Economics | Periscope Depth

From the Blog

Dec

stronger than yesterday

Posted by Perich at 7:00 am

Greetings, Carnival of the Indies visitors! I think Joel meant to send you to my post on cover design instead of this one. Check out that post for a detailed walkthrough of my experience in commissioning a cover design. You can also check out my book on Amazon if you want to see the finished product. And don’t forget the rest of this month’s Carnival as well!

Continued outrage at Amazon for its recent tactics (the price-check app, Kindle Direct Publishing Select) has brought out accusations of “monopoly tactics” and “predatory pricing” from Internet commenters. And while I normally don’t say this about the comment threads of any website, I think the accusations have some merit. The ongoing war over digital pricing has definitely uncovered evidence of predatory pricing in the ebook marketplace.

Just not by Amazon.

Look up your favorite big name author’s latest ebook on Amazon – say, Michael Connelly’s The Fifth Witness – and you’ll see a disclaimer under the price tag: This price was set by the publisher. This is Amazon’s way of notifying you that this book is subject to agency pricing, a new model wherein the retailer isn’t actually the retailer. See, the retailer is just an “agent,” facilitating the sale of a digital product, for which the agent gets to keep 30% of the proceeds. The big six publishing houses adopted agency pricing for ebooks early this year after a stand-off with Amazon.

When I first heard of this model, it sounded oddly familiar. Not because Apple had put it into practice already (for ebooks on iTunes). It sounded like minimum advertised pricing (MAP), a stunt that had cost music publishers hundreds of millions of dollars.

In May 2000, the attorneys general of 43 states filed a class action lawsuit against the world’s five largest record distributors (Bertelsmann, EMI, Warner-Elektra-Atlantic Corp., Sony Music Entertainment and Universal Music Group) and three of the largest music retail outlets (TransWorld, Tower Records and Musicland). The suit asserted that distributors and retailers in the industry conspired to fix a minimum price on compact discs, in an anticompetitive measure that threatened the existence of smaller retailers. The industry elected to settle out of court in October 2002 to the tune of $143 million, which, after attorney fees and compliance costs, netted out to a check for $13.86 for anyone who wanted one.

Telling retailers that you’d like them to advertise your products at a minimum price is not illegal in itself. However, the 43 states (and the FTC, in a parallel lawsuit) alleged that MAP was a tactic used to fix a de facto price floor.

There’s no hard and fast rule for when a bunch of firms constitute a cartel, but antitrust law uses several guidelines in a case like this:

Do the firms in question constitute a significant portion of the market?
Are the actions of other firms easy to monitor?
Is there extensive vertical integration?
Do the timing of actions by these firms indicate cooperative rather than competitive behavior?
Are there methods of enforcement available between firms, or between producers and retailers?

The AGs never had to prove their case in open court. However, based on the evidence that they had available (the FTC’s findings in the parallel lawsuit, remarks at National Association of Recording Manufacturer conventions, harsh penalties to retailers who deviated from MAP), it seems clear that they could have^*.

When I heard about “agency pricing,” it seemed like a clear heir to the music industry’s attempts at MAP in the 90s. Would a similar lawsuit against the big six publishing houses – either a class action or an FTC case – yield similar results?

Let’s run down the criteria:

Do the firms in question constitute a significant portion of the market?: Robert Pitofsky, then-chairman of the FTC, found that the named music industry defendants in 2000 (BMG, EMI, Warner-Alektra-Atlantic, Sony and Universal) constituted 85% of the market. While I can’t find exact numbers, I would be shocked if the largest publishers in 2011 constituted any less. The Big 6 (my thanks to Scott Marlowe for the extensive list) are Hachette, HarperCollins, Macmillan, Penguin, Random House (itself owned by Bertelsmann, also of BMG), and Simon & Schuster. Unless you’re big into self-published titles, almost every book on your shelf is printed by one of those houses or an imprint of one of them.

