Tyler Cowen recently blogged about secret menus at Chinese restaurants. Often, items are sold to Chinese patrons that aren’t listed on the menu.  (I have enjoyed secret dishes at the premier Chinese restaurant in my town.)   Tyler suggests this may be an effort to discourage non-Chinese business. I find it more plausible that the practice allows restaurants to cater their menu to American tastes without alienating ethnic customers.  Commenter Scott Summers makes the case for an alternative explanation:

There is also price discrimination. Prices are often cheaper on the Chinese menu, as Chinese patrons are often more price conscious. This is partly reflected in the Chinese language options for tables of 4, 6, or 8. In Chinatown one will often see Western couples dining at small tables, while the Chinese often occupy large tables with family or friends. The Chinese pay a lower price per meal. I don’t recall seeing any English prices for multiple entree options.

I was reminded of secret menus while talking with a fellow graduate student about cable television.  He enjoyed a 6-month free trial of basic cable through our local monopolist, Cox Communications.  When it ran out, he canceled his service and signed up for it again.  Cox ran the promotion as the country was preparing to switch from analog to digital television.  It hoped to attract new customers wanting to avoid the hassle of switching to the new technology.  The promotion was nearly a year old, but he encouraged me to give them a call and ask for it anyway.  A five minute phone conversation later I had 6 months of free basic cable.

I love McDonalds.  One of my great fears is that McDonalds will stop selling two apple pies for a dollar.  Most McDonalds sell double cheeseburgers for one dollar.  However, my local McDonalds charges over two dollars for them.  Apparently, cheap double cheeseburgers in a college town cannibalize the sales of more profitable items.  The other day, while buying some apple pies, I saw an off-duty employee buy an item that wasn’t listed on the menu: the McDouble (pic).  The McDouble is a double cheeseburger with only one slice of cheese.  Everything else is the same.  McDoubles are only one dollar, if you know they exist.

Secret menus are successful means of price discrimination for two reasons.

1)  They conceal price information that only the most price sensitive customers will seek out.  If I wasn’t so cheap, I wouldn’t have been so intrigued by the McDonald’s employee’s strange order.
2)  They require customers to be assertive to receive the preferential price.  Timid and/or price insensitive customers may shy away from inquiries that make them appear cheap.  It’s a little intimidating calling to ask for 6-months of free cable, when you’ve seen no evidence of the promotion.  A roommate in college hated the process of haggling with street vendors.  He overpaid for everything.  I think this explains the approach credit card companies take with late fees.  If you call the company, they will always forgive the penalty for a late payment.  However, many customers just pay the fine rather than make an unpleasant phone call.

As long as we’re on food, I learned in this documentary that most McDonald’s food is a product of corn.  The movie is a little slow at times, but interesting nonetheless.

Fortunately, it is bogus.  The number comes from a study of sexual assault on campuses done by Mary Koss in 1985 for Ms. Magazine.  I was born in 1985 and I’m a young graduate student.  How can this study be relevant to today’s college students born in the 90’s?  More notably, I found this interesting critique of the study by Christina Sommers of Clark University.  She notes that the study asked students:

Have you had sexual intercourse when you didn’t want to because a man gave you alcohol or drugs?

An affirmative answer was counted as rape.  In other words, a women who regretted a one night stand after a night of drinking was considered as having been sexually assaulted.  The ambiguous nature of the questions and inclusive definition of rape is evident from the following statistics.  Only 27 percent of the women Koss counted as having been raped identified themselves as rape victims.  Moreover, 42 percent of labeled rape victims, went on to have sex with their attackers at a later date.  Clearly, something is wrong.  If we just consider women who considered themselves to be raped, the figure falls to a more believable 1/14.

Rape is an egregious wrong.  I have no desire to minimize the seriousness of this evil.  However, I don’t think women’s advocates advance their cause by using shoddy studies from the 1980’s to make rape seem more prevalent than it really is.  We shouldn’t have to lie to young college women to frighten them into taking safety precautions.  In fact, making  rape seem ordinary is counterproductive.  Evidence suggests that young people drink less when they realize that most students don’t binge drink.  People adjust their behavior to conform to what they perceive as normal.  If women think that 25 percent of their friends have been assaulted, they may be less likely to report it when it happens to them.  Moreover, potential criminals may be encouraged.  If 1/4 of college women are being raped, that means that a lot of rapists are roaming the streets free.  Maybe it’s not that risky of a crime.

