Thursday, March 23, 2017

Should We Fear Tech-Driven Price Discrimination?

by Levi Russell

Writing at Bloomberg View, mathematician and author Cathy O'Neil walks through several ways in which new retail technology could enhance businesses' ability to engage in price discrimination. I recommend reading her piece, as it makes some good arguments in favor of being concerned. However, I think there are reasons to believe price discrimination either 1) is sometimes beneficial or 2) can be easily avoided.

What is price discrimination? It's the practice of charging people different prices for the same good based on their ability or desire to pay. O'Neil mentions that rules are in place that outlaw this practice, except in the cases of coupons, memberships, or bulk orders. But there are other cases. Senior citizen or military discounts are common. These discounts are based on the general idea that significant segments of these populations have relatively low incomes. Yes, there are well-paid soldiers and many, many people over 65 are quite wealthy, but these discounts apply to enlisted soldiers and elderly retirees on fixed incomes.

Coupons, membership deals, bulk discounts, and discounts for military and seniors are generally thought of in a positive light. People who have lower incomes but more time to cut out coupons will pay lower prices. Those willing to give shopping information to retailers get discounts. Some of us pay higher prices so that soldiers and seniors, who might have lower incomes, can still enjoy goods and services at prices they can afford.

Moving to online shopping, O'Neil explains how retailers collect data on their (potential) customers and are able to prey upon the desperate or cavalier by charging higher prices. Here are some examples with potential solutions in italics:

Retailers collect shopping and other data based on your IP address or browser "cookies."
Clear your browser's cache regularly.
Use the Tor browser, which makes it very, very difficult for you to be identified by websites

Retailers collect data based on user's individual profiles.
Many online retailers allow you to purchase without creating an account.

Personal assistants like Google Home or Alexa might pick up on behavioral cues that allow them to charge high prices.
 Just don't buy one. 

A common theme on this blog is that, as Harold Demsetz pointed out decades ago, comparing the real world with all its faults to a perfect ideal "alternative" isn't necessarily a good guide for policy. So, if advances in retail technology allow retailers to adjust prices based on income or stress or other factors, should something be done to slow these advances? Does it make sense to forego the benefits of improved technology to avoid these potential costs? I don't know the answer to that, but I'm interested in reading your thoughts.

Friday, March 17, 2017

A Lawyer and a Physicist Walk Into a Bar

by Levi Russell

A lawyer and a physicist walk into a bar... 

I don't have a good joke for that intro, but I do have a punchline: physicist Mark Buchanan's recent Bloomberg View column entitled "The Misunderstanding at the Core of Economics." What is this misunderstanding, you ask? Well, it's the (mistaken) belief that markets are perfect. This belief, Buchanan alleges, is widely held among professional economists. Buchanan argues that this widespread belief has had tragic consequences:
Economists routinely use the framework to form their views on everything from taxation to global trade -- portraying it as a value-free, scientific approach, when in fact it carries a hidden ideology that casts completely free markets as the ideal. Thus, when markets break down, the solution inevitably entails removing barriers to their proper functioning: privatize healthcare, education or social security, keep working to free up trade, or make labor markets more “flexible.”

Those prescriptions have all too often failed, as the 2008 financial crisis eloquently demonstrated. ...
The trouble with all of this is that none of it is true. If political party affiliation is any indication, the fact that academic economists are overwhelmingly Democrat indicates that pro-market utopianism isn't widespread. Another survey indicates that a mere 8% of academic economists can be considered supporters of free-market principles and only 3% are strong supporters. In terms of economists, Buchanan's only reference is to the late Kenneth Arrow. He provides no evidence that a massive swath of the profession are all free-market ideologues incapable of nuance. Buchanan cites one newly-popular economic commentator, an historian and lawyer, James Kwak. Kwak has been roundly criticized by economists for his simplistic analysis of economic phenomena many times, notably here, here, here, and here and many other times over the years.

So-called "free market" economists are far more nuanced in their views of market and government solutions to the problems in our imperfect world inhabited by imperfect human beings. A short but accurate summary would be something like: "In the real world, markets are, for the most part, better at dealing with externalities and other economic problems than actually-existing governments staffed by actually-existing politicians and bureaucrats." That is, no institutional arrangement is perfect, but the problems associated with voluntarily and spontaneously generated institutions are usually relatively minor when compared with those associated with institutions designed by a central authority. Examples of this nuanced position can be found in previous Farmer Hayek posts here, here, here, here, here, and here, as well as in the writings of Jim Buchanan, Gordon Tullock, Deirdre McCloskey, Pete Boettke, etc. A closer reading of these and other "free market" economists might change Buchanan's mind about the types and level of analysis that leads to "free market" conclusions.