Are the actions of other firms easy to monitor? In the case of the publishing industry, I’d say yes – especially with regards to Amazon pricing. If one of the Big 6 relaxed their “agency pricing” arrangement with Amazon, word would spread remarkably fast.

Is there extensive vertical integration? I was tempted to say, “No” to this one at first. Traditionally, publishers would sell books to retailers (local bookstores, Borders, Wal-Mart, etc), who would then sell them to consumers. The publishers may have had cozy relations with book buyers, but they didn’t literally own the storefronts. However, by adopting an agency pricing model, the Big 6 may have brought more trouble on their own heads. Technically, Amazon is not retailing an ebook anymore: they’re an “agent” acting on behalf of the publisher. This isn’t quite vertical integration, but it’s much closer than the traditional model.

Do the timing of actions by these firms indicate cooperative rather than competitive behavior? Let’s see. In January 2010, Amazon caves to pressure from Macmillan and lets Macmillan use agency pricing to sell its ebooks. Shortly thereafter, the other five major publishing houses tiptoe onto the agency pricing model as well. Funny how none of them wanted to take a chance on the increase in volume (and possibly revenue) that would come of letting Amazon set its own price for ebooks.

Are there methods of enforcement available? This is the tricky one. While the Big 6 publishing houses function as a monopoly (sole seller) on books as an intellectual property, Amazon functions as a near monopsony (sole buyer) of the wholesale product. So the Big 6′s threat, implied or explicit, to pull product from Amazon is just as serious as Amazon’s threat to remove the ‘Buy’ buttons from all Big 6 books.

What we’re faced with is the latest round in a cold war between the world’s largest online retailer and the world’s biggest publishing houses. Amazon’s size and market power make it hard to pose as a victim of corporate manipulation. Amazon’s recent tactics certainly paint it as an aggressor, not a knight of virtue pure. But I suspect the reason we haven’t seen a class action lawsuit against Amazon yet is because the lawyers for the Big 6 know that they could be tarred with a lot of the same brushes.

There’s fresh and extensive precedent for what happens when attorneys general, or the FTC, allege price fixing against a publisher cartel. Legacy publishers are already hemorrhaging money. They don’t need a multi-million dollar settlement on top of that.

(P.S. The E.U. Competition Committee agrees with me)

(P.P.S. I should clarify: I’m not hoping that the FTC sues the Big 6. I’m just laying out the precedent as I, a non-lawyer with a B.A. in economics, understand it. Asking which side the FTC would consider a monopoly/cartel, Amazon or the Big 6, is like asking who would win a nuclear war in 1970, the U.S. or Russia. Nobody wins in that scenario, which is why we don’t see anyone shooting first.)

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* I wrote a paper on the case in 2003, though I was coming at it as an economist, not a lawyer. We can chat in the comments if you want to discuss the 2000 case further.

Dec

don’t look at my hands in my pockets, baby

Posted by Perich at 7:00 am

Amazon attracted the Internet’s ire last week for its 5% discount for users who scan an item in a physical store, then buy it online. But amidst all this hubbub, Amazon also rolled out another program that’s stirred up similar furor, albeit in a smaller circle: Kindle Direct Publishing Select.

KDP Select allows independently published authors (read: me) to take part in the Kindle lending library. Every author who participates gets a share of a $500,000 fund, proportional to the number of times their book is “checked out” of Amazon’s Kindle library. They also get the opportunity to promote their book by offering it for free for up to 5 days, an option which was traditionally only available to legacy publishers.

The catch: the author has to remove their ebook from all other platforms – Barnes & Noble, Kobo, Smashwords, iBookstore – for 90 days. Failure to do so will result in getting booted from the program, and possibly getting barred from KDP overall.

Some authors (such as the ones in the article linked above) are thrilled at the notion. Other ebook distributors are furious, with Smashwords firing off the first response:

The new Amazon KDP Select program strikes me as a startling example of a predatory business practice. Amazon has the opportunity to leverage their dominance as the world’s largest ebook retailer (and world’s largest payer to indie authors) to attain monopolistic advantage by effectively denying its competing retailers (Apple, B&N, Kobo, Sony, etc) access to the books from indie authors.

