Kidney Holdup

Its seems that, back in 2012, a woman was fired by her boss soon after she donated her kidney to her boss ... because she was taking too long recuperating from the donation.

“I feel very betrayed. This has been a very hurtful and horrible experience for me. She just took this gift and put it on the ground and kicked it.’’

It seems she was hired, or rehired, so as to obtain access to her kidney. She had an implicit expectation that she would have continued employment post-donation. But after the operation, the decision was sunk and created a holdup opportunity.

Of course, she sued and apparently she lost. This may not have happened if selling a kidney were legal and she could have contracted for compensation. A market would likely have other benefits as it moves assets (kidneys) from low values uses (essentially "spare parts" in healthy bodies) to higher valued uses (bodies with nonfunctional kidneys).

How "localized" is hospital competition?

So-called "gravity choice models" estimate demand using revealed preference.  For example, a vacationer who passes a nearby polluted lake to travel a more distant one tells us that she values the pollution reduction associated with the more distant lake by more the increased “travel time” that she “pays” for it.  Similarly, a consumer who passes a lower-quality grocery store to visit a more distant one tells us that he values the higher quality shopping experience by more the increased travel time that he pays for it.  In both of these applications, the opportunity cost of travel is estimated or assumed to be about $25/hour, close to the median wage.

For health care gravity choice models, however, consumers behave as if their travel costs are much, much higher.  For example, a typical patient will not travel five minutes for elective surgery at a more distant hospital with much lower mortality risk.  The implied opportunity cost of travel is several orders of magnitude higher than in these other contexts, e.g., as much as $100/minute.  This means that competition is extremely localized, or that a merger between two nearby hospitals, located even a small distance away from a non-merging rival, can have enormous effects. 

However, the real reason for the observed reluctance to travel may not be the patient's aversion to travel, but rather the preferences of the patient's physician.

DeveshRaval and Ted Rosenbaum at the FTC show this by estimating travel costs by comparing the change in hospital choice between the first and second births for women who move and switch hospitals.  If the travel costs are all that is determining hospital choice then the woman should switch to a nearby hospital for her second child's birth.  But the data show that the woman is often likely to go to hospitals that are not as close at second birth.  The authors conclude that there must be that something other than distance, like physician preference, determining her choices.  

Their corrected estimates of travel cost imply that demand falls by 5.4% for an extra minute of travel, about half of what it would be without the correction.  

Bottom line:  hospital competition is localized, but about 50% less localized than it would appear from looking at simple choice models.

Taxes and Light Rail vs. Uber and Express Lanes

Colleague Malcolm Getz posts a critique of Nashville's transit plan, up for a vote on May 1, 2018.  He uses the "indifference principle" from chapter 9 to conclude that neither bigger roads, nor mass transit, will reduce congestion

With wider roads, traffic expands to congest them. This well-established fact is the "iron law of traffic." ...

Similarly, ... when some people shift from cars to transit, other people take their place on the roads. Visit cities with vast transit services—Chicago and Atlanta, for example. Notice that roadways are as congested as those in Nashville, if not more so. Transit may attract riders but does not reduce traffic congestion. The average time to travel to work by car is 24.2 minutes in Davidson County, TN, 27.6 minutes in Fulton County, GA, and 32.6 in Cook County, IL.

So what does Professor Getz recommend?  Car-hailing Services and Express Lanes.

The new services will reduce congestion with the confluence of three factors. A) The car services, including Lyft, are more convenient than owning a car or using conventional transit for many trips. B) The car-service companies are offering increasingly sophisticated shared-ride services. C) Digital systems are managing the flow of traffic in real-time on express lanes to forestall congestion. Taken together, these developments improve mobility, increase the capacity of the road network, and reduce congestion. They are also less expensive than trains.

Perhaps the most intriguing part of the report to students is that Prof. Getz uses the indifference principle to evaluate the fairness of using a broad-based sales tax to finance transportation improvements.  Provided that the transit plans work as intended,

Where better transit improves access to a location, the value of real estate increases. Market rents on housing and commercial space increase. The benefits of the transit improvement, then, go to the landlords, the owners of the real estate with better access, not to the transit riders. 

