Abstract: For experience goods, benefits from consumption are ex-ante unknown but revealed after repeated interactions. This uncertainty might lead to under-consumption. We use data from a large cataract surgery provider in Mexico City to estimate demand, given uncertainty in surgical outcomes. We consider forward-looking consumers with a surgery demand per eye and information revealed after the first surgery. We exploit data from sales agents to identify structural demand parameters; namely, price elasticities and the value of the uncertain shock. We simulate counterfactual policies, showing that budget-neutral price changes are more effective at increasing welfare than persuasive advertising.
Abstract: We analyze the economic incentives generated by the proof-of-stake mechanism discussed in the Ethereum Casper upgrade proposal. Compared with proof-of-work, proof-of-stake has a different cost structure for attackers. In Budish (2018), three equations characterize the limits of Bitcoin, which has a proof-of-work mechanism. We investigate their counterparts and evaluate the risk of double-spending attack and sabotage attack. We argue that PoS is safer than PoW agaisnt double-spending attack because of the tractability of attackers, which implies a large «stock» cost for the attacker. Compared to a PoW system whose mining equipments are repurposable, PoS is also safer against a sabotage attack.
Abstract: This paper develops a method to estimate the demand of network goods, using minimal network data, but leveraging within-consumer variation. I estimate demand for video games as a function of individuals’ social networks, prices, and qualities, using data from Steam, the largest video game digital distributor in the world. I separately identify price elasticities on individuals with and without friends with the same game, conditional on individual fixed effects and games’ characteristics. I then use the discrepancies between estimated price elasticities to identify the impact of social networks. I compare my method to “traditional-IV” strategies in the literature, which require detailed network data, and find similar results. A 1% increase in friends’ demands, increases demand by .3%. These results suggest firms have incentives to employ “influencers,” and to merge their gaming networks. I evaluate counterfactual game mergers, and find network effects must be considered to sign consumer welfare changes.
Abstract: This paper studies the trade-off between entry and congestion in Amazon’s Twitch.tv, which prioritizes popular content using a fast lane. I specify and estimate supply and demand models for live video, and a congestion model. Using technological shocks, I identify congestion costs for content providers and their consumers. Using shocks in prioritization, I identify its benefits. With estimated preferences and technological parameters, I construct counterfactuals. Without congestion, demand potentially doubles. A supply-side Pigouvian tax is preferred to a demand-side one. Without prioritization, consumer welfare drops up to 10%. I consider a rent-extractive platform, and discuss parallels with net-neutrality policy.
Abstract: Even with identical consumers and identical firms, if firms set prices in a first stage, and if consumers search sequentially in a second stage, price dispersion arises in the form of a mixed-strategy Nash equilibrium. One only needs to assume consumers know the realized price distribution and that they do not know which firm has what price. In contrast to Burdett and Judd (1983), price quotes are not required to be “noisy.” Moreover, actual search is predicted to be nontrivial.
Abstract: This paper presents a model of the evolution of the hedonic utility function in which perception is imperfect. Netzer (2009) considers a model with perfect perception and finds that the optimal utility function allocates marginal utility where decisions are made frequently. This paper shows that it is also beneficial to allocate marginal utility away from more perceptible events. The introduction of perceptual errors can lead to qualitatively different utility functions, such as discontinuous functions with flat regions rather than continuous and strictly increasing functions.
Abstract: With any positive fraction of altruistic consumers in the population who give away any positive fraction of their gains from trade, there exists a high enough level of uncertainty about demand such that the monopolist prefers pay-what-you-want over the traditional monopoly or any other pricing mechanism. Low marginal costs facilitate the adoption of pay-what-you-want. Consumer welfare always increases with pay-what-you-want.
[Gary Kurtz, Leigh Brackett, Lawrence Kasdan, Irvin Kershner, George Lucas, Mark Hamill, Harrison Ford, et al., Star Wars, Episode V, The Empire Strikes Back (Los Angeles: Twentieth Century Fox, 2004)]
Dr. Emmett Brown: [reads the «Save the Clock Tower» flyer and reacts with hope] «This is it! This is the answer. It says here that a bolt of lightning is going to strike the clock tower at precisely 10:04 p.m. next Saturday night! If… If we could somehow harness this lightning… channel it into the flux capacitor… it just might work. Next Saturday night, we’re sending you back to the future!»
[Robert Zemeckis and Bob Gale, Back to the future (Universal Studios,1985)]
In Avengers: Infinity War, Thanos is convinced that the universe is overpopulated, which causes anguish to its denizens. Instead of adjusting prices, Thanos proposes to adjust demanded quantities by erasing half of the population in the universe:
Gamora: I was a child when you took me.
Thanos: I saved you.
Gamora: No. We were happy on my home planet.
Thanos: You were going to bed hungry, scrounging for scraps. Your planet was on the brink of collapse. I’m the one who stopped that. You know what’s happened since then? The children born have known nothing but full bellies and clear skies. It’s a paradise.
Gamora: Because you murdered half the planet.
Thanos: A small price to pay for salvation.
Gamora: You’re insane.
Thanos: Little one, it’s a simple calculus. This universe is finite, its resources, finite. If life is left unchecked, life will cease to exist. It needs correcting.
Gamora: You don’t know that!
Thanos: I’m the only one who knows that. At least, I’m the only one with the will to act on it.
If only Thanos knew basic economics.
[Anthony Russo, Joe Russo, et al, Avengers: Infinity War (Marvel Studios, 2018)]
And here is an embarrassing letter to the editor of The Economist in response to «Friction lovers».
You can find it here or in the print edition of Apr 12th 2017.
Our foolish tax on efficiency
After looking for papers on «facile externalities» in the Scandinavian Journal of Economics, I got suspicious of the inclusion of a middle initial in the author’s name, Danilov P. Rossi, in «Friction lovers» (April 1st). You seldom do that. I solved the anagram. But am I still a poisson d’avril?
And here is a playlist that I hear when I’m running regressions. Be advised that it may reflect a rather cynical view of the less glamorous side of empirical work.
The profile picture is courtesy of Chuck Needy, a friend at the FCC.
Finally, the punchline: I’m a lifelong fan of Cruz Azul FC, which makes me quite resistant to frustration; a must-have in academia.