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Articles for the ‘Economics for Business: Ch 06’ Category

What they want you to want

We are coming into the big spending season, with Black Friday, Cyber Monday, the run-up to Christmas and then the winter sales. So will we all be rational maximisers and weigh up the utility we expect to receive from items against the price we pay (plus any other cost, such as time spent searching/shopping)? Or will we use a set of heuristics which make life easier and that we have found to be useful in helping us choose – heuristics such as buying things we’ve liked before, or going for things on special offer?

The answer is that we do probably use a set of heuristics, at least for many items. And don’t the retailers and the marketing firms they employ know this!

They will use all sorts of tricks of the trade to persuade us to part with our money. These tricks are designed to nudge us (or push us), without us feeling manipulated or conned – at least until we’ve bought their product.

And the tricks are getting more sophisticated. They include special offers which are not as good as they seem, time-limited offers which stimulate us to buy quickly without carefully thinking about what we’re doing, cunning positioning of products in shops to encourage us to buy things we had not planned to buy, adverts which play to our idealised perceptions or the ‘good life’ or what we would like to achieve, and packaging or display which make the product seem better than it is.

Also we are increasingly faced with targeted advertising where our smart devices capture information about our spending habits and tastes through our previous online spending or our search behaviour. This is then fed to advertisers to tailor adverts specifically to us on our mobiles, tablets, laptops and even, soon, on our smart TVs.

We may have a general desire to maximise utility from our spending, but market failures, such as consumers having imperfect information about products and a present bias (see also) in decision making, make us easy targets for the advertising and marketing industry. They understand the heuristics we use and try to take maximum advantage of them.

Happy shopping!

Articles
How shops use tricks to get you spending The Conversation, Cathrine Jansson-Boyd (16/11/17)
ColourPop looks to Qubit for next-gen personalization guidance Retail Dive, Dan O’Shea (13/6/17)
Channel 4 to offer 100% ad targeting across All 4 platform, seeking partners for linear equivalent The Drum, Jessica Goodfellow (14/11/17)
How Google aims to bring TV advertising into the 21st century The Drum, Ronan Shields (19/10/17)
How to Use Heuristics to Your Marketing Advantage MarketingProfs, Cam Secore (12/11/15)

Questions

  1. Does the use of heuristics contradict the assumption that consumers behave rationally?
  2. Give some examples of heuristics that you yourself use.
  3. Other than those identified above and in the first article, what ‘tricks’ might companies play on you to persuade you to buy their products?
  4. Is advertising personally targeted to individual consumers desirable for them?
  5. Give some examples of present bias in people’s behaviour.
  6. What factors should a retailer take into account when deciding whether to make pre-Christmas discounts?
  7. Explain what is meant by ‘affect heuristic’ and how the advertising industry uses the concept in setting the background to or scenario of an advertisement.
  8. Have you ever been persuaded into buying something you didn’t want? Why were you persuaded?
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Nudging mainstream economics

The annual Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, normally known as the Nobel Prize in Economics, has been awarded 49 times since it was founded in 1969. Many well-known economists have been recipients of the award. This year it had been awarded to Richard Thaler for his research in behavioural economics. The award recognises his work in integrating economics with psychology.

Richard H. Thaler has incorporated psychologically realistic assumptions into analyses of economic decision-making. By exploring the consequences of limited rationality, social preferences, and lack of self-control, he has shown how these human traits systematically affect individual decisions as well as market outcomes.

In total, Richard Thaler’s contributions have built a bridge between the economic and psychological analyses of individual decision-making. His empirical findings and theoretical insights have been instrumental in creating the new and rapidly expanding field of behavioural economics, which has had a profound impact on many areas of economic research and policy.

Instead of making the assumption that people are rational maximisers, behavioural economists look at how people actually behave and respond to various incentives.

For example, people may be motivated by concepts of fairness and be prepared to make personal sacrifices for the sake of others. Such concepts of fairness tend to depend on the social context in which choices are made and can be influenced by the way choices are framed.

Also people may not weigh up costs and benefits but use simple rules of thumb, or heuristics, when making decisions. This might be an example of rational behaviour when time or information is limited, but the use of such heuristics often becomes engrained in behaviour and the rules become just habit.

People may also suffer from a lack of willpower or ‘present bias’. They may spend more than they can afford because they cannot resist the temptation to have a product. They may overeat because of the short-term pleasure it brings and ignore the long-term effects on their health.

Understanding how people make choices and the temptations to which they succumb can help policymakers devise incentives to change behaviour to achieve various social goals.

One type of incentive is nudging. A well-known example is people’s choice about whether to become an organ donor in the event of their death. If people are required to opt in to such a scheme, they may never get round to doing so. However, if they are required to opt out if they do not want to participate, many more people would thereby be donors and more organs would become available.

Another form of nudge is making desirable things fun. A well-known experiment here was encouraging people to use the stairs rather than the escalator when exiting a subway by making the stairs like a musical keyboard. See here for more examples.

The UK government set up a Behavioural Insights Team – also known as the Nudge Unit (now independent of government) to find ways of encouraging people to behave in their own or society’s best interests.

But it is not just governments which use the insights of behavioural economists such as Thaler. The advertising and marketing industry is always examining the most effective means of influencing behaviour. A classic example is the loss leader, where consumers are tempted into a shop with a special offer and then end up buying more expensive items there rather than elsewhere.

Firms and advertisers know only too well the gains from tempting people to buy items that give them short-term gratification – such as putting chocolate bars by the tills in supermarkets.

Understanding consumer psychology helps firms to manipulate people’s choices. And such manipulation may not be in our best interests. If we are being persuaded to buy this product or that, are we fully aware of what’s going on and how our tastes are being affected? Would we, by standing back and reflecting, make the same choices as we do on impulse or out of habit?

