Monthly Archives: March 2019

Equilibrium response to reduced material use for plastic bags

Probably to save material on the manufacture of the free plastic shopping bags in the US, these bags are small and thin compared to the ones in Estonia (which used to be free, but are now priced at significantly above production cost due to EU regulations on disposable plastic products). The equilibrium response of cashiers and customers to thin flimsy bags is to double-bag groceries, a practice unheard of in Estonia. After all, if one bag is sturdy enough, almost nobody will use two inside each other. I have successfully carried 10 kg in an Estonian plastic bag.

The equilibrium response to small bags is to distribute the groceries among many bags, especially the heavy or bulky items, for example to put each milk canister or large salad sack into a separate bag. Both double-bagging and the one-item-per-bag distribution lead to more bags being used in response to manufacturing each bag out of less material. It is an empirical question whether thinner, smaller bags result in less or more plastic waste overall. To incentivise reducing the one-time use of plastic bags and to encourage reuse, customers should have to pay for these, like in the EU.

One form of plastic bag reuse is as garbage bags (although it is only a one-time reuse, it is better than nothing). However, the flimsy free bags in the US come in bulk packs with the bottoms of the bags stuck together, so separating one from the stack often results in holes in its bottom an inch wide or more. The holes discourage many forms of reuse, including as trash bags, because small items (dust, crumbs, scraps) fall out. Partly the holes are due to the flimsiness of the material, partly to the way the bags are glued together to make a bulk pack.

Claims that tickets are running out

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Both for paid and free events, the organisers often advertise that only a few tickets or places remain. The ad sometimes explicitly tells the viewer to register or buy now. Such advertising is costly, so there should be a benefit to the organiser. If the tickets have already sold out, then the benefit is zero, or at least smaller than if the event is not fully booked. The positive benefit from advertising a sold-out event is to build reputation for the future as an organiser of popular events, similarly to real estate agents putting a „Sold” sign in front of a house on which they closed the deal.

Given that the benefit of costly advertising is smaller when no tickets remain, some sellers should decide to advertise if and only if the event has not sold out. More generally, the probability of advertising should increase in the number of tickets remaining. In this case, rational buyers should treat advertisements saying that limited spaces remain as signals of the opposite – frequent ads show a desperate seller facing low demand. If most buyers think this way, then such advertising is counterproductive, because buyers want to delay their purchases when the probability of being able to buy in the future is large enough. The option value of waiting comes from the possibility that the buyer’s preferences change – a better event may become available, or some emergency may prevent the buyer from attending. Getting a refund for a ticket already bought is at least a hassle and may even be impossible.

The widespread claims of limited space remaining suggest that these ads boost purchases. One reason may be buyer attention – ads make them notice the opportunity to buy, which some of them wish to take advantage of. However, any ads draw attention to the event, so raising awareness cannot be the reason for the specific claim that tickets are running out.

For most events, buyers do not want to coordinate with the largest possible crowd, only with their friends, so do not prefer a fully booked event to a half-full one. Thus claims that the event is almost sold out are difficult to explain by the seller trying to coordinate buyer actions.

Some irrationality of buyers or the seller seems necessary to explain messages that demand is low. Either the buyers take the claim literally instead of using Bayes’ rule to infer the opposite, or the seller advertises despite ads decreasing demand.

It is an empirical question whether the target audience of ads saying that space is running out interprets these as signalling high or low demand, and whether these messages make people delay their purchase or speed it up.

Free wifi lies

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Many airports, hotels and other public places advertise free wifi, but in a significant fraction of them, the wifi does not work, e.g. in Doha Airport. One view about this is that you get what you pay for. On the other hand, the claim of providing free wifi makes people try to connect and wastes their time. Everyone would be slightly better off if the non-working wifi was not advertised – the advertiser would save the cost of printing the „Free wifi” signs and the visitors would save time.

It is cheap for the service provider to check whether the wifi is in fact working – just program a few cheap used smartphones to periodically try to connect to the wifi and send a notification to IT if the connection attempt fails. The connection failure may even trigger an automatic restart of the router.

Some airports may have wifi available, but only to a restricted group of people. For example, in India, connecting requires a local phone number, which most international travellers do not have. In Singapore and Shanghai airports, the wifi requires either a local number or scanning one’s passport in a kiosk, and the kiosks are sometimes out of order. Again, looking for the kiosk and trying to scan wastes time.

