Determinant's of elasticity and two cute videos on pricing

1. Foodie on the determinants of elasticity. Her lists varies slightly from the textbook’s list.
2. Click here to watch a clip from I Love Lucy on how (not) to set price.
3. Click here to watch a clip from The Hudsucker Proxy on Hula Hoops

Markups v. margins

1. http://www.accountingcoach.com/blog/gross-margin-markup.
2. this video on the relationship between margin and markup.

Optional material for aligning interests

1. This story from NPR is a great example of the effect of incentives. It is an account of a car dealership that earns a sizable bonus if it sells 129 cars in the month.
2. This video on the Cobra Effect. It has several examples of incentives that created unwanted responses.
3. This post from HBR discusses over-reliance on incentive compensation
4. The links from this post give two perspectives on the importance of monetary compensation schemes. Non-monetary incentives are useful complements to monetary incentives. (Pay attention in MGMT 641.)
5. View this clip.  (The instructor predicts that you will laugh.) Is the monkey that rejects cucumber rational?
6. View this humorous clip to see Captain Ron use incentives to prompt good effort.
7. View this humorous clip from Jerry McGuire. What motivates the football player?
8. Better than money? Geoffry James gives a list of 10 things he claims are more important to employees than money.
9. Here is a humorous critique of recognition rewards.
10. Millner’s blog, label = aligning interests. Even more from the instructor!
11. Froeb’s blog, label = Chapter 21
12. Read this report from Stern Stewart to see an example of the disadvantages of making a scheme complex.

Price discrimination against women

http://managerialecon.blogspot.com/2015/12/why-do-women-pay-more.html

Data analytics @ Spotify

http://qz.com/571007/the-magic-that-makes-spotifys-discover-weekly-playlists-so-damn-good/

On-Demand Pricing

Now Prices Can Change From Minute to Minute
by: Jack Nicas
Dec 14, 2015
Click here to view the full article on WSJ.com

TOPICS: Price Discrimination, Pricing

SUMMARY: Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, even the minute. Online sellers have used such tactics for years, but frequent price changes are increasingly common in the physical world. "On average, consumers pay more as a result of [pricing based on demand and also supply conditions at a particular point in time], economists say. Dynamic pricing also affects who gets the goods in highest demand, favoring those willing to pay the most, while creating deeper discounts for shoppers who can buy when prices are low."

CLASSROOM APPLICATION: Students can evaluate the effect of "dynamic pricing" (i.e., basing prices at a particular point in time on the demand and supply characteristics at that point in time) on seller profits, consumer welfare, and economic efficiency. One important point for instructors to emphasize is that sellers changing prices according to demand and supply conditions can be the result of a technological change in measuring demand on the equilibrium process of a competitive markets. Due to the technological change, equilibrium prices adjust quickly. Alternatively, changing prices over time as a result of changing demand conditions can be the result of price discrimination with consumers selecting from a price-time of purchase menu.

QUESTIONS: 
1. (Advanced) Consider the statement: "Previously, a taxi at rush hour went to 'the person who happened to be on the right street corner,' said Ian McHenry, the president of Beyond Pricing, which helps homeowners price their rented guest rooms like big hotels. Now, rides go to people willing to pay more, and fewer people 'hit the jackpot and get that underpriced reservation or baseball ticket or open cab.'" Does this statement imply that prior to "dynamic pricing," markets experienced excess demand during peak demand periods? Does "dynamic pricing" improve economic efficiency?

2. (Advanced) Evaluate the statement: "'This is not a passing fad,' said Peter Fader, co-director of the University of Pennsylvania's customer-analytics initiative. Amazon is making dynamic pricing the norm, he said, 'and then it's going to become imperative for the brick-and-mortar players to figure out how to do this.'" Why is it imperative for brick-and-mortar stores to adopt the same pricing policies as those of online retailers? In terms of game-theoretic analysis, why is it a best response for brick-and-mortar players to do so?

3. (Advanced) Does the price discrimination based on demand and supply characteristics a particular points in time result in higher average consumer prices?

4. (Introductory) The article notes a case about highway pricing based on time-of-day or congestion. Does basing the price of highway use on the amount of congestion improve economic efficiency?

Reviewed By: James Dearden, Lehigh University

Transplant centers respond to incentives

http://managerialecon.blogspot.com/2015/12/repost-why-are-so-many-donated-kidneys.html

Is an extended warranty a screen?

Why Gadget Warranties Are (Almost) Never Worth It
by: Geoffrey A. Fowler
Dec 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Decision Making Under Uncertainty, Insurance

SUMMARY: Crunch the numbers, and you'll see there are very few reasons to buy AppleCare or other plans, Geoffrey A. Fowler says.