And governments too can seek to manipulate people in ways that some may find undesirable. Governments may try to influence us to follow their particular political agenda – as may newspapers. Certainly, during election or referendum campaigns, we are being nudged to vote a particular way.

It is important then for us to understand when we are being nudged or otherwise persuaded. Do we really want to behave in that way? Just as it is important, then, for governments and firms to understand individuals’ behaviour, so too it is important for individuals to understand their own behaviour.

Articles
Richard Thaler’s work demonstrates why economics is hard The Economist, RA (11/10/17)
Nobel in Economics Is Awarded to Richard Thaler The New York Times, Binyamin Appelbaum (9/10/17)
The Making of Richard Thaler’s Economics Nobel The New Yorker, John Cassidy (10/10/17)
Nobel prize in economics awarded to Richard Thaler The Guardian, Richard Partington (10/10/17)
Richard Thaler is a controversial Nobel prize winner – but a deserving one The Guardian, Robert Shiller (11/10/17)
What the mainstreaming of behavioural nudges reveals about neoliberal government The Conversation, Rupert Alcock (17/10/17)
This year’s economics Nobel winner invented a tool that’s both brilliant and undemocratic Vox, Henry Farrell (16/10/17)
How a critic of economics became the disciplines Nobel-winning best friend The Guardian, Tiago Mata and Jack Wright (25/10/17)

Podcast
How Richard Thaler changed economics BBC, More of Less, Tim Harford (14/10/17)

Questions

  1. For what reasons may individuals not always weigh up the costs and benefits of purchasing an item?
  2. Give some examples of the use of heuristics in making consumption decisions?
  3. Is the use of heuristics irrational?
  4. Explain how people considering that they have behaved fairly is influenced by the social context of their behaviour?
  5. Find out what is meant by the Dictator Game and how it can challenge the assumption that people behave selfishly. How is the ‘dictator’s’ behaviour affected by the possible payoffs?
  6. Thaler suggested that Brexit could be an example of behavioural economics in action. Find out what he meant by this. Do you agree?
  7. Give some examples of ways in which the government can nudge people to persuade them to behave in socially or individually desirable ways.
  8. Find out what is meant by the ‘endowment effect’ and how it influences people’s valuation of items they own.
  9. Why may nudging by governments be undemocratic?
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Studies show that money can buy happiness (but only if you spend on experiences)

Guest post by Hazel Garcia from InvestmentZen

An oft-repeated quote is that money can’t buy happiness. But according to multiple studies, yes, it can. The key is what you spend that hard earned cash on. When researchers asked individuals to reflect on their recent purchases, those who had made experiential purchases i.e. trips, lessons, events, etc. were much happier compared to those who had made material purchases.

Why is this the case? According to a 20 year study at Cornell, our excitement from new purchases fades quickly over time. That new watch you bought quickly becomes a part of your everyday life. This is what psychologists call the “hedonic treadmill,” which describes the way we return to our normal state of happiness after a momentous occasion. However, buying a new chair will return you much quicker to that state than an adventure across the Rocky Mountains.

Researchers identified several key reasons why this is the case. One reason is that an object is just an object and can never become a part of your identity (at least, not a healthy one), whereas experiences shape us over time. In addition, because by definition unique experiences are only short-lived, we don’t adapt to them the way we might with a new phone or watch. They do not become part of the routine and as such are usually viewed in a special light.

Interestingly, researchers found that even a negative experience could be rated more highly than purchasing a luxury good. In the study, participants were asked to describe a bad experience they had recently and a few weeks later, they were asked again about it. Over the course of just a few weeks, most people’s opinion of that moment had changed.

This is because the human brain has a tendency to reduce the impact of stressful situations. In fact, a significant portion of those polled even stated that in the end, they were happy to have had the negative encounter as it gave them a fresh way to look at things. When similar questions were asked to those who had purchased a high-end item, their levels of happiness were consistently lower as time went on.

So when it comes to the age old question of “Does money buy happiness?” the answer is a resounding yes – provided you spend it on the right things. But of course, you should still aim to make every dollar go as far as possible in pursuit of great experiences. Take a look at the infographic below to see a visual summary of the research on money and how it can buy happiness.

If you want to be happy, spend money on experiences, not things

Blog
If You Want To Be Happy, Spend Money On Experiences, Not Things InvestmentZen news, Hazel Garcia (23/1/17)

References
Why You Should Spend Your Money On Experiences, Not Things Forbes, Travis Bradberry (9/8/16)
The science of why you should spend your money on experiences, not things Fast Company, Jay Cassano (30/3/15)
To feel happier, talk about experiences, not things Cornell Chronicle, Susan Kelley (29/1/13)
The way we shop now: the revolution in British spending habits The Guardian, Katie Allen and Sarah Butler (6/5/16)
Just do it: the experience economy and how we turned our backs on ‘stuff’ The Guardian, Simon Usborne (13/5/17)

Questions (by JS)

  1. Why does buying material goods not buy happiness? Does this apply to all material goods?
  2. What is different, in terms of happiness, about buying experiences? Does this apply to the consumption of all services?
  3. Is the consumption of experiences subject to diminishing marginal utility (a) for specific experiences; (b) for experiences in general? Explain.
  4. Why do we seem not to care as much about the “Jones’” vacation as about their income or possession of material goods?
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Secondary ticket markets: legitimate, a rip-off or downright illegal?

The UK Parliament’s Culture Media and Sport Select Committee has been examining the secondary ticketing market. The secondary market for events is dominated by four agencies – viagogo, eBay-owned StubHub and Ticket-master’s Get Me In! and Seatwave. These buy tickets to events in the primary market (i.e. from the events or their agents) and then resell them, normally at considerably inflated prices to people unable to get tickets in the primary market.