Saturday, February 25, 2017

Expert Advice and Optimal Policy

by Levi Russell

Is it possible to bring expert opinion to bear on policy without the current system of administrative bureaucracy? That was the question on my mind when I read this post by my former colleague Tiffany Dowell at Texas A&M. The specific case discussed in Tiffany's post is a jurisdictional dispute against the Army Corps of Engineers (an administrative bureaucracy charged with enforcing much of US federal environmental policy) regarding a provision of the Waters of the United States (WOTUS) rule.

I won't get into the specifics of the WOTUS rule here. The point I want to make is broader, namely that we are not using courts as much as we could to accomplish policy goals. Currently at the federal level, the Executive branch has broad powers to interpret legislation, to write regulations that are legally binding for everyone, and to enforce those regulations without much interference from the Judicial branch.

The problem is that administrative bureaucracies have little incentive to consider potential unintended consequences and do a poor job of accounting for the costs of regulations. If, to fix these relatively poor incentives, the power of the bureaucracies is reduced, where would it go? Some of it could go to the Legislature and the rest might be entrusted to the Judicial branch directly. These two branches might do a better job of enforcing things like non-point- (in the case of the Legislature) and point-source (in the case of the Judicial branch) pollution since they're more directly bound by public scrutiny (Legislature) or hundreds of years of nuisance law (Judiciary).

What about expertise? Don't the administrative bureaucracies bring a lot of brain power to these regulatory problems? Definitely, but such expertise is often called on in legislative committees and on the witness stand in court cases. It doesn't require one to be flippant about environmental problems to suggest that there are, potentially, better institutional models to deal with things like pollution and environmental quality.

Saturday, February 18, 2017

Is Corruption an Issue in Antitrust?

by Levi Russell

Antitrust has been a big issue in agriculture recently. The Bayer-Monsanto merger, the dairy industry settlement last year, and a relatively new suit regarding chicken price fixing have been consistently making headlines. Here at FH, I've been critical of the standard perspective on market contestability (here and here) and the tension between economic regulation and antitrust policy. In this article on the Stigler Center's blog, William Shughart applies public choice theory to antitrust enforcement. His basic point is that antitrust enforcement is just as susceptible to capture as other forms of regulation. Below are some excerpts, but I definitely encourage you to read the whole piece. It's pretty short.

Standing on the shoulders of at least one giant, my former colleague and frequent co-author the late Robert Tollison, I laid out the special interest group basis of antitrust in Antitrust Policy and Interest-Group Politics (Quorum, 1990). That book documented the political pressures brought to bear on antitrust law enforcers, including those of congressional oversight committees and the competitors of antitrust defendants, that shape enforcement outcomes at every stage of the process. The rent-seeking and rent-defending efforts of the parties involved in both public and private antitrust lawsuits are consistent with Olson’s Logic. The antitrust authorities, no less than regulatory authorities, are vulnerable to capture by the collective interests of groups having the most salient stakes in antitrust law enforcement outcomes.

It is tempting to think that antitrust law enforcers—and the judges who rule on such matters—are immune from the self-interested motivations of ordinary mortals, that the parties involved look only to the “public’s interest” by protecting consumers from the depredations of profit-seeking business enterprises. A review of more than a century of the actual practices of applying the relevant laws points in the opposite direction.

Antitrust is economic regulation and, as such, is amenable to scholarly evaluations of it within the same analytical framework. If not, scholars will continue to bemoan antitrust’s failures rather than seeing them as the predicable outcomes of an understandable political process, helping to explain the secular rise and fall of activist intervention against mergers and the behaviors of so-called dominant firms both at home and abroad.3)

Antitrust bureaucrats, judges and the parties who can bring the laws to bear to their own benefit are rational actors, not Madison’s fictional angels able to shed their parochial interests in the courtroom. The evidence is clear. Chicago School scholars, if anyone, should take off their rose-colored glasses.

Wednesday, February 8, 2017

Ostrom on Herbicide Resistance Management

by Levi Russell

I thought I'd share an interesting article I ran across last month on community-based approaches to herbicide resistance. The authors focus on the work of Elinor Ostrom as they evaluate the history of community-based solutions to common-pool resource problems and discuss how these solutions might be applied to herbicide resistance. Here's an excerpt from the conclusion:

What is to be done? First, we can recognize the wisdom of the Nobel Economic Sciences Prize Committee for awarding Elinor Ostrom part of the 2009 prize in economics for “for her analysis of economic governance, especially the commons.”—Oliver Williamson deservedly shared the prize for his “analysis of economic governance, especially the boundaries of the firm". There is now a rich body of research on managing common pool resources that can inform community-based approaches to resistance managements. Second, to organize to prevent herbicide resistant weeds, farmers and other stakeholders do not have to start from scratch. The multiple examples of community-based programs to control mobile insects and invasive weeds illustrate that farmer groups—in collaboration with and assistance from the research and extension communities—have organized effectively to overcome barriers to collective action problems. There is legal and administrative precedent as well as institutional memory that could aid farmers in developing resistance management programs based on programs they are already familiar with and which have a record of success. The particulars of herbicide resistant weed management will certainly differ from such insect and invasive weed programs. Insect biology and movement differs in spatial and temporal dimensions from that of weeds. And insect eradication programs have at times relied on mandatory area-wide spraying or practiced area-wide sterile insect releases. While both these actions took discretion out of the individual farmer’s hands, they were actions that farmers collectively accepted. Other organizational arrangements may also serve as useful examples. Endres and Schelsinger (2015) suggest that drainage districts perhaps provide a structure that can be replicated for effective community-based herbicide resistance programs.

Sunday, February 5, 2017

The Nirvana Fallacy in Healthcare Economics

by Levi Russell

RegBlog, a great source for regulatory info, published an opinion piece about three weeks ago by Allison Hoffman. a law professor, on the potential for an Obamacare rollback by Republicans. Reading the essay, I recognized several errors of economic logic that I thought I'd point out here. I'm not an expert in this field, but I'm a firm believer that the economic way of thinking properly applied can provide much-needed clarity. As with any other post on FH, I invite others to correct me on any of the following if I miss something important.

The first two-thirds of the post is essentially an exercise in Harold Demsetz's Nirvana Fallacy. Yes, of course people could have more accurate information about treatments and could do a better job choosing good doctors. Does that mean the government should step in? Of course people are generally healthier when they don't pay the marginal cost of care; the cost/benefit calculus is skewed by the fact that the cost is near zero. Of course diseases are caused, to some degree, by things outside of our control. Does that imply the government can control those things or can necessarily make better decisions than we can?

Professor Hoffman then takes on a few individual proposals. She acknowledges that health savings accounts (HSAs) benefit some people, but complains that they are only beneficial for those with "surplus income." Her lack of a concrete example exposes the flaw in her critique. Suppose you are faced with two options for employer-provided healthcare: (1) a traditional "insurance" plan with a premium of $500 monthly and copays for doctor visits or (2) a catastrophic plan with a premium of $200 and an HSA with a contribution match up to $3,000 per year. The HSA allows you to save money for later when your monthly expenditures are lower than what you save. Comparing the two, it's trivial to point out that if I choose (2) I have $300 in "surplus income" to put into the savings account (plus the match!). Certainly some people don't have employer-provided health insurance, but the ACA was quickly making such policies tremendously expensive.

Hoffman later discusses tax credits, tax deductions, and other premium support programs proposed by Republicans. She criticizes one plan that would give a $2,100 tax credit to anyone between the ages of 35 and 50 for medical costs. Her criticism is that this credit would not cover a Bronze ACA plan which costs $4,200 per year. Assuming her figures are correct, this criticism seems empty to me. The credit would probably work well for a lot of people (especially those with low incomes) in scenario 2 above. The fact that it doesn't work with a choice-limiting, 3rd party payer program like the ACA isn't necessarily proof that the tax credit is bad. Perhaps it means choice-limiting 3rd party payer programs are inefficient.

Finally, Professor Hoffman criticizes reform proposals on the basis that the vouchers, credits, or deductions will grow at a rate at or below inflation, which is below historic rates of growth of healthcare costs. Unlike many, many other goods and services (even those produced in "non-contestable" industries), those that are heavily subsidized by the government like education and healthcare increase in cost much more rapidly than inflation. It's possible that reducing the government's role in healthcare will make that industry operate more like other industries, thus lowering costs. I'm sure there are reasons to think otherwise, but federal and state governments have had a lot of control over healthcare markets for at least 7 decades. Perhaps we should try something different.

Thursday, February 2, 2017

Ag Potpourri - Feb 2017

by Levi Russell

Having recently completed a tour of the state discussing forecasts for Georgia's 4 primary meat commodities, I thought I'd put up some articles on interesting issues looking ahead for 2017.

The guys over at Agricultural Economic Insights have a great post discussing 16 questions for ag in 2017. They have another post on exchange rates which should be interesting given recent GDP and labor numbers, and recent movement in the stock market.

Scott Irwin looks at ethanol profitability for 2017.

Expect a LOT of meat on the market over the next 2 years. The beef, chicken, and pork industries are dealing with massive supplies with no relief in sight.

Finally, anti-trust continues to be a hot-button issue in proteins, most recently on the poultry side. Also, there is potential for the new administration to take action on a controversial new GIPSA rule designed to limit market power among meat processors.