Pirates: Rational Profit Maximizing Entrepreneurs of the Sea

January 24, 2012 9 Comments

Pirates are awesome.  Economics: also awesome.  The combination?

Check out this report: The Economics of Piracy.  It uses data from 1500 Somalian pirates to look at the future of international piracy.  An excerpt:

Pirates would appear to be the very essence of rational profit maximizing entrepreneurs described in neo-classical economics. Expected profits determine decisions based on the information available. The supply of pirates, therefore, is closely related to the expected benefits of being a pirate and the associated risk adjusted costs.

Yep. You read that right. Pirates are economics bad-asses.

The paper, which looks primarily at Somalian pirates, explores piracy in several arenas, and concludes that incidents of piracy will substantially expand in the coming years, primarily due to the rising income disparity betwen pirates and non-pirates.

How big a problem is piracy? In 2010, the cost of piracy to the international community was between $4.9 and $8.3 billion.  Off the coast of Somalia, the total income to pirates, from piracy, was between $75 and $238 million in 2010.

Thinking about hitting the high seas as a Somalian pirate? You can expect to earn between $168,630 and $394,200 over a five year career. If you choose the next best legal alternative, you’ll probably make $14,500 – over your entire working life.  At those prices, piracy doesn’t look so bad.

To combat piracy, the paper recommends the formation of a Global Contract Group, as well as new developments to asymmetric law and law enforcement.

Check it out.  Worth a read.

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Game Theory of Black Friday

November 25, 2011 1 Comment

If you’re reading this real-time, you’re probably not out shopping.

Black Friday, the day after Thanksgiving, is a day of shopping madness, and is sometimes considered the beginning of the Christmas shopping season. Most major retailers open extremely early andd offer promotional sales to kick off the shopping season.

A few days ago on NYT, Robert H. Frank described Black Friday as a retail race to the bottom in terms of a zero-sum or negative-sum game:

In recent years, large retail chains have been competing to be the first to open their doors on Black Friday. The race is driven by the theory that stores with the earliest start time capture the most buyers and make the most sales. For many years, stores opened at a reasonable hour. Then, some started opening at 5 a.m., prompting complaints from employees about having to go to sleep early on Thanksgiving and miss out on time with their families. But retailers ignored those complaints, because their earlier start time proved so successful in luring customers away from rival outlets.

Tyler Cowen, of MarginalRevolution, has a different opinion.  Based on the fact that early December has in general the cheapest prices of the year, not Black Friday, he says:

Dare I suggest that some people like waiting in those lines with their thermos cups and stale bagels.  You could try to argue they are “forced to do so,” to get the bargains, but in a reasonably competitive world  each outlet will (roughly) try to maximize the consumer surplus from visiting the store, including the experience of waiting in line.

All I know is that a few of my colleagues were more excited to go home for Black Friday than for Thanksgiving on Thursday.

Wondering why Rebecca Black’s face is the photo for this post?  Check out the commercial below.  Read about it here.

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Economics of this Halloween party

October 28, 2011 Leave a comment

On Saturday, I’ll be attending the Ghost Ship Halloween party, mainly because several of my good friends are going.  I was wrangled into the party a few weeks ago when one of them sent out an email directing us to the ticketing website.

This post is about the cleverness of the Ghost Ship’s ticketing strategy.

The pricing structure looked something like this*:

  • Super Early-bird Presale: $25
  • Early-bird Presale: $30
  • Regular Presale: $35
  • Presale: $40
  • Last Chance Presale: $45

*I couldn’t remember what the names of each tier were, so I made them up. You get the idea.

These weren’t actually time-sensitive tickets; sales for each tier all ended a few days before the party. At the time the tickets were posted, you could purchase any one of these options.  I could theoretically purchase the Super Early-bird Presale or the Last Chance Presale.  Obviously, given the option, I’d prefer to purchase the less expensive ticket.

So, why wouldn’t everyone purchase the Super Early-bird Presale tickets?  Well, there were only a limited number of tickets at each pricing tier.  And those coming to the website closer do the date of the party would see which tiers sold out.  So, when I got to the website, the pricing structure looked more like this:

  • Super Early-bird Presale: $25 Sold Out
  • Early-bird Presale: $30 Sold Out
  • Regular Presale: $35 Sold Out
  • Presale: $40 Sold Out
  • Last Chance Presale: $45

I quickly purchased a ticket because, well, look at the ticket sales – a lot of people were apparently going to this party.

What’s going on here?  Ghost Ship was doing something pretty clever – they were using the ticket sales to publicly indicate how many people were purchasing tickets to the party.  The ticket sales were an indicator of the party’s popularity.