I don’t know how compelling I find this argument, considering the monopolistic behavior that legacy publishers engage in to keep ebook prices on Amazon artificially high. I guess everyone’s a giant from a certain scale. But whether you like it or hate it, it’s a tactic in the same vein as their price-scanning app: going out of their way to deny competitor purchases by offering lucrative deals to consumers (price check) or producers (revenue sharing).

I received an invitation to add Too Close to Miss to KDP Select late last week. After giving it some thought, I decided against participating. Here are my reasons:

My reward: an unspecified share of a $500,000 prize. Amazon’s apparently bagged the biggest indie authors already, like J.A. Konrath and Patricia Ryan. They’ll likely take up the biggest slices of pie. So I’ll be sacrificing my availability on B&N and iBooks for … five dollars? Maybe less? Unlike every other aspect of the ebook market, this is a platform where another author’s success would hurt me.
I would also get to promote my book for free. This would be a bigger deal if I weren’t (currently) pricing it at $0.99. Maybe when I get to be a bigger fish that option will be worth it, but not today.
In terms of raw sales, Amazon is already beating out B&N and iBooks, combined, by 9X. However, it’s not about raw sales for me (currently). I have several friends who’ve already read Too Close to Miss on the Nook. I can’t afford to shut these friends out. I’m enough of an unknown quantity where I still need passionate advocates for my work more than I need some marginal revenue.
Finally, I’m new enough to self-publishing and e-publishing that this strikes me as a hassle at best, dangerous at worst. To take my book down from iBooks, Kobo and several other markets, I have to unpublish it from the Smashwords platform. What if Apple leaves it up a day or two longer, or if I miss some market that I didn’t even know I was live in? If Amazon spots my book anywhere else, I could get barred from KDP. Not worth the risk.

None of this is to say that I think KDP Select is a bad idea. The numbers just don’t make sense for me at present. And that’s the reason I elected to self-publish in the first place: because the numbers made sense there, not in legacy publishing. If you stick to your vision, understand the landscape and crunch the numbers, you can be sure you’re making the smart choice.

Sep

what I stand for, I mostly stand behind

Posted by Perich at 7:00 am

So I saw this snippet of text about a squillion times last week, either in writing or in a video or in the image below:

click for larger version

Excerpting the important parts, in case you can’t see the image:

You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory—and hire someone to protect against this—because of the work the rest of us did.

Now look, you built a factory and it turned into something terrific, or a great idea. God bless—keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.

I don’t want to unpack everything that goes into that sentiment. I’m not going to take sides on its accuracy or its implications. Right now, I just need to raise my hand from the back of the classroom and ask: this transactional theory of government? This notion that people get something out of the State and therefore they have to pay something back? You know that’s not how it actually works, right?

Yes, I know what social contract theory is, and I sat through civics class like the rest of you. I mean how the actual process works. The actual payment of taxes and the production of infrastructure.

Look: if I want to talk about how the Gap does business, I can do it a couple different ways. I can talk about the microeconomics of supply and demand. I can talk about the effect of advertising and marketing on stimulating demand for a product. I could talk about the macroeconomics of managing inventory at walk-in locations, or about the cost of domestic labor vs. sweatshop labor, or about the Fisher family’s strategy of maximizing market coverage by selling clothing under multiple retail brands (Gap, Old Navy, Banana Republic, etc).

But if I say the Gap is undermining the quality of American clothing, I’m no longer talking about the economic process of how shirts get onto shelves. I’m advancing a theory. Different people can interpret the same set of facts (the Gap company’s cost of labor, target audiences, profit margins) and come up with different conclusions. Maybe the Gap is undermining the quality of American clothing. Or maybe they’re liberating the casual “boater” style of the country club set of the 50s and 60s by disseminating it to the masses! Either works! If this were hard science, we could test whose theory were truer by making predictions and seeing which came to pass. Since retail is a soft science, and poly/cotton blends a softer science yet, all we can really do is yell at each other in academic quarterlies and obscure blogs.