One example has grabbed the headlines recently. This is where viagogo was advertising tickets for an Ed Sheeran charity concert for £5000. The original tickets were sold for between £40 and £110, with the money going to the Teenage Cancer Trust. None of viagogo’s profits would go to the charity. The tickets were marked ‘not for resale’; so there was doubt that anyone buying a ticket from viagogo would even be able to get into the concert!

There are four major issues.

The first is that the tickets are often sold, as in the case of the Ed Sheeran concert, at many times their face value. We examined this issue back in September 2016 in the blog What the market will bear? Secondary markets and ticket touts).

The second is that the secondary sites use ‘bots’ to buy tickets in bulk when they first come on sale. This makes it much harder for customers to buy tickets on the primary site. Often all the tickets are sold within seconds of coming on sale.

The third is whether the tickets sold on the secondary market are legitimate. Some, like the Ed Sheeran tickets, are marked ‘not for resale’; some are paperless and yet the secondary ticket agencies are accused of selling paper versions, which are worthless.

The fourth is that multiple seats that are listed together are not always located together and so people attending with friends or partners may be forced to sit separately.

These are the issues that were addressed by the Culture Media and Sport committee at its meeting on 21 March. It was due to take evidence from various people, including viagogo, the agency which has come in for the most criticism. Viagogo, however, decided not to attend. This has drawn withering criticism from the press and on social media. One of the other witnesses at the meeting, Keith Kenny, sales and ticketing director for the West End musical Hamilton, described viagogo as ‘a blot on the landscape’. He said, ‘Ultimately, our terms and conditions say ticket reselling is forbidden. If you look at the way that glossy, sneaky site is constructed, they’ve gone an awful long way not to be compliant in the way they’ve built their site.’

The Competition and Markets Authority launched an enforcement investigation last December into suspected breaches of consumer protection law in the online secondary tickets market. This follows on from an earlier report for the government by an independent review chaired by Professor Waterson.

The government itself is considering amending the Digital Economy Bill to make it illegal to use bots to buy tickets in excess of the limit set by the event. Online touts who break this new law would face unlimited fines.

Articles
Touts to face unlimited fines for bulk-buying tickets online Independent, Roisin O’Connor (13/3/17)
Unlimited fines for bulk buying ticket touts BBC News (11/3/17)
Ticket touts face unlimited fines for using ‘bots’ to buy in bulk The Guardian, Rob Davies (10/3/17)
Ticket touts face unlimited fines in government crackdown on bots Music Week, James Hanley (11/3/17)
Government confirms bots ban and better enforcement in response to secondary ticketing review CMU, Chris Cooke (13/3/17)
The ‘Viagogo Glitch’: Why Fans Must Be Put First In The Secondary Ticketing Market Huffington Post, Sharon Hodgson (14/3/17)
Angry MPs accuse no-show Viagogo of ‘fraudulent mis-selling’ of Ed Sheeran tickets i News, Adam Sherwin (21/3/17)
Ed Sheeran’s manager Stuart Camp on secondary ticketing BBC News, Stuart Camp (21/3/17)
Fury at Viagogo no-show as MPs probe tickets on sale for thousands Coventry Telegraph, James Rodger (22/3/17)
Music fans given 10-step guide on how to tackle ticket touts Daily Record, Mark McGivern (20/3/17)
Viagogo snubs MPs’ inquiry into online ticket reselling The Guardian, Rob Davies (21/3/17)
Viagogo a No-Show at U.K. Hearing Into Secondary Ticketing: ‘Huge Lack of Respect’ Billboard, Richard Smirke (21/3/17)
Daily Record campaign against ticket touts reaches Parliament but Viagogo don’t show up to answer claims Daily Record, Torcuil Crichton and Keith McLeod (22/3/17)
Ticketmaster is using its software — and your data — to take on ticket-buying bots recode, Peter Kafka (14/3/17)

Official sites and documents
The Culture, Media and Sport Committee holds a further evidence session on ticket abuse. Culture, Media and Sport Commons Select Committee (20/3/17)
CMA launches enforcement investigation into online secondary ticketing Competition and Markets Authority, Press Release (19/12/16)
Independent Review of Consumer Protection Measures concerning Online Secondary Ticketing Facilities Department for Business, Innovation and Skills, Professor Michael Waterson (May 2016)
Ticket abuse: ban digital ‘harvesting’ software says Committee Culture, Media and Sport Commons Select Committee (24/11/16)

Questions

  1. Use a demand and supply diagram to demonstrate how secondary ticket agencies are able to sell tickets for popular events at prices several times the tickets’ face value.
  2. If secondary ticket sites and ticket touts are able to sell tickets at well above box office prices, isn’t this simply a reflection of people’s willingness to pay (i.e. their marginal utility)? In which case, aren’t these sellers providing a useful service?
  3. How do secondary ticket agencies reduce consumer surplus? Could they reduce it to zero?
  4. See Tickets, the primary market ticket agency, has set up a secondary site, whereby fans can trade tickets with one another at a mark-up capped at just 5%. Will this help to reduce abuses on the secondary market, or is it a totally separate part of the market?
  5. Would it be a good idea for event organisers to charge higher prices for popular events than they do at present, but still below the equilibrium?
  6. How does the price elasticity of demand influence the mark-up that secondary ticket agencies can make? Illustrate this on a diagram similar to the one in question 1.
  7. What measures would you advocate to make tickets more available to the public at reasonable prices? Explain their benefits and any drawbacks.
  8. What would be the effect on prices if the use of bots could be successfully banned?
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Christmas Trading

We all know that our spending changes during the Christmas period: namely we spend a lot more than during the rest of the year. This applies across the board – we buy more clothes, food and drink, even though each day, we can generally only wear, eat and drink the same amount as usual! This has some interesting points from a behavioural economics stance, but here I’m going to think about the impact of this on some key retailers.

