Saturday, November 26, 2011

More On Buying Frenzies

Two things I learned coming home from Thanksgiving dinner this year: i) turkey goes well with gado-gado sauce, especially if you don’t have discerning taste buds for boring white meat, ii) there’s a buying frenzy and then there’s a buying frenzy.

This being a supposedly an economics-minded café, I’ll dwell more on the second. Watching the coverage on the door-busting sale at a neighborhood Best Buy store on the local news, and reading the tweeter feed on the chaotic Blackberry launch in Pacific Place, one looks for explanations. Aco’s post goes a long way in doing so. The people clearly were there for the deep discounts but their decisions to stand in line reflect not only their valuation of the products they’re waiting in line for but also how much they value their own time. Some of them may actually were there because they enjoy experience.

There’s a slightly different kind of buying frenzies, though, the like of which we see every time Apple launches a new product. The people standing in line in front of an iBox store are there for a different reason than those standing in front of Macy’s or Best Buy on Black Friday. Most likely, these are the people who like to be first in having everything Apple-related. No deep discounts are necessary for them. In fact they may even be willing to pay a higher price to be first. We know the type. Almost all Apple fanboys fall into this group. A lot of movie fanboys fall in to this, from the Jedi wannabes, the Trekkies, and those standing in line for hours to see Breaking Dawn (yes, you, you, and you).

There’s actually a rather classic paper by deGraba (1995)* discussing this second type of buying frenzy. The idea is that there’s a monopolist who wants to launch a new product of unknown quality. The monopolist has the option to supply enough units for the market to clear, or to deliberately ration the market and create excess demand. Often they do the latter for the following reason.

When a new product is launch, often the quality is not fully known to the potential buyers. For a brand with a fan base, limiting the number of units of the new product on the market will create a buying frenzy where potential buyers will clamor to get their hands on the "new big thing". Any fan worth his salt will try to get his hands on one. The hype is on. Anyone who wants to wait until they have more information about the product will face the threat of not getting any unit available to them. In this case, the monopolist can even set a price higher than a market clearing price. Later when the true quality of the products becomes known to the rest of the market, there’s less room for the monopolist to influence the frenzy.

So which category do people who fight over the Blackberry in Pacific Place fall into? It seems like they’re a combination of both: they put relatively lower value on their time, and they’re also the type who’s willing to take some risks in getting new products of relatively unknown quality. Some of them were probably there for the experience (well, probably not for the stampede).

How about the people standing in long line for those Cr*cs sandals years ago? Well, they clearly fall into the first category since nothing about those sandals are unknown by that time. Everybody knows they’re damn comfortable. And everybody knows they’re ugly.

Next we could discuss why people should go to restaurants with long lines in front of them.

* Patrick deGraba (1995) "Buying Frenzies and seller-induced excess demand", Rand Journal of Economics 26:2.

Friday, November 25, 2011

Economics of queuing, again

I'm in a seminar and I'm bored. So I just checked Twitter and saw some people tweeting about a long queue in some mall in Jakarta. Apparently they are standing in line for the newest Blackberry product or something. Why queue? Wait, let's step back: what is queue? Or more precisely, what does a queue imply? From an economist's point of view, queue is a signal that the good being sold is under-priced (of course, why else do people want to queue?). You see motorists are queuing on a gas station? That's because the price is too low. You see people form a long snake to buy Crocs? Must be because it is being sold in a heavily discounted price.

In other words, queue reflects price distortion - in that case, the price does not tell you correctly the number of goods being sold (i.e. the supply). When the price is lowered, people/consumers will naturally think that the quantity sold is a lot. That's the law of supply: (for normal goods) supply increase will lead to price decrease. When this holds, you don't see queuing. But, because the law is violated - supply does not change (or even: reduced), while the price is cut, then you *should* see some queuing. Those who stand in the queue either think that the goods are many, or are full well that the supply is limited but is driven by a mere .. hype (think about Apple iPad's launching - that's hype*).

So: what do we expect when a good is priced too low contrary to the level it should be (i.e. the one driven by the market)? A queue. Put it another way, what is a queue telling you? That the price of some good is not normal (or that some people are hyped). 

But now let's push it further. Are people so shallow so as not to understand this? Well, actually no: they know it. They are just willing to trade some of their time and energy for the discounted price. If one can factor these in, he or she will actually find that the price is not as cheap as the store declares. What are other hidden costs of distorted price that leads to queuing? Impatience, stampede, quarrel - and even death (remember the story from China in 2007 when somebody died after a brawl over queue-jumping in a gas station?)

