Category Archives: economics

Fungibility – the dark side

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If you give your child lunch money only later to discover they are buying candy with it you may discover your yearning for a special less fungible lunch currency. Not surprisingly there are micro-currency solutions for this problem in micro-managing your subordinates. If you give money to the local youth center earmarking your donation for youth basket ball and later find out it was spent to repair the roof the situation is less clear. When the green grapes appear at your grocer in January you can thank free trade and Chile; when there happens to be a black widow spider in the grapes you might question the wisdom of the making produce so fungible.

I used the word fungiblity a lot when I was working on Internet Identity. One of the many players in that standards making process are the firms that have huge amounts of account data about their trading partners. A strong identy system would allow them to make that data more fungible. If they could puzzle out a way to get permission to exchange that data with other parties they could convert static data in their vaults into dynamic data – a source of profit.

So I’m gobsmacked that I didn’t see this coming. The tax prep industry is seeking a rule change from the IRS that would allow them to resell the tax return data of their clients. Man is that evil! I paarticularly admire how this is framed as a clarification of tax payer privacy rights – indeed it is. Notice also how the industry is using it to protect themselves from foriegn competition. I guess this kind of thing happens almost automatically when the middlemen – in this case the tax prep industry – becomes sufficently concentrated.

Meanwhile, back on the lunch money problem. You could send you child to school with lunch already made. This would teach them valuable negotiation skills as they barter their lunch for better options. A wise parent might just send them to school with some highly fungible trade goods – cookies for example.

Payment Network Cost Trends

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The new issue of The Review of Network Economics has a pile of articles on payment networks. The last “A Puzzle of Card Payment Pricing: Why Are Merchants Still Accepting Card Payments?” (Abstract)of which takes a run at the question of how loyal the merchants are to these networks by looking into the puzzle of why they haven’t been dropping out of the networks in droves given the rapidly rising prices.

The number plotted on that graph is the price charged by the network to clear a transaction thru the network. It’s set by the network operators. This market is sufficently concentrated that those operators can signal to each other and as you can see their prices move in lock step. The only dip on the chart was do to a court case where two of the networks were accused of abusing their market power.

That chart does not show the prices merchants and consumers, the two sides of this network, actually pay since there are usually a number of intermediaries between them and that clearing house. When you add in those fees the question becomes yet more puzzling. It’s not just price that makes this an interesting question. Presumably Moore’s law and his friends have cause the cost of these networks to drop precipitously.

Clearly these merchants are extremely locked-in (or loyal if prefer that framing). These networks have accumulated a lot of market power.

I frame this up as a question of competition between various currency systems. In particular a competition between private currency systems run for the benefit of the currency system operator v.s. state run systems run for the benefit of those who govern the state. The question the paper is trying to puzzle out an answer to is actually asking the question why do merchants not abandon the private systems in preference for the state run systems? The short answer, at least in the US, is that the state run system isn’t even a player in the game anymore – i.e. it doesn’t compete. The second chart shows that in other regulatory environments the state has used it’s power to limit the power of the private systems to tax the system.

Both the private and state run currency systems have complex governance systems. An merchant or consumer (either individually or in groups) has a lot of options for how to negotate with these systems. Consider a consortium of giant merchants. They could go to Washington and lobby for more regulation so assure that the falling costs are passed thru which would increase their sales. They could go to the courts, as they did when some of the fees dropped in the first chart, and argue that market power is being abused. They could go, and i assume they do, to their banks and demand price breaks.

There are lots of different ways the reduced costs can be passed thru to the different players. Not suprisingly when the costs drop the first player to grab them are those closest to the place where the costs are falling – i.e. hub operator.

I use a credit card that pays me 1% back on all my transactions. That makes me much much more likely to pay with a credit card rather than cash. That’s a beautiful example of how these games are played. Technology gave the payment networks lots of options. When they took this one, i.e. offering cash back credit cards, they used their market position to shift costs from consumers to merchants in a way that increased the loyality of hard holders to the private currency system. That in turn made it harder for merchants to decline the cards. It took the payement network operators a few years to discover that 1% was sufficent to buy the loyality of most of their customers; there was a fun period when I had a card that returned 5% on all my purchases.

Interesting to me is how hard it is to get the benefits to spread to the small players; i.e. the corner stores run by small businessmen. Note that if the large merchants go put the squeeze on the network operators and negotate lower costs they actually prefer an outcome that creates a disadvantage for their smaller competitors. Examples like that are why I’ve become suspicious about claims that technology empowers small actors more than large ones. I’m coming round to thinking that it’s an important driver of the depressing shifts in the distribution of wealth.

