Two papers show the bad, and some good, of rent control in San Francisco

I have been talking with my ECONS101 class this week about rent controls, which is a topic that I have blogged about many times before (see the links at the end of this post). Economists really dislike rent controls, sometimes in deliberately hyperbolic terms. In one prominent case, the Swedish economist Assar Lindbeck was quoted as saying:

“Rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.”

Lindbeck's statement is based on the evidence that shows the negative impacts of rent controls. One example is described in this 2025 article by Eilidh Geddes (University of Georgia) and Nicole Holz (Northwestern University), published in the Journal of Housing Economics (ungated earlier version here). They looked at the impact of a large-scale rent control expansion in San Francisco in 1994, which removed an exemption from rent control for small (less than five units) owner-occupied buildings built before 1980, on evictions.

Their data are the number of eviction notices, as well as wrongful eviction claims and 'owner move-in' eviction notices at the zip code level, from 1990 to 2010. They apply a continuous treatment difference-in-differences, which essentially compares the change in evictions (or other measure) between zip codes that were more affected by the removal of the exemption and those that were less affected. Their measure of exposure to the treatment is the number of housing units in the zip code that became exposed to rent control policies after the passage of the voter referendum in late 1994. In zip codes where more housing units were affected by the change, we would expect to see greater impacts than in zip codes where fewer housing units were affected. One limitation of this is the data source that Geddes and Holz use, which is based on building data from 1999, five years after the change was implemented. However, they show that three main sources of problems (demolition of buildings between 1994 and 1999, splitting of land parcels, and construction that changed the number of units in each building), do not have much impact on the estimated number of units affected (and so, don't have a large impact on the treatment variable).

In their main analysis, Geddes and Holz find:

...an 83% increase in eviction notices filed with the Rent Board and a 125% increase in the number of wrongful eviction claims for ZIP codes with the average level of new exposure to rent control...

These effects are large and economically significant. We find an annual effect of an increase of 20.07 eviction notices per 1000 treated units in a zip code. Over the six years in our post period (1995–2000), this translates roughly into 12% of newly rent controlled units receiving an eviction notice.

So, the expansion of rent control leads to an increase in evictions. Geddes and Holz also find that the effects:

...are concentrated in low-income areas. These areas are not necessarily those that saw the largest increases in aggregate rents during the 1990s, suggesting that landlords may be more willing to engage in eviction activity in places where there are fewer resources to fight that behavior.

Geddes and Holz caution against taking a broad interpretation of their results though, as the removal of the exemption in 1994 primarily affected small landlords, who are often 'mom and pop' landlords and are able to take advantage of 'owner move-in' eviction provisions that are not available to large corporate landlords. However, the results are consistent with the broader literature, which suggests that tenants may be negatively affected by rent controls.

But not in all ways, it appears. In a more recent article published in the Journal of Health Economics (open access), Geddes and Holz look at the impact of the same 1994 expansion of rent control in San Francisco on intimate partner violence (IPV). They first note that that the effect of rent control on IPV is theoretically ambiguous, and there are two competing models with different predictions:

In the financial strain model, lower housing costs will decrease financial stress, leading to lower levels of violence. The effect of housing policies will thus depend on whether they lower costs for couples. However, in a bargaining model, there is a crucial distinction between policies that shift housing costs overall and those that shift the relative costs of housing inside and outside of the relationship. Policies that decrease housing costs overall will change the amount of resources in the relationship to be bargained over, but will not shift the bargaining power in the relationship. However, policies that decrease housing costs inside the relationship relative to those outside of the relationship will change the attractiveness of the outside option, shifting bargaining power away from the woman.

The empirical setup in this research is the same as for their earlier research on evictions. The difference is that the outcome variable of interest is IPV, measured as:

...the number of hospitalisations resulting from assaults that comes from California’s Department of Health Care Access and Information (HCAI, formerly OSHPD) from 1990–2000.

In their main analysis, Geddes and Holz find that:

...for every one percent increase in exposure to rent control in a ZIP code, hospitalized assaults on women decline by 0.08 percent. In levels, this translates to an almost 10 percent decrease in violence against women for the average ZIP code.

They find no corresponding decrease in assaults on men, which suggests that their results are not driven by an overall decline in assaults (including non-IPV assaults). They also find no effect on reported accidents, which suggests that their results are not driven by changes in the propensity to report IPV. Interestingly, they also find:

...no evidence of changes in household size or composition, suggesting that our results are driven by changes in violence within relationships rather than changes in cohabitation or relationship dissolution.

Overall, their results are most consistent with the financial strain model of IPV. Based on that model, we interpret these results as showing that rent controls, by reducing housing costs (and it is worth noting that housing costs in San Francisco are, and have been for some time, very high), decrease conflict within intimate relationships, and decrease IPV.

So, at least there is some evidence for positive effects of rent control. These results also sit alongside earlier evidence from the same rent control expansion, which showed short-run gains for incumbent tenants, but long-run reductions in the supply of rental housing units, as well as an increase in inequality. However, few people are advocating for rent control policies in order to reduce intimate partner violence. And benefits in terms of reduced violence have to be weighed against all of the other negative consequences of rent control policies, many of which are outlined in the posts linked below.

Read more:

• Why rent controls have worse effects over longer time horizons
• The deadweight loss of rent control
• The deadly consequences of rent control in Mumbai
• Rent control and inequality in San Francisco
• Rent control and the redistribution of wealth
• Rent control and vacant properties in India
• Rent control according to Seinfeld
• There should be no debate at all about rent controls
• Rent controls make many tenants worse off in the Netherlands

The supply-side story behind falling meth prices in New Zealand

Chris Wilkins, Marta Rychert, and Robin van der Sanden (all Massey University) wrote an article in The Conversation last month about the price of methamphetamine:

Methamphetamine has become dramatically cheaper over the past seven years, even as authorities report record seizures, according to the latest New Zealand Drug Trends Survey.

The annual online survey of over 8,800 people who use drugs shows wholesale prices of the illegal and harmful substance (per gram sold to dealers) have fallen by 41%, while street-level “point” prices (0.1 gram retail deals) have dropped by 27%.

The decreasing price of meth is not a new phenomenon. In fact, I wrote about it last year. Wilkins et al. try to tease out the reason underlying the decreasing price. Based on a simple supply and demand model of the market for meth, there are two main possibilities: an increase in supply, or a decrease in demand. Wilkins et al. go through a number of plausible factors on both sides of the market, dismissing each in turn, including:

• sellers feeling that there is less risk of arrest (which would increase supply), but Police report record seizures, which Wilkins et al. argue seems to rule that out;
• less strict enforcement by Police against people found with small quantities of drugs (which would increase supply, but probably demand as well), but that wouldn't affect large sellers;
• decreasing production costs (which would increase supply), but production costs only make up a fraction of the street price; and
• a decrease in buyers (which would decrease demand), but wastewater data suggests that meth consumption has increased.

The last point, that meth consumption has increased alongside the decrease in price, points strongly to an increase in supply as the main change. That doesn't rule out a change in demand, but the increasing consumption tells us that the increase in supply must be greater than any possible decrease in demand. But if it isn't lower risks of arrest, weaker enforcement, or decreasing production costs, that is causing supply to increase in the New Zealand meth market, then what is? Wilkins et al. point to:

...new global sources of methamphetamine supply.

New Zealand and Australia have traditionally sourced methamphetamine from lawless regions of Asia known as the Golden Triangle. More recently, however, growing seizures have been linked to Mexican drug cartels, often transiting through Canada.

Australian authorities say these cartels can supply methamphetamine at less than one-third the price of Asian producers and that about 70% of seized meth now originates from North America.