Now, why are some people not willing to join the queue? Can be because many things: they value their time more than those standing in the queue do, they know that queue means price distortion and hence an artificial sign that has hidden costs, or simply because they are not affected by some crazy hype. 

Or they might be participating in a seminar, albeit bored. 

Thursday, November 24, 2011

Thanksgiving Random Notes

Gee, it's been for awhile that I don't serve anything here. I am a lousy barista, indeed.

So where are we? Well, apparently we, the baristas, here don't seem to believe that a revolution in economics would happen real soon -- which doesn't mean that the field has gone nowhere since the last time you open the textbook. Come to academic seminars, open NBER web or AEA web, and you'll know what I mean.

Psychology/behavioral approach is moving to the mainstream now, to take one direction of progress in micro, and many are talking about (funny shape of) aggregate demand in near zero short term nominal interest rate in macro.

But we're now near Thanksgiving break, so all those seemingly important serving shall wait.

Well, maybe holiday mood and good behavioral economics shall not be contradicted, thanks to Daniel Kahneman.

His latest book, "Thinking, Fast and Slow", is delightful and well-written -- so well that actually you can read it while waiting for your train, cooking the Turkey, or attending the royal wedding (well, maybe not). For such a heavy academic content, it's not an easy to write in popular lingo yet retain the depth of knowledge. Kahneman did it. You don't need to know psychology or economics (god forbid) to digest Kahneman's thought in this book.

In short: you should buy it.

The other thing that you can do during holiday is probably going to your typical movie theater and watch The Muppets and not-so typical theater for Being Elmo.

Happy Thanksgiving, folks

Monday, November 14, 2011

You said you want a revolution?

This week, we had email exchanges with some colleagues about Harvard undergraduate students walked out of Mankiw's introductory economics class. The discussion was not so much about the walk-out (and much less, or nothing, about the reactions, as in here, here and here). The colleagues were talking about limitations of economic theory in explaining many phenomena, the need to give more room for multidisciplinary analytic framework, and to call for a revision for, even revolution in, economic curriculum and to another revolution in economic thinking.

Here's the summary of my response. First, no one would disagree that economic theory is limited. It provides a framework of analysis, not the framework. All economic models are based on certain assumptions. Not that we believe that the assumptions would (should) hold. But it serves as a benchmark condition to argue what would happen if the assumptions hold.

Second, no doubt that multidisciplinary analysis is good. Economists, and economists, would benefit from talking to, or collaborating with, scholars from other disciplines. But multidisciplinary requires each scholar have solid background on his/her own discipline. Imagine two people, an Indonesian an American, discussing their cultures. If the Indonesian doesn't have a solid understanding about Indonesian culture, the dialogue would be a lecture on American culture, not a cross-cultural one.

Third, while the curriculum and teaching methods should always be revisited to reflect current developments, we need to ask how much information we can (should) feed the students. Besides, the purpose of education and teaching is not to provide answers. The purpose is to make students asking the right questions (and find the answers) by providing analytic framework.

I am not sure about how much revisions we could have in microeconomics. It basically tells us that resources are scarce, so we need to make choices, which imply opportunity costs and give us trade-offs. Then there is demand and supply analysis, which, under a certain assumptions of how the market works, will define the prices. But we don't assume that market works all the time, so there is a substantial discussion of market failure in externality, public goods, uncertainty and game theory chapters. That's usually what we covers in 2 semester of microeconomics. There are more applications, such the agricultural household model, different game theoretical analysis and many more, which we usually teach in more advanced classes.

On the other hand, macroeconomics is a very dynamic subject. To be honest, I am not really catching up with the subject. But to catch up with the current state-of-the-art, including to criticize some mainstream theories, still you need to have the solid fundamentals. You can not, for example, argue for divergence in growth without starting from the basic Solow model which implies convergence. To criticize efficient market hypothesis you need to start from the AD-AS, Keynesian-cross and IS-LM models. No short-cut to do that.

Yes, Keynesian was a revolution in economics. Prior to Keynes, economists did not think of national income, and the relationships between money, interest and employment. In short, people never thought economics as a macro system, hence the term macroeconomics. But since then, (macro)economics have evolved, leaving us few rooms for revolutionary thoughts. Even Keynesian was at one time in a crisis, when excessive government's intervention in the economy led to high inflation without growth in production.

Honestly, the room for another revolution is getting much and much smaller now. Most big ideas have been delivered. The frontiers have been pretty much explored. Of course, there are still many unexplored spots in the forest. That is the real call: to fill the missing puzzles through new theoretical and empirical researches.