Managerial Econ

Why Buyers Hate Auctions

noreply@blogger.com (Michael Ward) — Sat, 03 Oct 2026 22:41:28 +0000

When Salad and Go filed for bankruptcy in August, it already had a buyer. Dutch Bros had agreed to pay $105 million for as many as 65 of the failed chain’s drive-through locations. But rival 7 Brew was also interested in the properties and objected to the private deal. Should the bankruptcy court switch to negotiations with 7 Brew? Instead it approved an auction between Dutch Bros and 7 Brew. On August 31, 2026, Dutch Bros announced that it would not raise its offer, and 7 Brew emerged as the winner. After adjustments to the number of leases included in the transaction, the court approved a sale of 63 locations to 7 Brew for about $123.5 million—roughly $18.5 million more than the original Dutch Bros deal.

Sellers should prefer auctions to simply negotiating with a willing buyer. In bilateral bargaining, Dutch Bros has every reason to convince Salad and Go that $105 million is about as high as it will go. But the arrival of another bidder changes the negotiation. Instead of the seller having to determine how much each buyer is willing to pay, the buyers reveal information about their valuations by competing against one another. Indeed, Dutch Bros ultimately chose not to increase its offer, effectively revealing where further bidding stopped making sense for it. Buyers naturally prefer to negotiate without a competitor standing beside them. Sellers prefer exactly the opposite.

Does Surgery Work?

noreply@blogger.com (Luke Froeb) — Tue, 29 Sep 2026 20:54:44 +0000

The Economist: Many surgical interventions are little better than placebo

The results are upending the field. Removing an inflamed appendix, an operation that around 5-10% of people have had at some point in their life, has turned out to be no better for most patients than a course of antibiotics. Trials comparing different surgical techniques have also revealed that cheaper and less complex operations can be more effective. Most striking, the data show that some widely used surgical procedures, such as spinal fusions and rotator-cuff repairs, have effects indistinguishable from placebo or non-surgical care such as physiotherapy.

Worse, some types of surgery may do more harm than good. A trial in Britain found that prostate-cancer surgery had no effect on patient mortality 15 years on, but worsened sexual and urological problems. A Finnish trial of a common knee procedure, meanwhile, concluded that patients who had real surgery had more problems in the affected knee ten years on than those who had had sham surgery (anaesthesia followed by a superficial incision). David Ring, an orthopaedic surgeon at the University of Texas at Austin, reckons that most operations in his field may be unnecessary. Surgery itself, it would seem, could use a major intervention.

WWA (World Weather Attribution) cashing in using flawed methodology

noreply@blogger.com (Luke Froeb) — Tue, 29 Sep 2026 18:12:45 +0000

From The Free Press:

On August 26, a wall of rock and ice broke away from Langtang Lirung in the Himalayas, resulting in a massive flood and mudflow that killed thousands of people along the border of Nepal and Tibet. Less than a month later, on September 17, an influential organization called World Weather Attribution (WWA), housed at Imperial College London, published a report on the catastrophe along with a press release touting its alarming findings.

What the WWA does:

Motivated Reasoning:
WWA has not been shy about the fact that it produces its studies to influence the public and to promote climate advocacy. Authors of one of the WWA’s foundational papers openly acknowledged that a primary reason for creating their methods is political: by “increasing the ‘immediacy’ of climate change, thereby increasing support for mitigation.”
Detection by Correlation and Attribution by Assumption
...WWA treats “climate change,” measured as a smoothed record of global temperature, as the only possible cause of any localized trend in rainfall, heat, flooding, or other types of extreme weather.
People are fooled
The WWA’s advocacy campaign has worked brilliantly, of course; 50 percent of Americans now believe policies addressing climate change would reduce the number or severity of the extreme weather events that they individually, or their communities, will experience.

Who funds these idiots?
WWA’s funders are philanthropists: the Grantham Foundation, the European Climate Foundation, and the Bezos Earth Fund, three of the largest backers of climate advocacy in the world.