It may also explain the rising supply of cocaine in New Zealand, with Mexican cartels deeply involved in global cocaine trafficking.

So, new sources of meth have increased the supply, decreasing the equilibrium price, and increasing the quantity of meth traded in the New Zealand market. Wilkins et al. also point to competition:

On top of this, digital drug markets – including darknets and social media sales – may be lowering the cost of finding alternative sellers and better deals, increasing competition and pushing prices down.

Economists often think of competition as a good thing. However, in the market for illegal drugs, that might not necessarily be the case. How can government best respond? Fighting the supply side of the market alone is unlikely to be successful, as I have noted before. The increased supply from new sources make this even more challenging. A renewed focus on reducing demand is necessary as well, and would likely be much more effective in the long run.

Read more:

• Police are not winning the P war - they need to focus on demand
• Evidence that the supply of methamphetamine is increasing
• The coronavirus lockdown and the New Zealand market for illegal drugs
• The increase in methamphetamine use in New Zealand has been driven more by supply than demand

The Strait of Hormuz blockade, trade passes in the Panama Canal, and the cost of imported goods

The New Zealand Herald reported last month:

The war in the Middle East has boosted demand to move vital cargo through the Panama Canal to such an extent that one vessel carrying liquefied natural gas (LNG) paid US$4 million ($6.7m) to skip the line and avoid a wait that can take up to five days, according to an official report.

A surge in such payments has been recorded since the US-Israeli attacks on Iran began February 28, which led to the blockade of the Strait of Hormuz, a critical waterway for one-fifth of the world’s oil and natural gas exports from Gulf countries.

The impact on the price of transits through the Panama Canal is shown in the diagram below. Before the Strait of Hormuz was blockaded, the market for Panama Canal transits was in equilibrium, where demand DA meets supply SA. The equilibrium price was PA, and the quantity of transits was QA. The blockade increased the demand for Panama Canal transits from DA to DB, increasing the equilibrium price of transits from PA to PB, and increasing the quantity of transits from QA to QB.

This increase in the price of Panama Canal transits doesn't just affect the cost of transporting oil or natural gas. Other ships must also pay the higher price. That increases the cost of shipping, which will flow through to the prices of imported goods, as shown in the diagram below. The market was initially in equilibrium, where demand D0 meets supply S0, with a price of P0 and a quantity of imported goods traded of Q0. The higher cost of Panama Canal transits increases the 'costs of production' of imported goods, which decreases supply to S1. This increases the equilibrium price of imported goods to P1, and reduces the quantity of imported goods traded to Q1.

So, it's not just oil and natural gas prices that will be pushed up by the blockade of the Strait of Hormuz. The resulting higher shipping costs will flow through to all sorts of other goods that are traded internationally and require shipping, including and especially those passing through the Panama Canal.

This week in research #124

Here's what caught my eye in research over the past week:

• Greenaway-McGrevy (open access) evaluates the impact of this widespread zoning reform in Auckland on housing starts, and finds that upzoning approximately doubled new dwelling permits per capita within five years

In an otherwise quiet week I have some exciting news. The latest issue of Australasian Journal of Regional Studies (AJRS) has just been published (backdated to December 2025). This issue has four papers (all open access), as well as the editorial:

• Duong et al. examine output divergence and club convergence across 63 provinces in Vietnam during the study period 2010–2023. The question of whether subnational regions move along a single common development path is important because it can help us to understand spatial inequality. In the case of Vietnam, this paper demonstrates that Vietnamese provinces are sorting into convergence clubs, suggesting that subnational growth in Vietnam is shaped by location, investment, and proximity to major economic centres rather than by uniform national catch-up (this paper won the John Dickinson Memorial Award for the best paper published in AJRS in 2025)
• Kanthilanka and Kingwell explore the export grain supply chain across Australian states. They find that grain producers in Australia benefitted from an increase in the velocity of Australia’s export grain supply chains. However, this presents a risk of higher food inflation if a prolonged drought were to strike eastern Australia, unless there is greater investment in grain storage and increased grain production
• Dutta explores the rural urbanisation process and the development of rural non-agricultural activities in West Bengal, India, an area of substantial urban growth. They find that districts with better infrastructure have higher percentages of non-agricultural enterprises employing hired workers, reinforcing the link between infrastructure and non-agricultural activity growth
• Leutwiler examines economic development planning for the Katherine region of the Northern Territory of Australia from 2014 to 2021 and contrasts this with a place-based development approach. This analysis highlights that formal economic strategies in the Katherin region are focused primarily on industries and projects that increase revenue for higher levels of government and large corporations, rather than creating local employment. This paper is important, as it provides justification for place-based development that prioritises local employment, diversification, and more sustainable regional outcomes

Dollar General opening may be a symptom, not a cause, of negative local market conditions

Dollar stores have a bad reputation for negatively impacting local communities (see here and here, for example). Some communities have pushed back, resisting the opening of new stores. One thing that dollar stores are accused of is hurting other local businesses, but is that the case?

That is the question addressed in this new article by Amelia Biehl, Amir Ferreira Neto (both Florida Gulf Coast University), and Juan Gomez (University of Iowa), published in the journal Economic Modelling (ungated earlier version here). They focus on the opening of new Dollar General stores in Florida, using data from Dun and Bradstreet's National Establishment Time Series dataset between 1990 and 2019. Over that period, there were a lot of store openings, with the state going from 202 stores to 1014 between 2000 and 2019. That's about one store per 23,000 people in Florida by the end of the period.

Biehl et al. look at the impact on revenue, employment, and probability of firm closure, by comparing firms operating within a half-mile of a new Dollar General store opening (the 'treated firms'), with firms operating between one and 1.5 miles away (the 'control firms'), in what is termed a difference-in-differences analysis. Biehl et al. limit their focus to firms with fewer than 50 employees, as they are more likely to be impacted by the opening of Dollar General. This still results in a sample of over 7.5 million observations of over 1.1 million firms. The hypothesis is that these small firms operating in close proximity to the new Dollar General store will be affected by its opening, whereas small firms located further away will not be.

Their results are summarised in Figure 4 from the paper, which shows an event study version of the analysis:

That figure shows the impact on each variable (revenue, employment, and probability of firm closure), year-by-year, from eight years before the store opening to eight years after. Focusing on the time after the store opening (from time zero onwards, because time -1 is the year of store opening), the positive and significant effects show that employment increases, revenue increases, and the probability of firm closure increases for treated firms compared with control firms after the store opening. These results are consistent with the overall difference-in-difference results.

However, there is a slight problem here. One of the assumptions of difference-in-differences is that there are parallel trends - that treated and control firms would have followed similar paths in terms of revenue, employment, and probability of closure, if no Dollar General store had opened. Obviously, this is impossible to establish for sure, because we don't know the counterfactual (we don't know what would have happened if Dollar General had not opened). But there is one indicator that is often used to argue in favour of parallel trends, which is to look at the estimated coefficients from the time period before the treatment started. If those coefficients are statistically insignificant, it establishes that there is little evidence that the treatment and control firms were diverging before the Dollar General even opened. But for this analysis, that isn't the case. Take a look back at Figure 4 shown above. There is a clear trend in the coefficients even before Dollar General opened, and that trend appears to continue through to the period after the Dollar General opens. If anything, the coefficients at time -1 (which is the year of opening) are unusually inconsistent with the coefficients on either side of them.

