hicks criterion and the efficiency criterion amount to the same thing. When Jack gains $10 and Jill loses $5, social gains increase by $5, so the policy is a good one. When Jack gains $10 and Jill loses $15, there is a deadweight loss of $5, so the policy is bad.

Evidently, on the Kaldor-Hicks criterion one need not know who Jack and Jill are, nor anything about their economic circumstances. Furthermore, a truly stunning implication of the criterion is that if a public policy takes $X away from one citizen and gives it to another, and nothing else changes, then such a policy is welfare neutral. Would any non-economist buy that proposition?

Full blog post here 

And Landsburg's response :

For economists evaluating alternative policies, the industry standard is the efficiency criterion, also known as the welfare criterion. (I’ll illustrate what that means as I go along.) But now comes Princeton Professor Uwe Reinhardt with a piece in the New York Times that questions the orthodox approach found in virtually all modern textbooks (including one in particular).
Let’s first dispense with the straw man. I’ve never heard of an economist who believes that every efficient policy is good, and I’ve heard of very few who believe that every inefficient policy is bad. It’s true that most economists do seem to believe that any good policy analysis should start by considering efficiency. That doesn’t mean it should end there.

I think economists are right to emphasize efficiency, and I think so for (at least) two reasons. First, emphasizing efficiency forces us to concentrate on the most important problems. Second, emphasizing efficiency forces us to be honest about our goals.

the Machiguenga are just like economists

The Ultimatum Game works like this: You are given $100 and asked to share it with someone else. You can offer that person any amount and if he accepts the offer, you each get to keep your share. If he rejects your offer, you both walk away empty-handed.
How much would you offer? If it's close to half the loot, you're a typical North American. Studies show educated Americans will make an average offer of $48, whether in the interest of fairness or in the knowledge that too low an offer to their counterpart could be rejected as unfair. If you're on the other side of the table, you're likely to reject offers right up to $40.
It seems most of humanity would play the game differently. Joseph Henrich of the University of British Columbia took the Ultimatum Game into the Peruvian Amazon as part of his work on understanding human co-operation in the mid-1990s and found that the Machiguenga considered the idea of offering half your money downright weird — and rejecting an insultingly low offer even weirder.
"I was inclined to believe that rejection in the Ultimatum Game would be widespread. With the Machiguenga, they felt rejecting was absurd, which is really what economists think about rejection," Dr. Henrich says. "It's completely irrational to turn down free money. Why would you do that?"

Read more: http://www.nationalpost.com/Westerners+World+weird+ones/3427126/story.html#ixzz0yBgnbtH8

And download the paper here

to raise or not to raise? that is the question

Raise!

Raghuram Rajan accurately warned central bankers in 2005 of a potential financial crisis if banks lost confidence in each other. Now the International Monetary Fund’s former chief economist says the Federal Reserve should consider raising rates, even as almost 10 percent of the U.S. workforce remains unemployed.

 Do not raise!

That is, other things equal, demand is higher, the lower the real interest rate. Do you really want to quarrel with that? But right now, thanks to the aftermath of the financial crisis, even a zero nominal rate, which is a slightly negative real rate, isn’t low enough to produce full employment.
In normal times, when the zero lower bound isn’t binding, this basic framework suggests that conventional monetary policy can play the key role in stabilization. So in normal times I’m all in favor of having the Fed take on the job of managing the business cycle, and basing fiscal policy on long-term concerns.
But now we’re up against the zero lower bound; and that changes everything.

Economists playing Monopoly

What economic lessons could you learn from playing Monopoly? And what does it mean if you prefer to play with the top hat?

Read (and listen to)  it all here.

Where does the Laffer curve bend?

With the Bush tax cuts due to expire soon and debates about raising top rates further to cut the budget deficit soon to follow, the Laffer curve is bound to come up again. The idea, popularized by economist Arthur Laffer and writer Jude Wanninski in the 1970s and '80s, is simple. Tax rates of zero percent produce no revenue, for obvious reasons. Rates of 100 percent should produce no revenue either, as no one would bother making the money that falls into that bracket knowing it would all be taken away.

Thus, presumably, there is some rate in between the two that maximizes revenue. Go above it and revenue would fall because people would avoid taxes or stop working; go below it and revenue would fall because less money would be taxed.

I decided to ask some tax experts and political activists where, in the current personal income tax, and particularly in the top tax bracket, they think that Laffer curve peaks -- that is, what that revenue-maximizing rate is. The responses were varied, to say the least. Let's start with the experts.

Read the full article here.

Freakonomics podcast: the world cup

With a little less than a week to go, here's the Freakonomics podcast about the world cup where they analyze where the home-field advantage comes from (you'll be surprised by one of the findings) and how to best take a penalty.

Listen to it here.

Food for thought

Economics is hard, don't let bloggers tell you otherwise - Katrik Athreya

The price is right?

"As I’ve written before, economists generally believe that the “external costs” of an economic activity (i.e. its impacts on others besides its producers and consumers) should be factored into its price. If producers and consumers don’t consider the harm (or benefit) that their actions cause others, they will create more (or less) of a good than is optimal from the point of view of society.
The steep external costs of alcohol consumption suggest that government should use price signals to moderate drinking. But do prices make a difference, or is drinking the sort of behavior people will do no matter how outlandish the cost (which you might have observed the last time you were at a sports stadium or concert venue)?

 ...What level would alcohol taxes have to reach to match the costs drinkers impose on society?"

         Read the whole story at the Freakonomics blog

Countries without doctors? How Obamacare could sprak the drain of physicians from the developing world

America is about to induce massive medical brain drain. The historic passage of health-care reform legislation in March will provide an estimated 32 million uninsured Americans with health insurance. But the United States will need to rapidly grow its supply of doctors and nurses to meet the demand that creates -- a fact that will surely attract qualified doctors and nurses to America's higher salaries, better working conditions, and promise of a booming industry. There's nowhere for those health professionals to come from but overseas; the domestic education system simply won't produce enough. Enter brain drain.

Full article on the Foreign Policy website