Sunday, 19 November 2017

Regal Cinemas to introduce dynamic pricing for movies

I've written a couple of times before about pricing at movie theatres (see here and here). On the surface, movie theatre pricing seems to defy basic economic theory. The price of movies doesn't differ between high-demand movies (where we would expect higher prices) and low-demand movies (where we would expect lower prices).

Although, as I wrote in both those earlier posts there probably is some element of this dynamic (or variable) pricing, it just isn't obvious. It is hidden by the choices the movie theatre makes, about which movies are "no complementaries" and the size and configuration of the theatre in which each movie plays (where some have a greater proportion of premium seating). These choices allow movie theatres to ensure that the average movie ticket price differs between high-demand and low-demand movies.

Now, Regal Cinemas in the U.S. is about to make the variable pricing more obvious, as Bloomberg reported last month:
Regal Entertainment Group is testing demand-based pricing for films, potentially leading to higher prices for top hits and low prices for flops, a big change for an industry that typically uses a one-size-fits-all approach.
Working with app maker Atom Tickets LLC, which has lobbied theaters to try dynamic pricing, Regal plans to test the concept in early 2018 and see if it boosts revenue and fills more seats at non-peak times...
Industry executives are debating whether dynamic pricing will increase attendance. Some object to a system that would involve charging higher prices for hit movies and lower prices for unpopular movies.
In that last paragraph, it might seem obvious that dynamic pricing will increase attendance for the low-demand movies. However, it isn't at all clear whether it will be offset by lower attendance at high-demand movies (because these consumers could go to a cheaper low-demand movie instead, and some of them may choose to do so). Total attendance is of course made up of the higher attendance at low-demand movies that will now be cheaper, and possibly somewhat lower attendance at high-demand movies that will now be relatively more expensive (even if the price remains the same as before). Industry executives shouldn't be focusing on the effect on attendance though. Instead they should be looking at total revenue. In this case, the effect on total revenue could be negative, since more tickets at a lower price might not offset fewer tickets at the original price (although that seems unlikely, since the high-demand movies tend to also have fairly inelastic demand, since they have few substitutes). That potential for lower revenue would be grounds for objection from the executives, and I guess we will see in due course whether Regal Cinemas benefits from this change - they movie consumer almost certainly will.

Read more:

Friday, 17 November 2017

The economic non-impact of malaria on African development

When I was completing my PhD, there were a number of studies based on macroeconomic models that showed significant negative impacts of HIV/AIDS on economic growth and yet econometric studies based on observed HIV prevalence of GDP showed virtually no effect. Some people put the difference down to surplus labour (since AIDS deaths are concentrated among prime age adults who make up the majority of the labour force, if there is surplus labour then losing adults from that age group would have little effect on GDP), but even macroeconomic models with surplus labour tended to show some modest negative impact. So much for macroeconomic models (as we later learned during the Global Financial Crisis)?

So, I was interested to read this forthcoming paper in The Economic Journal (ungated earlier version here) by Emilio Depetris-Chauvin (Pontificia Universidad Católica de Chile) and David Weil (Brown University). In the paper, the authors do a number of really interesting things to evaluate the historical and recent economic (non-)impact of malaria. First, they construct an ingenious and deceptively simple model of malaria prevalence, which is based on the prevalence of the gene that causes sickle cell disease. The sickle cell gene provides protection against malaria deaths in childhood for those who have one copy of the gene, but is fatal for those who have two copies of the gene. So the overall prevalence of sickle cell genes can be used to evaluate the overall burden of malaria in the population. The authors estimate that malaria burden is high:
In areas of high malaria transmission, 20% of the population carry the sickle cell trait. Our estimate is that this implies that historically between 10% and 11% of children died from malaria or sickle cell disease before reaching adulthood. Such a death rate is roughly twice the current burden of malaria in such regions. Comparing the most affected to least affected areas, malaria may have been responsible for a ten percentage point difference in the probability of surviving to adulthood. In areas of high malaria transmission, our estimate is that life expectancy at birth was reduced by approximately five years. In terms of its burden relative to other causes of mortality, malaria appears to have been perhaps about as important historically as it is today.
They then use their measure of malaria burden to evaluate the impact of malaria on African development historically. Strikingly, their measure is positively associated with the log of population density (as a measure of development) at the ethnic group level (for 398 ethnic groups across Africa), even after controlling for geography, access to waterways, climate, cultural clustering, suitability for agriculture, and suitability for tsetse flies. Other measures of development, such as having a large (more than 20,000 population) town in the ethnic group's homeland, complexity of the ethnic group's settlement pattern, and centralisation of power, also have a positive or no relationship with malaria burden. Even after adopting an instrumental variables approach (with malaria suitability as the instrument), they still don't find statistically significant negative effects of malaria burden on African development (see here for more on instrumental variables models), though the effects are sometimes negative and not statistically significant.

Why is there no discernible negative economic impact of malaria on African development, given the high malaria burden and the high resulting mortality? One section of the working paper version of the paper that hasn't made it into the final paper is quite interesting. [*] In that section, the authors note that:
The reason that our estimate of the effect of malaria is so small is two-fold. First, malaria deaths are concentrated at young ages, and second, consumption of young children is low relative to consumption of adults. Putting these together, most deaths from malaria do not, in this model, represent a significant loss of resources to society. In our calculation, deaths beyond age five account for only 1/3 of the reduction in life expectancy due to malaria, but for 2/3 of the economic cost of the disease.
So, because malaria mainly kills young children, society wastes relatively few resources investing in children who die from malaria (and can instead expend those resources on surviving children). So, the economic cost of malaria is relatively slight. I don't know why that part of the analysis didn't make it into the final version of the paper, but I think it is one of the more important insights from this work, as it usefully explains why we might not find any economic impact of malaria in Africa.