The failure of this analysis to consider a violation of the parallel trends assumption should make us very cautious about taking these results at face value. At least, I don't think they should be interpreted as showing that Dollar General leads to the closure of some local businesses, with the surviving firms having higher revenues and employment (which is how Biehl et al. interpret their results). Instead, I think it possibly shows that Dollar General stores locate in areas where stores are already closing (notice in Figure 4 that probability of closure is already positive and statistically significant for treated firms compared with control firms before the Dollar General opens).

Biehl et al. go on to look at the impacts on firms by industry and by retail category. However, given that their headline results don't really show what they are purported to show, I would place even less weight on the industry-specific results. Besides which, at that stage of the analysis they are doing multiple comparisons, meaning that some of their results might show up as statistically significant simply by chance, which they haven't adjusted for.

Overall, the results from the main analysis in this article are consistent with Dollar General finding new locations where there are open storefronts (because other firms have already closed), and setting up shop in those locations. So, it may be that it isn't the Dollar General that causes firm closures, and higher revenue and employment for surviving firms, but something else like local market conditions more generally. Considering that possibility, a Dollar General opening would be a symptom of those negative local market conditions, not a cause of them.

Who is morally responsible for grade inflation?

This article in The Conversation last year by Ciprian N. Radavoi, Carol Quadrelli, and Pauline Collins (all University of Southern Queensland) pointed me to their interesting article published in the Journal of Academic Ethics (open access) on who is morally responsible for grade inflation. The article attracted my attention because it engages moral philosophy in the task of identifying responsibility for grade inflation, a problem that I have blogged about before.

Radavoi et al. start by noting that grade inflation is unethical, relying on three main normative ethics theories: (1) deontology; (2) virtue ethics; and (3) consequentialism. As they explain:

In a deontological perspective, the problem with grade inflation is that it is a dishonest action...

A virtue ethics approach further substantiates grade inflation as unethical... As for what counts as virtues (that is, excellent traits of character), there have been numerous lists proposed in the history of philosophy, and courage, integrity and justice feature in most... regardless of the reason one inflates grades, that person does not act as a just person... It is easy to see how the act of equally rewarding with top marks hardworking and lazy students is unequal treatment that shows social irresponsibility, and fails to show leadership...

As for consequentialism, Radavoi et al. note all of the parties that are potentially harmed by grade inflation, including students whose grades are inflated (because they are "disincentivised from studying, shielded from the educative experience of failure, and instilled with a false sense of success"), employers (because grades become less valuable as a signal of the quality of job applicants), universities (whose reputations are damaged when they become known to be merely 'diploma mills'), and society generally. On the latter, Radavoi et al. note that:

If academic teachers do not fulfill their gatekeeping role, society will end up with incompetent doctors who may damage someone’s health, incompetent lawyers may ruin someone’s wealth or liberty, and so on. Also, if grades lose their quality of correctly indicating achievement, society will lose its trust in higher education and in universities as places of learning and excellence.

Having established grade inflation as unethical, Radavoi et al. then present the qualitative results from a survey of Australian academics, in the form of quotes from open-ended questions from the survey. This highlights the role of management coercion, and student evaluations of teaching , with the latter often being the mechanism through which management pressure is applied to academics. Radavoi et al. then unpack whether academics are manipulated into grade inflation, or coerced, concluding that:

...at least for casual academics, it seems safe to say they inflate grades under coercion, and this mitigates their moral blameworthiness: indeed, the coercive pressure on them, exercised via SETs, is insurmountable given the insecurity of their position and the overwhelming desire to secure another contract.

In contrast, in Radavoi et al.'s view, academics with continuing employment are generally not coerced into grade inflation, as those academics have greater agency to take a stand against grade inflation. Of course, context matters, and I suspect that there are not a lot of academics who feel genuinely secure enough in their employment to take a stand against university management on principle. I know from personal experience that even when a senior academic is willing to take a stand on behalf of a larger constituency of academics, those other academics will not necessarily voice their support in a public forum (and yet, simultaneously, be very willing to thank the senior academic in private). Taking a stand against grade inflation is only one example. Top-down one-size-fits-all rules imposed on teachers and their subjects, and enforcing onerous levels of flexibility that suit students but impose high costs on staff in terms of workload and administration, are other examples where pressure from university management has been applied, and yet academics have not effectively resisted. However, I am getting off topic.

Radavoi et al. do highlight that moral responsibility for grade inflation cannot be attributed solely to the academics responsible for grading. The institutional context, and management pressure (whether manipulation or coercion) are important too. However, Radavoi et al. do not consider the extent to which students are also implicated in this situation, albeit in a different way from academics or university management. As higher education has increasingly treated students as consumers of education services, successive cohorts of students have increasingly been encouraged to adopt the ideal of the ‘sovereign customer’, able to demand that education providers deliver particular outcomes for them. It is hardly surprising, then, that some students come to see higher grades not only as something to be earned, but as part of the education services that they have paid for. This does not make students primarily responsible for grade inflation, but it does mean that student expectations can reinforce the pressures placed on academics and university management.

So, perhaps moral responsibility cannot be attributed solely or largely to university management either. All three parties (academics, university management, and students) each bear some responsibility for grade inflation. However, that responsibility is not necessarily shared equally. The greatest responsibility should fall on those with the greatest power to change the incentives that make grade inflation attractive to students, convenient for managers, and sometimes the least risky option for academics. Which party bears the greatest responsibility will depend crucially on context.

Read more:

• Teaching evaluations and grade inflation
• Grade inflation is harming students' learning
• A few papers on grade inflation at universities
• Grade inflation and college completion in the U.S.
• More on teaching evaluations and grade inflation
• Grade inflation at New Zealand universities, and what can be done about it

How home loan customers can use switching costs against the banks

Economists often consider switching costs to be a problem for consumers. High switching costs can lock a consumer into buying a particular product, or lock them into buying from a particular seller. Often, the seller extracts additional profits from their locked-in customers by charging them a higher price, or selling them complementary products. However, sometimes locking in can benefit consumers, especially when they can play off one seller against another, where both sellers want to lock the customer in. Consider the example of banks, on which the New Zealand Herald reported last month:

Home loan borrowers are taking cashback incentives to stay with their current banks, as competition continues in the mortgage market.

The focus on cashback incentives intensified through the end of last year, when ANZ offered cash payments equal to 1.5% of loan amounts to new home loan borrowers.

In a competitive environment, banks really want home loan customers, and are willing to pay to attract new customers. Retaining their existing customers is important too, and banks may be willing to pay to keep their customers. However, not all customers will be able to extract the same 'retention payments' from their bank. The bank needs to weigh up how likely it is that they will lose a customer:

Helen Stuart, a mortgage adviser at Compass Mortgages, said she had seen “retention payments” offered by several banks lately, especially when someone had all their lending come off a fixed term...

It is harder to change to lenders when some of the loan is still fixed, because it usually means a break fee has to be paid.

That makes sense. When a bank customer has a fixed rate mortgage, they have to pay a 'break fee' in order to change banks. Their current bank can feel quite secure that the customer is going to stay with them, and so the bank is unlikely to offer a retention payment (or, if they do, any retention payment is likely to be quite small). On the other hand, when the fixed rate on the mortgage expires, the bank customer can change banks without paying a 'break fee', and so the bank would be more likely to offer a retention payment (or would offer a more generous retention payment). Of course, the retention payment itself is likely part of the bank’s lock-in strategy, since cashbacks often come with conditions that make future switching more costly to the customer.

Thinking further:

Jeremy Andrews, of Key Mortgages, said what people could get would depend on how long a customer had had their loan, whether they had taken a cashback previously and whether they had more than 20% equity.