Intermittent wifi may be better or worse than none, depending on what fraction of time it is available and people’s average time cost of trying to connect.

Online check-in lies

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Almost all airlines advertise the option to check in online and send email reminders to do so. In my experience, some airlines (Qantas, Air New Zealand and Qatar Airways) frequently do not allow online check-in despite falsely claiming that it is always available, or only unavailable to underage people and large groups. Email reminders to check in online seem like mockery in this case, but are still sent.

The false advertising of online check-in wastes customers’ time by encouraging them to start the data entry process. Often the process can be almost completed and only at the end does a message appear saying that online check-in is unavailable. To reduce the wasted time, the process should be stopped as soon as possible whenever it cannot be completed but is nonetheless started. It seems a simple IT fix to not send the automated reminder emails when online check-in is unavailable, and display the message „Online check-in unavailable” at the start of the data entry process instead of at the end.

A similarly ironic tone to falsely advertising online check-in is achieved by sending „we value your opinion” emails from a no-reply email address, or claiming to listen to customers but providing no contact email or phone on the website. Such mockery is practiced by many large companies. Sometimes the firms provide a feedback form that is user-unfriendly and requests lots of personal data. Or they may refer inquiries to a very limited FAQ section. The FAQ sometimes lists questions no real customer would ask, along the lines of „What makes your product so excellent?” These questions are in the FAQ just to let the company repeat their marketing slogans.

Chair material should be breathable

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Strangely enough, fancy office chairs are often upholstered in leather or other non-breathable material. After an hour or so, sitting in them gets uncomfortable because the moisture does not evaporate from the skin that is separated from the chair only by some cloth. However, people usually sit in office chairs for hours at a time, and I doubt that the chairs are designed to deliberately provide some discomfort to encourage users to occasionally stand up for health reasons. Especially in a hot climate when the air conditioning may break down or just be too weak, a breathable chair would make much more sense. Making a mesh chair is simple: stretch a breathable fabric on the chair frame. The small holes in the fabric let moisture evaporate from the surface. A mesh chair is probably cheaper to manufacture than a leather-upholstered one.

A reason for using leather may be to signal wealth by using a material associated with expensiveness.

Modern synthetic meshes are as durable as leather for practical purposes, because sitting in a chair is not a high-wear use.

Mugs, pens and USB sticks as advertisements

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Several universities I have visited give free mugs to seminar speakers as advertisements for themselves. Similar branded objects (pens, USB sticks, T-shirts, baseball caps) are handed out by firms and political campaigns as part of their marketing.

The idea of giving people practical objects instead of flyers, junk mail or banners is to make the recipients use these objects (as opposed to throwing these away or storing them at the back of a closet), preferably in a public setting, and thus increase the visibility of the advertiser. For this, the more usable the handout, the better.

Unfortunately, the people ordering these objects in bulk and paying for the brand logo to be printed on these are busy administrators who do not connect the overall purpose the marketing campaign to the properties of the objects. Specifically, the mugs should have a large handle that lets more than two fingers hold it, the mug should be short with a wide mouth for easy filling and washing, and should not be too fragile.

Pens should write well and be ergonomical, not angular or too narrow. I have seen branded pens violating all these suggestions. For example, the Australian National University pens are of flimsy plastic, create ink splotches and the ink runs out quickly.

The USB sticks handed out by the University of Queensland had a metal cover which increased the USB drive’s bulk and scratchiness. Also, the USB was wide and thick, making it impossible to plug in side by side with another USB. The small capacity of the USB was also behind the times.

To advertise with an object, it would make sense to print the advertiser’s name and other relevant information in large readable font on the object. The logo is not useful unless it is already widely known by the target audience and associated with the advertiser. The readability suggestion is violated by the Singapore Management University’s mug, which has SMU written on it in complicated calligraphic script that is difficult to decipher even for someone who knows what the abbreviation SMU means.

For people to develop a positive view of the advertiser, the object should not seem too cheap or bad quality. By contrast, most free T-shirts are the cheapest ones that could be bought wholesale, made of the most threadbare and transparent cotton, which discourages their use.

