What’s the Big Dilly (Dilly) with Intellectual Property?

‘You have to make a decision!’ you exclaim in a muffled shout, knowing that an entire afternoon of effort is riding on this one moment. Your partner nods calmly, and with an intense focus stares at the remaining spots on the board. “D3” he states, quietly but confidently. “It’s a hit. You’ve sunk my battleship” comes the disappointed reply from the other side of the divider. For a moment you sit in shock, until…

“Dilly Dilly!” your partner screams out, letting you know you have accomplished something great together. And what better phrase to commemorate the occasion? But where did the phrase even come from, and why does it seem that everyone can’t get enough of it? Who came up with it, and what were their motivations?

If you have watched television, or interacted with almost anyone who has in the past 6 months or so, you’ve likely heard the phrase “Dilly Dilly” before. Generally used as an exclamation of approval or excitement, the cries have swept the nation since the phrase’s debut in August 2017. While some phrases arise naturally and gain popularity through frequent use (or in today’s world, memes), others are carefully crafted through much trial and error. Such is the case with the phrase “Dilly Dilly”, which was created by marketers for the Bud Light (Anheuser-Busch InBev) brand.

Bud Light is ready to go to battle over a competitor's use of its medieval-themed slogan!
(Photo credit: Max Pixel/FreeGreatPicture.com)

The phrase has proven so popular, that Bud Light’s parent company is even preparing Super Bowl ads featuring the slogan. With all of this investment, it’s not surprising that Bud Light is pretty protective of the “intellectual property” they have cultivated. That protection was apparent in a rather amusing way recently, when a micro-brewery in Minnesota decided to name one of their beers the “Dilly Dilly Mosaic Double IPA”. As expected, Bud Light wasn’t about to let a direct competitor utilize their slogan, and chose to send legal documents to try to protect their intellectual property rights by forcing the micro-brewery to cease and desist. The reason this request made the news was due to the lighthearted way in which the cease and desist letter was sent; it was delivered by an “Old Timey Town Crier” who showed up unannounced dressed in full garb, reading out the legal document in old-timey language (as described in this article).  While this clever mechanism for delivery of legal documents made the news due to its peculiarity, I thought it would serve as a great platform for discussing why intellectual property rights exist in the first place, and why the court system would enforce them. (For proof of how this enforcement actually plays out, check out this recent settlement awarding $710,000 to ‘Grumpy Cat’)

I have heard reporters and commentators on television stations including CNBC and ESPN happily use the phrase “Dilly Dilly” as its popularity has grown, and Bud Light doesn’t seem to have any problem with this use. So why demand that one company cease and desist, while another is allowed (or even encouraged) to use the phrase? The answer lies in the fact that the value relies crucially on how popular or widespread the saying becomes, but at the same time how directly consumers relate the saying to the particular brand.

Companies invest a lot of time and money coming up with new slogans!
(Photo credit: Max Pixel/FreeGreatPicture.com)

Intellectual Property can take many forms. You may think of a cool new way to design a mousetrap, and to protect your design with a patent. Or you may come up with a new hit song that everyone seems to love. No matter the form of intellectual property, you’re only going to invest time and effort into trying to create it (likely failing many times along the way) if you think that you can at least recoup all of the money you invested by selling your successful product. In the case of Bud Light’s “Dilly Dilly” phrase, the company wants the phrase to be popular, but doesn’t want competing brands to be able to associate themselves with it. If there were no way to enforce ownership of such a phrase, you could just wait for someone else to develop a cool slogan and then steal it for yourself, rather than investing all of the time and money in failed attempts along the way.

As with most things in economics, it all comes down to incentives. To give companies an incentive to create new products, ideas, or even slogans, the government creates and enforces laws that forbid other entities from being able use those ideas or slogans for themselves. In other words, the government grants monopoly rights for some limited duration of time (perhaps 10 or 20 years), during which the inventor can earn profits on their property without other firms competing those profits away.

Bud Light found a rather ingenious way of enforcing their rights in a way that may actually bring more attention and popularity to their brand. In the battle to ship beers under the Dilly Dilly banner, it appears Bud Light has found a way to maintain their property rights without sinking their competitor’s business. I’d say that deserves a “cheers”, but perhaps the more appropriate phrase would be “Dilly Dilly!”

Stock You Like a Hurricane - When Price Gouging Won’t Fly under Severe Weather Conditions

In the wake of the devastation caused by Hurricane Harvey, many on the East Coast are watching closely to see where another powerful hurricane, Irma, will make landfall in the continental United States. These back-to-back catastrophes have created a unique situation in which many items considered necessities for surviving during and after such a storm are in short supply. In fact, in the wake of the devastation left by Harvey in the Houston area, many trucks in the southeast are being loaded up with water, diapers, food, and other items to help in the relief effort in Texas, further straining the supply of essential goods to the area that is about to be hit next. While shortages of essential goods have developed in many areas, there has been no shortage of articles written by economists describing how laws prohibiting price gouging lead to or exacerbate many of these shortages. For informational purposes, I’ll describe why this is in the following paragraph. What is even more interesting, is when we find examples of other economic forces at work that are largely being ignored in the other articles. In particular, this week several airlines announced that they would be doing quite the opposite of price gouging, by voluntarily capping the prices they are charging on flights to and from Florida during the evacuation effort.

Hurricane Irma Threatens Florida as People in its Path Prepare
(Photo credit: NASA/NOAA GOES Project)

Before we discuss the scenario with voluntarily capping airline flight prices, let’s first briefly examine the reason economists are so interested in price gouging laws to begin with. The reason most economists will argue against price controls of this sort that limit the maximum price that can be charged for a good, is that it prohibits the market from working to set the price that “clears the market” in a competitive equilibrium. That is to say, sometimes the price of a good needs to be very high before quantity supplied equals quantity demanded. If the price is below this point, people will want to buy more of the good (because people find it to be relatively pretty cheap) than is supplied (because many suppliers don’t find it profitable to sell a good for so few dollars). This inevitably leads to a shortage, and determining who gets the limited available quantity must be done in some other way than raising the price. One method of distributing goods in such a scenario is “queueing”, which is distributing the resource to whomever shows up first in line. If you’re worried about one person buying a lot of the good (stocking up on many cases of bottled water), instead of many people buying one case each, you could also try imposing limits on how many each person could purchase.

