When to Rob a Bank: ...And 131 More Warped Suggestions and Well-Intended Rants (8 page)

Much like Paul Feldman,
the economist-turned-bagel salesman we wrote about
in
Freakonomics,
the singer-songwriter Jane Siberry has decided to offer her wares to the public via an honor-system payment scheme. She gives her fans four choices:

        
1
. free (gift from Jane)

        
2
. self-determined (pay now)

        
3
. self-determined (pay later so you are truly educated in your decision)

        
4
. standard (today’s going rate is about .99)

Then, cleverly, she posts statistics on payment rates to date:

% Accepting gift from Jane: 17%

% Paid by determining price: 37%

% Paying Later: 46%

Avg. price per track: $1.14

% paid below suggested: 8%

% paid at suggested: 79%

% paid above suggested: 14%

Even more cleverly, Siberry posts the average payment rate for each song as you pull your payment option from the drop-down menu—another reminder that, hey, you’re more than welcome to steal this music but here’s how other people have acted in the recent past.

It seems that Ms. Siberry grasps the power of incentives quite well. This allows for at least a couple of interesting things to happen: people can decide what to pay after they hear the music, and see how much it’s worth to them (it looks like people generally pay the most per song under this option); and it takes the variable-pricing scheme that economists love and puts it in the hands of the consumer, not the seller.

I think record companies will need a lot more convincing before they’re willing to try this model on a large scale. Presumably, Jane Siberry fans who go to her website to get her music are a deeply self-selecting lot, far more devoted
than the average downloader. But as desperate as the record companies are, I wouldn’t be surprised to see more of this in the future.

TWO DAYS LATER
. . .

Apparently, Jane Siberry doesn’t appreciate people calling attention to her website, which allows people to pay as they wish to download Siberry’s music. I liked the idea, and blogged about it. But here’s what Siberry wrote on her MySpace journal today:

The “self-determined pricing” policy of the store is in the spotlight again, freakonomics has an online article; abc news emailed. I don’t want the attention. I think I’ll change the pricing to “you can pay me all you want but i’m not going to let you hear it.”

Youch. Regrets, Ms. Siberry. Seems like we have a lousy track record with pop singers—anybody remember when Levitt announced that Thomas Dolby
was releasing a new record
, an announcement that turned out to be 100 percent wrong?

I guess we should give up pop singers and stick to crack dealers, real-estate agents, and poker cheats.

The
Laffer curve
is a unicorn-y concept that seeks to explain the rate of taxation at which revenues will fall because earners either move away or decide to earn less (or cheat more, I guess).

If I were a tax scholar interested in this concept, I would be taking a good, hard look at the current behavior of top-tier professional athletes. Boxing is particularly interesting because it allows a participant to choose where he performs. If you are a pro golfer or tennis player, you might be inclined to skip a particular event because of a tax situation, but you generally need to play where the event is happening. A top-ranked boxer, meanwhile, can fight where he gets the best deal.

Which is why it’s interesting to read that Manny Pacquiao will probably never fight in New York—primarily, says promoter Bob Arum, because of the taxes he’d have to pay. From the
Wall Street Journal
:

Manny Pacquiao has won fights in California, Tennessee, Texas and Nevada, not to mention Japan and his native Philippines. But with Pacquiao in New York this week to promote his next fight—a November bout in Macau against Brandon Rios—Pacquiao’s team said Barclays Center and the Garden were two venues where he wouldn’t fight because he would have
to pay the state’s tax rate in addition to federal taxes. “He’d have to be a lunatic,” said Bob Arum, Pacquiao’s promoter.

In
an
L.A. Times
article
, Arum says that Pacquiao may never fight anywhere in the U.S. again:

“By fighting outside the country, as he’s doing in this Rios fight, Manny doesn’t have to pay U.S. taxes anymore—at a rate of 40% for a foreign athlete.

“If this pay-per-view and other things take off like we think they may, I can’t imagine Pacquiao will ever again fight in the U.S.”

There are of course other factors at play besides taxes—gambling, for one, which is a big reason that
Macau has become such a boxing center
. But whatever you think of the Laffer curve, it’s hard to ignore the variance in tax rates around the world, especially for athletes who might earn a lot of money in a short time.

In January, the golfer Phil Mickelson said he was “
going to have to make some drastic changes
” to deal with federal and California tax hikes (he lives in California). “If you add up all the Federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” he said.

His accounting
was challenged
and Mickelson, one of the most popular golfers ever, was widely spanked for publicly airing his tax dissent. So last month, when he won back-to-back
tournaments in Scotland (the Scottish Open and the Open Championship), he kept quiet. But the media did the speaking for him. In
Forbes,
Kurt Badenhausen wrote a
(very good) article
about Mickelson’s British tax tab, estimating that he’d pay, in total, about 61 percent tax on his nearly $2.2 million in earnings. And Badenhausen identifies this interesting wrinkle:

But that’s not all. The U.K. will tax a portion of his endorsement income for the two weeks he was in Scotland. It will also tax any bonuses he receives for winning these tournaments as well as a portion of the ranking bonuses he will receive at the end of the year, all at 45% . . .

The U.K. is one of few countries that collects taxes on endorsement income for non-resident athletes that compete in Britain (the U.S. also does). The rule has kept track star Usain Bolt from competing in Great Britain since 2009, outside of the 2012 Summer Olympics when the tax was suspended as a condition for hosting the Games. Spain’s Rafael Nadal has also allowed U.K. tax policy to
dictate his tennis playing
schedule.