So why do journalists, activists, and women’s centers cling to the 1 in 4  figure?  It catches your attention.  It outrages you. It makes you want to do something.  Such responses are good for circulation, donations, and support from the university.  But they come at the cost.  Sacrificing their credibility for more attention, these “advocates” inadvertently hurt students.   That’s a tragedy in and of itself.

Over Labor Day weekend I visited Chicago and spent Sunday afternoon watching Boston pummel the White Sox.  Walking into the ballpark I had noticed a stand selling premium Chicago-style hot dogs with all of the fixings.  While I was tempted, the ballpark level prices dissuaded me.  Fortunately, on this particular day the ballpark was running a $1.00 hot dog promotion.  I have seen similar promotions at other sporting venues.  The hot dogs are bare bones: cheap meat, a small bun, served plain, with ketchup and mustard available.  As I devoured my frugal treat, I began to think about the impact of the $1.00 promotion on the vendor selling premium Chicago-style hot dogs.  Assume that the vendor is a profit maximizing monopolist with no direct competition and the freedom to change its price.  Cheap hot dogs are an imperfect substitute and they normally cost $2.50.  On $1.00 hot dog days, should the premium hot dog vendor raise or lower its price to maximize profit?  The answer is under the fold. (more…)

My university raised the price of the 20-oz pop bottles in its vending machines from $1.00 to $1.25.  The move makes a lot of sense given that the convenience stores on campus have been selling the same bottles for close to $1.50.   I never understood why anyone bought them from the convenience store when they could save fifty cents by walking downstairs to the pop machine.  But, I digress.  In microeconomics we learn that a monopolist (the university in this case) can maximize profit by setting marginal revenue equal to marginal cost.   The only problem for the university is that it doesn’t know the exact demand for its product.  Selling  the same good at different prices allows the university to practice price discrimination.  Price sensitive students like me can go out of our way to save a little money.  Everyone else just pays the higher price.  But, different prices also help the university learn about demand for it’s product in general.  If no one is buying the cheap pop out of the machine, the university probably can raise it’s convenience store prices.  Alternatively, if vending machine sales are high relative to convenience store sales, it might be prudent to lower convenience store prices.  They took the opposite approach in this case and raised the vending machine prices.  This should increase convenience store sales, but they lose out on gains from price discrimination.  I’m bringing my own pop to school from here on out.

My laundromat also raised it’s price recently.  It now costs $1.75 to wash a load.  Up from a $1.50.  Normally, I wouldn’t think much of this.  But, about 6 months ago, a new laundromat moved in to the neighborhood.   From day one, it charged $1.75.  It is still in business and sees its fair share of use.  I can’t help but wonder if the owner of my laundromat decided to raise it’s price in response to its competitors entrance.  If the competitor was being successful at $1.75, maybe college students were less price sensitive then the owner originally anticipated.  Maybe students will go to the closest laundryman even if it’s a little more expensive.  The menu costs at a laundromat are high.  It takes a lot of time to change the machines to accept a higher payment.  And if the response is negative, you may lose customers even if you roll back the prices to their original level.  Competition helps remove asymmetric information.  Most of this time this is good for the consumer who is rationally ignorant.  But, when the producer guesses incorrectly, a little more transparency is a good things.

Tech Is Too Cheap to Meter: It’s Time to Manage for Abundance, Not Scarcity
It costs Netflix about a nickel to stream a 2 hour movie to your PC.  Wired editor Chris Anderson argues that data storage and processing is so cheap that we need to rethink the way we manage it.   He ridicules antiquated policies like the one employed by my university’s IT department.  Once a student’s small email quota is exceeded, the student is bombarded with requests to delete old messages.  Anderson is right on when he says that time is scarce, data is cheap.  To go one step further, I’d note that while data is abundant, analysis is scarce.  Our ability to determine relevance is getting better, but there is lots of room for improvement.  The more data we have, the more important it becomes to filter it effectively.