Not only that, but they were playing off of a phenomenon we discussed last week: Loss Aversion.  Tickets for Ghost Ship were selling out quickly, and I didn’t want to lose the opportunity to purchase one and attend the party … so I bought one.

There’s more to this story about ticket sales, such as the black market for tickets on Craigslist that erupted shortly after the final tier sold out, or the limited number of more expensive tickets available at the door (encouraging people to show up early), or the awesome costumes we made.  But this post is long enough as it is.

Happy Halloween!

Edit: This post got written up on the WePay blog!  Check it out here.

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Closing the Deal

October 14, 2011 3 Comments

Caveat:  This post is about sales.  I don’t usually like reading blogs about sales, but, while my job isn’t directly in the realm of sales, I interact with a lot of sales people on a daily basis.  I like tying game theory in with my job, and this seemed like the perfect opportunity.

At one point or another, all sales reps have faced this problem: a potential customer goes “Radio Silent.”  This is what happens when, after a sales rep has several engaging conversations with a prospect, the prospect disappears.  They don’t pick up their phone and they don’t answer emails.  Often, this is intentional and a signal that the prospect is no longer interested.  Sometimes it just means they’re busy.  Either way, the sales rep usually wants to know what’s happening on the other end.

A few sales reps I know will send out an email like this:

I will make this quick, as I haven’t heard from you lately regarding your interest in [product].
If I can ask a favor: could you please let me know if our services are no longer of interest to [company]??  Should I close out this discussion?

Potential customers respond almost immediately.

Why does this work?  Potential customers feel like they’re going to lose something – a connection with your company, the opportunity to purchase a product, or something less well defined.

This is a phenomenon called Loss Aversion.

Loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains.

What does that mean?  If you have an apple, and someone takes it away, you feel less happy.  Someone has to give you two apples in order for your happiness level to be equal to what it was before the first apple got taken away.

Want to get more complex?

Loss aversion was first proposed as an explanation for the endowment effect—the fact that people place a higher value on a good that they own than on an identical good that they do not own … Loss aversion and the endowment effect lead to a violation of the Coase theorem—that “the allocation of resources will be independent of the assignment of property rights when costless trades are possible”

[The endowment effect: If you have an apple, and Joe has an apple that is identical in every way, you still might not want to trade with him, because you value your apple more highly.]

Anyway, back to the topic at hand: For people to negotiate on a daily basis, taking advantage of loss aversion can be an easy way to move the conversation forward.  That being said, tread softly; you probably don’t want to come off as impatient or short tempered.

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The Future of the Internet: Regulation (Part 3 of 3)

July 9, 2011 2 Comments

Today, at the World Future Society 2011 Conference, I joined members of the Weiner, Edrich, & Brown team on a panel about Youth Trends.  I identified three trends related to the internet and social media.

Disclaimer: I am a Googler, however, nothing in this post has been influenced by confidential information or is a commentary on any insider knowledge about any of the topics I might be addressing.

First Trend: Real Names
Second Trend: Reputation

Regulation

The last two trends related to increasing accountability.  Organizations are holding end-users accountable for real names and for confirming their identities.  End-users are holding organizations accountable for their actions, and making decisions based on the reputation of those organizations.

The third trend deals with regulation – governments holding organizations accountable for their actions.  Going forward, the internet is going to be a much more regulated space.  It will be far less of a Wild West, and much more of a New York; a big, full, mature city, with regulations guiding actions of both organizations and end-users.

The European Union is at the forefront of this regulation.  On May 25th, the EU implemented a law surrounding cookies, which are essentially technology tracking devices.  The privacy law, often referred to as a “do not track” law, requires websites within the EU to obtain a visitor’s consent before installing a cookie in their browser.

The EU also has been discussing a “Right to be Forgotten” law.  The law would require websites in the EU to allow users to demand that organizations delete all of that user’s data, whether it’s personal data or unflattering photos.  The EU has been throwing this idea around for a few years; Viviane Reding, the Vice-President of the European Commission, gave a speech about this concept in 2010.  You can read a transcript of her controversial speech here.

The United States has been getting onboard with the “Right to be Forgotten” initiative.  While some of the policy specifics differ with those of the EU, “the EU and U.S. already agree on some general concepts, such as the idea that privacy safeguards need to be designed into Web products from the start.” They also both agree that all end-users should have the “do not track” option.

As any technology does, the internet is growing up.  We’re starting to figure out how it can be useful, harmful, or fun.  The next steps in that evolution are real names, reputation, and regulation.

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