Marks & Spencer have previously made headlines for the wrong reasons: poor sales on clothes and the need for serious restructuring of its stores, target audience and marketing in order for this long-standing retailer to remain current and competitive. Although sales were expected to rise in the Christmas period, they did significantly better than expected, with sales growth of 2.3%, above the expected 0.5%. More encouragingly, this growth was not just in food, but in clothing and homeware as well.

One of the key reasons given for this above-expected improvement in sales was the conveniently timed Christmas, falling on a Sunday and hence giving extra shopping days. M&S have said that this certainly helped with their Christmas trading. Although this was good for Q4 trading, the timing will not play ball for Easter and they are expecting a negative effective during that trading period. Some analysts have said that despite the growth being boosted by the timing of Christmas, there were still signs of a change in fortunes. Bryan Roberts from TCC Global said:

“It might be the sign of some green shoots in that part of the business.”

This is consistent with the Chief Executive, Steve Rowe’s comments that despite the timing of Christmas adding around 1.5% to clothing and home sales growth, the recovery was also due to “better ranges, better availability and better prices”.

It appears as though many other retailers have experienced positive growth in Christmas sales, with the John Lewis Partnership seeing like-for-like sales growth of 2.7%, with Waitrose at a 2.8% rise.

The other interesting area is supermarkets. Waitrose and M&S are certainly competitors in the food industry, but at the higher end. If we consider the mid-range supermarkets (Asda, Morrisons, Sainsbury’s and Tesco), they have also performed, as a whole, fairly well. The low-cost Aldi and Lidl have been causing havoc for these supermarket chains, but the Christmas period seemed to prove fruitful for them.

Tesco saw UK like-for-like sales up by 1.8%, which showed significant progress in light of previously difficult trading periods with the emergence of the low-cost chains. Q$ was its better quarter of sales growth for over five years. One of the key drivers of this growth is fresh food sales and its Chief Executive, Dave Lewis said “we are very encouraged by the sustained strong progress that we are making across the group.” However, despite these positive numbers, Tesco only really met market expectation, rather than surpassing them as Morrison, Sainsbury’s and Marks & Spencer did.

Perhaps the stand-out performance came from Morrisons, with its best Christmas performance for seven years. Another casualty of the low-cost competitors, it has been making a recovery and Q4 of 2016 demonstrated this beyond doubt. Like-for-like sales for the nine weeks to the start of 2017 were up by 2.9%, with growth in both food and drink and clothing.

Morrisons has been on a long and painful journey, with significant reorganisation of its stores and management. While this has created problems, it does appear to be working.

We also saw a general move up to the more premium own-brands and this again benefited all supermarkets. Morrisons Chief Executive, David Potts said:

“We are delighted to have found our mojo … Every year does bring its challenges, but so far we haven’t seen any change in consumer sentiment. Customers splashed out over Christmas and wanted to trade up … We are becoming more relevant to more people as we turn the company around.”

So it seems to be success all round for traders over the Christmas period and that, in many cases, this has been a reversal of fortunes. The question now is whether or not this will continue with the uncertainty over Brexit and the economy.

Articles
M&S beats Christmas sales forecast in clothing and homeware BBC News (12/1/17)
Marks & Spencer reports long-awaited rise in clothing sales The Telegraph, Ashley Armstrong (12/1/17)
Marks and Spencer reveals signs of growth in clothing business Financial Times, Mark Vandevelde (12/1/17)
Tesco’s festive sales lifted by fresh food The Telegraph, Ashley Armstrong (12/01/17)
Tesco caps year of recovery with solid Christmas Reuters, James Davey and Kate Holton (12/1/17)
Tesco, Marks & Spencer, Debenhams, John Lewis and co cheer strong Christmas trading Independent, Josie Cox and Zlata Rodionova (12/1/17)
Morrisons sees best Christmas performance for seven years BBC News (10/12/17)
Morrisons enjoys some ‘remarkable’ Christmas cheer’ The Guardian, Sarah butler and Angela Monaghan (10/1/17)
Record Christmas as Sainsbury’s ‘shows logic of Argos takeover’ The Guardian, Sarah Butler and Angela Monaghan (11/1/17)

Questions

  1. Why have the big four in the supermarket industry been under pressure over the past 2 years in terms of their sales, profits and market share?
  2. How have the changes that have been made by M&S’ Chief Executive helped to boost sales once more?
  3. Share prices for supermarkets have risen. Illustrate why this is on a demand and supply diagram. Why has Tesco, despite its performance, seen a fall in its share price?
  4. What are the key factors behind Morrison’s success?
  5. What type of market structure is the supermarket industry? Does this help to explain why the big four have faced so many challenges in recent times?
  6. If there has been a general increase in sales across all stores over the Christmas trading period, that goes beyond expectations, can we infer anything about customer tastes and their expectations about the future?
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How behavioural economics can help you stick to New Year’s resolutions

Many or us make New Year’s resolutions: going on a diet, doing exercise, spending more time studying. But few people stick to them, even though they say they would like to. So how can people be motivated to keep to their resolutions? Well, the experiments of behavioural economists provide a number of insights into the problem. They also suggest various incentives that can be used to motivate people to stick to their plans.

Central to the problem is that people have ‘time inconsistency’. They put a higher weight on the benefits of things that are good for them in the future and less weight on these benefits when they have to act now. You might strongly believe that going to the gym is good for you and plan to go next Monday. But when Monday comes, you can’t face it.