What Kind of Genius Are You?
This article by Daniel Pink opens with the following excerpt from a Harvard art lecture.  “Pablo Picasso did this copy of a Raphael drawing when he was 17 years old,” the professor told the students. “What have you people done lately?”  Pink examines the work of University of Chicago economics professor David Galenson.  Galenson compared the value of all sorts of rare art to age of the artist at the time of creation.  He found two patterns emerging.  Successful artists were one of two types: Conceptual or Experimental innovators.  The former do their best work early in their career by challenging prevailing trends and radically changing their field.  Experimental innovators, on the other hand, work through trial and error practicing their trade until they produce something truly exceptional.  I’d like to read Galenson’s work.  In some ways his theory seems safe and ambiguous.  All great work has to be done at some point in someone’s life.  But I’m intrigued by the economic study of creativity.  Creativity is the soul of economic growth.  Where does it come from?  How do we foster it as a society?  And how can we be creative in our own work?  These are questions worth exploring.

Nofollow has become increasingly popular.  Linking to another site upright conveys upon them a positive externality by improving their reputation.  The recipient is helped and the source gets nothing in return.  Not surprisingly, it is underprovided.  Some websites have a blanket “nofollow” policy.  They only give conventional links to recipients that pay.  Advertisers pay lots of money to get followed links from credible sites.  When signals are bought and sold, they lose their value.  Links that are followed are no longer the most relevant, they are the most profitable.  On some sites, “followed” links are less relevant than organic “nofollowed” links.  When everyone knows the signals, they lose their value.

This has many applications.  Signals are constantly evolving.  Fashion is a good example.  Brands come and go,  as a signal is recognized and copied.  For example, The North Face is a popular retailer of outdoor clothing and gear.  Initially, it was the purveyor of apparel and gear for an elite group of outdoor enthusiasts.  If you wore The North Face, it signaled that you skied, hiked, and spent time outdoors.  The signal was reliable.  But, it was an easy signal to imitate.  Americans liked being perceived as outdoor enthusiasts. The North Face become popular with the masses.  Today, someone wearing The North Face has some extra money and brand awareness.  The signal’s meaning has made a 180.

An acquaintance of mine recently joined the Peace Corps.   Before he left, I asked him why he decided on the Peace Corps.  “Simple,” he said, “It’s my ticket into a good law school.”  The experience is probably beneficial nonetheless, but it’s overt attempt to game the system.  Admissions committee are looking for compassionate, interesting people.  In the past, the Peace Corps was a good signal about your character.  Today, it says less about your character and more about your ambition.

I think this explains why, on a gut level, I don’t like some people who send all the right signals.  The guy who is too friendly, dresses too perfectly, has impeccable manners, says all the right flattering things, and is a great student.  If you are sending all the right signals — if they are all conscious choices — all I know is that you can play the game well.  I don’t know if you are kind, or curious, or interesting.  Everyone does this to a certain extent, but most people allow some of themselves out without conscious calculation.

Just because they can be copied, doesn’t make signals meaningless.  It just means that certain signals are more important than others.  Signals are most valuable when they are costly to send.  Job market candidates in economics can send three signals to the schools they are most interested in.  These are indeed valuable.  A thoughtful gift is a valuable signal.  Sticking with an unpopular idea or friend is a valuable signal.  We’re constantly on the lookout for such signals.

Does Google need a more complicated signaling system?  No, they’re doing pretty well on their own.  My guess is they calculate the value of the sites to which a website links.  If you link to quality sites (especially sites whose quality is not yet apparent) your signal is worth a lot. If you only link to advertisers, your signal is worth less.  Ultimately, in life and on the internet, signals mean the most when we don’t know how to send them.

How do you consistently get the ball rolling when starting a new social media site? How did you convince people to join Twitter when there were only a few hundred or thousand users? — Chris Y.

Answer: We never convinced people to use Twitter — we simply provided a tool they didn’t know they needed until they tried it. When Twitter began to emerge as a useful system, more and more people joined, which in turn made it more valuable.

While I appreciate his response, he doesn’t really address the heart of my question.  My full question was edited for length by Freakonomics.  In it’s original form I asked:

I was in awe when I learned that you also played a large part in creating Blogger and Xanga  (similiar to facebook) in addition to Twitter. All of these services are valuable because of network externalities, every additional user makes the service more valuable to everyone else. The flip side is that in the early stages, when these sites don’t have many users, their value is much smaller. How do you consistently get the ball rolling when starting a new social media site? How did you convince people to join Twitter when there were only a few hundred or thousand users?