If you do limit the ability of prices to rise through anti-price gouging laws, most economist argue, you create two problems. The first is that people may overindulge in the artificially cheap good (stocking up on as much bottled water as possible), leaving very little or none for others (who may value it more) to purchase. The second problem is that the price gouging laws remove or decrease the incentive for entrepreneurs to transport much needed supplies to the affected areas from areas where they are more plentiful. Absent these laws, someone from Virginia may be tempted to purchase several generators and drive to Houston or Florida to sell them to people who are in great need of them, albeit at a higher price to cover their investment/expenditures.

Price Gouging Laws lead to Shortages of Many Essential Goods
(Photo credit: By Maksym Kozlenko via Wikimedia Commons)

What I want to discuss in this article, however, is not the typical price gouging scenario. Earlier this week, as predictions of Irma’s landfall somewhere on the Florida peninsula became increasingly more certain, evacuations began to take place. Then, something interesting happened. Airlines began advertising that they were doing two things. First, they were attempting to add as many extra flights as possible to get people out of Florida. Second, and somewhat surprisingly to many economists, most airlines announced that they were voluntarily capping the prices of their Florida flights at relatively low levels. While this may seem like an odd phenomenon to many, I would argue that the unique circumstances of these flights make the voluntary price capping a unique exception, and unlike other necessities like plywood, bottled water, and gasoline.

First, despite economists’ general agreement that prices should be able to rise (for the reasons discussed above), the general public tends to view large hikes in prices negatively. Thus, you may not expect many companies to raise prices by much during disasters, even if there is no law prohibiting it, due to the potential decrease in customer satisfaction. This doesn’t apply much to the entrepreneur who chooses to drive to an area to sell more generators, but it can be pretty damaging for larger companies whose reputation is on the line. Airlines have received a lot of negative P.R. already this year, and probably aren’t looking to add to it, even if they’re otherwise justified in their actions.

Second, while airlines are increasing the number of flights (and size of planes) to transport more people, there’s actually little room to temporarily increase the supply of seats flying out of Florida. One large barrier to increasing supply is the limited capacity of airports to have more planes at their gates. This means that even if the airlines charged several thousand dollars per seat, there just aren’t enough flights for it to have much of an impact on profits. When the airlines weighed the lop-sided risk of the costs of a potential P.R. disaster with a small bump in profits versus making a positive impression on the public and forgoing those profits, the choice is pretty obvious. When viewed in this light, it’s easy to see why airlines would publicly impose price restrictions on themselves.

Larger Planes and More Flights are Being Added to Help with Florida Evacuation
(Photo credit: Carla Thomas  via NASA)

The problems associated with price gouging laws are clear when applied to goods like plywood or generators, but don’t fit as well when applied to flights. It is much more plausible that someone would be incentivized to drive a truck full of supplies to Florida than to fly their small plane down, find a runway with available space, and find customers to fly out of harm’s way a few at a time. The limited ability to expand “production” of flights, coupled with the fact that a few large companies with a lot to lose control most flights, means that in this instance there’s no need for a price gouging law to limit prices. The major airlines have made a competitive and economic decision that, at least for them, price gouging just won’t fly.

Total Eclipse of Supply - Why are Solar Eclipse Glasses Impossible to Find?

America is gearing up for its first total solar eclipse in well over a quarter century, and there’s something strange going on near the path of totality. No, I’m not talking about the possibility of Lizard Man sightings during the eclipse, but rather the fact that there appears to be a shortage of the cheap disposable solar eclipse viewing glasses that are essential to wear if you want to look at the sun without permanently damaging your eyes. This article, from Denver, describes the difficulty that people from Oregon to South Carolina are experiencing in finding the glasses in the waning hours before Monday’s eclipse. I’ve discussed shortages before on this blog, so why is this one so strange/unexpected?

A total eclipse over the United States is a once-in-a-generation phenomenon
(Photo credit: NASA  via Wikimedia Commons)

The shortage of solar eclipse glasses is interesting because it should qualify as a relatively competitive market (many buyers and sellers; free entry/exit; etc…), and the product is relatively inexpensive and quick to manufacture and distribute. In addition, science allows us to predict future eclipses far into the foreseeable future, so it’s not like this event suddenly snuck up on everyone. Thus, despite there being no specific laws placing a price ceiling on solar eclipse viewing glasses (some states’ general price gouging laws could potentially apply, but I’m not aware of any being applied at this time), a shortage of eclipse viewing glasses has emerged. So, you may be asking yourself, what kind of factors would contribute to such an economic anomaly?

When a competitive market experiences a shortage, it usually adjusts for the disequilibrium created (quantity demanded > quantity supplied) by increasing prices until the market reaches equilibrium. This occurs because, as prices rise, more suppliers are willing to produce more eclipse glasses, and at the same time some consumers stop demanding pairs of glasses because the price gets too high for them. We expect this to take a bit of time to occur, but even if there were no additional time to produce more pairs of glasses the price of glasses should increase a lot until enough consumers drop out and there is no longer a shortage.

The path of "totality" stretches from coast to coast!

(Photo credit: Wikimedia Commons)

There are two interesting things that appear to be occurring with eclipse glasses. First, it appears that both producers and consumers may have underestimated the Demand for these glasses. This is likely do in large part to the rarity of total solar eclipses in the United States. It’s hard to predict the level of Demand without much historical data, especially due to the lack of eclipses that could be hyped up by so many internet and 24/7 news stories. When stores that don’t typically sell eclipse glasses (hardware stores, gas stations, etc…) were deciding how many pairs of glasses to order to stock their shelves, they seem to have preferred erring on the side of underestimating Demand. This makes sense; while eclipse glasses are relatively cheap to produce and store, their value drops to almost nothing after the eclipse on 08/21/2017. The next total solar eclipse in the US is not until 2024, and only overlaps with this year’s path around southern Illinois/southeast Missouri. That leaves a lot of stores across the nation that would have to store any excess glasses with very few potential buyers after Monday.

The second complication, that may be the most interesting to an economist, is that many groups began advertising several weeks before the event that they would be handing out eclipse glasses for free. Some were schools, museums, and other government institutions who may have been seeking to promote the “public good” by helping protect people’s eyes while encouraging people to pay attention to this scientific phenomenon. Others were retail establishments, including many optometrists, who used the free glasses as a form of advertising and a way to get potential customers in their doors. No matter their reasons, these free glasses seemed to have two effects. First, many suppliers knew they’d be trying to sell glasses against others who were giving them away for free, and so they logically ordered fewer than they otherwise would have. Second, many consumers (like me) heard that there were free glasses available, and chose to pass by those that were for sale in the store a few weeks before the eclipse.