“Some banks will refuse retention cash if the clients are already fixed in and they see it as of no benefit to the client to refinance to another bank. Some examples include if it’d be detrimental either in break fees – they’re already on higher than market rates, or if they would need to move to higher rates in the market, or the legal costs associated exceed any cashback benefit of moving.

So, in general, the bank is weighing up how likely it is that the customer will change banks. If changing bank would lead the customer to end up paying a higher interest rate on their mortgage, the bank infers that the customer is less likely to leave, and the bank will therefore be less likely to offer a retention payment. It is a similar story if legal costs are high - the customer is less likely to move, and the bank will be less likely to offer a retention payment.

Bank customers should be savvy about this though. Any time that they have the 'upper hand', through low switching costs, they could use their position to extract a large retention payment from their bank. This happens when their home loan comes off a fixed rate, and especially when other banks are offering enticements for the customer to switch. Of course, they need to consider not just the retention payment, but the interest rate, break fees, legal costs, the hassle of switching, as well as whether accepting the retention payment locks them in and for how long. If it makes sense overall, then playing off the banks against each other may allow the home loan customer to reverse the logic of switching costs to their advantage.

The Australian government has 'subscription traps' in its sights

As I noted in a post last week, firms are increasingly selling subscriptions rather than products because consumer inertia can make them substantially more profitable. Once a customer starts a subscription, they tend not to cancel the subscription as soon as they should, simply because it requires some thought and attention (as well as a little bit of time) to execute a cancellation of the subscription. This 'customer inertia' is a form of switching cost, which locks customers into buying the subscription. However, sellers can easily amp up the switching cost by making it more difficult (and therefore more costly) to cancel. This makes customer lock-in more effective, and can 'trap' customers into their subscription.

In this article in The Conversation last year, Jeannie Marie Paterson (University of Melbourne) provides a couple of examples of 'subscription traps', each of which represents an instance of the firm increasing the switching costs for the consumer:

One example is when consumers sign up for a service quickly and easily online, but can only cancel on the phone (sometimes needing to ring another country)...

Another example, known as “confirm shaming”, involves requiring consumers to click through multiple screens before they can cancel.

Typically, each of those screens has a message asking consumers to reconsider, often reiterating the service’s purported benefits and even offering new discounts on the price not previously available.

When the switching costs are higher for the consumer, the customer lock-in is more effective (it is harder for the consumer to cancel, or switch). The firm can then profit through selling at a higher price, or by selling complementary goods and services to the locked-in consumer.

It is deceptively easy for a consumer to get locked in as well. I'm sure that you will have been offered the first month free on a subscription. That is how the firms get you. Firms often offer subscriptions at a low price initially (or free), then once the consumer is locked in, the firm can raise the price (this is referred to as multi-period pricing).

However, governments are wising up to the 'subscription traps' that Paterson highlights. She notes that:

Making it hard to cancel – commonly called a “subscription trap” – isn’t currently illegal. But now the federal government has announced a plan to ban subscription traps and other hidden fees.

Since then, the policy process in Australia has advanced, with draft legislation released in early 2026 that would impose disclosure, notification, and easy-cancellation requirements on subscription contracts from 1 July 2027, if the legislation is passed.

It is worth noting that banning subscription traps is not the only policy solution here. Anything that reduces the switching costs will likely be effective at reducing customer lock-in. One example that Paterson notes is:

California’s “click to cancel” rules also mean consumers must be able to cancel using the same method of communication they used to subscribe. And businesses must offer consumers information on how to cancel.

So, if signing up for a subscription requires a single click, then cancelling a subscription must also require a single click. That minimises the switching costs, and minimises customer lock-in. Making subscriptions easy to cancel would allow consumers to retain the genuine benefits of subscriptions (including lower transaction costs and fewer service interruptions) while reducing the unnecessary costs from subscriptions they no longer use. Firms may still be able to offer discounts or reminders to retain customers, but the cancellation process should inform consumers rather than obstruct them. Reducing these artificial switching costs is therefore likely to improve consumer welfare overall.

Read more:

• The subscription economy as price discrimination
• The switching costs of online subscriptions
• More on the switching costs of online subscriptions
• Cancelling subscriptions and customer lock-in
• Why do firms increasingly prefer to sell subscriptions, rather than products?

This week in research #123

Here's what caught my eye in research over the past week:

• James and Watson (with ungated earlier version here) find using an online survey experiment that state-administered cash transfers (such as Alaska’s Permanent Fund Dividend Program) likely attract new residents
• Wang et al. find that the online and mobile game Genshin Impact had a significant positive effect on China's product exports, likely by fostering a more favourable perception of China among people in other countries
• Liu et al. find a significant child penalty in the rental housing market in China, with couples with children 8.0 percentage points less likely to receive a response from landlords, and 5.9 percentage points less likely to be invited to an open house

Why do firms increasingly prefer to sell subscriptions, rather than products?

An increasing number of goods and services that were once sold as one-off purchases are now offered as subscriptions. Newspaper subscriptions and gym memberships have existed for a long time, and 'software as a service' is now commonplace. But the model has spread much more widely: consumers can now subscribe to meal kits (such as HelloFresh), razors (such as Dollar Shave Club), and a growing range of other products. Why are firms that once sold products outright increasingly choosing to sell subscriptions instead?

That is the question addressed in this 2025 article by Liran Einav (Stanford University), Ben Klopack (Texas A&M University), and Neale Mahoney (Stanford University), published in the prestigious American Economic Review (ungated earlier version here). They start by noting that the rapid growth in subscriptions is often attributed to the rise of digital products, and the convenience of a subscription for consumers. However, Einav et al. focus their attention on a third factor:

Because subscriptions are automatically renewed, consumers who are inertial may continue to pay for subscriptions they no longer value... If consumers do not fully anticipate their inertia at sign-up, this may create supply-side incentives to offer subscriptions to exploit inertial consumers, amplifying the growth of subscription offerings.

My ECONS101 students will be familiar with this explanation for subscriptions, because we literally covered this in the lecture today. Einav et al. test for the extent to which inertia matters using transaction data from "a large payment card network in the United States between August 2017 and December 2021". Their final dataset includes over 800,000 accounts, and about 870,000 account-service pairs (each account-service pair is a set of observations of a payment card account that subscribes from one of the ten largest subscription services).

Einav et al. exploit the fact that when a card expires and is replaced, consumers typically have to update the billing information for their subscriptions, prompting them to either update or cancel each subscription. To the extent that card replacement decreases the retention rate of subscriptions, this provides evidence of customer inertia. If consumers cancelled subscriptions whenever they stopped making use of them, then there would be no difference in subscription retention between months with card replacements and months without.

Unsurprisingly, Einav et al. find evidence of customer inertia, and the effects are large and consequential for firms selling subscriptions:

We use the estimated model to perform counterfactual exercises that assess how much more quickly consumers would cancel their subscriptions if there was no inertia, which corresponds to fully attentive consumers (inattention model) or default cancellation every month (switching cost model). We find that seller revenues (or equivalently average subscription durations) are significantly higher due to subscriber inertia with important heterogeneity across services. Specifically, in the inattention model, we find that inertia increases seller revenues by 87 percent on average, with increases that range from 14 percent to more than 200 percent depending on the service. In the switching cost model, inertia raises revenue by 120 percent on average, with a range of 17 percent to 259 percent.

So, there are strong incentives for firms to engage in the selling of subscriptions, and to take advantage of customer inertia in subscriptions. However, many consumers are clearly spending more on subscriptions than they need or necessarily want to. Think about yourself as an example - how many subscriptions do you have right now that you rarely use and probably should cancel? I don't have any, but that's only because writing this post made me think about this and cancel one that I was no longer really using!