What the methodology should do (IPCC, Intergovernmental Panel on Climate Change):

The first step is detection: whether the long-term statistics associated with a particular type of extreme weather change—a century of hurricane landfalls, say, or peak river flows—can’t be explained by the normal fluctuations in weather over years and decades, called internal climate variability. [COMMENT: this is extraordinarily difficult given the long run cycles in climate data]

The second step is attribution: The IPCC starts with a detected change and assesses the possible causes underlying that change—greenhouse gases, aerosols, volcanoes, land use, modes of climate variability, etc.—using sophisticated computer models of the earth’s climate system. [COMMENT: ruling out alternative explanations from non-experimental data is also extraordinarily difficult].

IPCC Findings:
The scientific reality—long understood in mainstream climate science—is that any emissions policy a government adopts today will not noticeably reduce the frequency and intensity of extreme weather, through the lifetimes of children or their children’s children.

If lack of knowledge were the problem, I would send WWA a copy of Chapter 17: Making Decisions with Uncertainty

How to Sell Meta Glasses (and Car Stereos)

noreply@blogger.com (Michael Ward) — Tue, 29 Sep 2026 13:18:50 +0000

Best Buy is moving in two seemingly opposite directions with in-store product demonstrations. In June, it announced that Meta Labs will open in more than 50 Best Buy stores. The 900-square-foot spaces let customers try Meta’s AI glasses and VR headsets, use interactive displays and smart mirrors, receive personalized fittings, and talk with dedicated Meta specialists. Yet just weeks later, Best Buy reportedly began removing many of its traditional car-audio demonstration displays, some of which had missing products or simply did not work. Demonstrations aren’t disappearing altogether: car-audio manufacturers including Sony, Pioneer, Kenwood, JVC, and Kicker have been paying for their own branded displays, now found in about 300 Best Buy stores.

The contrast highlights retailer actions boosting manufacturer demand. Helping a customer experience a pair of smart glasses may increase demand for Meta’s product, but Best Buy bears much of the cost of providing the service. Worse, customers can learn about a product at Best Buy and then buy it elsewhere—the classic retail-services free-rider problem. Meta’s solution is to become more deeply involved in the retail experience, helping provide dedicated specialists and an elaborate branded demonstration space. Car-audio manufacturers are responding more modestly by financing their own displays as Best Buy retreats from providing them. In both cases, manufacturers that benefit from demonstrations are taking on more of their cost, better aligning the incentives of manufacturers and retailers to provide services that help sell the product.

When Winning Is a Budget Risk: Hedging Coaching Bonuses

noreply@blogger.com (Luke Froeb) — Tue, 22 Sep 2026 17:02:07 +0000

Prediction-market trades have turned up whose payouts nearly match college football coaches' playoff bonuses. Five line up almost exactly with Lane Kiffin's bonuses at LSU. The schools didn't place them, but third parties acting for them plausibly did.

Why would a school bet on its own success? Coaching contracts promise big bonuses for making the playoffs, advancing and winning a title. A deep playoff run can leave the athletic department owing millions it didn't budget for. A contract that pays off when the team wins covers that bill when it comes due. Like a farmer locking in a crop price, the school gives up some upside in exchange for a predictable budget.

Why go through a third party? NCAA rules forbid athletic staff from betting on games, and prediction markets count. So a school can instead pay an insurer a premium, and the insurer buys the contracts itself.

Takeaways:

A performance bonus is a bill that only comes due when things go well.
If people are betting on whether that success happens, you can buy a bet that pays for the bill.
As budgets tighten and these betting markets grow, expect more of this.

Source: Josh Hendrickson, Insuring Against Success?, Economic Forces

Rewarding Judgement in AI Use

noreply@blogger.com (Michael Ward) — Wed, 16 Sep 2026 15:03:01 +0000

AI is changing which employee skills create value and how to incentivize these skills. EY recently announced a $100 million employee rewards program aimed at recognizing workers who develop “future-focused” capabilities and use technology to produce better outcomes. The interesting part is what EY has chosen to reward. Along with technology adoption, the firm emphasizes business acumen, judgment, adaptability, experimentation, collaboration, and innovation. As AI makes some technical capabilities more abundant, human judgment can become increasingly scarce and valuable. EY is not simply paying employees to use more AI; it is rewarding them for developing skills that make AI more productive.