Slippery sidewalk paving

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In Singapore, the streets are well planned and maintained, smooth and clean like everything else. However, the sidewalks have one illogical aspect: the pavement is smooth stone, which gets very slippery when wet. Singapore is tropical and humid, with frequent rain. When initially paving the sidewalks, it would be easy and probably cheaper to use rougher covering (asphalt for example) that would not get slippery in the rain. After the smooth pavement has been laid down, changing it is of course costly, and if the locals have adjusted to the slipperiness, then switching the sidewalk cover may not be worth it.

The University of Queensland has a similar problem with the sidewalk in front of its main building. The sidewalk is coarse, like yellow asphalt with 1 cm stones in it instead of sand. One would expect such a coarse surface to provide good grip in all conditions, but unfortunately the looks are deceiving. When that sidewalk gets wet, it becomes slippery like polished glass. Again, it would be cheaper and more practical to pave that sidewalk with asphalt.

A broader point generalising the above observations is that things should be field-tested in realistic conditions before putting them to widespread use. For example, the sidewalk stones should be walked and biked on under all local weather conditions before paving a street with them.

Perhaps the smooth stones in Singapore are meant to make street cleaning easier. Still, there are materials that do not become slippery when wet and are smooth enough for mechanised cleaning and cheap enough to use as pavement.

Fund management fee paid explicitly to nudge consumers to choose better funds

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Mutual funds with lower management fees have higher future before-fee returns (Gil-Bazo and Ruiz-Verdu 2009). Nonetheless, the high-fee funds have not gone out of business, so there must exist a sizable number of silly customers who accept low returns without switching to competitors. When asked explicitly, all fund investors prefer more money to less. Their hourly wage is not large enough to explain their non-switching with the time and hassle costs of comparing fund returns and choosing a new one. Similarly, many Estonians keep their retirement savings in badly performing high-fee pension funds despite the availability of dominating options (Tuleva and LHV index tracking funds). This is costing the customers over one percent of their retirement wealth per year.

By contrast, people with chronic or expensive diseases in the US often pick the health insurance plan that maximises their wealth (coverage minus premiums). This dynamic optimisation involves switching to a different plan when their illness changes. People without costly medical conditions tend not to switch their insurance even when cheaper plans with higher coverage are available.

Both the pension and the insurance plan decisions are complex, but matter greatly for wealth. Why do people pay attention to the financial consequences of their insurance choice when sick, but ignore better options among pension funds (and when healthy, also among insurance plans)? One possibility is that insurance is more salient to the sick, and the greater attention leads to better decisions. Specifically, the premiums and out of pocket payments for medical procedures frequently remind patients of the financial consequences of their insurance, but the missing returns on one’s retirement assets are not observed without explicit comparison to the stock market or competing funds. Most people do not compare their pension plan to the market, so even in retirement may not know what their (counterfactual) wealth would have been had they chosen a better fund .

If it is lack of attention that causes the bad choice of mutual and pension funds, then one solution (proposed by my friend Hongyu Zhang) is to make the management fees more salient by requiring their explicit payment. For example, every month the customer has to transfer the amount of the management fee from their bank account to the fund. Financially, this is equivalent to the fee being deducted from the retirement assets like now (assuming these assets are eventually taxed the same as income, otherwise the transferred fee can be adjusted to make it financially equivalent to the deduction). The attention required is however greater for an explicit payment than for doing nothing following a lack of capital gains. Similarly, requiring customers to pay the difference between the return of their fund and the market return into the fund every two weeks would nudge them towards greater attention to their retirement account.

In practice, such a nudge is unfortunately politically infeasible. Not only would the fund industry lobby against it, but voters would irrationally perceive the required explicit payments as increased taxes. This would make the transition to transferring fees to funds from customers’ bank accounts very unpopular. If people understood the equivalence between low returns on their assets and explicit payments required of them, then they would be financially literate enough to choose low-fee, high-return index funds in the first place. Thus the problem of low-performing pension funds would be absent. To sum up, the fool and his money are soon separated, and it is difficult to protect people from their own bad decisions.

Delivered food and restaurants are unhealthy due to moral hazard

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Consumers observe the taste and cost of food directly, but checking the ingredients for healthiness takes extra effort and time. Rational inattention then implies that eaters are unlikely to verify the health claims. Thus food suppliers are subject to moral hazard: consumers buy based on the healthiness they expect, not the actual ingredients the seller chooses, so the seller has an incentive to improve taste, reduce the production cost and cut price even when this makes the food less healthy.