Were you able to snag a pair of these stylish and necessary frames?

(Photo credit: nps.gov)

By the time everyone realized that Demand was much higher than expected, it appears to have been too late. No longer being able to find free glasses around town, consumers turned to the stores selling the glasses. Prices appear to have been a bit “sticky”, with the high Demand not being fully revealed to the stores selling the glasses until they had almost sold out. If they had raised their prices immediately only to find that Demand was low, consumers would have only bought from their competitors, and they would have been left with a large excess of glasses with no buyers.

One additional complication in this ordeal was the emergence of “fake” solar glasses sold on Amazon and elsewhere. Many people purchased glasses for themselves and their families only to be told that they may not be fully protected from the solar rays after all, and that they would need to find the “approved” version of the glasses. Whole counties even ordered and distributed these unapproved glasses! As any given person only needs one pair of approved glasses to view the eclipse, many people who would have otherwise been satisfied and not purchased more glasses at any (positive) price were now thrust back into the market to try to buy a pair of glasses in time.

We typically expect a market to self-equilibrate over time, unless some sort of barrier (such as a price control) keeps it from doing so. With the Great Eclipse of 2017, we can see that a confluence of unique circumstances has created a shortage of eclipse glasses that it appears will persist through the end of the phenomenon. With a little economic insight, we can “shed some light” on this mystery, just in time for Monday’s darkness.

Credit for Trying - Is Banning Transactions Fees a Win for the Consumer?

Take a second and think back to the last time you bought something that was on sale. How great did it feel? It’s easy to recognize and appreciate deals when you get a better price for something you were going to buy anyway. But how do you feel when the tables are turned, and you’re charged extra to buy something?

For example, when you go to the gas station to fill up your SUV, do you pay with cash or credit? At most stations, the price that you pay per gallon when using cash is different than the price per gallon for using credit. Either way, you’re getting the exact same gasoline, so how do you perceive this difference in price? If you see it as a mark-up or extra fee for using credit, you’re probably not a huge fan of the price differential. On the other hand, if you see it as a discount for using cash, you may view it favorably, and would be unlikely to want to see the discount removed.

When you purchase something, you often weigh 
the cost and benefits of using cash vs. credit

(Photo credit: 401kcalculator.org)

It is with this in mind that this article from The Telegraph, across the pond in the UK, caught my eye. The article was written by The Telegraph’s Consumer Affairs Editor, who chalks up a new law banning charging many credit card fees as a clear victory for consumers. If the title of the article, “[e]nd to rip-off credit card fees…” doesn’t make this position clear, the description of these “rip off” fees as being “used by shops, restaurants and travel firms to make extra profit at the direct expense of customers choosing to pay by card” should remove all doubt. But is the removal of these fees truly a clear “win” for consumers, at the expense of the greedy shops, restaurants, and travel firms?

Let’s begin by considering a portion of the quote above. These fees are charged to customers who are “choosing to pay by card.” This implies that the customers have other options (usually cash), but find paying by card to be preferable for some reason. Presumably, either they find using credit more convenient, or they may receive some cash back or points for using their credit cards. No matter the reason, some citizens chose to pay in credit despite the fee, and others chose to avoid the fee by paying in cash. Essentially, you’re free to sort into the group (cash or credit) that you feel is the best deal for you, after taking the fees into account.

Now what happens if you ban the ability to charge credit card transaction fees? If you’re a consumer, perhaps you’re hoping that the cash price will stay the same, and the credit price will be lowered to match it. Those who previously paid in credit would now be better off, since they still get the perks (convenience, points, etc…) of using credit, but for a lower price. If this scenario were to play out, even those previously using cash would be as well off, if not better off. Some of them may even choose to switch over and begin using credit cards for their purchases! Consumers would clearly be better off, and the costs would fall on either credit card companies or those greedy shops, restaurants and travel firms. The problem is, this scenario has some assumptions that aren’t likely to play out in the real world.

How do you view the price difference in
paying for gas with cash vs. credit?

(Photo credit: 127driver via Wikimedia Commons)

The issue with the scenario above is that it assumes the cash price will stay constant. It’s like assuming that if gasoline is currently $2.00/gallon when using cash, and $2.10/gal when using credit, that all gas would be $2.00/gal after the fees were banned. But it’s costly for gas stations and other stores to offer the payment option for credit cards. They even have to pay fees to the credit card companies for facilitating these transactions. If gas stations can’t pass along these fees to consumers, they have to find some other way to not lose money on the transaction. In this example, gas stations will do one of two things. First, they may increase the price of gas for everyone, let’s say to $2.05/gallon. While those consumers using credit cards are now better off, those who still use cash are clearly worse off, as they are helping subsidize the purchases of their credit using neighbors. The other possible result of the ban on fees is that vendors may choose to cease offering credit cards as a payment option all together. In this case, those who previously used credit cards are clearly worse off, as they used to have to choice to use either cash or credit and chose credit, but now must choose their second best option.

The lessons in the example above could easily be extrapolated to apply to all sorts of shops and firms. It’s easy to see that a law which essentially limits the choices of the consumer is not necessarily a clear “win” for all consumers, or even the average consumer. Viewing the issue as a discount for using cash rather than a penalty for using credit allows us to see more clearly the true costs and benefits of such a regulation. Perhaps The Telegraph is giving lawmakers more credit than they deserve.

Prognosis Negative - The Dual Drivers of Electricity Price Variability

How great would it be if someone paid YOU to consume their goods or use their service? For instance, what if instead of having to pay to go see a new hit movie, you not only got into the theater for free, but were even given a few dollars in compensation?

People love to complain about their power bills being too high, 

but what if you actually got paid for using power!?

(Photo credit: Max Pixel)

This is exactly what would occur if prices were negative for a good, but it’s a fairly rare occurrence. Why? For most goods, the Supply curve doesn’t cross below zero (or even marginal cost (or even minimum average cost for a given firm)). This means that even in the most competitive markets, suppliers are free to either leave the market or just not sell their goods to you, if they can’t get a high enough price to make selling them worthwhile. A negative price doesn’t usually satisfy this condition, so you may wonder if it is ever something we would observe in a real-life marketplace.