And let’s not forget that the greatest endurance athlete of our era, Mick Jagger,
fled the U.K. years ago because of tax considerations
(and, also, the police there
kept arresting him and his mates
).

The other day, I stopped by a local fried chicken joint,
Harold’s Chicken Shack
. Just to give you a sense of what sort of restaurant this is, there is a layer of bulletproof glass separating the workers and the customers. They don’t cook the chicken until you order, so I had five or ten minutes to kill waiting for my food.

One of the items on the menu is a chicken-wing dinner. With each dinner, you get a fixed amount of french fries and coleslaw.

The two-wing meal costs $3.03. The three-wing meal costs $4.50.

Since the only difference between the two meals is one extra wing, with that third wing costing the customer $1.47. I thought this was interesting, because if each of the first two wings were priced at $1.47 each, then the implied price of the french fries and coleslaw is a combined 9 cents. So it seems like Harold’s is implicitly charging more for the third wing than for the first two wings, which is unusual since firms generally give quantity discounts.

I read further down the menu:

two-wing meal $3.03

three-wing meal $4.50

four-wing meal $5.40

five-wing meal $5.95

The four- and five-wing meal prices are more in line with how firms usually price.

So what do you think Harold’s charges for a six-wing meal? Here’s the answer:

six-wing meal $7.00

Definitely most bizarre. When economists see things that don’t make any sense, we can’t help but think of some story that rationalizes the seemingly odd behavior. Maybe Harold’s prices the six-wing meal high because it is worried about obesity? Not likely, since every item on the menu is fried. Is the sixth wing especially big or tasty? Is demand by people who order six wings more inelastic?

Perhaps some clues could be found in the pricing of other items. Fried perch are sold in a similar fashion to fried chicken, again with french fries and coleslaw. Here is how perch is priced:

2-piece perch meal: $3.58

3-piece perch meal: $4.69

4-piece perch meal: $6.45

So you get that third piece of perch cheap, but they nail you on the fourth piece. This certainly hints at Harold’s thinking there is some logic to this sort of pricing.

Ultimately, though, my guess is that the person who
chose these prices was just confused. One thing I have realized as I have worked more with businesses is that they are far from the idealized profit-maximizing automatons of economic theory. Confusion is endemic to firms. After all, firms are made up of people, and if people are confused most of the time by economics, why wouldn’t that carry over to firms?

I’ve been eating a lot of kiwifruits lately. (You may also know them as the Chinese gooseberry.) At the corner deli near my home on the West Side of Manhattan, I can buy three for a dollar. They are delicious. Unless the stickers are lying, they come from New Zealand. At thirty-three cents apiece, a New Zealand kiwifruit costs less than the price of mailing a letter to the East Side of Manhattan. (And believe me, I consider a first-class stamp one of the greatest bargains ever.) How on earth can it cost so little to grow, pick, pack, and ship a piece of fruit across the world?

To make fruit matters more complicated, I can buy one banana (also imported) and one kiwifruit for about the same price as one apple, which may well have been grown as near as upstate New York. So I wrote to
Will Masters
, a food economist at Tufts University’s Friedman School of Nutrition.

Most economists, as I’m sure you know, reply to such queries in verse, and Will is no exception:

Damn supply and damn demand:

Why cheap hogs and costly ham?

Bargain wheat, expensive flour,

The oldest villain’s market power.

Just one seller makes us nervous,

Like that U.S. Postal Service:

They may offer bargain prices,

But who disciplines their vices?

Middlemen have long been blamed

For every market that’s inflamed,

Yet better explanations come

From many a Hyde Park alum.

Modern views from
Chicago-Booth

Give a nuanced view of truth,

Steven Levitt
and
John List

Made each of us a
freakonomist
.

We let data speak its mind

No matter what Friedman opined

And find the price of fruit and veg

To be driven by the market’s edge.

Like the tail that wags the dog,

Marginal thinking clears the fog:

Sellers, buyers, traders too,

Interact and prices ensue.

A kiwi costs 33 cents

Simply because no one prevents

Another farm or New York store

From entering and selling more.

In contrast apples may be dear,

For reasons that will soon be clear:

Picking them’s below our station,

To lower costs we need migration.

Bananas have a different story,

Seedless magic, breeder’s glory,

Cheap to harvest and to ship,

Who cares if workers get paid zip?

Each crop’s method of production,

Where it grows and how it’s trucked in,

Satisfies some needs quite cheaply

While other costs will rise more steeply.

A buyer’s choices matter too,

For nonsense stuff like posh shampoo,

Prices are not down to earth,

The more you pay the more it’s worth.

Behavior is as behavior does,

Maybe some things are “just because,”

Much of life’s a mystery,

A habit due to history.

For prices, though, it’s competition

Plus tariffs set by politicians,

That determines whether we see

Such delightfully cheap kiwi.

Bravo.

Some time ago, Pete Rose signed a bunch of baseballs with the inscription “I’m sorry I bet on baseball.” According to media reports, he gave these balls to friends and never intended them to be sold for profit.

But the estate of someone who received some of these balls decided to put thirty of them up for auction. There was speculation that they would sell for perhaps many thousands of dollars.

That is when Rose himself stepped in and delivered one of the fundamental lessons in economics: as long as close substitutes are available, prices won’t get very high.

When Rose heard that these balls were being auctioned, he offered to sell balls with the same inscription for just $299
on his own website
, effectively destroying the market for the auction-bound balls. True, the newly signed balls wouldn’t be perfect substitutes, because a collector could still say he had one of the original thirty. For that reason, you wouldn’t
expect the auction price of the old balls to fall all the way to $299. Indeed, the auction was called off and the balls were sold for $1,000 apiece.