(TL;DR: positive vs. normative analysis; for more, see my friend Jodi B.)

Elizabeth Warren, in the above quote, is making a normative statement. She’s saying, “People who benefit from infrastructure ought to pay to support it in a level commensurate to their benefits.” This is a great theory! I don’t object to it, stated that far and no farther^*. But I worry that several of the people who’ve quoted her so enthusiastically do so not because she’s stating a great theory but because they think she’s stating some obvious fact.

Because she’s not. And I think we all know she’s not. You do not pay a tax bill itemized for services rendered. Citizens pay taxes, yes, and the revenues from those taxes (as well as capital on bonds) pay for infrastructure. But to suggest that one causes the other simply because one came before the other is bad science. Anyone who follows the statutory process with cursory interest knows that big projects are often – one might cynically say usually – agreed to before the revenue is obtained to pay for them. Anyone who follows the electoral cycle knows that rarely – one might cynically say never – are the regulators, government employees and contractors who lay out infrastructure the ones to get fired if it fails, barring some tragedy (the Ted Williams Tunnel collapsing on a commuter, etc). And a true crank might say that it’s not infrastructure that demands taxes, but in fact the other way around – that taxes demand infrastructure, that the machinery of taxation looks for ways to justify its existence, that the urge is to collect revenue first and then plan massive projects to validate the need for their revenues, thus proving to the constituency how great a representative you are (“Three new schools and two hundred new cops under my first term, and with YOUR help …”) by laying out ever more glorious projects that need ever more exorbitant levies to support them, to which no one dare object since the results can be documented in black and white numbers (“whaddaya, against schools or something?”), in an ever-increasing cycle of taxes and projects until we’re voting for Two Vast and Trunkless Legs of Stone for state Senate.

Of course, now I’m theorizing myself. You see how tempting it is! So let me limit it to what can be said for certain: taxes come in, capital flows out, but any accounting link between the two is spurious.

“The law isn’t justice,” wrote Raymond Chandler in The Long Goodbye. “It’s a very imperfect mechanism. If you press exactly the right buttons and are also lucky, justice may show up in the answer. A mechanism is all the law was ever intended to be.” The relationship between tax revenue and infrastructure should be taken with similar skepticism. I know we all want a government process that’s equitable and fair and transparent, but we should never let that distract us from the convoluted, brittle and wheezing mechanism that governs us already.

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* Though even if we stay within the garden of classical microeconomics 101, there are problems with this theory, first among them: in no other transaction is a person asked to pay exactly according to their benefit. Traditional price theory holds that, in a free exchange, I’m going to pay less than the benefit I expect to receive. I pay the orange farmer a quarter because I want the orange more than I want the quarter: I’ve got lots of money that I can’t eat. He sells me the orange because he wants the quarter more than he wants the orange: he’s got lots of oranges but he needs mortgage money. Both of us profit because we’ve made an exchange that benefits us both.

If the farmer were to track me down later, discover that I’d derived a dollar’s worth of satisfaction from his juicy orange and then demand another seventy-five cents, I’d slap him on the ear. And yet the social contract theory Professor Warren espouses suggests that, if I benefit more from a piece of infrastructure than I paid for it, I haven’t paid nearly enough.

Of course, marginal utility theory has Warren’s back on this, because if I get a dollar’s worth of satisfaction out of an orange and I only paid a quarter, that’s a lot of consumer surplus going uncaptured. In an evenly rotating economy, supply and demand should even out such that prices will reach an equilibrium where the benefit of an exchange is minimal. So maybe I’m not paying enough.

Of course of course, textbook economics is bullshit anyway. But it’s a useful bullshit. We are at least speaking a common jargon to each other.

Sep

as one life finishes, another one starts

Posted by Perich at 7:00 am

[Updated below.]