If readers disagree with Professor Getz's analysis, please comment!

Wither the Price Tag?

Planet Money ran a story about the price tag a few years ago. The premise of the story is that the price tag emerged in just the 1870s and may be on its way out. So how did you know what to pay previously?

You know, for almost all of the history of human commerce - for thousands of years - you walk into a store, and you point to something. And you say, how much does that cost? The guy at the store is going to say, how much you got? You know, everything was a negotiation.

Price tags saved transactions costs but removed the ability to price discriminate. There is a nice discussion of how price tags lowered the skill level required by clerks, and hence labor costs. But now we are in the era of online 'personalized pricing,' a constant price on a tag seems to be on the way out. But we are still working out the rules.

And there is this broader sense, I think, that right now, you know, we're still trying to figure out the rules of this new pricing universe we're in. There is one thing the people clearly don't like, that clearly at least so far is against the rules. And that is when a company charges different customers different prices at the same moment. 

Perhaps this is a quibble, but the point of price tags was to minimize the costs of haggling. The new pricing mechanisms typically do not invite haggling back.

18th Century Pretzel Standardization

Pretzels, or bretzels, were an important part of the cuisine in southern Germany at least since the 12th century. Apparently, shirking on the size of pretzels could be a problem. The photo here is from Heidelberg and represents a solution adopted nearly three centuries ago. The size and shape of a 'standard' pretzel, about 10" in diameter, was engraved onto the stones at the base of the central cathedral. If anyone suspected they were being cheated, they could place their pretzel on top of the engraving to verify if it was, in fact, large enough. This is an early example of the regulation of minimum quality standards.

BTW, pretzels in southern Germany (with a little butter) are delicious and Heidelberg is a lovely town to visit.

Scaling up Auto Dealership Size

The WSJ reports that the efficient size of an auto dealership in the US is getting larger. They have become 20% larger over the past four years:

The top 50 dealer groups are poised to book more than $175 billion in revenue this year, compared to $144 billion 

There is an consolidation wave going on:

Erin Kerrigan, founder of the Kerrigan advisory, said about 200 dealerships changed hands in 2017, near an all-time high with a similar level of transactions to take place this year.

An economist observer naturally asks why?

1. One explanation suggests that inefficient small firms had been able to survive only because of weak competition. They cannot stay afloat on the smaller margins:

... dealer margins are shrinking amid tough competition and the increased pricing transparency enabled by the Internet. Dealers took home about 2.5% of the selling price of the average new car in 2017, down from about 4.7% in 2009, according to data from the National Automobile Dealers Association; used-car margins slipped to 6.9% from 10.7% in 2009 during that period.

and

 Dealers say they need to as much as triple revenue in the next half-decade to offset shrinking margins and increasing competition from companies that didn't exist a decade ago.

2. Another explanation is that the cost conditions changed so that unit costs are lowest at a larger scale.

"In order to survive and thrive you need scale and scope and access to capital," he [Mr. Rosenberg, chief executive of GPB Capital] said.

DON'T PANIC: a guide to claims of increasing concentration

New paper by some middling economists:

The Obama Administration’s Council of Economic Advisers (CEA) sounded an alarm in 2016 with an “issue brief” pointing to indications of “a decline of competition.” Principal among them was “increasing industry concentration,” and the key evidence was data from the U.S. Census Bureau. Commentators relied on these data in advocating antitrust reform. But these data do not demonstrate increasing concentration of markets, i.e., ranges of economic activity in which competitive processes determine price and quality, and in which the impact of mergers and trade restraints are evaluated in antitrust law.  

Market concentration is a useful indicator of competition, but Census data relate to aggregations of economic activity much broader than markets. We show that even the least aggregated Census data can be over a hundred times too aggregated, yet the CEA used the most aggregated Census data. It principally cited the change in the 50-firm concentration ratio for 13 broad sectors of the U.S. economy, such as retail trade. We agree with Carl Shapiro, a member of the CEA during the Obama Administration (2011– 12), that these data are “not informative regarding the state of competition.”

These claims have spread rapidly into policy debates without careful review of the claims or the underlying data on which they are based.