Is there no limit to loyality point programs?

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As a adjunct to the prior posting about competition for who get’s to run the currency systems; one of my favorite backwaters of that is the loyality points programs. As the cost to track a transaction falls we can expect more and more transactions to have a loyality points involved.

Most people think of IT as a tool for reducing transaction friction; but I’m starting to see it the other way around – as a way to add friction thruout the transactions life cycle. Each bit of friction designed to make money for somebody.

I’m amused to see you can collect points for drinking certain soft drinks; but you have to do the paper work! What’s next loyality points individual sheets paper? Oh dear, I can see that – a number printed in the corner of each sheet of the newspaper. Enter the number on their web site to collect points and win prizes!

Suggestion – let’s rename taxes, call them loyality point!

Pseudo Bank Accounts for the Poor

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I gather that 60 million people are paid with a paper check in the United states and that almost half of those don’t have a bank account. The banking industry calls this market segment the unbanked. If you go into the neighborhoods where those folks live: instead of banks you find check cashing stores. Check cashing stores will cash your pay check and since you don’t have a checking account they will help you pay your bills. Some of them charge a lot for the service. Check cashing operations are more common in poor areas; and they are more common in states with weak consumer protection in the banking industry.

As Clay Christensen points out one way to disrupt an industry, in this case the banking and currency system, is to sneak in below their radar. Serve the people who are currently unserved. If you go after the low margin customers then the existing players won’t bother to compete with you. They don’t want those customers. This is long tail strategy. For the credit card networks I think of this as a loose change strategy.

Christensen’s displace from below strategy for disrupting an industry presumes you can find a way to serve people who couldn’t be served before. Technology provides those; particularly IT. I have a hypothisis that many of these disruptions via IT are similar. You take a previously bundled activity and burst it apart so that you then charge for smaller transactions that were previously charged for in a bundle. The IT enables that. So instead of a monthly phone bill you do pre-paid. So instead of a bank account you sell access to the banking infrastructure with a charge for every little thing.

Here’s the fee schedule for the most reasonably priced stored-value-debit card I could find.

Check “Balance Reimbursement” $9.95
ATM Domestic – Withdrawal $ 1.50
ATM International – Withdrawal $ 3.00
ATM Domestic – Balance Inquiry $ 0.50
ATM International – Balance Inquiry $ 1.00
ATM Domestic – Decline $ 0.75
ATM International – Decline $ 1.00
POS Domestic – Transactions $ 0.50
POS International – Transactions $ 0.75
NET Internet Balance & Inquiry FREE
Load Via Card to Card Transfer $ 2.00
Load Via Direct Deposit FREE
Load Via Bank of America $2.00
Load Via Money Order $2.50
Load Via Retail Location POS $1.00
Fee PIN Creation free
Fee Monthly Maintenance $ 3.95
Fee Paper Statement $10.00
Fee PIN Change $ 0.25
Fee Live Operator Customer Service $ 1.50/call
Fee Automated Customer Service $ 0.50/call
Fee Lost/Stolen Replacement Card $10.00
Fee Emergency Card Replacement $30.00
Fee Dormant Account
(after inactivity of 60 days)		 $5.00 /mo.
Fee Additional Maestro Card $ 9.95
Fee Over-Limit $30.00

The unbanked are the target market for these. Employers are encouraged to hand these out to new employees. That saves money for the employer because he doesn’t cut checks anymore; he just shoots the pay check straight into the card. Notice that instead of the banking term “deposit” they use the word “load.” I bet that’s because they are hoping to avoid some regulations associated with deposit accounts.

These prices are horrible compaired to a real bank account. They are pretty good compared to the check cashing store.

There is a second target market for these; i.e. Guest Workers. Or as we like to optimistically call them in this country immigrants. In that use case the card holder purchases a 2nd card with access to the same account. He then sends this back to his relations in the home country and they can pull money from the account.

There are four drivers for all this. Three mentioned so far – competition with the check cashing industry, lowering costs for employer’s of the unbanked, and better service for the unbanked. The four driver is the police authorities – all currency systems have policing issues – transaction flows that move thru the electronic currency systems are much easier to browse.