Another part of the time inconsistency problem is the relatively high weighting given to short-term gratification – eating chocolates, watching TV, spending time on social media, staying in bed. When thinking about whether you would like to do these things in, say, a couple of days’ time, you put a low weight on the pleasures. But thinking about doing them right now, you put a much higher weight on them. As the well-known saying goes, ‘Hard work often pays off after time, but laziness pays off now’.

So how can people be motivated to stick to their resolutions? Behavioural economists have studied various systems of incentives to see what works. Some of the findings are as follows:

•  People are generally loss averse. To get us to stick to New Year’s resolutions, we could devise a system of penalties for breaking them, such as paying 20p each time you swear!
•  Given people’s time inconsistency, devising a system whereby you get treats after doing something you feel is good for you: e.g. watching TV for 30 minutes after you’ve done an hour’s revision. Rewards should follow effort, not precede them.
•  Having simple clear goals. Thus rather than merely saying ‘I’ll eat less’, you devise a meal plan with menus that meet calorie and other dietary goals. Rather than saying, ‘I’ll exercise more’, you commit to going to the gym at specific times each week and doing a specific amount of each exercise.
•  Ritualising. This is where you devise a regime that is feasible to stick to. For example, you could always write a shopping list to meet your dietary goals and then only buy what’s on that list; or you and your flatmates could have a rota for household chores.
•  Social reinforcement. This is where people have a joint plan and help each other stick to it, such as going to the gym at specific times with a friend or group of friends, or joining a support group (e.g. to lose weight, or give up drinking or smoking).
•  Avoiding temptation. For example, if you want to give up chocolate, don’t have any in the house.
•  Using praise rather than criticism. People generally respond better to positive incentives than negative ones.

Behavioural economists test these different incentive mechanisms to see what works best and then to see how they can be refined. The testing could be done experimentally, with volunteers being given different incentives and seeing how they respond. Alternatively, data could be collected on the effects of different incentive mechanisms that people have actually used, whether at home or at work.

The advertising and marketing industry analyses consumer trends and how people respond to pricing, quality, display, packaging, advertising, etc. They want to understand human behaviour so that they can ‘direct’ it in their favour of their clients. Governments too are keen to find ways of encouraging people to do more of things that are good for them and less of things that are bad.

The UK government’s Behavioural Insights Team looks at ways people can be ‘nudged’ into changing their behaviour, see the blog A nudge in the right direction?

But back to New Year’s resolutions, have you made any? And, if so, have you thought about how you might stick to them? Have you thought about the incentives?

Podcast
Dan Ariely talks “Payoff” WUNC 91.5: North Carolina Public Radio, Dan Ariely talks to Frank Stasio (3/1/17)

Articles and blogs
50 New Year’s Resolution Ideas and how to Achieve Each of Them Lifehack, Ivan Dimitrijevic (31/12/16)
5 New Year’s Resolutions You Can Keep (With The Help Of Behavioral Science Research) Forbes, Carmen Nobel (3/1/17)
The science behind keeping your New Year’s resolutions BT, SNAP PA (30/12/15)
The Guardian view on New Year resolutions: fitter, happier, more productive The Guardian, Editorial (3/1/17)
The Behavioral Economics of Your New Year’s Resolutions The Daily Beast, Uri Gneezy (5/1/14)
The psychology of New Year’s resolution The Conversation, Mark Griffiths (1/1/16)
Apply Behavioral Economics for a Better New Year Wharton Blog Network, William Hartje (16/1/14)
The Kardashians Can Help Your New Year’s Resolutions Huffington Post, John Beeby (29/12/16)
Using economics to score with New Year resolutions The Hindu, Venky Vembu (4/1/17)
Be It Resolved The New York Times, John Tierney (5/1/12)

Goal-setting site
stickK ‘Set your goals and achieve them!’

Questions

  1. Explain what is meant by time inconsistent behaviour. Is this the same as giving future costs and benefits a lower weighting than present ones (and hence having to discount future costs and benefits)?
  2. Give some examples of ways in which your own behaviour exhibits time inconsistency. Would it be accurate to describe this as ‘present bias’?
  3. Would you describe not sticking to New Year’s resolutions as ‘irrational behaviour’?
  4. Have you made any New Year’s resolutions, or do you have any plans to achieve goals? Could you alter your own personal incentives and, if so, how, to make it more likely that you will stick to your resolutions/goals?
  5. Give some examples of ways in which the government could ‘nudge’ us to behave in ways that were more in our own individual interests or those of society or the environment?
  6. Do you think it’s desirable that the advertising industry should employ psychologists and behavioural economists to help it achieve its goals?
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What the market will bear? Secondary markets and ticket touts

If you want a ticket for an event, such as a match or a concert, but the tickets are sold out, what do you do? Many will go to an agency operating in the ‘secondary market’. A secondary market is where items originally purchased new, such as tickets, company shares, cars or antiques, are put up for sale at a price that the market will bear.

The equilibrium price in a secondary market is where supply equals demand and the actual price will approximate to this equilibrium. In the case of tickets, this equilibrium price can be much higher than the original price sold by the venue or its agents. The reason is that the original price is below the equilibrium.

This is illustrated in the figure (click here for a PowerPoint). Assume that the total supply of tickets is Qs. Assume also that the official box office price is Pbo and that demand is given by the demand curve D. At the box office price demand exceeds supply by QdQs. There is thus a shortage, with many fans unable to obtain a ticket at the official price. Many of you will be familiar with having to be as quick as possible to get hold of tickets where demand considerably outstrips supply. Events such as Glastonbury sell out within seconds of coming on sale.

