Sales: guns, meals, widgets

18/12/2012 § 7 Comments

In all the articles and posts I’ve read about guns over the last few days, I haven’t seen much on the economics. It is useful to remember that guns, bullets, and accessories — whatever they may symbolise — are also just products that are designed, manufactured, marketed, and sold. Economic theory about mythical widgets applies to guns, too.

I have read enough about the small-arms industry to know that I don’t know. So, let’s talk about restaurants.

Let’s say that you have a family restaurant in a medium-sized town. It’s a dinner restaurant, open only in the evenings. Thursday, Friday, and Saturday nights are your big days. The rest of the week, you are open more for show than anything else.

One day, you decide to increase business. Maybe you have a new child, maybe the rent has gone up — the reason doesn’t matter. What do you do?

First, it is important to remember that existing clients are more valuable than potential clients. You’ve got a bit of a capacity constraint — you couldn’t do more seatings on Friday or Saturday, and people can eat only one meal at a time. So, you try to get your existing patrons to eat out on Mondays and Tuesdays. On the menus, you place little notices: ‘Two-for-one Tuesdays!’, ‘Mondays are hard enough already — we’ll cook for you!’

Maybe that doesn’t generate enough business. So, you diversify. Wednesday nights become Quiz Night or Bingo Night or Open Mic Night — something different to appeal to a new market segment. These people wouldn’t usually go to a dowdy family restaurant, but Wednesdays are a bit quiet in town and it’s something to do.

Let’s say that this town still has blue laws and businesses are closed on Sundays. You spot an opportunity. Sunday is the one day that families are actually together; during the week they are rushing off to their own activities and can’t eat together. If you could get the law changed, you would have a new market. So, you petition the city council.

Now, what’s the pitch? Do you say, ‘Hey city council, I want to open on Sundays so I can make more money’? Of course not. That would be crass and grasping and socially inappropriate. How about, ‘We want to take the burden off Mum so the whole family can eat together’, or ‘Some people work on Friday and Saturday nights — they want a chance to eat out with their families, too.’ You position yourself as providing a service, as benefiting the community, as supporting family togetherness.

So it is with guns. Hunting is a declining activity in the US. It requires one weapon at a time. Maybe someone hunts a lot of different animals and needs a total of, say, three weapons. And guns, because of what they do (contain small explosions), need to be sturdy. A friend of mine used to use an 80-year-old .22 rifle from his grandfather. There’s not a lot of turn-over in that kind of market.

Self-defence! That represents diversification. Existing customers now need new products for a different use. New customers — people who have never hunted — can also be attracted. Bigger market, more sales.

But not everyone wants to walk around with a police pistol on their hip for all to see. Small, discreet pistols are a new product to appeal to a different group of customers. The problem, though, is that concealed carry isn’t always legal. Just like the restaurant in my story, the weapons manufacturers have an economic interest in getting the laws changed. Of course, they aren’t going to say it’s about markets and profits — that would be crass and grasping. So, instead, it is about freedom and families.

Whatever else guns are or represent, they are also products. The companies who make them are trying to increase their customer base, increase sales to new and existing customers, and make money.

Guns, tragedies, and alternatives

17/12/2012 § 7 Comments

The shooting at Sandy Hook Elementary School is a tragedy, another tragedy. It doesn’t fit the normal scope of topics here, but I couldn’t let it pass without comment.

What to say? It seems like everything has been said before. Again and again. We need more guns, we need fewer guns. We need more rules, we need fewer rules.

What I can offer is the perspective of an American ex-pat (I’ve been living overseas continuously for over a decade):

There is a better way to live.

Millions of people around the world live each day without the tiny, nagging fear that today is the day someone takes a gun to their families. They live without worrying that a disgruntled ex-employee or a bright-but-troubled teenager will tear their worlds apart. They live in countries and societies that have found other ways to balance individual rights and social order.

They are not under the jackboot of tyranny. They can still hunt animals and shoot targets.