That changes the incentive problem. If AI substitutes for routine research, analysis, or coding, producing more of those activities becomes a less useful measure of employee performance. Knowing which questions to ask, recognizing when an AI answer is wrong, exercising judgment when information is ambiguous, and finding new ways to combine AI with expertise can become more valuable. But these qualities are also difficult to measure. Counting hours, completed reports, or even AI usage is relatively easy; determining whether an employee exercised good judgment is not. EY's new program therefore allows employees at all levels to recognize colleagues, while other EY initiatives use simulations, coaching, and assessments of decision-making and collaboration to identify these less tangible skills.

Moving from objective output measures toward judgment, adaptability, and collaboration also changes the role of supervisors. Managers must have more discretion to decide whose contributions actually created value, making the quality and credibility of those evaluations more important. EY has argued that AI-era performance management should place greater weight on peer feedback, coaching, adaptability, and cross-functional impact, rather than relying simply on traditional manager ratings. It is also investing in more structured ways of assessing these skills: its new Career Residency program uses workplace simulations, coaching, and client situations to assess decision-making, collaboration, learning, and adaptation. As easily measured tasks become easier to automate, performance evaluation may consequently depend more on subjective judgment, but also on multiple evaluators and better ways of evaluating the evaluators.

When driving is (almost) free

noreply@blogger.com (Michael Ward) — Sun, 13 Sep 2026 23:56:08 +0000

While I am pet-sitting for my sister in California, she is letting me use her beach-community house and electric car. It has been nice driving past gas stations with prices so high. She also has residential solar panels to charge her car (and run her other devices). The panels generate enough power that she is almost always "off the grid" with no electricity bill. So is the cost of driving zero? Should I be driving all over the place?

Almost. The opportunity cost is what she would do with the surplus power she produces. Her utility will buyback her surplus power at $0.05-$0.08 per kwh while her retail rate is $0.45-$0.47 per kwh. Back in Texas these would be $0.07-$0.08 per kwh and $0.13-$0.19 per kwh. The opportunity cost in California is nearly 1/10 of the price while it is close to 1/2 in Texas. In Texas, I might drive a bit more if I had an EV and solar panels. In California, I would drive a lot more.

Save Early Kids

noreply@blogger.com (Michael Ward) — Wed, 09 Sep 2026 15:37:02 +0000

One of the most valuable decisions in retirement saving is when to start. Over the 50 years from 1976 through 2025, the S&P 500 delivered a compound annual return of about 11.82%, including reinvested dividends. Suppose a young worker had invested just $100 each month in an S&P 500 fund and earned that historical compound return until age 65. Starting at age 25 would produce about $922,000. Waiting until 30 reduces the ending balance to about $523,000, while waiting until 35 reduces it to about $295,000. Scraping together $100 when you are 25 is difficult, but if you can do it consistently, voila you will become a millionaire.

What makes the comparison striking is how little of the difference comes from the contributions themselves. Doubling your set-aside each month will merely double the ending balance. But by starting at 25 versus 30, you contribute only $6,000 more yet finish with roughly $399,000 more. Save 15% more and finish with 76% more. Compared with starting at 35, the early saver contributes just $12,000 more but finishes with about $627,000 more. The reason is compound growth: dollars contributed early earn returns, those returns earn returns, and the process repeats for decades. Of course, future stock returns may be lower than the past 50 years, and actual returns are anything but smooth. But the lesson does not depend on the return so much. The opportunity cost of waiting to save is not primarily the contributions you miss, it is the decades of compound returns those contributions could have earned.

You can use the SEC site to do your own “what if” scenarios.

Costco Employees Can Enjoy Labor Day

noreply@blogger.com (Michael Ward) — Mon, 07 Sep 2026 16:04:17 +0000

Most major retailers remain open on Labor Day, often running special sales. Costco is unusual in that it closes its U.S. stores, called “warehouses” by the company, on Labor Day. At first glance, closing on a potentially busy shopping day looks expensive. But the visible lost revenue may substantially overstate the true cost. Former Costco CFO Richard Galanti says most of those sales simply shift to the days before or after the holiday. A shopper planning to buy groceries, paper towels, or a television at Costco may just go on Sunday or Tuesday instead. The relevant cost of closing, therefore, is not the revenue Costco could have collected on Labor Day, but the contribution margin on sales that disappear altogether rather than shift to another day.