If you buy a ticket and then find out you cannot go to the event, you can sell the ticket on the secondary market through an online site or agency. Such agencies could be seen as providing a useful service as it means that otherwise empty seats will be filled. But if the equilibrium price is well above the original ticket price, there is the potential for huge gain by the agencies, who may pay the seller considerably less than the agency then sells the ticket to someone else.

What is more, the difference between the original price and the equilibrium price in the secondary market makes ticket touting, or ticket ‘scalping’, highly profitable. This is where people buy tickets with no intention of using them themselves but in order to sell them at much higher prices on the secondary market. Such ticket touting has been illegal for football matches since 1994 and was illegal for the 2012 London Olympics, but it is legal for plays, concerts, festivals and other events.

Ticket touts are often highly organised in obtaining tickets at official prices by buying early and using multiple credit cards and multiple identities to avoid systems that restrict the number of tickets issued to a card. They often use internet bots to mass purchase tickets the moment they go on sale.

Those in favour of ticket touting argue that the high price in the secondary market is just a reflection of demand and supply (see the IEA article below). Ticket touting allows tickets to be directed to people who value them most and will get the greatest benefit from it. What is more, banning ticket touting, so the argument goes, would simply drive it underground.

Those against argue on grounds of equity. Ticket prices set below the equilibrium are designed to give greater equality of access to fans. Rationing on a first-come first-served system, either on the internet or by a queue, is seen to be fairer than one by ability/willingness to pay. A poor person may be just as keen to go to an event as a rich person and gain just as much enjoyment from it, but cannot afford the high equilibrium price. What is more, non of the profit from the higher prices reaches the event organisers or the artists or players. Yet the mark-up and hence profit made by ticket touts can be massive, as the first Observer article below shows.

Various measures are being tried to prevent ticket touting. One is the use of paperless tickets, with the number of tickets limited per person and with people having to show their ticket on their phones along with ID at the door or gate. If a person cannot attend, then the solution is a system where they can give the ticket back to the box office (perhaps electronically) which will re-sell it for them at the official price.

A government-backed investigation, the Waterson review reported in May 2016 and recommended that touts should be licensed and that there should be harsher penalties for firms that flout consumer rights law as applying to ticket sales. Whether this would be sufficient to bring secondary market prices down significantly, remains to be seen. In the meantime, organisers do seem to be trying to find ways of beating the touts through smarter means of selling.

Articles
MP Nigel Adams calls for secondary ticket marketing to be reformed Music Week, James Hanley (14/9/16)
Iron Maiden go to war with ticket touts BBC News, Mark Savage (22/9/16)
The new age of the ticket tout BBC World Tonight, Andrew Hosken (25/5/16)
Government urged to help music industry tackle ticket touts The Guardian, Rob Davies (13/9/16)
Ticket touts face licensing threat The Guardian, Rupert Jones (26/5/16)
How the ticket touts get away with bleeding fans dry The Observer, Rob Davies and Rupert Jones (15/5/16)
What sorcery is this? A £140 ticket for new Harry Potter play now costs £8,327 The Observer, Rob Davies and Laurie Chen (14/8/16)
Ticket touts made $3m from the last Mumford & Sons tour. $0 went back to the music industry. Music Business Woldwide, Adam Tudhope (6/9/16)
This is tout of order – join the Daily Mirror campaign to beat rip-off ticket resales Daily Mirror, Nada Farhoud (19/9/16)
Ticket touts: A muggle’s game The Economist (20/8/16)
Can We Fight Back Against The Robot Touts Ruining Live Music? Huffington Post, Andy Webb (6/9/16)
In defence of ticket touts Institute of Economic Affairs, Steve Davies (25/2/15)

Report
Consumer protection measures applying to ticket resale: Waterson review Department for Business, Innovation & Skills and Department for Culture, Media & Sport 26/5/16)

Guide
#Toutsout MMF & FanFair Alliance September 2016

Questions

  1. Why can ticket touts sell tickets above the equilibrium price shown in the diagram?
  2. In what ways could ticket touts be said to be distorting the market?
  3. How do ticket touts reduce consumer surplus? Could they reduce it to zero?
  4. Why may allowing ticket touting to take place result in empty seats at concerts or other events?
  5. Would it be a good idea for event organisers to charge higher prices for popular events than they do at present, but still below the equilibrium
  6. How does the price elasticity of demand influence the mark-up that ticket touts can make? Illustrate this on a diagram similar to the one above.
  7. Is it in ticket touts’ interests to adjust prices as an event draws closer, just as budget airlines adjust seat prices as the plane fills up? Could organisers sell tickets in the primary market in this way with prices rising as the event fills up?
  8. Discuss the various ways in which the secondary ticket market could be reformed? To what extent do these involve reforms in the primary ticket market?
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Is personalised pricing possible?

A number of famous Business Schools in the UK and US such as MIT Sloan, NYU Stern and Imperial College have launched new programmes in business analytics. These courses have been nicknamed ‘Big Data finishing school’. Why might qualifications in this area be highly valued by firms?

Employees who have the skills to collect and process Big Data might help firms to successfully implement a pricing strategy that approaches first-degree price discrimination.

First-degree price discrimination is where the seller of a product is able to charge each consumer the maximum price he or she is prepared to pay for each unit of the product. Successfully implementing this type of pricing strategy could enable a firm to make more revenue. It might also lead to an increase in economic efficiency. However, the strategy might be opposed on equity grounds.

In reality, perfect price discrimination is more of a theoretical benchmark than a viable pricing strategy. Discovering the maximum amount each of its customers is willing to pay is an impossible task for a firm.

It may be possible for some sellers to implement a person-specific pricing strategy that approaches first-degree price discrimination. Firms may not be able to charge each customer the maximum amount they are willing to pay but they may be able to charge different prices that reflect customers’ different valuations of the product.