Subscriptions can provide important benefits for consumer though, including reducing transaction costs (it is simpler to pay a monthly subscription than to buy goods or services individually over and over), and reducing service interruptions (because a subscription makes it more likely that the consumer won't run out of the good they are buying a subscription for). However, we might still be concerned that customer inertia makes some customers with subscriptions worse off overall. So, Einav et al. then turn to evaluating what the most appropriate policy response is. They focus attention on a rule requiring firms to provide consumers with an active renewal decision at regular intervals. Using their two models, Einav et al. find that:

In the inattention model, we find that requiring active choices at a six-month frequency would reduce the excess revenue from inattention by 45 percent. The switching cost model makes a similar quantitative prediction; moving from default renewal to default cancellation once every six months would reduce excess revenue by 48 percent.

Those are quite substantial effects, which again illustrates just how much consumers are giving away to subscription firms for subscriptions that they no longer make the best use of and should be cancelling. What becomes clear from this paper is that one important reason why firms that previously would have sold products instead prefer to sell subscriptions is that consumer inertia can make them substantially more profitable.

Read more:

• The subscription economy as price discrimination
• The switching costs of online subscriptions
• More on the switching costs of online subscriptions
• Cancelling subscriptions and customer lock-in

A surprising example of block pricing with heterogeneous demand

My wife and I just got back from holiday in Europe, and stopped in the duty-free store at Auckland Airport to pick up some bottles of gin for my mother-in-law. The price was $45 for one bottle, $69 for two bottles, or $95 for three bottles.

Standard block pricing (as described in this post) calls for the seller to sell at a declining marginal price per unit. In this case, the first bottle is $45, and the second bottle is $24 (for a total of $69 for two bottles). However, the third bottle is $26 (for a total of $95 for three bottles). Did the duty-free store get its block pricing wrong?

Certainly, their pricing is inconsistent with the standard block pricing story, because the third bottle should be less expensive (or, at least, not more expensive) than the second bottle. However, as Nobel Prize winner George Stigler noted, the pricing strategies that we see in the real world are likely to be those that work fairly well (otherwise, the strategy wouldn't persist and we wouldn't see them). So, there must be something about this pricing strategy that makes it work.

I think that the duty-free store is doing a bit of a mix of block pricing and menu pricing. Menu pricing is a form of price discrimination, where consumers sort themselves into those who are high-demand consumers and low-demand consumers. Low-demand consumers buy one bottle (or perhaps two), and pay a relatively high price per unit, while high-demand consumers buy three bottles and pay a lower price per unit.

Now, as I noted in this post, block pricing doesn't typically work when there is heterogeneous demand, because low-demand consumers are unaffected by block pricing (they buy the same quantity as if there was no block pricing), while high-demand consumers may buy more of the good, but spend less overall (because of the lower price per unit). The duty-free store avoids this negative outcome because consumers can only buy three bottles of gin duty-free. If they buy any more than that, they have to pay duty on the additional bottles. So, that effectively caps the number of bottles that high-demand consumers can buy to three. So, the high-demand consumers are stopped from buying four, or five, or six, or twenty bottles at the lower price. That means that the high-demand consumers may buy more bottles than if there wasn't block pricing, but they don't end up spending less overall.

That also helps explain why the third bottle can be priced a little higher than the second. A plausible interpretation is that the two-bottle deal is designed to attract moderate-demand consumers, while the three-bottle deal is aimed at the highest-demand consumers who are constrained by the duty-free limit. If that is the case, then the store does not need the third bottle to be cheaper than the second. Instead, it needs the three-bottle bundle to be attractive to a different group of buyers than the two-bottle bundle or a single bottle. Again, this points to menu pricing as part of the explanation.

So, while the duty-free store isn't conducting block pricing exactly as I describe in my ECONS101 class, we can nevertheless puzzle out what they are doing. And it makes sense, even if it is surprising to see a seller that is able to use block pricing when there is heterogeneous demand.

Price discrimination in tourism... French tourist attractions edition

The latest development in pricing at French museums should be familiar to my ECONS101 students, or to regular readers of this blog. As reported by the New Zealand Herald back in January:

France is hiking prices for non-Europeans at the Louvre this week, provoking debate about so-called “dual pricing”.

From Wednesday local time, any adult visitor from outside the European Union, Iceland, Liechtenstein and Norway will have to pay €32 ($64) to enter the Louvre – a 45% increase – while the Palace of Versailles will up its prices by €3...

Other state-owned French tourist hotspots are also hiking their fees, including the Chambord Palace in the Loire region and the national opera house in Paris. 

This form of pricing is, of course, known as price discrimination - offering the same product (in this case, museum entry) to different consumers for different prices. Price discrimination works when the seller has consumers with heterogeneous demand for their product. That means that some consumers have more elastic demand for the product (and are more price sensitive), while other consumers have less elastic demand for the product (and are less price sensitive). The seller charges a higher price to the consumers who are less price sensitive.

Why do foreigners have less elastic demand for tourist attractions? As I noted in this post back in 2014, there are two reasons. First, consumers tend to have less elastic demand for goods with few close substitutes. There are few substitutes for visiting the Louvre (or other tourist attractions), making demand less elastic. Arguably, for foreign tourists there are fewer close substitutes to the Louvre. Locals can do all sorts of things with their time, but tourists tend to want to go to tourist attractions while on holiday. Second, the significance of price in the total cost of the good is lower for foreign tourists than for locals. Foreign tourists have usually also travelled a long way at great cost to get to France, so the cost of entry into the Louvre is pretty small in the overall cost of their holiday, making demand less elastic. For locals, the cost of the ticket to the Louvre is probably most of the total cost of attending, so a change in the ticket price would have a greater effect on whether they go (making demand more elastic).

The New Zealand Herald article focuses attention on the ethics of price discrimination, noting that:

Trade unions at the Louvre have denounced the policy as “shocking philosophically, socially and on a human level” and have called for strike action over the change, along with a raft of other complaints.

That criticism is not trivial, because museums are not just profit-maximising firms - they also have a public-access mission, so charging more can look inconsistent with their public access goal. However, it is important to recognise that price discrimination is not illegal or even necessarily immoral, and may provide greater support for the long-term goals of the museum.

Price discrimination is in fact relatively common at tourist attractions (see the links at the end of this post), especially in developing countries but also increasingly in developed countries like New Zealand. And:

Britain has long had a policy of offering universal free access to permanent collections at its national galleries and museums.

But the former director of the British Museum, Mark Jones, backed fee-paying in one of his last interviews in charge, telling the Sunday Times in 2024 that “it would make sense for us to charge overseas visitors for admission”.

Society should want museums to remain sustainable. However, funding purely by taxes doesn't ensure sustainability, which is one reason that museums charge entry fees in the first place. And since museums are charging an entry fee anyway, it is right to consider what is the 'best' entry fee. There is no reason why that entry fee needs to be the same for locals and foreigners. After all, locals likely already pay for the upkeep of the museum through their taxes, so having a lower price for locals (as many tourist attractions do) is in that sense a fairer option. Price discrimination therefore has fairness in its favour, in addition to being a way of increasing profits for the museum, increasing its financial sustainability.