And they can still kiss their children goodnight.

Assessing the Insurance Council claims

13/12/2012 § 1 Comment

The Insurance Council of New Zealand (ICNZ) issued a press release that the Dominion Post turned  into a piece on the op-ed page (but hasn’t loaded on the website, to my knowledge). The main message is that complaints about insurance companies in Christchurch aren’t accurate.

I’m not sure the ICNZ arguments actually stack up.

Let me start with the one that really got up my nose. The piece seems to be crying poverty — poor insurance companies having to pay out all that money:

Insurers will pay for most of the rebuild of … $20 billion, a sum far exceeding premiums paid over several decades.

Welcome to the insurance business — that’s exactly what you would expect. The earthquakes and their damage were rare events. The damage should represent decades of premiums. That’s the way insurance works.

The main argument offered against apparent delays by the companies is that there is no commercial reason to delay paying out. These are liabilities on the companies’ books, so it doesn’t help their balance sheets to retain them. The press release also says that the inflation in costs would outweigh the earnings from retaining the money. I’m not convinced. Delaying payments might not stack up from a balance sheet perspective, but businesses live and die by their cashflow. Spreading the payments over several years certainly helps that. As for cost inflation, it has been contained in Christchurch. The rebuild is happening slowly, and Fletcher and EQC are using their market power to keep costs low. In fact, slowing the insurance payouts actually reduces cost inflation by spreading out the rebuild work (technically, inflation is an endogenous variable in this system).

The piece also points out that the EQC co-insurance model was not designed for multiple events. The resulting administrative burden has complicated making payouts. The chutzpah of ICNZ on this one is astounding. One interpretation of the earthquakes is that there was one earthquake that set off thousands of aftershocks. Instead, EQC decided that several of the earthquakes would be ‘new events’. By re-setting the $100,000 limit with each ‘new event’, this interpretation saved the insurance companies money. I’m surprised they are complaining about it.

The fact that it has taken so long to settle some claims also comes up. We are told that it just wasn’t possible to settle claims within the first two years. Look, the EQC is required by the Act to pay out within one year (see this letter from Treasury (pdf), for example). They haven’t done that. Now, I can understand why — it’s a big job. The fact remains that Christchurch paid premiums based on legal requirements that were later waived. They paid for something they didn’t get.

The press release/article contains some good information. For example, it points out that 20,000 properties have more than $100,000 in damage, but New Zealand built only 10,000 houses in the past year. That gives a sense of the scale of the work.

However, if the insurance industry is trying to convince the public that they are the good guys, these arguments fall flat.

Technology policy — never satisfied

11/12/2012 § 2 Comments

It doesn’t seem like the government can win with technology policy. When it spends on technology R&D and nothing happens, people complain about the waste of money. When a company with a government grant looks like it’s going to be bought out for US$130m, people complain about the waste of money. Damned if you do, damned if you don’t.

I have two contradictory thoughts on this latest tweet-spat. The first is that evaluating tech policy with headline case studies is fruitless. The second is that these people have a point.

The first problem results from policy design meeting sample selection bias. The specific grants in question — grants to businesses to help them develop R&D — are intended to help businesses become more commercially successful. The idea is that (a) people under-invest in R&D because of public-good aspects of research, and (b) people in business have a better sense of what might be commercially viable than academics or bureaucrats, so (c) government should provide money and businesses should provide direction (and more money) and the economy will be better off.

R&D is a chancy thing. It might work, it might not. As a result, many initiatives fail, some muddle through, and the odd one does really well. When you give the grant, or better yet, when you establish the funding policy, you don’t know what’s going to work. It’s easy to look back and say, ‘given what we know now about the value of the company, maybe it didn’t need that grant after all.’ It’s harder to make that decision at the time the grant is given. In fact, the more grant recipients are successful, the more it calls into question the grants themselves. Perverse, eh?