The benefit, seemingly obvious, is even harder to quantify. Costco CEO Ron Vachris says the company closes so employees can enjoy the holidays with family and friends. That benefit may extend beyond the value of the day off itself. A company willing to sacrifice sales for its employees may generate morale, loyalty, retention, and recruiting benefits that never appear on an accounting statement. They instead show up indirectly through lower turnover, easier hiring, or greater effort. Costco therefore faces two hidden quantities: the cost of closing may be much smaller than the day's lost sales suggest, while the value to employees may be much larger than the day's wages suggest. If most sales merely shift to neighboring days while employees highly value having the holiday off, closing the stores can create value even though neither side of that calculation is readily visible.

GitLab Restructuring

noreply@blogger.com (Michael Ward) — Fri, 04 Sep 2026 15:52:39 +0000

In May 2026, GitLab announced a major reorganization that will create roughly 60 smaller R&D teams with greater autonomy and end-to-end ownership, while eliminating as many as three layers of management. This episode illustrates a basic tradeoff in organizational design. Larger functional or divisional groups make communication within a specialty relatively easy, but they can create weak incentives and costly communication across organizational boundaries. A programmer might finish her assigned code, for example, while responsibility for whether the overall product actually works belongs somewhere else. GitLab explicitly identifies layers of management and “handoffs that dilute accountability” as problems it wants to eliminate. Putting the people needed to deliver a product into a smaller team gives them greater authority, and responsibility, over the decisions affecting that product.

But organizing around small product teams creates a different communication problem. Engineers working on similar technologies may now sit in different teams, so knowledge that once flowed naturally within a large engineering group must travel across product groups. Teams can also duplicate solutions to common problems or make decisions that work for their product but impose costs elsewhere in the company. GitLab is betting that this tradeoff has changed: it plans to use AI agents to automate some reviews, approvals, and handoffs, while its current development model emphasizes small, cross-functional teams with end-to-end accountability. Organization form depends on which communication problem is more costly. Divisions facilitate coordination among specialists but weaken incentives for the final outcome; product teams strengthen ownership of outcomes but make sharing knowledge and coordinating across products more difficult. GitLab’s restructuring suggests that it now believes the first problem has become more important than the second.

Boeing / SPEEA Negotiations

noreply@blogger.com (Michael Ward) — Mon, 31 Aug 2026 18:16:38 +0000

Boeing and its roughly 17,000 engineers and technical workers represented by the Society of Professional Engineering Employees in Aerospace (SPEEA) are bargaining over new labor contracts. Both sides are taking actions to raise their disagreement values. After workers rejected Boeing’s contract offers, they also voted to authorize their negotiating team to call a strike. Boeing, meanwhile, has begun implementing a strike contingency plan designed to keep the business operating if workers walk out. Boeing says the plan is intended to allow it to continue aircraft deliveries and meet other customer commitments during a strike. Boeing also says it had hoped to spend some of those resources on employee incentives but, following the rejection, redirected the money toward strike preparations. Thus, each side is taking actions that make it easier to say “no” to the other side.

They are committing to playing hard rather than simply threatening to do so. Each side hopes these actions will be viewed as credible so as to affect the final agreement in their favor. A strike authorization strengthens the union negotiators’ ability to credibly threaten a walkout, while Boeing’s contingency investments reduce the cost to Boeing of allowing a strike to continue. Deliberately reducing your flexibility can improve the deal you receive. If your opponent knows that you have committed yourself to saying no, they may have to offer you more to get you to say yes.

Walmart Gives its FinTech a Foot in the Door

noreply@blogger.com (Michael Ward) — Sun, 30 Aug 2026 18:25:58 +0000

Fintech companies such as Chime and Current face a basic problem: acquiring customers can be expensive. They must advertise, offer promotions, or form partnerships to persuade consumers to download an app and begin using their financial products. Walmart’s majority-owned fintech, OnePay, has a very different starting point. According to Semafor, most of OnePay’s roughly 7 million customers have come from Walmart’s 1.5 million employees and approximately 150 million shoppers. OnePay CEO Omer Ismail argues that these customers are effectively acquired for free: Walmart already has the stores, website, app, checkout system, customer relationships, and traffic needed to put OnePay in front of millions of potential users.