CLASSROOM APPLICATION: Students can examine the economics of extended warranties. The advice in the article: "Most extended warranties like AppleCare, or those from Asurion and SquareTrade, for broken, lost or stolen electronics are a bad deal. And in some cases, they're a downright rip-off.... Insurance makes sense on the big things in life, like your house or your health. The cost of fixing either can be astronomical. But the pain of repairing consumer electronics-even pricey ones like a laptop-is still relatively limited." That is, extended warranties are expensive and, when only small losses are possible, people should self-insure. The article also cites Richard Thaler about the behavioral economics issues involved in recommending not to purchase.

QUESTIONS: 
1. (Introductory) Characterize the type of consumers who should purchase extended warranties for electronic devices and the types who should not?

2. (Advanced) What is "mental accounting"? Does the decision to choose an extended warranty involve behavioral economics?

3. (Advanced) What is Richard Thaler's recommendation about purchasing extended warranties for electronic devices?

Reviewed By: James Dearden, Lehigh University

Pricing at drug @ $9,850 / month

How Pfizer Set the Cost of Its New Drug at $9,850 a Month
by: Jonathan D. Rockoff
Dec 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: A look at how Pfizer set a cancer medicine's price at $9,850 a month shows an elaborate process of testing the market and the views of doctors and health plans.

CLASSROOM APPLICATION: Students can evaluate process used by Pfizer to determine the price of one of its cancer drugs, Ibrance. The process includes determining the drugs that are in the same market, the patient benefit from the drug, and the willingness to pay by health plans. "The company wanted a price that would maximize its revenue without deterring health plans or keeping the drug from getting to patients it could help.... Hoping to smooth the drug's way onto health-plan lists of covered medications, Pfizer economists created a dossier containing data on clinical benefits and risks, plus-important to the plans-the likely effect on their budgets. The economists mined electronic health records, drug-prescription tallies and health-insurance claims to estimate the number of prescriptions, costs of treating side effects and monitoring patients for infections, and spending that might be avoided if the drug kept cancer at bay longer.

QUESTIONS: 
1. (Introductory) What factors do physicians consider when prescribing drugs?

2. (Advanced) What factors did Pfizer consider when setting the price of its new cancer drug, Ibrance?

3. (Advanced) What role did Pfizer's economists play in setting the price of the company's new cancer drug, Ibrance?

Plea bargaining

Opinion. The Injustice of the Plea-Bargain System
by: Lucian E. Dervan
Dec 04, 2015
Click here to view the full article on WSJ.com

TOPICS: Decision Making Under Uncertainty, Law and Economics

SUMMARY: Fearing harsh sentences, far too many defendants are pleading guilty and forfeiting their right to trial.

CLASSROOM APPLICATION: The article offers a good case to analyze decision making uncertainty. Students can examine how the length of the possible sentence based on a trial, the probability distribution over possible sentences, and the length of a plea deal affect whether an accused person accepts a deal. The accused's degree of risk aversion also affects the decision. Students can also discuss the ethics of plea bargain deals and of innocent defendants accepting deals.

QUESTIONS: 
1. (Introductory) Why are defendants overwhelmingly accepting plea deals? Discuss two issues: whether the police and judicial system is functioning well in the sense that mostly those who are arrested for crimes are in fact guilty; and whether plea deals lengths are set so that it is in the best interest of most defendants, whether guilty or not, to accept the deals.

2. (Introductory) Is it ethical that in the U.S. judicial system an overwhelming majority of defendants are accepting plea deals? What criterion should be used to evaluate whether a judicial system is ethical?

3. (Advanced) Consider the following scenario of an individual accused of a crime and facing the possibility of a trial. Let x represent the length in years of a prison sentence. The individual's utility function is U(x) = sqrt (10-x). If the person chooses to take his or her case to trial, the possible sentences are 0 (if the person is acquitted) and 10 years (if the person is found guilty). The probability of being found guilty is 7/10. What is the expected value in terms of years in prison of going to trial? What is the expected utility of going to trial? Suppose the accused is offered a plea deal of 8 years. Would the person accept the deal? What is the greatest time in prison that the person would accept as a plea deal?

4. (Advanced) Is the person risk averse with respect to the number of years in prison? How does the greatest plea deal the person would accept compare to the expected value in terms of prison years of going to trial? Discuss the relationship between risk aversion and the comparison of these two values?

Reviewed By: James Dearden, Lehigh University

How did Blockbuster solve the double marginalization problem?

http://managerialecon.blogspot.com/2015/12/repost-how-did-blockbuster-solve-double.html

Could vertical integration (Blockbuster produces its own content or studies opening video rental stores) have been an efficient alternative?

When did return on investment begin to measure success?

http://qz.com/569738/the-dupont-invention-that-forever-changed-how-things-work-in-the-corporate-world/

Part-time work and the app economy

http://qz.com/472246/the-industrial-revolution-of-our-time-is-changing-the-way-we-work/