As it happens, I’ve done quite a few case study assessments of technology programmes and companies. You can learn a lot from case studies, because they allow you to delve into how programmes develop over time. One of the key tasks is selecting the right ones to analyse. Obviously, the ‘right’ one depends on what you are trying to achieve. You always have to remember that there is a selection bias — it isn’t a random sample.

My second thought, though, is that Selwyn Pellett has a point, and we should keep debating our tech policies. One of the main reasons to provide late-stage R&D funding is to build New Zealand’s technology capacity. We are trying to create self-propelling agglomerations of technology companies, and these grants are supposed to be getting the process started. If, in fact, they are just funding single companies until they can be sold offshore, then we aren’t meeting our goals. And, given the lack of capital gains tax, we aren’t even getting our money back.

I’m not sure that taking an ownership stake is necessarily the solution, either. That could get quite complicated, and I’m not sure that the government has the skill to be a good shareholder in a bunch of small tech companies.

We do need to know whether these grant policies are ‘value for money’. Some analysis has been done: one on the Research for Industry Fund (pdf) comes to mind. Most analysis, though, is piecemeal — this specific institution, that particular research programme. Analysis that is more sustained and comprehensive would greatly inform the debate.

What’s the value of a degree, Virginia?

07/12/2012 § 4 Comments

My prima alma mater sent me a link to a Washington Post article on a new database:

a groundbreaking database Virginia published Thursday … pinpoints for the first time how much graduates from specific college programs, public and private, earn when they enter the job market.

It’s good to have this sort of information available, although a lot of it is unsurprising. I think most people are aware that psych graduates tend to earn less than IT graduates. There will be some jostling over the earnings by institution, but again, I think people are pretty aware of university rankings. As always, insert the standard disclaimer that money isn’t everything in life.

The article is titled ‘New data tells what a Virginia college degree is worth’. Actually, the data does nothing of the sort. It tells you what annual earnings are by school and degree. It doesn’t actually tell you the present value of the degree. With some calculation and assumptions, you could figure it out from the data. Also, given the costs cited in the article, the benefit-cost ratios are going to vary widely. Anyone interested in an Honours project?

The Treasury has been looking at this issue, both in terms of private returns (to the person) and public returns (to the wider economy). My former colleague James Zuccollo (now part of the NZ Brain Drain) did a lot of interesting research on this, looking at both the theory and the data. We are working on a public report, but here is a chart from a presentation on the research:


The value of tertiary education in New Zealand is comparatively low. It’s still positive, so please don’t let this stop anyone attending university. Also, this doesn’t tell the whole story (so click through on the link above).

The government has been working with data from Statistics NZ, the IRD, and elsewhere to try to get a better handle on the benefits and the heterogeneity involved. I’ve done some web browsing, but haven’t come up with any really good links for you. It would be great if we could do what Virginia has done — tell entering students what they can expect to get for the time and money they spend on their education.

Commitment through our identities

06/12/2012 § 19 Comments

One of my favourite Christchurch restaurants is Welcome Cafe. Why? Because it’s a vegetarian restaurant, so I have my pick of anything on the menu. I had dumplings last time I was there — I have no idea why more restaurants don’t make veggie dumplings.

Here are two ways of looking at my dietary practice:

  • I do not eat meat
  • I am a vegetarian.

In practice — in the market — these two statements lead to the same revealed preferences: I do not demand products made from meat. But, there is an important difference. One statement focuses on behaviour while the other says something about identity. And I wonder, are we vegetarians because we don’t eat meat, or do we avoid meat because we are vegetarians?

One problem in economics is time inconsistency of preferences (here is Akerlof’s ‘Procrastination and Obedience’). We know we should do something — give up cigarettes, take up exercise, save for retirement — but it is easy to put the change off until tomorrow. After all, one more cigarette isn’t that bad, and exercise tomorrow is just as good as exercise today. It’s not that we don’t want to do these things. Our preference is to have done them. The problem is matching our preference for today with our preference for the longer term.