Netflix pissed everyone off a few weeks back when it announced that the price of “everything you want, all the time, as fast as we can mail it to you or force the pipes to carry it” was increasing by more than 50%. It’s a bold new future and I don’t know what the right price for “unlimited” should be. If the market is any indication, I should get unlimited web access and voice calls full of static for $65/month, but I should get unlimited streaming video of popular movies on a full-size monitor for a fifth of that, if not less.

While companies jack up prices all the time, I see no reason to doubt Reed Hastings’s tearful email from Monday morning that the cause of the price increase was the differing cost structures of DVDs and streaming. The short version: you can’t profit from access to streaming movies the way you can profit from renting physical DVDs.

Bill Gurley has more (pure speculation, but it makes sense given what we know about the market):

So here is what I think happened with Netflix’s recent price change (for the record, I have no inside data here, this is just an educated guess). Netflix has for the past several years been negotiating with Hollywood for the digital rights to stream movies and TV series as a single price subscription to users. Their first few deals were simply $X million dollars for one year of rights to stream this particular library of films. As the years passed, the deals became more elaborate, and the studios began to ask for a % of the revenues. This likely started with a “percentage-rake” type discussion, but then evolved into a simple $/user discussion (just like the cable business). Hollywood wanted a price/month/user.

This is the point where Netflix tried to argue that you should only count users that actually connect digitally and actually watch a film. While they originally offered digital streaming bundled with DVD rental, many of the rural customers likely never actually “connect” to the digital product. This argument may have worked for a while, but eventually Hollywood said, “No way. Here is how it is going to work. You will pay us a $/user/month for anyone that has the ‘right’ to connect to our content – regardless of whether they view it or not.” This was the term that changed Netflix pricing.

We don’t know whether or not that’s the actual case, as Bill says. But it sounds plausible, since (1) it means that licensing requirements by the movie industry drove a pricing decision and (2) it’s going to cripple the streaming media business. And totalitarian, crippling decisions are the only page in the MPAA/RIAA playbook, 1999 to 2011 Edition.

I’m a big home movie watcher and I still can’t get Netflix streaming to work. I tried earlier this month with Restrepo – hell of a documentary; I recommend reading it with Junger’s companion memoir War – and got a fatal browser crash when I tried to go fullscreen. And it’s not a case of network speed, either. My pipes were fat enough to acquire Restrepo through “means” in 17 minutes and watch it after cooking dinner. And I’m the target audience: young, willing to watch movies on my computer or XBox-linked TV, forming those brand loyalties that will carry me into my golden years.

This seems to be the trend with big media in this decade. The publishing industry’s insistence on setting minimum prices for Kindle books has driven me back to the public library. Why pay $15.99 for a Lee Child novel I might not like when I can borrow it for free and then dispose of it when I’m done? Bantam Press gets no money when I read a library copy, compared to the $3 to $5 they got when I bought a $9.99 copy under Amazon’s old pricing structure. But, again, that seems to be the Old Media Playbook: do something dumb, blunt and fast without considering its long-term revenue implications.

Netflix continues to fascinate me as a case study in creative destruction. I just didn’t think I’d see them be destroyed as quickly. One door closes, etc.

Update: Huh. Well, this might change my behavior, at least on the Kindle front.

Sep

we’re just a million little gods causing rainstorms turning every good thing to rust

Posted by Perich at 7:00 am

I had an exchange with Tom yesterday that reminded me how close I came to flunking macroeconomics.

You might not believe it, given my understated brilliance, but I really struggled with advanced macro. I was never great at studying: I lacked the diligence it required and attending college at the dawn of the era of streaming digital video didn’t help. But I had no problem with microeconomics because it made sense. Marginal utility, demand elasticity, interest rates: once the right people explained it to me, I understood it. I reasoned my way through problem sets, rather than spitting out stock answers, and did fine. (I still would have done better if I studied)

But macroeconomics resists that kind of intuition. Take the following quiz question, for instance:

All other things being equal, raising interest leads to _____ in aggregate demand.