Okay, so “in awe,” might be a little bit of an exaggeration, but I was thoroughly impressed.  I think that sucess with network sites such as Twitter and Xanga has to do with the first-mover advantage and getting influential people to use the site.  Twitter has become immensly popular since celebreties like Ashton Kutcher and Oprah have promoted it.  I doubt that Facebook would have been successful if the network didn’t start with a group of Harvard students.  Lets face it, knowing someone from Harvard is kind of cool.  Everyone likes to have smart and sucessful friends.  Facebook spread to college campuses so quickly because college students wanted to join the service and “friend” their Ivy League acquaintences.  This allowed Facebook to beat out other social networking competitors.  It’s long-term success wasn’t initially apparent.  I remember when Facebook was so small that it didn’t even own the “facebook.com” domain (it was “thefacebook.com”).  Anyway, marketing in the early stages matters for these network sites.

As long as we’re talking about Twitter, and who isn’t nowadays, will they ever be profitable? I think they will be profitable, but I don’t see them growing as large as a Google, or even a Facebook.com.  I think there is a place for microblogging.  I would have a lot more posts, if I could share my thoughts in 140 character spurts.  My guess is that Twitter will team up with Google and use contextual ads along search to monetarize its site.  We’ll have to wait and see.

1. Consumers do not trust advertising. (References Dan Ariely of Predictably Irrational)
2. Consumers do not want to view advertising
3. Consumers do not need advertising

The crux of his argument is that the internet has made information so widely available that advertising no longer is necessary.  If consumers want to learn more about a product they can read reviews online.  Moreover, they don’t need or want to be inundated with advertisements.  He notes,  “There is no shortage of places to put ads“.

True, but ad space never was the scarce resource.  There is lots of open space for billboards in Montana.  But no one is there to read it. The scarce commodity is people’s  attention.  And, there are still 24 hours in a day.  As people spend more time online, they are spending less time doing other things, like reading the newspaper.  Websites and blogs that capture people’s attention will always be able to make money if they can divert some of that attention to a third-party.  Radio personalities have become experts at this.  Bloggers can and will do the same.

From the demand side of things, advertising is more than just conveying information.  I’m not a marketer, but it’s clear that brands are valuable because they illicit emotions in their consumers.  Advertisers are getting better at using the internet to connect with users and create a brand image.  For example, how couldn’t you like Burger King’s  “Whopper Sacrifice” promotion?  They gave  customers a free Whopper if they dropped 10 Facebook friends? (Friends were messaged that their friendship wasn’t worth 1/10 of a Whopper).  And doesn’t this website make you want to chew Stride gum?

Advertising, though, does more than just build a brand.  Advertising is useful because consumers don’t know what they want. Yes, the non-profit side of the internet helps me find things that I would enjoy.  I find a lot of good economics books by reading blogs.  But I am also introduced to a lot of good products and ideas through advertisements.  Sometimes these advertisements are direct, other times advertisers have created the incentives for websites to promote products that their visitors are likely to enjoy (you’d see  a lot less book reviews online if websites didn’t get a cut of any sales that followed on Amazon).  Asymmetric information will persist unless there are financial incentives for people to introduce others to things they would enjoy, but are currently oblivious to.

Advertisers are constantly bidding for our attention.  Those that are bad at guessing our preferences lose money and go out of business.  The internet makes advertising all the more targeted.  It’s the survival of the fittest and only those companies that can best predict our preferences will survive.

Of course, this model is a simplification.  It doesn’t hold up so well when advertisers only need us to buy, not like, what we end up purchasing.  Moreover, advertisers often take advantage of our weaknesses.  But, these are the exceptions, rather than the rule. As long as attention is scarce, it will always command a price.   And this market, as so many others, does a good –albeit imperfect– job of allocating resources.

Isn’t this a good thing.  Don’t we want to discourage people from being two-faced?  Ben Casnocha thinks that social mediums like Facebook and blogs require you to show your true self:

In other words, technology is collapsing the masks we wear, making it harder to project different versions of our identity depending on the audience.