If we are concerned with some aspect of meat — gout or animal cruelty — then one burger more or less doesn’t make a difference. And then one more burger doesn’t make a difference. Nor the next one. The preference for avoiding gout or animal cruelty gets caught in the marginal impact that is zero in the limit.

I wonder if selecting identities is a way that people overcome the problem of time-inconsistent preferences. This thought is in the same vein as Peter Earl and Jason Potts’s work on the market for preferences. They were explaining the use of interior designers: people aren’t sure what their preferences ‘should be’. That is, they have a preference to be a certain kind of person but aren’t sure how to reflect that in their colour scheme.

By deciding ‘I am a vegetarian’ (or ‘I am a non-smoker’ or ‘I am a saver’), you construct the immediate consumption problem differently. The impact of the burger or cigarette isn’t on your heart or lungs but on your identity. The marginal impact on your physical health may be nearly zero, but the impact on your identity is binary. You are no longer that which you have decided to be.

Selecting an identity — like selecting an interior decorator — allows you to make a portfolio of decisions all at once. You commit to the identity. Then, to preserve the identity you  have to do the behaviour in the future and in the now. Identity becomes a strategy for pre-commitment.

Which is another reason why I like Welcome Cafe. They don’t just have non-meat dishes. They are a vegetarian restaurant. They even have store copies of Vegetarian Living New Zealand, from the New Zealand Vegetarian Society. Note the magazine title — ‘Vegetarian Living’. It’s not about the everyday consumption decisions; it’s about the identity.

One-sided science reporting

03/12/2012 § 3 Comments

The Dominion Post over the weekend had a set of articles — above the fold, lots of column-inches, full-colour photos — focusing on scientists. That, in itself, is great. The problem is that these scientists were stepping far outside their expertise and the journalists did nothing to rein them in, or at least present an alternative view.

I have previously discussed these problems, but going back over the posts I think I might have been too nuanced. Let me be plain:

  • New Zealand has a better environment than most tourists’ home countries. That’s why they want to come here. Are we 100% Pure? Of course not. Does it matter? Yes, no, maybe. Should we get our knickers in a twist that we haven’t lived up to the hype? Of course not — don’t be daft.
  • All the talk of creating an innovation ecosystem and fostering a high-tech economy is a patter. A patter is what the con man does to keep you distracted from his hand reaching into your pocket. One article (‘Smart means looking beyond clean green’, which I can’t find on the DP site) pointed to the Kapiti Coast and its efforts to get high-tech manufacturing going. Hey, I’ve looked at it. The KC is tiny — there are single university campuses and factories overseas with more people. There is no way to get the scale, scope, agglomeration, etc. necessary for a leading-edge sector. The New Zealand science system does really well: it publishes a lot, it has plenty of researchers, there are some areas in which we are the world’s best. But let’s not kid ourselves. Oh, and just in case you don’t believe me, check out the Growth and Innovation Framework (pdf) from 2002, which was going to solve all these problems by 2011.
  • People live here, and therefore work here, because of the quality of life. I was talking last week with a guy my age who is doing really well in the scientific world in Europe. His work and commute mean that he is away from home 14 hours a day. This is pretty standard in most big cities, where all that great innovation takes place. I’m not interested, and neither are most of the people here. If we wanted that life, we would be living it — elsewhere.
  • Don’t bring up alcohol research to prove how scientific you are, unless you are really willing to engage with it. I’ve just played around the edges and I can see how complicated it is. Yeah, okay, jacking up prices and clamping down on access will reduce harmful drinking amongst adolescents. But, at what cost? That is always the question — at what cost? If you don’t ask and answer that question, you are spouting propaganda.
  • Spare me the martyr talk. I’ve been hassled over my research, too. Heck, some of it is so controversial I can’t get it properly funded. It doesn’t make you more right.

The core problem is uncritical science reporting. These scientists have to deal with robust debate at work. More of that in the newspapers wouldn’t go amiss.

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