Economy of scope can occur when an input created for one product can be shared to produce another product more cheaply. Walmart’s enormous distribution network was built to sell groceries, clothing, electronics, and other merchandise, but the same network can distribute financial services. For example, OnePay is integrated directly into Walmart’s physical and digital checkout channels, where installment loans are now powered by Klarna. A standalone fintech must build both a financial product and a way to reach customers. Walmart can use an asset it already owns to do both retailing and finance. This allows diversification to create value. Both businesses using the same underlying asset creates economies of scope across the businesses.

Accepting Late Bids?

noreply@blogger.com (Michael Ward) — Thu, 27 Aug 2026 14:25:06 +0000

Spirit Airlines’ bankruptcy has produced an unusual auction: Google agreed to pay $10 million for a trove of Spirit’s internal corporate data, including roughly 100 million emails and 500 million Microsoft Teams messages, beating a $7.5 million bid from AI firm Mercor. But after the auction closed, AI startup Micro1 offered $12.5 million, a sizable bump from Google’s bid. The bankruptcy court must now decide whether to consider the late offer. At first glance, the answer seems obvious. Spirit’s creditors want as much money as possible, so why not accept the higher bid?

Because changing the rules after an auction can affect bidding before the auction. A well-designed auction gives bidders confidence that deadlines and procedures are credible. If firms expect a losing bidder to get another chance after seeing the winning price, they have an incentive to hold back during the formal auction and wait to top the winner afterward. That can reduce competition and lower expected revenue in future auctions. Bidders on potential auctions for additional Spirit assets may adjust their bids downward. Conversely, rigidly rejecting a substantially higher late offer leaves money on the table today. There is an auction design tension because maximizing the highest observed bid is not necessarily the same as maximizing the seller’s expected revenue. Sometimes committing not to accept a better offer later can induce bidders to make better offers now.

WaPo: Social Security and Medicare going bankrupt

noreply@blogger.com (Luke Froeb) — Tue, 25 Aug 2026 03:00:19 +0000

How AI Might Affect Demand

noreply@blogger.com (Michael Ward) — Sat, 22 Aug 2026 16:28:38 +0000

Artificial intelligence is often portrayed as a technology that will lower costs by replacing skilled workers, but ophthalmology provides an interesting counterexample. AI can now perform one relatively routine task, screening patients with diabetes for diabetic retinopathy, without requiring an ophthalmologist to examine every patient. In the ACCESS randomized trial, offering an autonomous AI eye exam during a diabetes visit increased screening completion from just 22% with conventional referral to 100%. Among patients receiving an abnormal AI result, 64% subsequently visited an eye-care provider. AI therefore substitutes for some ophthalmologist labor while dramatically increasing the number of patients who make it through the first stage of the eye-care supply chain. (Nature)

AI has lowered the cost of one link in the screening → referral → treatment supply chain. That cost reduction need not appear as lower overall expenses. Instead, it can appear as improved quality that increases demand: screening becomes easier, more patients are screened, and ophthalmologists can concentrate on patients who actually need their expertise. A 2026 Johns Hopkins study of 3,745 adults with diabetes provides evidence of this downstream effect, finding that AI screening in primary-care offices increased presentation to specialist eye care among an at-risk population. A recent meta-analysis of AI diabetic-retinopathy screening likewise concludes that it is generally cost-effective, particularly when it expands screening to underserved populations. (Nature)

The interesting result is that a cost-reducing technology can increase rather than decrease demand for expensive downstream services. Cheaper screening means more screening; more screening discovers more disease; and more detected disease generates referrals and treatment. Total spending on eye care could therefore rise even as the cost of producing a given level of eye health falls. The productivity gain results more in demand augmented by higher quality (shifting demand out) rather than lower price (moving along the demand curve). This may be a useful lesson for thinking about AI throughout the economy. When innovation improves one stage of a supply chain, its benefits need not appear primarily as lower prices or fewer workers. They may instead appear as better matching, greater use of complementary services, and higher-quality final output, in this case, healthier eyes.