(A) A rise
(B) A fall
(C) No change

So I think:

Well, raising interest rates encourages more people to save, which increases the funds available for borrowing, which means banks have more money to lend out. It would also draw more banks into the credit card market, since payoff terms become more favorable for the lender, thus increasing the sources of available credit. Of course, there would also be a decrease in borrowing, as fewer people would want to take out loans. It’s tough to tell which effect would outweigh the other, so I’ll presume they cancel.

At which time I put (C) and am told I’m incorrect. The correct answer is (B).

As it turns out, my answer is also correct depending on when you stop counting. Raising interest rates does (or should) encourage people to save and invest. Raising interest rates also does (or should) increase the profits of credit card companies, and the more profitable a field the more competitors enter it. But all of these effects manifest in the long run. In the short run, an increase in interest rates lowers aggregate demand.

The problem is that it’s always the long run. Today’s “long run” is next year’s “short run.” And today is the “long run” of four years ago. “The market will correct the price of these subprime mortgages eventually.” “We need companies to start spending now; we can deal with the consequences of bailing them out later.” Now is later! Today is the future of the past! We’re on all corners of the four-dimensional timecube simultaneously!¹

Not to bury the lede, but this return to my prodigal youth came up after I linked to this lovely chart on income stagnation² from The Economist. In 2010 dollars, income for the bottom 10% of America has been largely steady since 1967 and hasn’t improved much for the median 50% either.

I made the observation that average prices have gone up about 6X in that time (which is true; check for yourself). Tom asked me if this observation still mattered, given that inflation was already baked in to the rise in median income. I had to plot the reasoning out in my head several times to answer him because, again, macroeconomics does not come naturally to me. Ultimately, Tom was right to correct me, since people aren’t 6X worse off today than they were forty-five years ago. But I was still on to something.

If you’re in the 50th percentile of American households today, your income is about $50,000 in 2010 dollars. A household in similar straits in 1967 would have an income of about $40,000 in 2010 dollars. However, a new car in 1967 would cost about $17,755 in 2010 dollars (source); a new car today costs $29,217 in 2010 dollars (source). So the price of a new car has gone from about 44% of a middle class family’s income to … about 58% of a middle class family’s income.

This isn’t as damning a statistic as it sounds. “Middle class” is not an absolute term; it only means something in relation to the folks above and below it. If things besides income are getting better for everyone (like the quality of goods, hypothetically), then the relative allocation of prices doesn’t matter as much. And the people who were middle class in 1967 most likely weren’t middle class in 2010, if they’ve survived. But what’s noteworthy is that households in the top 10% haven’t suffered the same fate. While their membership isn’t absolute either, it tends to be stickier.³

We think of inflation as a force that weakens the purchasing power of a dollar. This is true. But inflation can also lift the wages we receive, since employers pay more for labor while we pay more for groceries. So you’d think it all evens out – until you see a chart like this. Then we recall that inflation enters the economy through an increase in the money supply. And even though an increase in the money supply trickles down to everybody, it hits those with easy access to credit first. The defense contractors, the institutional investors, and the ones with an inside scoop on appropriations. They get the “first batch” of new money – still warm to the touch, juggling steaming Andrew Jacksons from hand to hand – before people start raising their prices.

Don’t take it from me, though. I nearly flunked macroeconomics.

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1. Do I even need to link to Timecube anymore? They still hand that to you on your first day of Internet, don’t they?

2. Apologies for that “opinion cloud” sidebar, which is completely fucking up my browser.

3. “Families are always rising or falling in America, am I right?”
“Who said that?”
“Hawthorne.”
“What’s the matter, smartass, you don’t know any fuckin’ Shakespeare?”

Aug

the price you pay

Posted by Perich at 7:00 am

Every year, the Commonwealth of Massachusetts conducts an experiment in the form of a sales tax holiday. This experiment determines the premium that I am willing to pay to shop in a Best Buy, Target or Filene’s Basement without dealing with hordes of suburbanites and their children. That premium is 6.25%.

Also:

Many shoppers said the holiday was motivation to wait and buy until this weekend.