Read more:

• Are tourism operators in NZ missing a trick?
• Price discrimination in tourism... India edition
• Price discrimination and the Great Walks
• Hamilton Gardens' entry fee for tourists as a form of price discrimination
• Te Papa Tongarewa embraces price discrimination, but other tourism operators are still missing the trick

This week in research #122

Here's what caught my eye in research over the past week:

• Prati and Senik (with ungated earlier version here) propose a rescaling of happiness data using retrospective and current life evaluations, and show using their rescaled data that, among other results, the happiness of Americans has substantially increased from the 1950s to the early 2000s
• Johannesen and Muchardt (open access) test whether female scholars in economics are held to higher standards than males in the US and Europe, and find no evidence that standards are higher for females across faculty appointments, network invitations, grant awards, and editor appointments
• Choi finds that adding a healthcare copayment of $1 in Korea reduces monthly outpatient visits by 10 percent, with effects concentrates in low-value care, such as the inappropriate use of antibiotics
• Ozsoy and Rodríguez-Planas (with ungated earlier version here) find that students who took advantage of a flexible grading policy at Queen's College (City University of New York) during the COVID-19 pandemic underperformed once the policy was no longer available, with a cumulative GPA 0.11 standard deviations lower in Spring 2021 than in Fall 2019 relative to the change in performance of students who never used the policy
• Alonso-Armesto, Cáceres-Delpiano, and Lekfuangfu (open access) find substantial gains in mathematics and science achievement, concentrated among male students and those from lower socioeconomic backgrounds when the minimum legal drinking age increases from 16 to 18 years
• Mitra (with ungated earlier version here) finds that more educated mayors in Italy boost public investment, especially in the education sector, without compromising the fiscal stability of the municipalities

Blame it on the rain (on open day), or campus tour weather and university choice

The University of Waikato Open Day is coming up next month. We'll have thousands of prospective students on campus for most of the day, learning about their study options, attending mini-lectures, talking to current staff and students, and collecting lots of free stuff that we give away. Many people question the value of these open days. Do they make a difference to students' choice of university? Undoubtedly, for some students at the margin they will make a difference. And from my experience, open days can affect some students' subject choice.

One thing that open days provide prospective students is a 'vibe' for their potential study location. This is where I might criticise open day, because it really is almost nothing at all like a 'normal' university day, so it doesn't give prospective students any idea what university is really like. The 'vibe' might also be affected by elements beyond the university's control, like the weather. How important is the weather? This recent NBER Working Paper by Olivia Feldman, Joshua Hyman, and Matthew McGann (all Amherst College), provides some idea. They look at the effect of weather on the day that a student undertakes a campus tour at an unnamed "institute of higher education" (IHE) on whether the student subsequently applies and/or enrols at that IHE, finding that weather affects applications but not enrolment. The campus tour is a more limited version of our open day:

Tours are typically given by current students and involve the guide walking the participants around campus for about an hour while sharing information about the institution, academics, student life, campus dormitories, academic buildings, dining halls, and sports and recreational facilities.

Feldman et al. use administrative data on all campus tours between summer 2016 and fall 2024, along with hourly weather data from The Weather Channel, and data on where each student subsequently enrolled from the National Student Clearinghouse. They report that overall:

28.8 percent of participants apply to the institution, and 2.2 percent ultimately enroll.

In their main analysis, Feldman et al. apply a simple OLS regression model, with application (or enrolment) at the focal IHE as the dependent variable, and weather variables (cloudy, rainy, and several temperature ranges to capture hot and cold days) as the explanatory variables of interest. They find that there is:

...a 1.7 percentage point (5.9%) lower application rate when the tour is cold, a 2.3 point (8.0%) lower rate when the tour is warmer, and a 2.9 point (10.1%) lower rate when the tour is hot. Further, cloudy tours reduce the application rate by 1.4 percentage points (4.9%), and tours with precipitation reduce it by 2.4 points (8.3%).

Those effects on applications are quite large in context. However, when Feldman et al. look at the effect on enrolment (rather than just application) they find statistically insignificant effects (albeit using several different composite variables for 'bad weather' as the explanatory variable of interest, rather than individual weather variables as in the earlier analysis).

My takeaway from this paper is that students’ choice of university is fairly resilient to the effects of weather on the day of their campus tour. While poor weather may reduce the chances that a student applies to a particular university, it doesn’t seem to have much effect on whether they ultimately enrol there. Of course, this is evidence from a single US institution, and may not easily translate to the New Zealand context. Still, extending these results to open days suggests that while the ‘vibe’ on the day might affect whether a student applies to the University of Waikato, and the weather contributes to that vibe, it probably isn’t an effect that we should worry too much about.

University enrolments fluctuate from year to year, and there are lots of variables that affect them. One thing this study suggests is that, while rain on open day might dampen spirits, it probably isn't the major cause of low enrolments. So, if the numbers are down, we needn’t blame it on the rain (on open day).

[HT: Marginal Revolution]

The short-run impact of the Russian invasion of Ukraine on the euro-ruble exchange rate

When Russia invaded Ukraine in February 2022, one of the immediate consequences was a reduction in financial flows between Russia and the rest of the world due to international sanctions and Russia's own emergency capital controls (see here). Among other effects, this led to a decrease in the demand for euros and other foreign currencies (from Russians) and a related increase in the demand for rubles. Those changes should be observable in the data on the euro-ruble exchange rate. We should expect to see an appreciation of the ruble relative to other currencies.

Indeed, that is what this recent article by Sagiru Mati (Near East University) and co-authors, published in the Journal of Policy Modeling (sorry, I don't see an ungated version online), reports. They use a time series econometric model and data on the euro-ruble exchange rate from 1 January 2020 to 11 October 2022, testing for a change in the exchange rate after 24 February 2022 (when Russia invaded Ukraine).

Mati et al. don't find a step change in the level of the euro-ruble exchange rate. However, they do find a change in the rate of appreciation/depreciation in the exchange rate. Before the conflict, the ruble was losing value (depreciating) at an average rate of 0.04 percent per day. However, after the conflict, the ruble appreciated at an average rate of 0.21 percent per day (this averages out an initial steep decline in the exchange rate, followed by a rapid depreciation. This is shown in Figure 3(a) from the paper (although note that this graph shows the exchange rate in terms of the number of rubles per euro, so an appreciation of the ruble is a decline in the graph, while a depreciation is the reverse):

In other words, as expected the ruble began appreciating after the conflict, presumably due to an increase in the demand for rubles. The consequences of this appreciation include that Russian exports become more expensive for foreigners to buy (if priced in rubles, because more euros would be required for the same purchase) or less profitable for Russian exporters (if priced in euros, because the same quantity of euros would convert to fewer rubles). On the other hand, imports become less expensive for Russian consumers (if priced in euros, because fewer rubles would be required for the same purchase) or more profitable for exporters to Russia (if priced in rubles, because the same quantity of rubles now converts to more euros). Of course, sanctions on Russia extended to trade flows, so those potential changes were mostly moot.

International markets, including exchange rate markets, are frequently shifted by geopolitical shocks. Here is a case where the shock (the Russian invasion of Ukraine) had a largely predictable effect on the exchange rate.

Book review: Cloud Empires

The libertarian ideal of the internet was that it was a place without borders, without gatekeepers, and without government control. However, the modern internet falls well short of that ideal. In the physical world, it is typically governments that make and enforce the rules. However, online it is increasingly large and undemocratic platform firms that make the rules and enforce them. That is the general idea underlying Vili Lehdonvirta's 2022 book Cloud Empires, which I just finished reading.

Lehdonvirta tracks in detail how we ended up in the current situation, noting that:

The Internet was supposed to free us from powerful institutions. It was supposed to cut out the middlemen, democratize markets, empower individuals, and birth a new social fabric based on self-organizing networks and communities instead of top-down authority. "We will create a civilization of the mind in Cyberspace... more humane and fair than the world your governments have made before."... This is what Silicon Valley's visionaries promised us. Then they delivered something different - something that looks a lot like government again, except that this time we don't get to vote.

