Tuesday, April 12, 2016

Price Discrimination vs. DLC

YouTube user ShoddyCast is one of my favorite channels o'er yonder. For one, he is obsessively, charmingly pedantic about minor video game physics inconsistencies. For two, he cusses like a middle school boy. These are qualities I can't help but admire. But consider this recent foray into economics (featuring Richard Thaler, no less):

He gets several points absolutely correct. Game (and console) pre-orders work well for physical media, so long as the quantity demanded on or around release date is unpredictable. I recall some trouble landing a copy of Silent Hill near its release date, for example. And since I'm the sort of gamer who likes to play a few favorite franchise titles right away, this was irksome. Or maybe it was vexing. Irritating? Whatever the sensation, pre-orders purported to ease the problem. I was promised to no longer be confounded on release day. I was guaranteed a physical copy in my hot little hands. Because I'm the type of player for whom that is important.

Another point he gets right is the time value of money. Unfortunately, he gets it right for the wrong reasons. $60 today is indeed worth more to me than $60 a year from now, but that's true even without inflation. And it's even true without the explicit opportunity cost of foregone investment.

Perhaps I should pause for a moment to cover the concept of opportunity cost. Here's the superlative David Henderson on the topic. Opportunity cost is the [subjective] value of the next-most attractive alternative. In the case of the Fallout 4 season pass (at the original price), the $30 I dropped would have bought me 3 pizzas from my favorite local pizzeria (Tuesdays are buy one, get one free at Brick Pizza). For putting money into a lockbox, the alternative uses could include a couple extra shares in an ETF or an interest-bearing savings account (good luck finding one), but it doesn't have to. All that's needed to show the opportunity cost of holding cash is that you're restrained from spending it. Something might come along that you value more than that thirty bucks, but too bad, Sally. It's out of reach. Better luck next time. You might recognize this as a component to our good friend the regret condition.

He also mostly gets Thaler right. At most department stores, prices on the sale racks are still above the cost of goods sold. Therefore, the full markup price is absurdly, unreasonably high. This sales tactic relies on a cognitive illusion: you think you get a screaming deal on a pair of trousers for $20 because on another day, they might have sold for five times that price. You shake your head and pity the poor sucker too unlucky to shop on that particular day and walk off proud of your shopping acumen. But here's the curious thing: every so often, trousers are indeed sold at full retail price.

What gives? Are these spendthrifts actually behaving irrationally?

What we have here is a yes, if/no, but situation. It is indeed classically irrational to pay full price for something if the lower price is predictably available and if the opportunity cost of waiting for it is lower than the price differential.

Let me give you a quick example. One day, I was scheduled to teach an early morning Public Choice class. My favorite parking spot on campus is a seldom-used dirt and gravel lot near the football pitch on the west side of Patriot Circle. If you know the GMU campus, it's across the street from the hotel (which I think is now closed). Being a brisk early spring morning, the nearby hill that I often used as a shortcut was slick with dew. When I attempted to carefully plot my way down the hill, I lost my footing, went ass over teakettle, and completely ruined my slacks. I had a big ol' mud streak all the way up my left leg. With class starting in 20 minutes, I needed a new pair of pants, pronto. I hopped back into my car, hightailed it to a TJ Maxx, bought what I needed, and tore ass to Robinson B just in time to start my lecture on the Condorcet Paradox. In other words, I had very high opportunity costs thanks to the urgency of my shopping excursion. I was willing to pay more for convenience and speed.

So is it classically irrational to pay full price under normal situations? No, not as long as you can't adequately predict the pattern of future prices. What you're doing by pre-paying is essentially buying a call option. You put your money down now in the expectation that future prices will either rise (which is exactly what happened with Fallout 4) or that something else will change with your own subjective valuation of the good in question. Farmers do this all the time. If you've ever seen the 80s comedy classic Trading Places, you'll be at least passingly familiar with the Frozen Concentrate Orange Juice futures market. This is just a fancy, centralized method for Florida orange farmers to sell their July crop in February. This is quite a boon to farmers who are more interested in fertilizer and weeds than in the vagaries of global demand. The same idea applies with individual pre-purchases. Buying all the DLC ahead of time is a player's way of betting on expected content expansions.

But, and it's a big but, there exist incentives to gain additional information about the future state of the world. For retail department store sales, Thaler is right on the money: it's common knowledge that department stores have been taking great advantage of silly little cognitive blind spots for ages now. You are indeed a sucker to walk out of a Macy's thinking you put one over on the hapless merchant by buying off the discount rack. With low information costs like this, there's precious little excuse to pay prestige prices. But does a season pass for premium content fit this model?

