John Kay has some interesting views on the nature of capitalism, and suggests that some modern business types have missed the point entirely.
(Thanks to LW for the link.)
Thursday, January 8, 2009
Wednesday, January 7, 2009
Virtual currencies can have exchange rate crises, too
A student sent me a link to a very interesting article on a virtual currency crisis.
Massively multiplayer video games, such as World of Warcraft, allow millions of gamers to participate in a virtual world, complete with a virtual economy. These economies typically have their own currencies.
The biggest difference between virtual and real currencies is that players usually mint the virtual currencies, whereas that power is reserved by government in most offline currencies. In these online games, currency is often created from nothing whenever a player accomplishes a specific task, such as defeating an enemy. The currency is valued because many desirable in-game activities and purchases require its use. Hyperinflation is kept at bay by a planned system of leakages and money sinks.
There's a catch to all this, of course. Some players play for hours on end, others for much shorter periods of time. Money sinks must be scaled to the intensive players in order to avoid hyperinflation or, for in-game items with hard-coded prices, in order to maintain scarcity.
This puts casual players at a disadvantage, and creates the opportunity for a carry trade of sorts, exchanging real-world currency for in-game currency.
The article linked to above deals with an example of this 'Real Money Trading' (RMT), and its peculiar pitfalls.
Massively multiplayer video games, such as World of Warcraft, allow millions of gamers to participate in a virtual world, complete with a virtual economy. These economies typically have their own currencies.
The biggest difference between virtual and real currencies is that players usually mint the virtual currencies, whereas that power is reserved by government in most offline currencies. In these online games, currency is often created from nothing whenever a player accomplishes a specific task, such as defeating an enemy. The currency is valued because many desirable in-game activities and purchases require its use. Hyperinflation is kept at bay by a planned system of leakages and money sinks.
There's a catch to all this, of course. Some players play for hours on end, others for much shorter periods of time. Money sinks must be scaled to the intensive players in order to avoid hyperinflation or, for in-game items with hard-coded prices, in order to maintain scarcity.
This puts casual players at a disadvantage, and creates the opportunity for a carry trade of sorts, exchanging real-world currency for in-game currency.
The article linked to above deals with an example of this 'Real Money Trading' (RMT), and its peculiar pitfalls.
Tuesday, January 6, 2009
Price, sales and music piracy
In August of 2007, Ars Technica pointed out that the impact of piracy on the music business is probably over-estimated. The demand for music at a near-zero price is, after all, much larger than the demand for music at $20 a CD.
An example: Assume a world where there is no piracy, songs cost $1 each, and the public buys 10,000 of them. Now suppose a pirate enters the market, giving away songs at $0 each, and that 30,000 people are willing to listen to free songs. Even if the number of songs sold legally stayed at 10,000, piracy could be measured as being twice the volume of sales. This would be misleading, though, since the extra 20,000 songs are not lost sales. They're evidence of a downward-sloping demand curve that continues past the price that legal suppliers are willing to charge.
An example: Assume a world where there is no piracy, songs cost $1 each, and the public buys 10,000 of them. Now suppose a pirate enters the market, giving away songs at $0 each, and that 30,000 people are willing to listen to free songs. Even if the number of songs sold legally stayed at 10,000, piracy could be measured as being twice the volume of sales. This would be misleading, though, since the extra 20,000 songs are not lost sales. They're evidence of a downward-sloping demand curve that continues past the price that legal suppliers are willing to charge.
Monday, December 29, 2008
A video dear to my teaching philosophy
This YouTube video on video game design touches on points that I think are important to all sorts of teaching and learning. For 'video games', read 'economics', and for 'controller', read 'mathematical model'.
Tuesday, November 4, 2008
This post pre-empted by the US election
On Thursday: Galbraith, pre-Raphaelites, economic theory and internet fanfiction.
Thursday, October 30, 2008
Selling search
A few days ago I asked my students the following question:
It's well-known that internet piracy of music is rampant. How is it, then, that iTunes can make a profit selling songs at 99 cents each? Someone who can use iTunes presumably has access to the rest of the internet. Apple is competing with other producers of an identical product who offer it at a price of zero.
One young lady made a very insightful comment - she pointed out that Apple is not so much selling the music so much as charging a transaction fee for the use of a convenient, reliable and safe search engine. The content may as well be free; it's the search that is being sold.
Finding a song on pirate sites can be difficult, due to spotty labeling, broken torrents, virus-infested files and so on. iTunes users don't have to put up with any of that.
The flat 99 cents that are charged for each song tend to bear out the 'transaction fee' idea. Neither popularity, nor file size, nor the original source of the content affect the charge.
This is the same model that some academic journals use for people seeking PDF files of their articles. The journals also compete with 'free' producers: most academics have free access to these articles at work. There's a big difference in this market, though: buying the reprints from individual journals is a painful process, requiring separate registrations and payment schemes for each publisher. Accessing the articles via a work-place portal is not only 'free' (in the sense that the employer bears the entire cost, usually fixed) but vastly superior in efficiency. Library web sites and databases such as EconLit look through the contents of dozens of publishers for each search.