It would be unexpected for movie theaters to pay 

consumers to go see new blockbuster films.

(Photo credit: LuisJ3000 via Wikimedia Commons)

As it turns out, we do observe negative prices for goods from time to time. As you may have guessed from the title of this article (unless you were thrown off by the Seinfeld reference), the market for electricity will at times end up supplying electricity for negative prices. A few unique characteristics of this market lead to such an occurrence. These characteristics include:

•          The inability to store the good for long periods of time
•          Markets that are often segmented and closed-off from other parts of the country
•          Varying levels of subsidy to different types of electricity generation
•          The impracticality of shutting down or scaling back electricity generating operations for short time-periods

When considering all of these peculiarities together, it is not surprising that at times more electricity will be generated than people want to consume, resulting in a negative price. What is most interesting, however, is how fittingly electricity generation provides a “powerful” example of how there are always two sides to a market.

I first learned of the negative prices in this market while reading an article in 2015. At the time, it was fascinating to see prices below $0 for a good, but for the particular scenario described it was easy to figure out why it had occurred. In this instance, the supply of electricity in the short-run was relatively fixed and inelastic (due to the reasons outlined in the bullets above). As such, and price changes would likely come about due to shifts in demand. This was exactly the case. During periods of extremely low demand for electricity, the inability to store or substantially reduce the production of electricity at low cost meant it was cheaper to take a loss by selling it for a few hours at a negative price than it would have been to completely stop generating power.

What made this story even more interesting, is when I came across this article recently discussing the upcoming total solar eclipse. The article is all about how the eclipse is a very rare event, but will still have a large impact on the amount of power being generated that day, due to the drop in ability of solar panels to convert the sun’s rays to energy. What I found most interesting in this article, is the following:

“The onslaught of wind and solar resources is already regularly contributing to wild swings in power supplies across grids, sending wholesale electricity prices below zero on some days.”

I was struck by this particular sentence, because it is describing negative prices in the electricity market for completely different reasons than the article discussed above. That is to say, even if demand is stable, the type of technology used to produce and supply power (e.g. renewable energy sources like solar and wind) can have such inherent variability in productive capacity that supply can shift in substantial ways. In this case, it is the supply-side of the electricity market that is sometimes leading to negative prices.

The important takeaway from all of this is that there are two sides to a market, and it is the unique characteristics of the market you are looking at in space and time that will determine the degree to which supply and demand work together to determine prices. People often have the tendency to focus on one or the other, but it’s best to remember to stay “plugged-in” to information about both.

Who Watches the Watchmen? Rick Perry, CBS, and Basic Economics

Life would be pretty boring if we were only allowed to form opinions on and discuss matters that we had studied extensively. Often times, part of learning about a subject entails making somewhat shaky declarations on how you think something works, and then having others with more knowledge explain through gentle nudges how and why you weren’t quite right. However, it takes a fair amount of confidence to not only make a statement on a subject you’re only tangentially familiar with, but to try to actually explain the concept to others. It takes even more confidence to be willing to publicly correct whoever made the statement, calling him or her out on the misinformed opinions that were presented. All of that being said, a large part of why I created stealtheconomics.com was specifically to point out misinformation in the news, as it pertains to economics. So while it’s difficult to try to correct someone’s claims, I usually won’t fault someone for trying. This past week presented a glaring exception.

Last Thursday, the internet was abuzz with pretty much everyone who has ever taken an introductory economics course (and as you’ll see, maybe some who haven’t) calling out Secretary of Energy Rick Perry for an incorrect explanation of economics principles that he delivered while visiting a coal plant in West Virginia. The quote in question was in Secretary Perry’s misapplication of a fundamental building block of economics; Supply and Demand.

(Photo credit: Gage Skidmore on Flickr)

According to reports, Perry stated “Here’s a little economics lesson: supply and demand. You put the supply out there and the demand will follow.” This statement does not agree with traditional economic theory. It implies that anything that is supplied in larger quantities will invoke larger quantities being demanded. If this were true, you would find that when your business was having trouble finding buyers for your huge warehouse of fidget spinners, and sales had stagnated, you should just produce many more fidget spinners to solve the problem.

(Photo credit: Pexels)

When I first became aware of this statement, I wondered if it had flown under the radar enough to be featured in a story of its own on this blog. Fortunately, when you’re in a high profile position like the Secretary of Energy, many people appear to be watching to point out when you don’t get your ‘little economics lesson’ quite right.

(Photo credit: Wikimedia Commons)

One such outlet that was quick to jump on the story was CBS News. The site featured this article, which correctly pointed out that Perry’s explanation of the concept of Supply and Demand was pretty far off. The author of the article, unfortunately, did not stop there. The journalist went on not only to point out that Perry’s explanation of this economic concept was incorrect, but to try to explain this concept in her own way, as follows:

“The gist of the theory is, if the supply for a product is low but its demand is high, the product’s price is likely to increase. If a product’s supply is high and the demand for a product is low, however, the product’s price is likely to drop.”

While attempting to point out one person’s blunder, the journalist makes a mistake of her own. The problem is, the price for a product is determined (in general) by the equilibrium reached at the point where Supply and Demand intersect. At this price, the Quantity Supplied = Quantity Demanded, and the “market clears”. It would be correct to say that a product with relatively high demand or relatively low supply would have a relatively higher equilibrium price, and vice versa. However, the only way to get a change in price (to have the price “increase” or “decrease”) would be to observe a shift in Supply, Demand, or Both.  Thus, if a product’s supply is high and the demand for a product is low, the product is likely to have a relatively low price, but the price wouldn’t be expected to “drop”, as Supply and Demand aren’t changing.

It’s important to call out blatant misinterpretations of bedrock economic principles. However, as we learned this week, if you’re going to go further by trying to explain the concept for yourself, it helps to be sure you got it right.

Do You Really Own Your Home? Fix It Up With Some Property Rights!