Regulatory Limits on Personalized Pricing

noreply@blogger.com (Michael Ward) — Fri, 21 Aug 2026 16:07:03 +0000

The FTC has proposed a new rule governing personalized pricing, the increasingly feasible practice of using information about an individual customer to determine the price they are offered. Importantly, the FTC does not have authority to ban personalized pricing. Instead, sellers would have to disclose when personal information was used to determine a customer's price. The economics is familiar: by estimating each customer's willingness to pay, firms can practice direct price discrimination, charging higher prices to customers willing to pay more and lower prices to those who otherwise might not buy. This allows firms to capture more consumer surplus, but it can also increase sales by bringing low-willingness-to-pay customers into the market.

In some ways, personalized pricing takes us back to the nineteenth century. Before price tags became common, once a customer had selected some items at the general store, the clerk and the patron would start haggling. Different customers could therefore pay different prices for the same item, depending partly on the merchant's assessment of their willingness to pay. The spread of department stores and mass retailing replaced this individualized bargaining with posted, take-it-or-leave-it prices. Digital technology may now be reversing that evolution. Instead of a nineteenth-century shopkeeper sizing up the customer across the counter, an algorithm can use browsing histories, locations, previous purchases, and other data to more precisely size up willingness-to-pay. The FTC's proposal would still allow this twenty-first-century version of an old pricing strategy but would require firms to tell customers when it is happening.

How Low Should Seasonal Discounts Be?

noreply@blogger.com (Michael Ward) — Tue, 11 Aug 2026 16:05:44 +0000

Retailers often mark down seasonal merchandise to clear inventory, but how big should the discount be? An Impact Analytics article describes a clothing retailer that initially discounts winter coats by 20%, observes the resulting sales, and then increases the discount to 35% when inventory remains too high. This is a simple pricing decision in which lowering price sacrifices margin on units that would have sold anyway but generates additional sales. Keep cutting price as long as the marginal benefit from the additional sales exceeds the marginal cost from the lower price.

The pricing calculation can must compare benefits to costs. Selling another coat frees shelf and warehouse space, releases capital tied up in inventory, and avoids being stuck with merchandise that will be worth even less when the season ends. On the other hand, deeper markdowns may damage the brand or teach customers to wait for discounts. Include all the consequences of changing price, including possibly hidden changes in costs. The profit-maximizing markdown isn't the one that clears the shelves; it is the one where the benefit of cutting the price a little further no longer exceeds the cost.

Compensating differentials outlawed in Birmingham

noreply@blogger.com (Luke Froeb) — Fri, 07 Aug 2026 11:34:15 +0000

From MarginalRevolution:

In 2010 an employment tribunal ruled that Birmingham City Council had discriminated against thousands (6,000) of female workers — cooks, cleaners, care assistants, caretakers — who were denied bonuses paid to the mostly male binmen, gardeners, and gravediggers (400). Why were the binmen given bonuses? Well, refuse collection is filthy, heavy, outdoor work and not many people want to be gravediggers.

Birmingham went bankrupt when they had to pay the bonuses to the 6,000 women and they went bankrupt. Then they eliminated the bonuses paid to the men, who then went on strike. Then:

The council hired an outside contractor to take over its rubbish collection and it now pays roughly triple its pre-strike outsourcing bill..

A Pac-Man Defense Against Predatory Pricing?

noreply@blogger.com (Michael Ward) — Fri, 31 Jul 2026 22:16:46 +0000

After the story of how Southwest Airlines broke an attempt at predatory pricing with booze, I learned of the Dow vs. Die Deutsche Bromkonvention episode. See here for an interesting narrative of events. To summarize, at the turn of the twentieth century, the German chemical industry was dominant and the various producers there had a comfortable cartel selling bromine at 49 cents a pound. Herbert Dow had developed a way to produce bromine and sold it in the US for 36 cents. The Germans might have been OK if he stayed in the US, but the cartel swung into action when he began exporting in 1904.

It poured bromine into America at 15 cents a pound, well below its fixed price of 49 cents, and also below Dow’s 36 cent price.

Dow simply pulled out of the US market and sold abroad. Moreover, he had his agents secretly buy up hundreds of thousands of pounds at that 15 cents, repackage it, and resell it in Europe at 27 cents. Instead of being driven out of business, he profited from the cartel's actions! At first the Germans were confused by the insatiable demand in the US and the lost orders from Europe. Was one of their cartel members offering secret discounts? Accusations were made. Even after they discovered Dow's ploy, they were not sure how to respond. In the end, the bromine monopoly was broken.