The biggest search engine of all is Google. Search is free, and content found through the search is usually free. This engine is supported through ad revenue, which I find curious. Though I use it many times a day, I can't remember the last time I clicked on one of the sponsoring ads, even by accident. I don't think I'm alone in this.
It's not unheard-of in the offline world for human tour guides to share their take with those providing the sights of note - iTunes's model. The journal publishers are individual stalls in a bazaar, competing with a supermarket. Google hopes that passengers on the trip will buy from the in-flight boutique, or at least burn into their memory the sponsored posters on the walls.
It's well-known that internet piracy of music is rampant. How is it, then, that iTunes can make a profit selling songs at 99 cents each? Someone who can use iTunes presumably has access to the rest of the internet. Apple is competing with other producers of an identical product who offer it at a price of zero.
One young lady made a very insightful comment - she pointed out that Apple is not so much selling the music so much as charging a transaction fee for the use of a convenient, reliable and safe search engine. The content may as well be free; it's the search that is being sold.
Finding a song on pirate sites can be difficult, due to spotty labeling, broken torrents, virus-infested files and so on. iTunes users don't have to put up with any of that.
The flat 99 cents that are charged for each song tend to bear out the 'transaction fee' idea. Neither popularity, nor file size, nor the original source of the content affect the charge.
This is the same model that some academic journals use for people seeking PDF files of their articles. The journals also compete with 'free' producers: most academics have free access to these articles at work. There's a big difference in this market, though: buying the reprints from individual journals is a painful process, requiring separate registrations and payment schemes for each publisher. Accessing the articles via a work-place portal is not only 'free' (in the sense that the employer bears the entire cost, usually fixed) but vastly superior in efficiency. Library web sites and databases such as EconLit look through the contents of dozens of publishers for each search.
The biggest search engine of all is Google. Search is free, and content found through the search is usually free. This engine is supported through ad revenue, which I find curious. Though I use it many times a day, I can't remember the last time I clicked on one of the sponsoring ads, even by accident. I don't think I'm alone in this.
It's not unheard-of in the offline world for human tour guides to share their take with those providing the sights of note - iTunes's model. The journal publishers are individual stalls in a bazaar, competing with a supermarket. Google hopes that passengers on the trip will buy from the in-flight boutique, or at least burn into their memory the sponsored posters on the walls.
Tuesday, October 28, 2008
Economists and regulation
Perhaps not surprisingly, the recent financial crises (note the plural) has led more than a few people to think that tighter regulation of money matters may not be a bad idea.
What IS surprising, or has been to a few of my students, is that some of these people are professional economists.
To the general public, the word 'economist' is tied up very closely with 'free trade' and 'free markets'. That they may support regulation seems at first a contradiction.
In point of fact, economists are responsible for much of existing economic regulation. This includes everything from rules for monetary policy, to deciding on the guidelines for the approval of a merger, to controls on firms' pricing policies to encourage competition.
Economics is all about the efficient use of scarce resources. The 'stuff' we have - natural resources, time, knowledge, health and so on - is limited. The stuff we want is unlimited, and the needs of the world's population, while arguably limited, are not being met.
In some cases, leaving markets alone will get the job done, getting stuff where it's most needed or desired without too much lost along the way. That's great.
In other cases, leaving markets alone may result in waste, or inefficiency, or some other loss of the potential available to society, given what we have to work with. It's in these cases that regulation is welcome.
When it comes down to it, economists and environmentalists think rather alike. Our focus just happens to be on different resources, different needs, and different desires. Sometimes. Environmental economics and resource economics are flourishing fields in their own right.
Just as environmentalists, while generally preferring 'free nature', may advocate conservation programs, seed banks and so on, economists, while generally preferring 'free markets', will often advocate helpful regulation.
What IS surprising, or has been to a few of my students, is that some of these people are professional economists.
To the general public, the word 'economist' is tied up very closely with 'free trade' and 'free markets'. That they may support regulation seems at first a contradiction.
In point of fact, economists are responsible for much of existing economic regulation. This includes everything from rules for monetary policy, to deciding on the guidelines for the approval of a merger, to controls on firms' pricing policies to encourage competition.
Economics is all about the efficient use of scarce resources. The 'stuff' we have - natural resources, time, knowledge, health and so on - is limited. The stuff we want is unlimited, and the needs of the world's population, while arguably limited, are not being met.
In some cases, leaving markets alone will get the job done, getting stuff where it's most needed or desired without too much lost along the way. That's great.
In other cases, leaving markets alone may result in waste, or inefficiency, or some other loss of the potential available to society, given what we have to work with. It's in these cases that regulation is welcome.
When it comes down to it, economists and environmentalists think rather alike. Our focus just happens to be on different resources, different needs, and different desires. Sometimes. Environmental economics and resource economics are flourishing fields in their own right.
Just as environmentalists, while generally preferring 'free nature', may advocate conservation programs, seed banks and so on, economists, while generally preferring 'free markets', will often advocate helpful regulation.
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