If you’re anything like me, you spend 30% of your day sleeping, 10% cooking, and approximately 60% watching people renovating and selling houses on HGTV. What’s better than sitting back on your functional but not-so-pleasing to the eye sectional sofa in your cramped house to watch people create the open floorplans and tile patterns of their dreams? Many of the channel’s hit shows feature people searching for or creating their dream house, and who better to make that dream come true that the quirky and lovable Chip and Joanna Gaines. The show’s hosts introduce prospective buyers to two or three homes that are well below their maximum budget, leaving plenty of room for renovations. After a bit of cajoling, the family chooses one home and design plan, and the work begins in earnest; breathing new life into a house that has otherwise been neglected. At the end of the show, the remodeled house is revealed, and that episode’s featured family is given a grand tour of the house that is now theirs to enjoy! However, as these families are quickly discovering, the house might not be as much “theirs” as they thought.

How much work would you put into this Fixer Upper?

(Photo credit: chumlee10 on Flickr)

This recent article details how many of the people featured on the show thought they were designing their dream home, but are now sharing that dream with frequent visitors. A large proportion of the homes remodeled on the show are now being featured as vacation destinations on websites including Airbnb and VRBO. The reasoning for this is pretty simple; the homes have become immensely popular with viewers of the show who want a first-hand look at how the house came together, and the rentals provide extra income for the home’s owners. While the home owners from those first seasons aren’t breaking any rules or laws by renting their houses out, the producers of the show aren’t exactly thrilled. Two questions arise out of this disagreement. First, can the producers actually forbid these homeowners from renting out space in their own homes; and as an extension, what other things might you not be allowed to do to your own property? Lastly, how does all of this play out in terms of the incentive to improve your home in the first place?

The producers of Fixer Upper can easily prohibit families from renting out the houses featured on the show, simply by adding a clause in the contract. As mentioned in the article, they have begun doing exactly that. It’s likely that the main reason they’ve chosen to do so is to protect the brand of the show. The show is based around the Gaines family helping other families create a dream home at a price they can afford. It takes away from the mystique of the show if viewers start thinking too much about how those families then have to rent their dream homes out to strangers, renovate additional rooms, and generally not live ‘happily ever after’. On the ‘flip’ side (pun intended), homeowners wouldn’t be willing to sign-up for the show at all, if the contract were to become too overbearing. Plus, there’s literally no way to contract over every single thing that could ever be done or not done to a house. As a result, those things which were not explicitly controlled for in the contract are in what’s known in the property rights literature as the “public domain.” The rights, such as whether the house can be rented our, remain in a sort of limbo until one side or the other claims the right for themselves. In this case, homeowners from the earlier seasons began claiming this right, but the show’s producers decided to take it back by working it into future contracts.

If you sit down and think about it, there are a lot of things that you can’t technically do to your own house/property, at least not without getting explicit approval. For example, most places require you to meet minimum codes of safety to prevent accidents such as fires. Even if you have fully paid off your house, you may not be allowed to add on an addition, add a fire pit, or even paint the house a different color if you belong to certain homeowners’ associations. In fact, there are many different groups, from public to private, that can limit your ability to remodel or even sell your own house. Generally, these rules and laws are put into place using the argument that making these changes have external benefits or costs to your neighbors or others. They are intended to nudge you in the direction of making the ‘socially optimal’ decision of how much to renovate. In some cases these rules are worthwhile, while in others they may be excessive. To examine this further, let’s consider how these restrictions could have a real impact on your decisions when fixing up your dream home.

Deciding to renovate a house is a large undertaking, but it’s not an all or nothing proposition. The couples on Fixer Upper are presented with a plan to make several large changes to improve the livability and design of the house they are purchasing, but there simply isn’t enough budget to fully renovate every room of the house. These un-renovated rooms aren’t featured on the show, since they aren’t new and stylish like the rooms that are fixed up. The interesting thing to think about is, how much more would people invest in their renovations, if they had more rights over their property. For instance, in most places in the U.S. you can be forced to sell your house under the rule of eminent domain. You are required to be compensated, but perhaps not as much as the minimum you would actually accept if you were to engage in voluntary negotiations. Knowing that your property could be bulldozed in order to create a highway for public benefit alters your calculation of how many long term investments you really want to make. It’s harder to justify putting on a new roof that should last 30 years, or renovating a spare bedroom. It’s possible that the optimal level of renovations is something more than what people are currently undertaking. People would almost certainly make more investments in their homes if their property rights were more secure. However, detailing and providing those rights comes at a cost itself, which may mean that we’re already having housed ‘fixed up’ the efficient amount. Although, if Chip and Joanna Gaines are the ones doing the remodeling, I think we can all agree that having more wouldn’t be such a bad thing. 

What do Donald Trump and Germans Have in Common? More than You’d Expect!

Unless you live in tornado alley, there’s probably a pretty small chance of a powerful windstorm causing downed limbs and fallen trees on your house or surrounding property; a small chance, but not zero. If you estimate the probability of such an occurrence to be high enough, you may even find it worthwhile to take some precautions and prepare a few items in case you are affected. Maybe you purchase a chain-saw or even a generator, to be ready in the event that a storm does strike. What happens though, if one day your neighbor drops by looking to borrow your chainsaw to cut down some trees on his property? If you think the chance of you needing the saw soon is small, you’ll probably be happy to let him borrow the saw. But what if you happen to catch the weather report on the news, and they're airing a special segment on the devastating impact of past storms. If a statement like that causes you to increase your estimate of a storm’s likelihood, would you change your actions and decide that lending out the saw is just too risky? You may be asking yourself, what does all of this have to do with Donald Trump and the German government? The answer is, both Donald Trump and the German government have made some interesting statements in the previous year that warrant some discussion of how they may cause people to change their actions.

Image: Donald Trump's statements on the probability 

of default may have interesting effects.

(Photo credit: Gage Skidmore on Flickr)

In the case of Trump, he made statements in May of 2016 to the effect of saying that the U.S. can’t default on its debt, because it has the ability to print more money to pay off those debts. How does this statement affect expectations? In order for the U.S. to borrow money and take on debt, it has to find people who are willing to lend the money. The interest rate that those lenders require in order to agree to lend their money depends on how likely it is for them to be fully paid back. For instance, if I were offered the opportunity to purchase a U.S. Treasury Bond today that was worth $100 one year from now, two things would affect how much I would be willing to pay for it; the interest rate and the likelihood of default.

First, I’d factor in how likely it was that I would actually be paid the $100 next year; that is to say, the probability that the borrower (U.S. government) would default on the loan. If you’re lending money to your sketchy neighbor, you might say it’s pretty likely he’ll default. If you’re lending money to Mother Theresa, you may be less skeptical. Here Donald Trump is reinforcing the perception that the probability of the U.S. defaulting on a loan should be approximately zero. This is good from the perspective of the borrower, since it should lead to a lower interest rate that the U.S. has to pay to borrow the money.

