Thursday, 21 November 2019

Social media influencers and superstar effects

In my ECONS102 class, we talk about why earnings differ between different jobs. However, even within jobs that are ostensibly the same, workers may have different wages. Putting aside the gender wage gap and discrimination, two reasons for differences in wages are superstar effects and tournament effects.

Superstar effects, described by Sherwin Rosen in the 1980s [*], occur because top performers are paid (in part) based on the amount of value that they generate for their employer. If a top performer generates a lot of value, they will be paid more. This explains much of the rise in earnings over time for top sportspeople or entertainers - as television (and more recently internet) viewership has grown, the value generated by a top sportsperson or entertainer (in terms of the number of viewers they attract) has grown, and their salaries or earnings have grown as a result.

Tournament effects, described by Rosen and Ed Lazear in the 1980s, occur when people are paid a 'prize' for their relative performance (that is, for winning the 'tournament'). The prize may take the form of a bonus, a raise, or a promotion. The point is that each worker only needs to be a little bit better than the second best worker in order to 'win' the tournament.

These effects are nicely illustrated in the case of social media influencers, as described in this article in The Conversation by Natalya Saldanha (RMIT University):
As people consume less traditional media and spend more time on social platforms, advertisers are increasingly using these influencers to spruik their products. A mega-influencer like Kylie Jenner, with 139 million followers on Instagram, can reportedly charge more than US$1 million for a single promotional post...
So far most of the indications are that the new economics of influencer marketing are not too different to the old economics of marketing.
As in the acting, modelling or music industry, there’s a tiny A-list of superstar influencers making millions. Then there’s a somewhat larger B-list making a handsome living. But the vast bulk of influencers would be better off getting an ordinary job.
In 2018 a professor at the Offenburg University of Applied Sciences in Germany, Mathias Bärtl, published a statistical analysis of YouTube channels, uploads and views over a decade. His results showed that 85% of traffic went to just 3% of channels, and that 96.5% of YouTubers wouldn’t make enough money to reach the US federal poverty line (US$12,140, or about A$17,900).
There are elements of both superstar effects and tournament effects here. If an influencer promoting a product can increase sales, then it makes sense that they will be paid more if they have more followers. So, a superstar with millions of followers will be paid substantially more than one with just hundreds or thousands.

And, influencers are competing for a scarce advertising spend, where successful influencers will attract paid work from many willing advertisers. Being slightly better than the second best influencer is likely to result in a disproportionate number of advertising contracts, increasing their earnings by a lot (and 'winning' the tournament). In contrast, slightly less successful influencers could end up earning less than the poverty line. This probably plays out separately in 'markets' for influencers with a broad appeal, and those whose followers are in a particular niche that advertisers want to target. Interestingly, the tournament effects here are little different to the effects for drug dealers, as Steven Levitt and Stephen Dubner describe in the excellent book Freakonomics (also described in this LA Times article from 2005).

Being a social media influencer isn't going to be a path to riches for the majority of aspiring wannabe Kylie Jenners. The best advice might be to try and exploit a very particular niche audience that advertisers are seeking and one that is not already occupied by one (or many) successful influencers. However, most of these wannabes are going to need a day job.


[*] This was not a new insight, as Alfred Marshall had made a similar point as early as 1875.

Wednesday, 13 November 2019

Bucks as money on the American frontier

This week I'm in Pittsburgh, and yesterday I got the opportunity to do a bit of sightseeing, including the excellent Fort Pitt Museum. It was very enlightening in terms of the early history of the city as a frontier fort town, including its role as a trading post in the fur trade. This exhibit in particular caught my attention:

In ECONS101, we talk about the roles of money, as: a medium of exchange (you give it up when you buy goods or services, and you can receive it when you sell goods or services); a unit of account (you can measure the value of something using the amount of money it is worth); and a store of value (you can keep it and it will retain its value into the future). The exhibit caught my attention because of this note on the wall:

It shows the use of deer skins as a unit of account. Notice that, on the left, it shows how much skins of different animals are worth, measured in "bucks", where one buck is one deer skin. So, six raccoon skins is equal to one buck, or two otter skins is equal to one buck. On the right, it shows what you can buy, again measured in "bucks". So, one pound of gunpowder is one buck, and 12 flints is one raccoon skin (which is 1/6 of a buck).

Of course, money existed in the 18th Century. But coins and other money were in short supply on the American frontier, so deer skins were a useful alternative. Interestingly, this also shows the origin of our use of the term "bucks" to refer to money!