Maybe. It depends on the publisher. Bethesda is notable for releasing DLC that often exceeds the quality of the base game. After the infamous horse armor incident with Oblivion, they overcompensated by giving us the massive Shivering Isles expansion, Mothership Zeta, Dawnguard, Dragonborn, Broken Steel, on and on. And the four New Vegas expansions (even though it was Obsidian rather than Bethesda) were all as good or better than the base game. Tell me you wouldn't be happy just playing Old World Blues as a stand-alone title. Point is, a long-time Bethesda customer has certain expectations about their add-on content. Incidentally, the same holds true for Borderlands publisher 2K. I felt confident enough that the net present value of all the season pass content for Borderlands 2 exceeded the opportunity cost of biding my time. As it turns out, I was right in that instance. The $30 I spent on that pass was a great deal less than the $60+ I would have had to pay on release day to get Gaige, Captain Scarlett, Mr. Torgue's Campaign of Carnage, and the splendid D&D-themed Assault on Dragon Keep. Recall that for these titles, I am the type of player to pay full price for the pleasure of playing them on or very near their release date.

And that last bit there is really the key to price discrimination. Not all shoppers are created equal. Not everyone is so enamored of fictional universes that they'll rush to get new releases on the day they drop. I'm still somewhat baffled that there can be a new Madden every year that sells extremely well, despite being pretty much identical to the previous year, but for a few roster changes. The same goes for the endless parade of FPS titles. But Fallout? You bet your ass I'm first in line to get the Bloody Mess perk and start exploding super mutants all over that wasteland.

The last component here, is of course, Steam sales. Most big titles will bundle up a Game of the Year edition complete with all the DLC a year or so after its initial release. And another year or so after that, you can usually rely on that GoY edition to go on deep discount in the Steam store during one of their periodic (and predictable!) annual sales. For players willing to wait a while, you can get some screaming deals on titles that have been out for a few years. Well over half my Steam library was acquired this way. This pattern is just as well known, just as predictable as Presidents' Day sales at department stores. However, Steam sales are also just as irrelevant to an impatient fan as Presidents' Day sales are to someone who just skidded down a muddy hill and has to teach a class. I want Far Harbor the day it drops, not a moment later. The opportunity cost of waiting exceeds my desire to play as soon as is reasonably possible.

Long story short, if you're an impatient fan, and you have a pretty good expectation that the forthcoming content will be pretty good, Season Passes can be a pretty good deal. Casual fans or folks less confident about the quality of forthcoming DLC are probably better off holding out for the Game of the Year edition round about Christmas time.

Another decent way of thinking about it is that some folks will pay full price to see a movie on opening night. Are they being irrational when they could simply wait until it gets to Netflix? Why or why not?

Monday, March 21, 2016

Martin Tenbones vs Army of Dorkness

Neil Gaiman, on Twitter:
The panels at the link come from A Game of You, one of the little sidebar miniseries in The Sandman. In contrast to many of the other characters in the run, the cheerleader-type blonde protagonist was what the kids these days are calling a "normie": a plain-vanilla citizen. No spider collection, no multicolored hair, no ancient immortal who sits down to drink tea with emperors. Just a regular girl with a regular life. Well, she is incubating an otherdimensional entity in a fragment of her dreams, a chunk of which escapes into the waking world in the form of a giant talking dog that gets shot by the NYPD, but that's neither here nor there. The point is, Barbie is a Regular Girl, and by using a Regular Girl, Gaiman gets to deliver what I thought at the time to be a particularly nasty barb to comic shop owners. Namely, that their places were inimical to girls.

I thought it was a nasty barb, and my first reaction was that it was a strange thing for Gaiman, who was writing under the fledgling Vertigo property of DC at the time to paint this gruesome caricature of a comics proprietor. It seemed like shitting where one eats, so to speak. But then I've never been a girl in a comic shop. And in 1997, I have to admit, I did know more than one comic shop that, were I a girl, I would have thought twice before entering.

I sort of understand how it could happen, too. My economics training tells me that there's a pretty big premium to be paid if you want to alienate a market segment as large as "all women" so therefore, we shouldn't expect to see nasty, unkempt, leering clerks very often. But on the other hand, there are men who have been on the receiving end of contempt from women their whole lives, and developing a carapace of misogyny is one way of coping with that. Comics and roleplaying games occasionally provide a refuge for these sorts of guys, since they're traditionally boys' pursuits. If girls loathe you, go where the girls aren't. Right?