Image: What determines your willingness to lend money?

(Photo credit: quazie on Flickr)

The interesting portion of Trump’s statement, however, is how it affects the interest rate in a different way. If you’re lending money, you want to be sure that the money you’re paid back in the future will be able to buy more goods than you could buy with it today. This is the compensation for you delaying your purchase. You’ll therefore decide the minimum amount of interest you must be paid by examining how the rate compares to expected inflation. Trump’s statement seemed to indicate that the U.S. would be willing to print money to pay off current debts. While this makes it cheaper to pay off previous debts in the short-run, it means previous lenders aren’t getting as much buying power as they expected. In the long-run, printing more money unavoidably leads to inflation. Printing a lot of money leads to a lot of inflation. This devalues the currency, meaning you need to trade more dollars for the same number of goods. If you announce intentions to potentially print a lot of money in the future, then lenders will require a higher interest rate now in order to maintain the same amount of purchasing power after the value of the dollar decreases.

In the case of Germany, the German government advised citizens last August to stockpile food and water for ‘civil defense’ purposes. The statement was urging citizens to have 10 days of food and water in reserve, in case of a national emergency that temporarily cutoff supply lines. If people take this statement seriously, it could create some economically interesting short-term adjustments. The demand for stockpile-able items, such as canned food and bottled water, would increase as more people entered the market for these goods. As such, we would expect both the price and quantity sold of these goods to increase, in a short-term bump. However, this increased demand would presumably return to normal levels after the stockpiles were accrued. What would be even more interesting to observe is how producers of these goods read the signals of the higher demand, not knowing that it was only temporary. If suppliers misinterpret the short-term increase in demand as a permanent shift, then they may invest in long-term capital expenditures (such as new machines, larger plants, etc…) to try to keep up with the heightened demand. Unfortunately, these investments would soon prove unprofitable, as demand fell. All because people’s perceptions were changed by a simple statement.

Image: Germans were encouraged to stockpile food and water.

(Photo credit: Julie & Heidi on Flickr)

As you can see, it is not only concrete actions which can have a profound effect on an economy. Mere statements on a topic can alter people’s perceptions and expectations, and expectations form an extremely important part of our decisions on what actions to take today. As always, it’s important to think before you speak, and consider the ramifications of information you convey.

What’s your take on the impact the statements discussed above may have had? Have you recently changed your actions based on a change in expectations (perhaps you purchased a new car or television after your expectation of a raise or promotion at work increased)? Feel free to discuss in the comments below!

Nice Guys Finish Last? You Can Bank on It

Remember when you were growing up in elementary school, and the teachers made pretty much everything a competition versus your peers in order to keep your attention and teach you valuable life skills? Perhaps it was determining who got to walk at the head of the line on the way to lunch by who did the best on a quiz, rather than deciding based on height (which I, at 6’3” would have preferred). These incentives were used to motivate us to work harder in order to have a chance to reap the rewards, as well as to convey a sense of “fairness” about the process which would otherwise be seen as a process involving either favoritism or randomness (or both) on the part of the teacher. As economists, we recognize how valuable such incentives can be as a motivational tool. The (unintended?) consequence of all of this competition among school children is that the common refrain, “he cheated!” rings out across the schoolyard on a frequent basis. And why shouldn’t some children test the boundaries, immediately discovering whether the costs of cheating outweigh the benefits, as they are caught and sent to the back? Thus, the incentive to cheat is greatly restrained by the swift doling out of a penalty moving you to the back of the line. The added benefit is that those students who don’t cheat aren’t relegated to the middle or even the back, due to the immediate punishments of the wrongdoers.

Things work out well in the school competition scenario described above, but with a slightly different set-up of incentives things can quickly go awry. This appears to have been the case for Wells Fargo, as the bank was recently fined $185 million due to the discovery that many of its employees had “cheated” by opening fake accounts in order to receive bonuses associated with meeting sales goals. It has been widely acknowledged that there have been winners and losers as a result of this practice. There are the account holders who never consented to having new accounts opened in their names, but were still charged fees associated with those accounts. Wells Fargo has agreed as part of the settlement to refund those approximately $2.6 million. There is the Wells Fargo Unit Leader who oversaw the “cheaters,” who left with $125 million just after news of the scandal broke. This is akin to a teacher getting credit for her students’ impressive test scores, only to find out later that the students had cheated. And of course, there are the 5300 employees who were eventually fired for “cheating” by opening the fraudulent accounts.

But there is one affected group which has largely been ignored in this situation; the Wells Fargo employees that simply chose not to cheat. Unlike the schoolchildren in the example above, the offending employees who cheated were not caught and reprimanded immediately, but rather over a five-year period that culminated in the recent ruling. Throughout those five years, there were thousands of Wells Fargo employees who played by the rules, and didn’t open fraudulent accounts. Because the penalties weren’t immediate, these honest employees were relegated to the middle/end of the metaphorical line. Where are the articles calling for these “nice guys” to be compensated for lost bonuses that they may have rightly earned had everyone played by the rules?

To be fair, even the honest employees would have benefited some from Wells Fargo’s success before the cards came tumbling down. If they owned stock in the company, they would have seen the rising value as the company appeared to be performing better than it actually was. If they are still holding that stock, however, those gains would have quickly dissipated this week. It could also be argued that some honest employees were only able to be retained by Wells Fargo over this period due to the company’s relative success. However, the flip-side of that coin is that some honest employees may have been fired for not meeting elevated sales goals that would have been lower had the cheating not occurred.

The problem here is that the lag in punishment for cheaters leads to what amounts to an immediate punishment for non-cheaters, which is never fully rectified. Wells Fargo has even announced that they are removing the sales goals in an effort to restructure incentives, but they aren’t going as far as to retroactively compensate the “honest” employees according to the new pay structure. They are now “Taking appropriate actions—including disciplinary‚ to address those who have served our customers in ways that were counter to our ‘Vision & Values,’” but make no mention of addressing those who served customers honestly and by the rules.

From an economic perspective, it is important to consider that people are rationally motivated by incentives, but that they may not realize or consider the negative impact that their actions have on others. However, this does not mean that the negatively impacted group should be ignored or forgotten. It’s important not only to punish those who cheat, but also to be sure that those who play by the rules get their turn at the front of the line.