Perhaps Dow got lucky, but perhaps predatory pricing may not be so easy.

The Cost of Going to Space

noreply@blogger.com (Michael Ward) — Mon, 27 Jul 2026 20:30:23 +0000

Terzi & Nicoli have a fascinating new paper analyzing over 4,400 orbital launches since 1960 to estimate "Wright's Law." This law states that a new technology's unit costs fall in proportion to cumulative experience. Essentially, it is an expression of learning-by-doing. They show:

... that the average cost of sending a kilogram to orbit has dropped from 87,023 USD in 1960 to 3,868 USD in 2025. Using a Wright's Law framework, we estimate that for each doubling of cumulative payload to orbit, the average cost of sending a kilogram to orbit decreases by 21.2% ...

This is faster than many past technologies e.g., 19th century Steam engines and recent solar photovoltaics. There is a positive feedback loop because, as launch costs fall, more stuff is launched. Their forecast is that it will cost reach $300/kg by 2040. For reference, sending a kg from LA to London by overnight express costs $5-$50/kg depending on package size. I get giddy trying to imagine all the potential new opportunities.

Incentive Misalignment in Communism: the case of Vietnam

noreply@blogger.com (Luke Froeb) — Mon, 27 Jul 2026 14:13:24 +0000

Rainer Zitelmann writes in How Capitalism Beat Communism in Vietnam in Reason Magazine,

The state collectives did not reward members for the amount of rice they produced, but instead counted how many days they had worked. If you worked 30 days, you got 30 points, which gave you the right to a defined share of the harvest. If you worked 20 days, you got 20 points and correspondingly less.

Days worked is cheap to verify, hard to dispute, immune to weather. But it was not what the country needed, which was rice. Output was the right target, but no individual's contribution was measurable, so the Collectives graded attendance instead.

Farmers responded rationally — they showed up. Real effort migrated to private plots where they could keep what they made. While cooperatives absorbed 40 percent of state agricultural funding, over 60 percent of cooperative members' income came from the 5 percent of land left in private hands. In 1980 the country grew 14 million tons of rice against the 16 million it needed.

Private Property (under the Doi Moi reforms) fixed the problem: households leased land and kept what they produced. Vietnam is now among the world's largest rice exporters.

BOTTOM LINE: People will optimize whatever you count; and Private property aligns incentives and makes the proverbial pie bigger.

Using Demand Signals to Re-Price

noreply@blogger.com (Michael Ward) — Thu, 23 Jul 2026 23:43:49 +0000

A CNBC story indicates that Starbucks repeatedly raised menu prices over the past several years. Initially, this strategy worked well. Higher prices more than offset modest declines in customer traffic, increasing average revenue per transaction. More recently, however, the company's quarterly earnings have shown declining customer visits, and new CEO Brian Niccol has shifted the company's emphasis away from broad price increases and toward improving service, simplifying the menu, and restoring the in-store experience, i.e. product differentiation. While many factors undoubtedly contributed to Starbucks' slowdown, the company's strategic pivot suggests that management believes customers have become increasingly willing to substitute away from Starbucks when prices rise. The available evidence is consistent with demand becoming more price elastic than it was only a few years ago.

Demand elasticity is not a fixed characteristic of a product or brand. Firms may consider premium brands' demand characteristics as permanent, but elasticity depends on the availability of substitutes and customers' willingness to switch. As time passes after a price increase, more consumers become aware that the price has changed, become more willing to experiment with competing brands, and discover acceptable alternatives. With better informed customers, future price increases can trigger much larger reductions in sales than before. The Starbucks experience is less a story about charging "too much" for coffee than about how repeated price increases may inadvertently encourage customers to search for substitutes, making demand progressively more elastic. Every price increase is also an experiment that provides information for future pricing decisions.

Specrtum Auctions Address Economies of Scope

noreply@blogger.com (Michael Ward) — Mon, 20 Jul 2026 22:16:56 +0000

The Federal Communications Commission (FCC) auction can demonstrate economies of scope. The FCC periodically auctions off additional spectrum licenses for advanced services. It recently raised $3.5 billion from recent AWS-3 (Advanced Wireless Services) auctions and expects to raise $30-$6 billion from upcoming Upper C-Band auctions. In telecom, these frequencies are not independent assets; their value is multiplicative. This additional spectrum will allow for greater capacity to handle the exponentially growing demand for wireless data transmission.