But then something happened. Some of what happened was Gaiman himself. Girls started liking comics in a big way. Sandman had something like 60% female readership. The relative price of running a sour-smelling, female-hostile comic shop increased dramatically. Shop owners who were unwilling to cater to the new customers lost a lot of business. So you'd expect shops like these to be dinosaurs, relics of a bygone era.

Apparently not. His followers began tweeting sordid tales of how some places have gotten worse, as if the no-girls-allowed sensibility has overtaken the remorseless economics. That should be worrying. There's something in the culture that has some men so badly alienated that they're leaving sales on the table in an industry that hasn't been a guaranteed moneymaker since Michael Keaton was Batman.

I occasionally think there's a larger malaise out there and a lot of this stuff: gamergate, Trump, Sad Puppies, this comic shop thing... I think these all might be symptoms of the same underlying problem. I'm not sure what the ultimate cause is, but even if the source can be accurately identified, I'm not convinced that there is an easy or cheap solution.

Wednesday, March 2, 2016

Risk, Reward, and Romance: I Do Like Them. Sam I Am.

Happy birthday, Dr. Seuss.

Today, my 4 year old dressed up as Sally from The Cat In The Hat despite her reluctance to wear a bow in her hair in celebration of your contributions to Western Literature. How many young minds have your iambs set off on a lifetime relationship with the joy of reading, I wonder?

More interestingly, how have you mirrored and shaped your native culture? Your major canon is infused with the very same specific cultural values that Tocqueville identified as being idiosyncratically American. Horton is loyal and diligent to a fault: he sits on an egg until it hatches (deus ex machina ending notwithstanding) despite any promise of reward other than the preservation of his own trustworthiness. He exhorts the Whos of Whoville to overcome the tragedy of the commons (a finer allegory for Western expansion I can hardly imagine) for the common defense.

But it's in Green Eggs And Ham that we really see the curious tension in the American experience. A hidebound conservative, hectored incessantly by a pestering Bohemian, dismantles a Chestertonian fence to find he enjoys verdigris-tinted breakfast cuisine. A Romantic confronts the objections of a prude. This, I believe, is the central conflict brought over from the Continent. It is a conflict found few other places. And it is a book that could be written nowhere else.

Happy birthday, Dr. Seuss. May your eternal rest be ever euvoluntary.

Also, my daughter nearly broke down in tears when she heard you died 20 years before she was born.

Saturday, February 20, 2016

Regrets, Small and Large

There must be a word for the sensation evoked by reading the link below. It isn't schadenfreude, neither is it pity. It's the feeling you get when you witness someone expressing regret over perfectly predictable consequences.

As they say, read the whole thing, my friends.

Take note of the postscript. The author was relieved of employment (thanks to the contents of the post?). Does this come as a relief or as additional regret?

How euvoluntary is it to tell your CEO off in public?

For more on bosses and bunny slippers, here is Mungo in his own words.

Wednesday, February 3, 2016

The Irrational Regret of Automatic Withholding

Ladies and Gentlemen, I present you the following:
Today, I found out that my tax filing status was never changed after my divorce. This means I haven't been paying enough and now the government wants its money. FML

 A proletarian gripe, yes. But it's a sentiment pretty widely shared. If you have ever taught a principles course, ask yourself how often you've had to explain the permanent income hypothesis to students. Consider how much effort you've expended trying to shoo away the notion that IRS withholding is pretty close to the worst sort of savings scheme outside of payday lending. Now consider how many students out there never bothered to show up to your classroom in the first place.

Now take a moment to think just how easy it might be to hoodwink a democracy.

I am curious how stubborn a tick this automatic withholding it. Some programs cannot easily be dislodged once in place, thanks to popular support. IRS policy seems at first blush to lack popular support, yet I think it enjoys just enough indifference among the people that multipartisan support by elites is sufficient to ensure its longevity.

Friday, January 29, 2016

Dank Federalism

With the winter chill pestering my Old Virginia home, family swimming excursions are enjoyed at the local rec center. Obliged by my aversion for idle conversation with strangers, I look to heavy tomes to deter the other parents (if not as a signal, then as a melee weapon as a matter of final resort). One of the more imposing volumes in my library is a hardcover translation of Tocqueville, so I've been revisiting Democracy in America while my 4 year old practices the ancient art of annoying other adults.