Lehdonvirta outlines how the platform firms have essentially replicated the process by which governments established rules, because of the same underlying necessity to maintain control. He uses numerous examples including Amazon, eBay, and cryptocurrencies such as Bitcoin and Ethereum, to illustrate his points. These case studies demonstrate the challenges, and the close corollary between the economic institutions established by the platform firms and those established by governments. Lehdonvirta notes that the key difference between governments and platform firms is in the political institutions. Platform firms lack the accountability that is inherent in political systems, and there is little prospect of overturning the 'government' of a platform. Even the most autocratic state risks revolution in a way that is to a large extent impossible for users to achieve within a platform environment.

While Lehdonvirta does a great job of outlining the issues, where the book falls short is in terms of the solutions. The subtitle of the book promises to tell us, "how we can regain control". Lehdonvirta's solution is a 'bourgeois revolution', of the kind that western countries experienced through the late Middle Ages. The growing urban middle class ('burghers') developed significant resources and gradually pushed back against the local lords, helped by powerful allies in the Church and often the monarchy as well. These coalitions led to more devolution of political power and authority, and eventually to the modern political institutions we observe today.

Lehdonvirta notes that, with some creative licence, it is possible to imagine a similar dynamic playing out on the platforms. However, while he devotes a great deal of effort in explaining the problems and linking them to real-world case studies, he doesn't expend the same effort on his proposed solution. The reader receives a few, almost cursory, observations about how a 'bourgeois revolution' may play out in certain situations. I felt like the book needed a more detailed explanation, linking the solution to embryonic real-world efforts and charting a path forward for them. Although speculative, a 'road map' for advocates of returning some power to the platform users would have added significant value to the book.

Aside from that small gripe, I really enjoyed this book, and it was a good follow-up to reading the more textbook treatment of platforms found in The Business of Platforms (which I reviewed last week).

This week in research #121

Here's what caught my eye in research over the past week (a quiet week, as I have been travelling in Europe):

• Three articles published in the prestigious journal Nature by Miske et al., Aczel et al., and Tyner et al., investigate the replicability of research results in social and behavioural sciences (a very important set of papers that have garnered a lot of attention)
• Mišák (open access) investigates the impact of temperature on soccer team performance, and finds that attacking efficiency is enhanced in warmer conditions, leading to increased goal productivity and improved shot conversion rates, defensive performance appears to weaken in warmer conditions, with a decrease in defensive pressure and passing accuracy, and player aggression follows an inverted U-shaped pattern in relation to temperature

The impact of the 2023 Bud Light boycott on alcohol purchases

When a consumer stops buying a particular product for some reason (for example, if a product becomes unavailable), do they switch their spending to another product within the same category, or do they reallocate their spending across all available goods and services? The consumer choice model (or the constrained optimisation model for the consumer) suggests that the consumer should reallocate across all possible goods and services, rather than transferring the exact proportion of spending to the closest substitute product.

This recent article by Aljoscha Janssen (Singapore Management University), published in the journal Economics Letters (ungated earlier version here) provides an interesting test of that expected response. The context is the 2023 boycott of Bud Light in the US:

The boycott began in early April 2023 after Bud Light partnered with a transgender creator, prompting calls from conservative media to avoid the brand... Viral content amplified the message, and the manufacturer responded with advertising that emphasized traditional Americana themes... Sales declines emerged not only in conservative areas but also in regions without strong ideological leanings...

Janssen uses data from the NielsenIQ Consumer Panel from 2021 to 2023, which tracks spending by between 40,000 and 60,000 US households. Janssen drops households that did not buy alcohol, and then categorises the remaining households into three groups based on Bud Light purchases: (1) 'Bud Light households' (that purchased 18 litres of Bud Light in both 2021 and 2022); (2) 'Bud Light-dominant households' (that purchased at least twice as much Bud Light as other beers, in addition to purchasing at least 18 litres of Bud Light in both 2021 and 2022); and (3) 'Non-Bud Light beer households' (that purchased at least 18 litres of light beer in both 2021 and 2022, of which less than one-third was Bud Light). Janssen reports that:

In the full sample there are 34,470 alcohol-purchasing households; 585 qualify as Bud Light households and 439 of those are Bud Light-dominant, while 5130 are non-Bud Light beer households.

Janssen analyses monthly purchase data using a difference-in-differences approach, essentially comparing the difference in purchases between different treatment and control groups before and after the Bud Light boycott in April 2023. In practice, the comparisons show very similar results for the impact on Bud Light purchases, purchases of other beer, and total alcohol purchases. Specifically, Janssen finds that:

Across all designs, treated households reduce Bud Light by roughly 160 ounces per month (34%–37% of their pre-boycott Bud Light volume)...

Households partially replace Bud Light with other beer: other-beer purchases rise by 70–90 ounces per month. The offset is meaningful but incomplete relative to the Bud Light shortfall...

Net of substitution, total ethanol declines by about 3–4 fl-oz per month among treated households, a 5.5–7.5% drop. Converting with 0.6 fl-oz per U.S. standard drink, this equals roughly 5.0–6.7 drinks per month per treated household...I find no significant changes in wine or spirits, indicating that switching is almost entirely within the beer category.

So, the boycott led households on average to purchase less Bud Light (as you might expect from a boycott). They bought a greater quantity of other beer products, but the increase in other beer purchases was less than half the decrease in Bud Light purchases, meaning that consumers substituted to other non-beer products. Consumers also didn't switch entirely to other alcohol products, as total alcohol purchases declined. Instead, some spending appears to have shifted away from alcohol altogether. In other words, consistent with the consumer choice model, when consumers stopped buying (or reduced their purchases of) Bud Light, they reallocated their spending across all goods and services, not just switching their spending to the closest substitute to Bud Light (other beers).

Does this offer anything meaningful for advocates of reduced alcohol consumption? Probably not in any direct sense. These were fairly unusual circumstances, and consumer boycotts of particular alcohol products are uncommon. It is hard to imagine advocates or policymakers being able to engineer similar boycotts on a regular basis in order to reduce alcohol consumption. However, the findings do suggest a broader possibility. Interventions that reduce purchases of particular alcohol products, especially those associated with high levels of alcohol-related harm, may lead to at least some reduction in overall alcohol purchases, rather than consumers simply switching one-for-one to the nearest substitute. That said, this study is about purchases rather than consumption, and more evidence from other types of interventions would be needed before drawing firm policy conclusions.

Taylor Swift, look what you made fans buy

Taylor Swift released 27 versions of her 2025 album The Life of a Showgirl. That sounds excessive, but it offers a nice lesson in economics and pricing strategy, specifically price discrimination.

Price discrimination occurs when a firm charges different prices to different groups of consumers for the same good or service, and where the price differences do not arise from a difference in costs. One form of price discrimination is 'versioning', where the firm offers different versions of a product that each cost the same to produce, but which appeal to different groups of consumers (with different price elasticities of demand). Consumers that are more price sensitive (and have more elastic demand) would buy the version of the product that is less expensive, while consumers that are less price sensitive (and have less elastic demand) would buy the more expensive version.

We saw an extreme example of versioning last year, executed by the astute economist Taylor Swift. Paul Crosbie (Macquarie University) wrote about it in this article in The Conversation last October:

The Life of a Showgirl was released in dozens of formats, with physical and digital editions tailored to different levels of commitment.

In total, over the first week, there were 27 physical editions (18 CDs, eight vinyl LPs and one cassette) and seven digital download variants.