The standard solutions to moral hazard from economic theory are verification, repeated interaction and vertical integration (selling the firm). In the context of food, safety standards and truth-in-advertising laws restrict the substances manufacturers may add and claims they can make. Regulators verify claims made and punish for illegal additives or false advertising. Also, if a food supplier is found to use unhealthy ingredients (or amounts of sugar, salt and fat), then some consumers may switch to alternate providers, which is a repeated game punishment for the original seller.

The weakness of both verification and repeated interaction is imperfect monitoring: small increases in unhealthy substances are difficult to detect, because tests are noisy and food composition varies naturally. The variation sometimes makes the amount of an ingredient exceed the healthy limit, so honest suppliers would also be punished with positive probability. Incentives are created by the difference in payoffs, so reducing the payoff of the honest decreases their motive to stay honest. The imperfect monitoring allows unscrupulous sellers to outcompete the providers of healthy food on taste and price, for example by using various tricks to circumvent the legal requirements on labelling (https://sanderheinsalu.com/ajaveeb/?p=728).

The remaining solution to the moral hazard problem is vertical integration of the buyer and the supplier, i.e. home cooking. Of course, the ingredients bought to be cooked at home are subject to similar moral hazard – unhealthy substances can be added at any stage of the production process. The risk could in principle be even larger than for processed foods and restaurant meals, but in practice, it seems that simple and unprocessed ingredients are more difficult to manipulate than prepared meals, which are a mixture of many components. Adding sugar, salt, fat or monosodium glutamate to flour, rice or dry beans without mentioning it on the nutrition label is easier to detect than the same (amounts of) additives in shrimp fried rice, bread or a burrito. Raw meats and fish do have extra salt and food colouring added, but usually less than for ready-to-eat meals.

Relative prices are another reason why there may be less manipulation of ingredients than processed foods. There is a per-unit cost of adding unhealthy substances, as well as a fixed cost due to the risk of lawsuits and fines, especially if the additives are not declared on the label. Unprocessed ingredients are less differentiated, so the price competition is more intense. The increase in the price that customers are willing to pay if an ingredient tastes better than the competitors’ may be small if price is the main dimension of competition. The slightly higher price may not justify the per-unit cost of the additives. In contrast, for processed foods the margin may respond greatly to taste, motivating manipulation of the ingredients.

The taste of the final dish is likely to respond less to manipulating one ingredient than to altering the composition of the entire food, both because the ingredient may be only a small part of the final dish and because the taste of a dish is largely determined by the seasoning and the cooking method. In this case, additives to ingredients do not improve taste that much, reducing the profitability of manipulating these.

Intense price competition motivates cost-cutting, including by substituting cheaper ingredients or using additives (e.g. preservatives) that reduce the manufacturing cost. However, if the additives cost more than they save on production cost (such as preservatives for dry goods that already keep indefinitely), then they are unprofitable to include.

Demand for cooking ingredients may also respond less to price and taste than for restaurant meals or delivered food (raw ingredients may even be an inferior good, but eating out is more like a luxury good). In this case, there is a range of fixed costs of unhealthy substances for which adding these to ingredients is unprofitable, but to processed foods profitable.

Eggs boiled in an oatmeal cooker

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In addition to rice cookers, multi-cookers and egg boilers, there are devices specifically for cooking oatmeal, even though a rice cooker would do the job just fine. Perhaps the reason is that the minimal cooking time is shorter for oatmeal than for rice, so an oatmeal cooker speeds up the process compared to a non-programmable rice cooker. A programmable one could of course be set for the shorter cooking time.

The normal cycle length of rice cookers (30-45 min) and oatmeal cookers (20 min) is longer than the 12-15 minutes it takes to hard-boil eggs. However, overcooking a hard-boiled egg does not worsen its taste or texture significantly in my opinion, unlike for meat or vegetables. It turns out that oatmeal does not stick to eggshells that much, so eggs boiled in a cooker together with the oatmeal can be rinsed off quite easily.

Boiling the eggs and oatmeal together saves either time (if there is only one device available for cooking) or the labour of washing one more cooker (when using separate ones for eggs and oatmeal). Even with a dishwasher, disassembling a cooker, putting it in and taking it out of the washer and reassembling takes a few minutes. Rinsing the eggs is quicker.