*****

[*] Actually, there are a lot of substantial differences between the NBER Working Paper version of the paper and the final accepted publication, which might explain why there was a four-year time delay between the two versions of the paper. I'm glad I read the working paper version first, since otherwise I would have missed some of the greater detail.

Wednesday, 15 November 2017

What's in a (porn star) name, for identifying survey respondents?

In social science research, we usually want to maintain the confidentiality and anonymity of the respondents to our surveys and interviews. However, there are times when we will want to follow up with respondents at some later date, and if the first round of surveys was anonymous it is impossible to match up the first round respondents' responses with the later responses. So, I was interested to read this short 2011 article (open access) by Megan Lim, Anna Bowring, Judy Gold, and Margaret Hellard (all from the Burnet Institute in Melbourne), published in the journal Sexually Transmitted Diseases.

In the article, the authors discuss asking each survey respondent what their "porn star" name is. They explain:
"We trialed the uniqueness and reliability of a novel identifying characteristic: first pet's name and first street - colloquially known as a "porn star name".
The authors provide a table of examples of porn star names, of which 'Honey Scotsburn' and 'Precious Duckholes' were two (I'm not making this up - check the paper). They then go on to test whether they could match respondents from a baseline and follow-up survey based on the porn star name. Porn star names were unique to 99% of their 1281 respondents to the baseline survey, and adding month/year of birth was enough to provide 100% uniqueness. When re-contacted later, they were able to match 76% of respondents between the two surveys using only the porn star name, and using month/year of birth they could further match 96% of those who provided a partially-consistent porn star name.

It seems this is a pretty unique way of matching respondents between waves of a survey while maintaining plausible anonymity for those respondents. However, the authors note that "calling the identifier a PSN... might also have made the question seem trivial to some participants and resulted in false responses". Of course, this could all be a joke - Lim and Hellard were also two co-authors on research about the survival of teaspoons. Even if this paper was taken seriously (and it could be, since it addresses a real issue), it seems the research community isn't interested - this paper has only been cited twice since it was published in 2011.

Sunday, 12 November 2017

School uniform monopolies

I recall many years ago having an argument with a school administrator about uniform requirements (if I recall correctly, this was about school shorts that were the correct colour, but were not allowed because they didn't have the school logo embossed on them). My side of the argument was that the school was using its market power over uniforms to create a monopoly (there was only one uniform provider who sold the school shorts with that particular logo) and unfairly price gouge parents. So, I was interested to read this story in the New Zealand Herald last week:
The new Education Minister has planned action to stamp out "covert" fundraising by schools such as marking up uniforms to make a profit.
Chris Hipkins told the Herald the new Government's overall objective was to make sure a state school education in New Zealand was free...
"At the moment, particularly around things like the big mark-ups on uniforms, schools are finding ways of getting around the rules that they shouldn't be asking parents to pay. We are going to be taking a much firmer line on that..."
A Weekend Herald price comparison carried out earlier this year found parents with a boy and girl at secondary school could pay $700 for just the uniform basics.
The Commerce Commission has received complaints about the costs of uniforms and stationery and issued procurement guidelines, recommending schools make the supplier-selection process transparent and tell parents why deals were entered into. It is illegal to enter an agreement that substantially lessens competition in a market.
With school uniforms, there are few substitutes. If your child is going to School A, you need the appropriate uniform for School A. This gives the school considerable market power (the ability for the seller to set a price above the marginal cost of the uniform). Since most schools are not uniform producers or sellers themselves, they instead transfer that market power to a uniform provider. Usually this takes the form of an exclusive deal with the uniform provider, where that provider is the only one that can sell the school's uniforms, and in exchange the school receives some share of the profits. This creates a monopoly seller of the uniforms, and the monopoly maximises its uniform profits by raising the price. The result is that parents must pay higher prices for uniforms, which must be purchased from the exclusive uniform provider.

One might argue (as the Herald article does) that this is a covert way of increasing school fundraising, in the absence of the ability for schools to do so through higher school fees. A rational school would want to maximise this source of revenue, and they can do that by ensuring that there are few substitutes for the uniform (because, when a firm has market power, the mark-up over marginal cost can be greater if there are fewer substitutes for what they are selling). When I was at school, any shorts of the correct colour were acceptable for my school uniform. However, one way that rational schools can ensure that there are few substitutes for uniform items is to require each item to have the school logo printed or embossed on it. So now, every child must wear not just the correct colour item, but the correct colour item endorsed by the school (and sold by the exclusive monopoly uniform provider).

However, you might not be concerned with high uniform costs if you believe that the additional money you pay is going to the school. But this is probably not the case at all, because schools probably cannot capture all of the excess profits that they create through this market power. If there are many potential uniform providers, then ultimately the school can probably receive the entire profits from the market power, since they could play uniform providers off against each other until they get the best offer (equal to the entire profits from selling uniforms). But if there are few potential providers, this is not the case, and the successful bidder will capture at least some of the profits. And that is what my argument with the school administrator was about, all those years ago. I had no problem with giving the school extra money, but objected to enriching the exclusive monopoly uniform provider.

An idealistic solution to this problem would be to 'adequately' fund schools, so that they don't feel the need to create market power in the uniform market in the first place. However, that would ignore the fact that any school would be better off with a little bit more funding, and so a rational school would always engage in this practice regardless of the level of government funding they receive. The only way to prevent this practice then is to regulate against it. Labour has pledged to draw up 'guidelines' for schools. If they are enforceable, then that might be the best we can hope for, unless school uniforms were abolished entirely.