“Just paying less money for an item that we would have gotten anyway but knowing that we could do it and support the economy and yeah, so we’re here,” said shopper Audrey Loria, of Winchester.

How long do you think before we see sincere “SUPPORT THE ECONOMY” bumper stickers? I say 2015.

Mar

love you, mama, but you’re too proud to change

Posted by Perich at 7:40 am

While I’m thinking about Netflix, a quick question: why does Netflix care so much about improving their recommendation system?

Netflix made headlines years ago when it announced its Netflix Prize, a $1,000,000 bounty to whoever could build an algorithm that would improve the accuracy of its recommendations by 10%. When this award was claimed in 2009 by BellKor’s Pragmatic Chaos, Netflix gave them the million. They then announced a new prize for whoever could improve the system further (which was later canceled.

What’s in it for them?

My understanding of the Netflix business model is low fixed costs (giant DVD warehouse) plus low variable costs (envelope stuffers, postage, replacing scratched DVDs) vs. hefty subscription fees = profit. Even if Netflix buys its DVDs at retail prices – which they don’t – they only need to rent out each DVD three times to make back its cost. The margins are in the low transaction costs and the quick turnaround time.

I don’t see how a more accurate recommendation system adds value to that.

Someone help me out here? What am I missing? Netflix knows more about the video rental market than me, obviously (or even Blockbuster), so I’m willing to bet they know something I don’t. But what is it?

Feb

we gon’ find you, we gon’ find you

Posted by Perich at 9:29 am

I’m frankly and legitimately torn on the dustup in Wisconsin.

On the one hand, as an economist I dislike cartels. Cartels band together to raise the price of their product, using intimidation to keep members from breaking away. We wouldn’t cheer if a group of airlines teamed up to inflate the price of a plane ticket. We wouldn’t be fans of oil companies who blackballed producers who tried to sell a cheap barrel of crude. So we shouldn’t be fans of employees who try to inflate the price of labor.

On the other hand, I am labor. Anything that makes it easier (or harder) for employees to collectively bargain for health care, retirement benefits or increases in wages makes it easier (or harder) for me. Even if I’m not in a union. Sure, unions are anti-competitive, but nothing says I have to be a cheerleader for economic efficiency – especially if it’s at my expense.

It’s not as if the owners are going to start playing fair if workers stop forming unions. Especially in the case of state employees. Since the state of Wisconsin has a monopsony on the labor of state employees, it makes sense that state employees would form a monopoly – a cartel – to counter-balance it.

Obviously, I’m glossing over a lot of important distinctions. For one thing, corporate cartels and labor unions aren’t equivalent. Corporations have limited liability for their losses, for one thing; auto workers who lose their job (absent the existence of unions) don’t. But I’m also handwaving away the tradition of intimidation – either through peer pressure or threat of violence – that unions use to keep members in line. So if I’m being unfair, I’m being unfair to both sides.

So I’m pretty ambivalent about the showdown in Wisconsin. Except on one front: I love end runs around the democratic process. I love the idea of a state budget being gridlocked because half of the state Senate just up and R-U-N-N-O-F-T. Can they stay gone? Can we do this more often?

Sep

macheteconomics

Posted by Perich at 7:39 am

New post on Overthinking It, examining Machete through the lens of public choice theory and anarchist philosophy:

a State is that agency which (1) has a monopoly on force in a given area and (2) upholds the claim that this monopoly is legitimate.

In Texas as depicted in Machete, no agency has a monopoly on the use of force. The Network and Jackson’s vigilantes can trade gunfire with equal capacity. Both sides are criminals, but neither seems particularly afraid of the cops. Texas has no government – no State as Weber would recognize it. Therefore, it’s an anarchy.

But what sort of anarchy is it?

Ch-ch-ch-ch-check it.