A range of covers, coloured vinyl, bonus tracks and signed inserts turned one album into a collectable series rather than a single product. Other artists – such as the Rolling Stones – have used this strategy before, but rarely at this scale or with such an intense response from fans.

Taylor Swift fans who are more price sensitive will have tended to buy the less expensive version of the album. More price-sensitive fans will include those who have lower incomes (where the album price is a higher proportion of their income) and those who are more casual Taylor Swift fans (where there are more substitutes available that they might prefer to spend their income on).

Taylor Swift fans who are less price sensitive will have tended to buy the more expensive premium version of the album. Less price-sensitive fans will include those who have higher incomes (where the album price is a smaller proportion of their income) and those who are more diehard Taylor Swift fans (where there is no close substitute for the latest Taylor Swift album).

Crosbie questions whether it is possible to have too many versions of a product. In this case, 27 versions do seem like a lot. It could be a very effective means of segmenting the market. However, that works best if each buyer only buys one version. There will be some fans who bought more than one version, and perhaps a substantial number who bought several. A non-trivial proportion of the most diehard fans probably own all 27 physical editions of the album.

This matters because the usual rationale for price discrimination through versioning is that consumers sort themselves across the available versions - the casual fans buy the standard version, while the diehard fans buy the premium one. But if some consumers buy multiple versions, the strategy is doing more than just segmenting the market. It is also encouraging multiple purchases from the same buyer. In that case, the different versions are not just substitutes for one another, but for some fans they become collectibles, with each version they collect adding a bit of extra value through completeness, exclusivity, or identity. So, the economics of versioning for Taylor Swift are not only about price discrimination between consumers, but also about extracting more surplus from the most committed fans.

There is a limit to how many versions even the most diehard fan is willing to buy, and that limit arises because of diminishing marginal utility. In economics, utility is the satisfaction or happiness the consumer gets from the goods and services they consume. Marginal utility is the extra utility the consumer gets from consuming one more unit of a good or service. Diminishing marginal utility is the idea that marginal utility declines as the consumer consumes more of a good. In the context of Taylor Swift's album, Crosbie notes that:

The first version of an album brings a lot of satisfaction. The fifth or sixth brings less. Eventually, another version does not add enough enjoyment to justify the price. Fans begin to feel they have had enough.

It is clear that there is a balance to be found between maximising profits by price discrimination using versioning, and the number of versions that are offered when some consumers will want to buy multiple versions. Price discrimination can be an incredibly profitable pricing strategy for firms, including for Taylor Swift. Maintaining fan engagement and encouraging diehard fans to spend more by making the versions collectible are also important. As Crosbie notes in his article:

Instead of leaving that money on the table, the strategy turns passion into profit. The cost of creating extra covers or vinyl colours is small, but the willingness of fans to pay more for them is high. That is exactly where versioning pays off.

In theory, it should be possible to work out the optimal number of versions that maximises long-run profit. The profit-maximising number of versions is not necessarily the number that best segments the market for the purposes of price discrimination, because diehard fans may buy multiple versions. It seems likely that Taylor Swift is well aware of this. Would you be willing to bet she hasn’t gotten close to that optimum? I wouldn’t.

Facebook Marketplace forces a change in TradeMe's business model, but will it succeed?

TradeMe is one of the key examples that I use when teaching about platform markets in my ECONS101 class. But competition from Facebook Marketplace is causing TradeMe to change its business model, and those changes are risky.

The reason why TradeMe is such a good example is that, by attracting buyers and sellers to its platform in the 1990s, TradeMe managed to keep eBay out of the New Zealand market. How did that happen? In a platform market, the firm (in this case, TradeMe) acts as an intermediary that brings together two parties (in this case, buyers and sellers) who would not otherwise interact or easily connect. Buyers using TradeMe create value for sellers, and the more buyers there are, the more value is created. Sellers using TradeMe creates value for buyers, and the more sellers there are, the more value is created. Once TradeMe was set up and had attracted a large share of buyers and sellers, it would be difficult for any other platform to set up in competition with TradeMe. And so, eBay couldn't get a foothold in New Zealand, and TradeMe had an effective monopoly over online auctions for many years.

TradeMe profited by charging a 'success fee' to sellers of goods on the platform. Buyers faced no fees. This reflects the principle that a platform firm (like TradeMe) should set a lower price for access to the platform to whichever side of the market has demand that is more elastic, ceteris paribus. In this case, buyers have more elastic demand for access to TradeMe, as there are many other places that they might go to buy things. Sellers, on the other hand, had more inelastic demand for access to TradeMe because no other place had access to the same quantity of buyers. That is, until Facebook Marketplace appeared.

Facebook Marketplace doesn't charge fees to sellers. And through its links to Facebook users, there are a large number of potential buyers on Facebook Marketplace. And so, there is now a viable (and cheaper) alternative to TradeMe for sellers. And now, TradeMe has finally reacted to this competition, as reported in the New Zealand Herald last month:

Trade Me is removing success fees for casual sellers, in a move that one marketing expert says is probably a response to the growing power of Facebook Marketplace.

Sellers have usually been paying 7.9% of the final sales price of items sold via Trade Me.

But a new fee structure will remove them from next week and site spokeswoman Lisa Stewart said casual sellers would be better off.

It is making other changes at the same time: bank transfers will not be possible and Ping will be offered on every listing alongside cash and Afterpay, with a 2.19% transaction fee for the seller. This provides buyer protection up to $5000 if trades go wrong.

Buyers will also pay a new service fee based on the purchase price, if items are more than $20. This will be 99c for goods sold for $20.01 to $100, $1.99 for sales between $100.01 and $250 and $4.99 for items over $250. Stewart said 44% of trades were under $20.

It was a response to customer feedback and what was happening in the market, Stewart said...

Massey University marketing expert Bodo Lang said it was likely to be in response from growth in the use of Facebook Marketplace, which offers no protection for buyers but charges no fees.

With Facebook Marketplace available for sellers, seller demand for using TradeMe has become more elastic. While the 'success fees' have been eliminated, TradeMe will still profit from sellers through mandating the use of its payment service Ping. And notice that buyers will also now pay a 'service fee' to TradeMe on successful purchases over $20. TradeMe is now leveraging its market power to derive revenue from a complementary good (payment services) rather than the auctions themselves. This change makes TradeMe's business model resemble that of Facebook Marketplace. Meta derives revenue from Facebook Marketplace though selling advertising (on Facebook Marketplace, but also on Facebook), rather than deriving revenue directly from the sales on Facebook Marketplace.

It remains to be seen whether Trademe's new business model will be successful. I question the wisdom of charging a service fee to buyers. They are still the more elastic side of Trademe's platform market, and they have a cheaper option available in the form of Facebook Marketplace. TradeMe is banking on buyers valuing the protection that TradeMe offers them, which Facebook Marketplace does not. However, it isn't clear how much buyers value that protection, and if they don't value it in excess of the new service fee, then they will continue to exit to Facebook Marketplace. And if buyers show an increasing preference for Facebook Marketplace, it won't be long before sellers start to reduce their listings on TradeMe. And if that happens, the market could tip and TradeMe could very quickly find itself in an irreversible decline.

This week in research #120

Here's what caught my eye in research over the past week:

• Büyükeren, Makarin, and Xiong (with ungated earlier version here) find that the full-scale launch of Tinder led to a sharp, persistent increase in sexual activity among college students, but with little corresponding impact on the formation of long-term relationships or relationship quality
• Chollete et al. find that recreational marijuana legalisation by US states increases property crime, although the effect disappears when they control for state-specific time trends
• Picault (open access) describes a method to introduce authentic group projects in senior undergraduate economics courses