Should a Gold Medal be Awarded in Ticket Scalping?

It’s pretty exciting to watch Michael Phelps, Katie Ledecky, or Usain Bolt race their way to victory on TV each night during the Olympic Games. Think of how much more exciting it would be to witness the experience live in Rio, with the crowd surrounding you jumping and chanting and cheering with every kick, stroke, or step! As with pretty much everything in life, there are some people who would find this experience to be much more valuable than others… and they would be willing to pay for it!

The problem is, there is a very limited number of seats in each venue, so not everyone can get a ticket that wants one. The question then becomes, how should the tickets be distributed in order to maximize total welfare? If we take the Coase Theorem at face value, then it really shouldn’t matter who gets the tickets initially, as they will always end up with those who value them most. The process of reselling tickets in a secondary market is called "scalping." In fact, when people engage in this trade, surplus is created and society overall is better off. The conclusion that these trades will take place, however, relies on one particular assumption which is not always valid in this circumstance: the assumption that transactions costs are low.

Let’s assume, for example, that the Olympic Committee is in charge of the initial distribution of all 100 tickets to the Men’s 100m final race that Usain Bolt is sure to dominate. They don’t want the world to tune in and see empty seats in the stadium, so they are sure to set the price for tickets low enough to ensure a sold-out stadium. We can assume that the charge the minimum price that they need to receive in order to not lose money on the event. Thus, no producer surplus is collected in this scenario. The problem is that at this price, 150 people want to buy the 100 tickets that are available. So by what mechanism does the Olympic committee allocate these tickets? It seems that, as may be expected, some are allocated to those who have some special involvement with the event (athletes’ families, event organizers like the man discussed in the article mentioned above, etc…), and then the vast majority of tickets are made available online. Is this an optimal way to distribute tickets? Let’s take a look at some graphs to see.

First, let’s look at how much surplus would be generated if the 100 people who valued these tickets most highly just happened to be the ones who received them in the online distribution. The surplus generated under this scenario is shown in the purple area in the first graph below.

 What if, instead, it was the 100 people who valued these tickets the least, but were still willing to purchase them at the price set by the organizing committee (persons 50 - 150)?

As can be seen in the example above, the area of Consumer Surplus is much larger if the tickets are allocated to the 100 people who value them the most. But there’s no guarantee they will be the ones to get through the online ticketing system first.

This is where the Coase Theorem kicks in. The 50 people who value the tickets the least would be willing to sell their tickets to the 50 who value them the most, and at a price that those high-valuers are willing to pay! In fact, they may even be willing to pay a small fee to help match those with tickets with those who to purchase them. Sites like Stubhub, BANDWAGON, and the NFL’s Ticket Exchange have been created to provide this information and, in exchange, try to capture some of this surplus.

The problem is, not only can it be costly to try to find and buy tickets to the event you want to attend, sometimes it is illegal to resale tickets to these sorts of events. For instance, check out this article on an Irish International Olympic Committee executive who recently was “accused of plotting with at least nine others to sell tickets above face value.” Laws like this prevent welfare enhancing trade from taking place, so why would they even exist in the first place?

It is true that there is a fair amount of risk involved in purchasing a ticket in a secondary market. The ticket could turn out to be counterfeit. Many sites offer a money-back guarantee if a counterfeit ticket is purchased, which helps users develop enough trust to use the site (and pay a small fee) rather than purchasing a ticket in person or not buying a ticket at all. Knowing you’ll get your money back is great, but there is an additional cost incurred by those who travel to the sporting event and have been waiting for weeks or months to see their favorite athletes compete, only to be turned away at the date on the day of the race. Penalties for selling counterfeit tickets attempt to address this, but enforcement of those penalties has a cost as well.

Are there any better ways to allocate these tickets, which may avoid some of these costs? One option may be to offer the tickets via an online auction! An auction could sell each seat (or each section of seats) at a different price. If run properly, this method could approximate perfect price discrimination. The result would be a graph that looks very similar to the first graph above, but with the surplus accruing to the producers rather than the consumers. The question is, would the cost of setting up and running this auction reduce surplus by less than all of the costs of the secondary market discussed above. Also, we can’t forget that people may well change their preferences in the time between when the tickets are first allocated and when the event takes place. The change in preferences will cause some people to enter the market, and some to want to sell their tickets after all, so a secondary market may still be beneficial.

Dynamic Pricing and Menu Costs - Taking a Shot

When you’re planning a trip to McDonalds for dinner, you have a pretty good idea of how much any item you’re planning on purchasing is going to cost. In fact, you would be pretty surprised if you arrived at McDonalds and an item on the “Dollar Menu” suddenly cost $1.37, or even $0.74. McDonalds keeps its prices fairly stable, and in doing so, two things happen. First, you’re able to decide whether driving your family to McDonalds for dinner today is preferred to going to Applebee’s, or Five Guys, or preparing your own burgers on your backyard grill. The second thing that happens is McDonalds is able to print up signs and advertisements that list the items (usually with a picture that looks much more delicious than what you’ll eventually receive through a drive-through window) along with the prices and how great of a deal you’re getting! These signs and advertisements act to increase demand for McDonalds’ products by informing more people of their availability and luring them into the market.

Wouldn’t it be crazy if the price for a hamburger and fries changed before you got to the restaurant; or if the price changed while you were standing in line? That’s exactly what’s going on at a bar in San Diego, as described in this article. The Blind Burro has adopted a system that allows for the price of the tequila it sells to change at any moment, based on how many people are ordering the brand and, presumably, how much is in stock. Known as dynamic pricing, this method allows the bar to raise the price of tequila brands that are selling well that night, sensing the higher than expected demand for the beverage.

“This is an outrage! They’re taking advantage of their customers!” you may protest. “They lure you into the bar and then jack up the prices, forcing you to pay way more than expected!”

However, don’t forget the flip side to this arrangement. If you’re willing to drink a brand that’s not selling well that night, you’ll be enticed by falling prices and a great deal! Plus, it’s always important to remember that no one is forcing you to exchange your hard earned dollars for tequila or any other drink. In fact, it’s not just “trade” that makes everyone better off (or technically at least no worse off), but rather voluntary trade. This idea hinges on the idea that if you aren’t gaining from the trade, you won’t rationally take part in it. You can always walk away without purchasing the drink.