Aug

a little goodwill goes a mighty long way

Posted by Perich at 10:04 am

Yesterday, Jerry Holkins (a/k/a Tycho of the popular video game webcomic Penny Arcade) said some stuff about used games:

In a literal way, when you purchase a game used, you are not a customer of [game developer THQ]. If I am purchasing games in order to reward their creators, and to ensure that more of these ingenious contraptions are produced, I honestly can’t figure out how buying a used game was any better than piracy. From the the perspective of a developer, they are almost certainly synonymous.

[...]

It’s exceedingly rare that I purchase a game from Gamestop these days. I got tired of being harangued for trying to buy products there, or being told that they didn’t have a product when they did, or going across the street to Best Buy or Target or Fred Meyer and finding fifty copies of the game I was trying to buy heaped up like some heathen altar to commerce. There’s more, besides. At some point in the last few years, I became incredibly uncomfortable with the used games market.

[...]

I traded in games for a long time, there’s probably comics somewhere in the archive about it – you can imagine how quickly my cohort and I consume these things. It was sort of like Free Money, and we should have understood from the outset that no such thing exists. You meet one person who creates games for a living, just one, and it becomes very difficult to maintain this virtuous fiction.

Ouch! Harsh words. And I wasn’t the only one who felt that way. Jerry’s partner on the webcomic, Mike Krahulik (a/k/a Gabe) wrote the following about eight hours later:

My Twitter and my email are both exploding today. People on both sides of the used game debate are crazy passionate about this. If Penny Arcade was a talk radio show this would be a perfect time to “go to the phones”. Since we can’t do that I’d like to do the next best thing.

If you are a developer or a gamer or both I’d like to hear your thoughts. Shoot me a mail and let me know how you feel about this but try and do it in a paragraph or so if you can.

So I took him up on it, sending Gabe an abridged version of the following:

Selling used games doesn’t cheapen the developers’ product. If I buy a copy of Dragon Age: Origins for $60 when it’s first released, play it for a few months, then give up in frustration (as I have done), I have a couple options. I can let it sit on my shelf and gather dust, benefiting no one. Or I can trade it in at GameStop for store credit, where someone else can buy it for $40. I haven’t magically created a second copy where the developer only intended there to be one. I’ve put it out of my hands and into someone else’s. In fact, by putting it into the hands of someone who’ll play it, I’ve done the developer a favor.

Of course, Bioware – the developers of DA:O – don’t get that $40 from the resale. GameStop does. That can rankle some developers. But there’s no alternate scenario in which the developer gets that $40. The alternate scenarios are:

The game sits on my shelf (to no one’s benefit);
I give the game to a friend (I get some goodwill; the friend gets the game);
I sell the game myself, on eBay or Amazon, to a friend or stranger (I get some cash; someone else gets the game);
I turn the shiny plastic disc into decorative jewelry or a mural (to no one’s benefit).

People get tired of the games they buy. They want to make room on their shelves for new games. Trading in a game disc for cash or credit doesn’t water down the developer’s intellectual property, since I stop having it the moment someone else does. And it doesn’t take bread out of the developer’s mouth.

I know that Holkins isn’t proposing a buying cycle where buying a video game is a sacred trust – where the purchase of EA or THQ’s latest offering means you become custodian of a product that you must guard for all time, bequeathing as a rich legacy unto one’s issue. But there’s no other logical conclusion to his complaint. If the idea of people reselling games bothers him so much, what would he prefer? Some ridiculous new law? Some bizarre standard of behavior which applies to video games but not to bicycles, cars, leather jackets, books, houses, DVDs, cameras, lamps, unlocked phones, bed frames, coffee tables, curtain rods, vases or collectible plates?

One thing that might keep the discussion from getting too rancorous is separating the idea of buying used games in general (which is harmless) to the practices of Gamestop (which are sketchy and questionable). Shopping there becomes less fun every time I go in, as the staff aggressively hypes their magazine, their frequent buyer programs, game protection, pre-orders and every other possible way to extract money from me without adding much value.

But I don’t think selling a game, or buying a used game, takes money out of a developer’s pocket. I don’t know as many developers as Jerry and Mike do, but I know a couple. And I don’t think they mind.