My theory: The most natural “you” is the version that gets presented when masks collapse. For example, host a dinner party with your mom, best friend from school, your boss from work, and a woman/man you’re interested in dating. How do you act? What comes most naturally?

Thus, the “you” that emerges on a personal blog represents a regression-to-the-mean synthesis, which may represent the most natural version of yourself.

While I think it is generally good to be transparent about who you are and what you stand for, I don’t agree that the synthesis of yourself is the most natural version of yourself.  People relate differently with one another because people connect on different levels. It’s not always a mask.  Variance in personality is not always caused by distortions from one’s “real” self.  Rather, different people bring out different aspects of your personality.  In C.S. Lewis’ book “The Four Loves” (I think) he notes that a group of three friends is more than the sum of its parts.  Friend B not only brings out something unique in myself, he also fundamentally changes the relationship I have with Friend A.  The loss of Friend B, destroys part of the dynamic I have with Friend A.

I have always been poor at the subject, but an analogy from chemistry seems to fit.  People are like periodic elements and groups of friends are like compounds.  What is the “true” oxygen?  Is it being itself when it is bonding with Hydrogen to form water?  Or is it being its true self when it gets together with itself and Carbon to form CO2?  It would be silly to say that oxygen is the most itself when it with both Hydrogen and Carbon.  It isn’t natural to interact with everyone you know at once.

As far as the internet goes, it means that social networks can only get so big before they lose their value.  Facebook and Twitter won’t monopolize the sector.  There is a need for niche social networks and semi-anonymous blogs (like this one).  It’s nice to write without tailoring my words to avoid offending certain friends, acquaintances, and future employers.  Personal communication like email will not be replaced by wall posts, blog comments, and other forms of public communication.

The internet has made information ubiquitous.  It is almost impossible to connect with people on the internet under your true identity and lead separate contradictory lives.  That is a good thing.  And yet, human relationships require privacy and intimacy that will never be replaced by interaction in a public forum.  Thankfully, your true self can’t be decomposed to a “regression-to-the-mean synthesis”.  Personality has too many dimensions that new relationships will always continue to reveal.

We can no longer afford an academic calendar designed for when America was a nation of farmers who needed their children at home plowing the land at the end of each day. Our children…spend over a month less in school than children in South Korea — every year. That’s no way to prepare them for a 21st century economy. That’s why I’m calling for us…to rethink the school day to incorporate more time – whether during the summer or through expanded-day programs for children who need it.

I have to give credit to Obama for advancing a clearly unpopular idea, but I don’t think he is right. Thinking back to my childhood –summers building forts in my backyard, learning HTML, visiting my grandpa’s ranch in Montana– made me hesitant to get behind reform that would cut into the next generation’s time to be a kid.

Each generation our nation is getting wealthier and wealthier.  The scientific and technological advances of the last fifty years not only make us materially better off, but increase the returns to getting a higher education.  A surgeon today can do things that would have unthinkable 20 years ago.  Computers have made professionals from economists to engineers substantially more productive.

What is the rational response?  You might argue that education is more valuable, so students should purchase more education.  But, we don’t live to maximize our wealth.  People value leisure.  Research shows that doctors will actually start decreasing the hours they work when their wage gets high enough.  Leisure is a normal good.  The more money you have, the more leisure you wish to consume.  At a certain point the dollar value of an additional hour of leisure exceeds your hourly wage.

Similarly, education is a substitute for leisure when people are young. Do we want to trade our children’s free time for a little more money when they are older?  Maybe, but the answer isn’t obvious.  Looking back, I wouldn’t have wanted to spend 20 percent more time in school.  If I had, I might be better at math, but I would have missed out on a lot of memories.  At some point, a nation becomes so rich that the benefits of a little more free time as a child outweigh a little more money in increasingly prosperous future.

Of course, such a future is far from certain, particularly for certain subsets of our population.  Certainly, kids with dysfunctional families have a less rosy view of free time.  For others though, time outside of a structured environment is not only fun, but essential to foster creativity and independence.  It seems that the best policy would be to expand school hours the most where the opportunity cost of leisure is the smallest.  Hopefully, this is what Obama has in mind when he says that this aspect of reform is targeted for “those children who need it.”