Something struck me in DiA's dissection of American culture. Federalism, separated hierarchical government, seemed to him to be more than a mere political choice, selected from a suite of otherwise-mostly-equal options. In a rather Humean fashion, he claimed that the town-state-nation organization of politics arose from the very sentiments of the typical Yankee ploughman. Think of it as Tiebout-plus. Rather than residents moving to new towns that better suit their peccadilloes, American residents use American little-d democracy to move town policies to suit them. He didn't say so, but there's pretty good English countryside precedent for this predilection. Peasants settled their own disputes in common law courts rather than petitioning the crown or some local lord. The American colonialists were basically just peasants with a little more self-determination.

The point is, the heuristics of the people determined the form of the organizational structures that were later codified in the national, state, and local constitutions, laws, and codes. Sentiments preceded rules. If this is true, I must wonder what sentiments preceded the slow abolition of local self-determination. What moral intuition explains the gradual loss of town and state sovereignty?

I'm in the habit of thinking of politics as being simply another form of exchange (albeit with a bit more coercion). If I am to cling to this habit, perhaps I should consider taking more seriously the sources of political tastes and how malleable they might be. Sometimes, the bargaining set is null, no matter how well you haggle. What happens when a nation develops irreconcilable differences?

Monday, January 18, 2016

Despotism in America

Count Alexis de Tocqueville on the (17th c.) Connecticut code of laws (Democracy in America vol. 1 ch. 2) [translation errors mostly mine]:
Among these memorials, we will particularly single out, as particularly characteristic, the code of laws given the little State of Connecticut in 1650.
The legislators of Connecticut begin with penal laws, and, for their composition, they conceive of the strange idea to borrow provisions from sacred texts:
“Whosoever shall worship any other God than the Lord,” says the preamble, “shall surely be put to death.”
This is followed by ten or twelve enactments of the same kind, copied verbatim from Deuteronomy, Exodus, and Leviticus.
Blasphemy, sorcery, adultery, and rape were punished with death; an outrage offered by a son to his parents was to be punished similarly. The legislation of a rude and half-civilized people was thus transferred to an enlightened and morally mild community; the consequence was that the punishment of death was never more frequently prescribed by the statute, and never more rarely applied to the guilty.
Side note: I'm aware of the physical condition of many of the original pages, but Tocqueville is an eminently clear, vigorous writer. It is indeed a shame that so many English translations of DiA are prone to burdening his prose with extra baggage. If the original author writes clearly, a good translation should reflect that propensity, n'est ce pas?

Tocqueville was contrasting the character of the sons of the Puritans in New England with the more commercially-minded settlers in Virginia. His claim was that the character of the nation was as the character of a man: one might observe the traits of the adult in the behavior of the child. A nation forged by commerce is one likely to retain commercial virtues; a nation of browbeating harridans is likely to cling to petty despotism. The wonder of America, claims ol' Lexy, is that she is a land of both.

So there is, should you believe de Tocqueville, a curious bundle of predispositions in the United States. On the one hand, there is a deep and abiding appreciation for hard work, honesty, integrity, trust, professionalism, honor, and prudence. On the other hand, there is a deep skepticism about profligacy, ostentation, inequality, and aristocracy. We Americans appreciate the life of an honest yeoman, and revile the pomp of inherited privilege. Or so goes the predisposition anyway. The American mythology seems mostly consistent with that story, even if the actual experience says otherwise.

What, I wonder, might this tell us about the odd moral intuitions about commerce in America? The Connecticut anti-fops described above would doubtless appreciate Elizabethan sumptuary laws, and might find kinship with the petit paternalism flogged in the academy and on the campaign trail. The tight-buckled Capotain-doffing burgher might even see in this round's crop of insufferable presidential candidates something to love: here an authoritarian who promises to scour the land of undesirables, there another authoritarian who promises to purge ostentatious displays of illicit wealth.

I do wonder though. I wonder to what extent these national predispositions color our individual moral intuitions about the nature and extent of the market. Euvoluntary exchange is great, at least until it enriches someone enough that they start behaving boorishly? Exchange can't be euvoluntary if it violates the ancient legislation of a rude and half-civilized people? This presents a curious puzzle for those few of us not instinctively bound by the mores of either the Plymouth rockers or the Richmond rollers. How can you possibly argue convincingly against the crushing weight of four hundred years of national opinion? Reason is slave to the passions, nowhere so much as in the unexamined tabernacle of the poll.

Also, I had totally forgotten that de Tocqueville was nobility. I wonder why we don't include that little tidbit more often in class.