How could a firm go about predicting how much each of its customers is willing to pay? Traditionally smaller sellers might try to ‘size up’ a customer through individual observation and negotiation. The clothes people wear, the cars they drive and their ethnicity/nationality might indicate something about their income. Second-hand car dealers and stall-holders often haggle with customers in an attempt to personalise pricing. The starting point of these negotiations will often be influenced by the visual observations made by the seller.

The problem with this approach is that observation and negotiation is a time-consuming process. The extra costs involved might be greater than the extra revenue generated. This might be especially true for firms that sell a large volume of products. Just imagine how long it would take to shop at a supermarket if each customer had to haggle with a member of staff over each item in their supermarket trolley!! There is also the problem of designing compensation contracts for sales staff that provide appropriate incentives.

However the rise of e-commerce may lead to a very different trading environment. Whenever people use their smart phones, laptops and tablets to purchase goods, they are providing huge amounts of information (perhaps unconsciously) to the seller. This is known as Big Data. If this information can be effectively collected and processed then it could be used by the seller to predict different customers’ willingness to pay.

Some of this Big Data provides information similar to that observed by sellers in traditional off-line transactions. However, instead of visual clues observed by a salesperson, the firm is able to collect and process far greater quantities of information from the devices that people use.

For example, the Internet Protocol (IP) address could be used to identify the geographical location of the customer: i.e. do they live in a relatively affluent or socially deprived area? The operating system and browser might also indicate something about a buyer’s income and willingness to pay. The travel website, Orbitz, found that Apple users were 40 per cent more likely to book four or five star hotel rooms than customers who used Windows.

Perhaps the most controversial element to Big Data is the large amount of individual-level information that exists about the behaviour of customers. In particular, browsing histories can be used to find out (a) what types of goods people have viewed (b) how long they typically spend on-line and (c) their previous purchase history. This behavioural information might accurately predict price sensitivity and was never available in off-line transactions.

Interestingly, there has been very little evidence to date that firms are implementing personalised pricing on the internet. One possible explanation is that effective techniques to process the mass of available information have not been fully developed. This would help to explain the growth in business analytics courses offered by universities. PricewaterhouseCoopers recently announced its aim to recruit one thousand more data scientists over the next two years.

Another possible explanation is that firms fear a backlash from customers who are deeply opposed to this type of pricing. In a widely cited survey of consumers, 91% of the respondents believed that first-degree price discrimination was unfair.

Articles
Big data is coming for your purchase history – to charge you more money The Guardian, Anna Bernasek and DT Mongan (29/5/15)
Big data is an economic justice issue, not just a Privacy Problem The Huffington Post, Nathan Newman (16/5/15)
MIT’s $75,000 Big Data finishing school (and its many rivals) Financial Times, Adam Jones (20/3/16)
The Government’s consumer data watchdog New York Times, Natasha Singer (23/5/2015)
The economics of big data and differential pricing The Whitehouse blog, Jason Furman, Tim Simcoe (6/2/2015)

Questions

  1. Explain the difference between first- and third-degree price discrimination.
  2. Using an appropriate diagram, explain why perfect price discrimination might result in an economically more efficient outcome than uniform pricing.
  3. Draw a diagram to illustrate how a policy of first-degree price discrimination could lead to greater revenue but lower profits for a firm.
  4. Why would it be so difficult for a firm to discover the maximum amount each of its customers was willing to pay?
  5. Explain how the large amount of information on the individual behaviour of customers (so-called Big Data) could be used to predict differences in their willingness to pay.
  6. What factors might prevent a firm from successfully implementing a policy of personalised pricing?
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Peak stuff

As most developed countries continue to experience low rates of economic growth, governments and central banks struggle to find means of stimulating aggregate demand. One explanation of sluggish demand is that people on higher incomes have enough of most things. They have reached ‘peak stuff’. As the Will Hutton article linked below states:

Around the developed world consumers seem to be losing their appetite for more. Even goods for which there once seemed insatiable demand seem to be losing their lustre. Last week, mighty Apple reported that in the last three months of 2015 global sales of the iPhone stagnated, while sales of iPads tumbled from 21m units in 2014 to 16m in the same three months of 2015. In the more prosaic parts of the economy – from cars to home furnishings – there are other warnings that demand is saturated.

People on lower incomes may still want more, but with income inequality growing in most countries, they don’t have the means of buying more. Indeed, a redistribution from rich to poor may be an effective means of increasing aggregate demand and stimulating economic growth.

It’s important to clarify what is meant by peak demand for such products. It is not being said that people will stop buying them – that future demand will be zero. People will continue to buy such products. In the case of durables, people will buy replacements when products such as furniture, fridges and cars wear out; or upgraded versions as new models of televisions, smartphones or, again, cars come out; or new music tracks or films as they become available for download, or clothing as new fashions appear in shops. In the case of foodstuffs, concerts, football matches and other consumables, they too will continue to be purchased. The point is, in the case of peak demand, the demand per period of time is not going to grow. And the more products there are that reach peak demand, the harder it will be for companies and economies to grow.

If peak demand has generally been reached, it is likely that the demand for material resources will also have peaked. Indeed, we could expect the demand for material resources to be declining as (a) there has also been an increase in the efficiency of production, so that a lower volume of material inputs is required to produce any given level of output and (b) there has been a general switch towards services and away from physical goods. The graph shows domestic material consumption in the UK in millions of metric tonnes. Domestic material consumption is defined as domestic extraction of resources minus exports of resources plus imports of resources. As you can see, domestic material consumption peaked in 2004.