Spectrum auctions are usually run as Simultaneous Multiple-Round Auctions (SMRAs). US coverage is divided into many distinct geographic areas that are auctioned simultaneously across many rounds. An aggregation problem arises when a bidder risks winning fragmented licenses that are less valuable without their complementary counterparts. Since transmission has origin and a destination, it is more valuable to win a license in, say, Chicago if the operator can also secure one for Dallas. SMRAs allow bidders to cobble together desired regional capacity by aggregating multiple licenses.

The cell towers, base stations, and cables that link them are huge fixed costs. The ability to defray these costs over more volume reduces average costs. Economies of scale in these fixed costs generate economies of scope across these fixed costs in different regions.

Curating Complements: Apple & USB-C

noreply@blogger.com (Michael Ward) — Tue, 14 Jul 2026 14:01:44 +0000

One of the strongest arguments for industry standards is that they increase competition. A common charging connector means consumers can choose from hundreds of competing cable manufacturers instead of being locked into a single supplier. The resulting competition lowers prices and increases consumer welfare. When the EU required Apple to transition from its proprietary Lightning connector to USB-C in 2023, it illustrated that this logic, while generally sound, is incomplete. The WSJ reports that one independent repair specialist saw Apple iPhone failures associated with poorly designed or non-compliant USB-C cables and chargers. While these failures appear to be relatively uncommon, they highlight an economic tradeoff that is easy to overlook: greater competition among complementors can also increase quality variation. Under the Lightning ecosystem, Apple exercised tight control over accessory manufacturers through its Made for iPhone (MFi) certification program. Consumers paid more for certified cables, but they also purchased into a curated ecosystem with stronger quality assurance. By requiring Apple to adopt the industry-standard USB-C connector, regulators and policymakers may have increased competition, but they may also have exposed consumers to a much broader range of accessory quality.

Firms sometimes vertically integrate to solve coordination and quality-control problems, and not to exploit market power. Apple had strong incentives to ensure that its phones, chargers, cables, and software functioned reliably as an integrated system because failures reflected directly on the Apple brand, regardless of who manufactured the accessory. A proprietary standard gave Apple greater ability to police quality and exclude unreliable suppliers. This is likely the case for many of the Apple iPhone’s complements. An open standard like USB-C creates incentives for lower prices, interoperability, and reduced electronic waste. It also may have shifted more responsibility to consumers, who must distinguish between high-quality and low-quality accessories in a crowded marketplace. In this case, it is unclear if the pre-purchase consumer search costs and post-purchase repair costs were comparable to the competitive benefits from allowing open entry. But the episode demonstrates that a tradeoff could exist.

Can you Go to Jail if your AI Engages in Collusion?

noreply@blogger.com (Michael Ward) — Tue, 07 Jul 2026 21:43:26 +0000

The stereotype of price fixing is fat, cigar-chomping executives meeting secretly in smoke-filled rooms to agree to raise prices. But the Justice Department's recent consent decree with RealPage anticipates that AI collusion may look different. RealPage sold revenue-management software that used confidential pricing information from competing landlords to recommend rents. Although the software generated the recommendations, the DOJ alleged that the system facilitated unlawful coordination among competitors. I had my doubts. Nevertheless, the settlement requires RealPage to stop using certain competitively sensitive data and to change features of its pricing software.

AI can still recommend prices. Firms have used sophisticated pricing software for decades. A broader implication is that firms cannot avoid antitrust liability by outsourcing pricing decisions to an algorithm. If competing firms provide confidential information to a common AI system that helps coordinate pricing decisions, regulators may view the arrangement much like traditional collusion.

This distinction will become increasingly important as companies deploy AI agents to make autonomous business decisions. An AI pricing system that independently analyzes a firm's own costs, demand, and inventory is generally very different from one that relies on competitors' confidential information or otherwise facilitates coordination among rivals. The RealPage consent decree is consistent with antitrust law focusing on economic outcomes rather than how those outcomes were produced.