“If this dynamic pricing idea is so great and economical, why isn’t it more prevalent?” Actually, in a lot of ways it has been around for a while. For example, you don’t always pay one constant price for the goods you buy at the grocery store. The price is adjusted through things like sales and coupons. A more appropriate example in this context may be the infamous Happy Hour (unless you’re in Boston or a handful of other areas where they are outlawed). Even restaurants engage in a similar practice for some items, listing “market price” on a menu for the seafood “catch of the day.”

All of these tactics are a form of what economists call “price discrimination,” which sounds terrible but can actually be quite beneficial in increasing overall surplus. The surplus is increased because people who value the good most highly are able to purchase it, while those who place a low value on the good don’t buy it if the price is too high. Because the amount of each brand of tequila in a bar each night is relatively fixed, the preferences of who buys the tequila matters a lot.

Imagine one shot of José Cuervo Gold tequila were listed on a traditional menu at a price of $3, which is the lowest price that the bar is willing to sell the beverage in order to not entirely give up their profit. The bar has stocked 10 shots worth of this particular brand for the night. Also, imagine that the first guy who walks in wants to buy at least ten shots for him and his friends, and they’re all willing to pay no more than $3.25 for those shots. Luckily, the bar has them in stock, and happily sells him the 10 shots. The consumer gets surplus of $0.25x10 shots = $2.50 and the bar gets no surplus.

Then, 20 minutes later another person walks up to the bar who is willing to pay up to $5.00 for each of those 10 shots, but is turned away because the bar is now out of stock. If the bar had been able to adjust prices, they could have set the price higher (at say $4.50) to start the night. The first person would have been deterred, but the second would have been able to buy the shots! In this scenario, surplus to the consumer would be $0.50/shot x 10 shots = $5, and the bar also gets $1.50/shot x 10 shots = $15 above the minimum price they were willing to sell the drinks for. Of course, without dynamic pricing the bar could still set the price at $4.50, but the bar would then worry that if the second person never walked in that night, it wouldn’t sell any at all. So dynamic pricing allows for the flexibility that increases surplus in this scenario from $2.50 to $20.00!

The question now is whether dynamic pricing will become much more prevalent, infiltrating all sorts of bars, shopping centers, movie theaters, and fast-food restaurants all across the country. I would argue that, even with technological advancements, it would take a lot of time for individuals and businesses to get used to prices changing so frequently. While making some tasks easier, others like planning a vacation would be much harder to budget for. There are some gaps that could be filled by writing contracts and purchasing insurance ahead of time, but these options come at a cost as well. However, I’d still argue that implementing this pricing system in some areas is worth a shot!

No 'Free Parking' in Real-Life Monopoly?

It’s a tradition as old as consumerism itself. You’ve mastered the art of procrastination, and it’s now Christmas Eve and you have yet to finish buying presents for your loved ones. Unless you’re lucky enough to live in a city where Amazon offers same day shipping, you’re going to have to venture out into the cold to shop at an actual store. But everyone knows you don’t venture out to just any store for Christmas presents, you head to your local shopping mall! The problem is, everyone else has the same plan, and you find yourself circling the parking lot for hours, looking for a place to leave your car before the stores close or sell out of Tickle-Me-Elmos.

Wouldn’t it be great if there were a way to deter others from using up all of these parking spots that you find so valuable? Well one mall in Colorado is attempting to do just that. According to this article from an NBC News affiliate in Colorado, the Cherry Creek Mall in Denver has decided to begin charging for parking in its surrounding lots and garages. In terms of economics, we can speculate on why this change was made (and whether it’s a good or bad idea) from a couple of different perspectives.

It’s possible that the mall is charging for parking spots specifically to improve the use experience on days like the one described above, where the fixed quantity of parking spots available is exceeded by the number of shoppers looking for them. The mall may consider that happier shoppers who are willing to pay a bit to park may also be the types of shoppers who will spend more in the stores inside.

The mall is more likely to be making its decision using a profit-maximization framework. Clearly, assuming some people continue to choose to park at the mall for more than an hour (the first 60 minutes will be free), the mall will be bringing in more revenue from parking than when parking was free. The first question, however, is how many customers will be turned away by the new up-front fixed cost of shopping at the mall, and how this will impact the sales of the mall’s tenants? The mall is hoping to gain more from charging people to park than it will lose through a decrease in the prices it is able to obtain from charging stores to lease spots within the mall. These factors are influenced both by the elasticity of demand for parking, as well as the elasticity of demand for tenant space in the mall itself.

The elasticity of demand for parking is a measure of how many fewer people will park at the mall, if the price of parking increases. It is largely dependent on how many substitutes people can find for parking at the mall. These could take a variety of forms. If people are mainly parking at the mall now to shop at the mall’s stores, then substitutes could include parking elsewhere and walking or riding over to the mall to shop, parking and shopping at other malls or shopping centers, or even staying home and shopping online. There may also be people, however, who use the mall’s parking facilities as a free way to store their car close to downtown Denver, and then travel into town via public transportation or carpooling. These people may choose to instead park closer to downtown, or to find a lot farther out which is less expensive. It will depend on the cost of other parking and transportation options available to them.

It is clear from the mall’s ability to increase prices that it is not in a perfectly competitive market for parking in the area. This is because, while the potential substitutes above exist, many consumers will find spots close to mall (especially garage spots) to be more valuable/higher quality than spots in nearby areas. With this limited monopoly power, standard analysis will show that raising prices and restricting quantity can maximize profits for the monopoly, although it would likely decrease overall welfare, as those previously parking at the mall for free who now don’t park there at all lose Consumer Surplus in the amount of what they would have been willing to pay to park in the mall lot (more than $0 but less than the new price).

So did the mall make the best choice for how to handle its parking situation? This largely depends on what its other options were. Another solution that may have been considered, and may limit the backlash from the public to some extent, would be to have stores validate parking if a purchase is made. This would allow the mall to more directly target the two different groups of people who are looking for parking spots; shoppers and commuters. If the mall is able to raise the price of parking for commuters, but keep the parking free (through reimbursement) to shoppers, it can improve upon any issues with congestion and a shortage or spots without giving up too much revenue from its store tenants. So if you live in the Denver area, keep in mind that while the new parking fees may be irritating now, they could save you a huge headache when you’re already back at home with family and friends on Christmas Eve, instead of sitting in a snowy parking lot for looking for a spot.