Thursday, 7 November 2019

Fire protection as a private good, rather than a club good or public good

Two years ago, I wrote a post entitled "Why fire protection is (or was) a club good":
Some goods or services that are categorised as club goods may be contentious. For instance, according to the table fire protection is a club good - it is non-rival and excludable. Provided there aren't large numbers of fires, if the fire service attends one fire, that doesn't reduce the fire protection available to everyone else... So, fire protection is non-rival. Is fire protection excludable? In theory, yes. People can be prevented from benefiting from fire protection. Say there was some sort of fire service levy, and the fire service decided to only respond to fires at homes or businesses that were fully paid up.
Although my earlier post made the case that firefighting could be a club good, public firefighting is usually a public good - a good that is non-rival (one person’s use of the good doesn't diminish the amount of the good that is available for other peoples' use) and non-excludable (a person can't be prevented from using or benefiting from the service). However, now it turns out that some fire protection may be a private good - a good that is rival and excludable. According to this article from the AFP:
Kris Brandini and his crew had just returned from four intense, non-stop days battling fires in western Los Angeles.
They dashed to the neighborhood where wealthy residents like Arnold Schwarzenegger were fleeing their homes, then to the inferno that threatened the Ronald Reagan Presidential Library, then back again.
But unlike state firefighters, Brandini was not concerned with protecting most of the exclusive residences lining these valleys.
He and his team are private firefighters.
"I only protect the houses that are on my list," he told AFP. "I don't just go there randomly -- that's the difference between me and the state firefighters.
"They go out and protect every house. I protect the houses that are actually enrolled in the program."
If private firefighters will only protect houses that "are actually enrolled in the program", then that makes private fire protection an excludable good. Of course, private firefighting is excludable on the basis of price - not everyone can afford to pay for their own private firefighters. It's not time to do away with public firefighters just yet, because I don't think we would be willing as a society to price some people out of the market for receiving fire protection.

Unlike public firefighting, private firefighting is also a rival good, since there are only a limited number of houses that a private firefighter can protect (so, if they are protection House A, they may not have enough time or resources to also protect House B). However, in the case of large wildfires like those in the AFP article, even public firefighting becomes a rival good, since public firefighters also can't be in more than one place at a time. A good that is non-excludable but rival is a common resource.

That makes firefighting an interesting case study for my ECONS102 class - it is a good that can be characterised as all four classes of good - private good, public good, common resource, or club good - depending on the circumstances.

[HT: Marginal Revolution]

Thursday, 31 October 2019

You won't find meth labs in places where you're not looking for them

I just read this 2018 article by Ashley Howell, David Newcombe, and Daniel Exeter (all University of Auckland), published in the journal Policing (gated, but there is a summary of some of it here). The authors report on the locations of clandestine methamphetamine labs in New Zealand, based on data from police seizures between 2004 and 2009.

It's an interesting dataset and paper, and they report that:
In the unadjusted spatial scan, there were five locations in the study area with significantly high clandestine methamphetamine laboratory rates (Fig. 2). The ‘most likely’ cluster, centred in Helensville (north-west of Auckland), had a RR of 4.14 with 59 observed CLRT incidents compared to 15.1 expected incidents. A similarly high cluster (RR = 4.09, P = 0.000) was found in the Far North TA.
In other words, there were four times as many lab seizures in Helensville and the Far North than would be expected, if lab seizures were randomly distributed everywhere. The other locations were Hamilton, West Auckland, Central Auckland, and there was a sixth cluster centred on Papakura in some of their analyses. This bit also caught my eye (emphasis mine):
In addition, 26 laboratories (2%) were found at storage units, 21 (2%) discovered in motel or hotel rooms, and another 27 were abandoned in public areas, including cemeteries, parks, roadsides to school yard dumpsters and even the parking lot of a police station.
I wonder how much effort it took for police to find that last one? The paper gives some insights into where the most meth labs have been seized by police. However, we should be cautious about over-interpreting the results, because by definition, you can only seize labs in locations where you are looking for them. So, if police are more diligent or exert more effort in searching for meth labs in Hamilton or the Far North, we would expect to see more lab seizures there, even if there were actually fewer labs than in other locations.

To be fair, the authors are aware of this, and in the Discussion section they note that:
Reports of clandestine laboratory seizures may also be prone to subjectivity. There is no way to be certain that CLRT incident density is not a symptom of a greater police presence or different policing priorities.
However, that doesn't stop them from noting in the abstract that:
Identifying territorial authorities with more clandestine laboratories than expected may facilitate community policing and public health interventions.
It is true that identifying areas with more meth labs than expected would give information about resource allocation. The problem is that this paper doesn't tell us where meth labs are, it only tells us where police have found them.

[HT: The inimitable Bill Cochrane]