But, although peak demand may have been reached in some markets, there are others where there is still the potential for growth. To understand this and identify where such markets may be, it is important to step back from simple notions of consumption to satisfy materialistic demand and focus on the choices people might make to increase their happiness or wellbeing or sense of self worth in society. Thus while we might have reached peak red meat, peak sugar, peak cars, peak furniture and even peak electronic gadgets, we have not reached peak demand for more satisfying experiences. The demand for education, health, social activities, environmental conservation and a range of fulfilling experiences may have considerable potential for growth.

There are business opportunities here, whether in the leisure industry, in building networks of like-minded people or in producing niche goods that satisfy the demands of people with specific interests. But without greater equality there may be many fewer business opportunities in the mass production industries producing standardised goods.

This is not a world in which goods and services are produced at scale as conventionally measured, but a honeycomb economy of niches and information networks whose new dynamics we barely understand, even if we have a better grasp of its values.

If having more no longer satisfies us, perhaps we’ve reached ‘peak stuff’ The Guardian, Will Hutton (31/1/16)
Steve Howard, Ikea Exec, Says The World Has Hit ‘Peak Stuff’ Huffington Post, Zi-Ann Lum (20/1/16)
We’ve hit peak home furnishings, says Ikea boss The Guardian, Sean Farrell (18/1/16)
Peak stuff: the ‘growth’ party is over. So what next? The Ecologist, Bennet Francis and Rupert Read (22/1/16)
Have we reached peak ‘stuff’? The Mancunion, Tristan Parsons (22/2/16)
Ikea senses room to grow amid ‘peak stuff’ Financial Times, Aliya Ram and Richard Milne (18/1/16)
Peak Stuff ifs insights, Janet Hontoir (21/2/16)
UK retail sales soar as Brits splash their cash on ‘fun stuff’ The Telegraph, Szu Ping Chan (19/2/16)
How less stuff could make us happier – and fix stagnation The Guardian, Katie Allen (26/4/16)

Questions

  1. What are the implications of countries reaching ‘peak stuff’ for (a) the marginal utility of mass produced goods; (b) the marginal propensity to consume and the multiplier?
  2. Give some examples of goods or services where peak stuff has not been reached.
  3. If peak stuff has only been reached for certain products, does this mean that there may still be considerable potential for stimulating aggregate demand without a redistribution of income?
  4. Would it be in the interests of companies such as Asda to make a unilateral decision to pay their workers more? Explain why or why not.
  5. Why may we be a long way from reaching peak demand for housing, even without a redistribution of income?
  6. Make out a case for and against tax cuts as a way of stimulating (a) economic growth and (b) a growth in wellbeing? Do your arguments depend on which taxes are cut? Explain.
  7. The Ecologist article states that “Attaining one-planet living will probably involve in due course achieving degrowth in countries such as ours: building down our economy to a safe level.” Could such an objective be achieved through a mixed market economy? If so, how? If not, why not?
  8. Does the Telegraph article suggest that peak stuff has not yet been reached as far as most UK consumers are concerned?
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The sexist surcharge!!

Recent reports in the media have included headlines such as “Sexist surcharge” and “Pink premium?” Various claims have been made that women pay significantly higher prices for similar products than men.

The Times newspaper recently published the results from an investigation it carried out on the prices of hundreds of similar products that were marketed at both men and women. The study found that those products marketed at women cost 37% more on average than similar versions that were marketed at men. Examples included:

Disposable razors: Tesco priced a packet of five of its own-brand disposable razors for women at £1. The key characteristic that targeted the razors at female customers was the colour – they were pink. For the same price, a packet targeted at male customers (i.e. they were blue) contained 10 disposable razors.
Ballpoint pens: Staples priced a packet of five pastel-coloured Bic pens marketed ‘for her’ at £2.99. A packet of five Bic pens that were not in the ‘for her’ range (i.e. they had transparent barrels) were priced at £1.98.
Scooters: Argos increased the price of a child’s scooter by £5 if it was pink instead of blue.

Maria Miller, the chair of the Women and Equalities Select Committee, stated that:

“It is unacceptable that women face higher costs for the same product just because they are targeted at women. Retailers have got to explain why they do this.”

A more detailed study carried out by New York City’s Department of Consumer Affairs was published in December 2015. Average prices were collected for 794 individual items across 5 different industries. The key findings were that products marketed at women were

7 per cent more for toys and accessories
4 per cent more for children’s clothing
8 per cent more for adult clothing
13 per cent more for personal care products
8 per cent more for health products

Interestingly whereas the investigation in the UK only found examples of women paying higher prices than men, the New York study found some goods where the price was higher for men.

Reports in the media have claimed that this is clear evidence of price discrimination. Although this is likely to be true, it is impossible to say for certain without more detailed information on costs.

For example, when referring to the higher price for the razors marketed at women in the UK study, Richard Hyman, an analyst at RAH Advisory, stated that:

“the packaging will be different and they will sell fewer so it could be to do with the volume”

If economies of scale and the different costs of packaging can fully account for the difference in prices between the razors then it is not an example of price discrimination.

Articles
The sexist surcharge – how women get ripped off on the high street The Guardian 19/01/16
Women paying more than men for everyday products The Independent 19/01/16
Price differences for men and women ‘astonishing’ BBC 19/01/16
Pink premium? There are greater problems The Guardian 24/01/16
Being a women costs more than being a man CNBC 23/12/15

Questions

  1. Define price discrimination.
  2. Outline and explain the three different categories of price discrimination.
  3. Could a situation where a firms charges all of its customers the same price for a good or service ever be classed as an example of price discrimination?
  4. A firm with market power may still not be able to successfully implement a policy of price discrimination. Explain why.
  5. Under what circumstances could price discrimination improve allocative efficiency?
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