Web Secret Card

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There is a surprising degree of competition for who’s going to run the currency system. There are at least four major currency systems in the US: cash, checks, visa, mastercard, and amex. Running a currency system can be quite profitable, and not just because you can tax people to particpate in your network. Once you start looking for them these private currency systems are extremely common. For example loyality award point programs and phone cards.

Gift cards are an interesing example. Look around in grocery, drug, stationary stores – there are hundreds of these cards! Today I was looking at the ones at CVS and Wallgreens, two drug store chain.

Gift cards let you convert highly fungible money into money with only some limited range of uses. You can spend $25 any where, but a $25 burger king gift card is more limited. But yeah – there are lots of Burger Kings. Some cards are more fungible that others, for example one of the cards I saw on recent visit can be used at any of six different resturants chains!

I find the gift cards that let you buy gift cards amusing. These let you move from highly fungible currency into semi-fungible; before you finally commit to marginally fungible. An online example of this are the gift cards from Great American Days. Those were on sale at the drug store today.

Of course if you have gift cards for one of those drug stores I was in today you can buy any of the gift cards they sell. Converting to another gift card is close to close to free. You will probably have to pay sales tax. I like to note at this point your taxes pay to keep the national currency system functioning.

And then there are the gift cards that can be used any place that those credit card networks reach. You can buy those at the drug store too; but your charged a fee of about 5% – think of it as the tax to regain some fungiblity. Though it looks like it might be possilbe to reduce that some using this vendor

Credit cards aren’t the same as currency though. Lots of authentic little vendors doen’t take them; and those that do pay a heavy lot of fees for access to those private currency networks. When you use them you loose your privacy. As they say in high school: it all goes on your permanent record.

So I was interested to see this gift card today Web Secrets Card. It’s really intended only for buying stuff online. Though it appears you can pay ten dollars and have then ship you a physical card which you could then use to buy offline goods. They charge five dollars a month until you drain the card.

So there you have it. The cost of fungible is around 5%, the cost of privacy is around $5 dollars a month.

Amazon price drop policy; let the games begin.

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Another one for my pile of stories about pricing games.

I read this posting about Amazon’s price drop policy and squirrel’d it away in del.icio.us for the next time I bought something pricy at Amazon.

My wife bought a camera a bit back and so from time to time I’ve been checking to see if the price had dropped at Amazon and yesterday I noticed that it had. So I dug out the posting, logged in as my wife and followed the directions. The directions suggest that you look at your old orders and click thru from them to the item’s you think might now have lower prices; so I did that.

What a surprise. The price my shown when logged in as my wife is the price she paid. The price shown logged in as me is the a lower price. Actually, having played these pricing games for so long I’m not surprised; but still. It didn’t matter how I navigated to the item after my first visit – it sill showed the price she paid.

We asked for the price adjustment anyway and Amazon quickly granted it; so I guess that’s a good thing.

Club Pricing

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Paul English is peeved about what a pain in the neck it is to buy a membership in a health club. He asks “Why the sleaze?”

Here are some theories:

  • Low barrier to entry means too many health clubs; i.e. excess supply, leading to sleazy marketing practices as they desperately attempt to survive.
  • Lack of consumer protection laws or enforcement removes the only effective negative feedback on the sleaze.
  • Testosterone and steroids.
  • The subscription pricing models (i.e. lock-in and upfront discounting) is sleazy out of the gate, it’s all down hill from there.
  • Clubs that adopt aggressive value pricing are more sustainable than those that don’t. The more aggressive the more sleazy.
  • Matching price/user to cost/user is impossible, all attempts to do so look and often are sleazy.

Clubs are the text book response to the standard list of problems with of public goods, e.g. overcrowding, under provisioning, free-riding, etc. It’s fascinating that in this example the club doesn’t resolve those problems; it just reframes them. The presumption is that once you are allowed into the club you will find a world where facilities and services are abundant and collegial; i.e. you will enter a world where the facilities are now a public good. You won’t be excluded and there won’t be rivalry. The water in the pool will be warm and you won’t have to double up in the lanes when you swim. Piles of towels will be close at hand. The exercise equipment will be standing by and dependible when you need it.

Most of the health clubs I’ve experienced fail to achieve the eden like fantasy. They are under provisioned and overcrowded at the hours when I would show up. Interestingly the lanes in the pool would be occupied by people who used them for hours every day, in effect free-riding on the membership contributions of people like me.

These clubs have terrible pricing problems. They would like to charge people for the value they extract from their facilities, including the value of reducing their guilt by having a membership even if they don’t use it. Of course they don’t mind if they over charge. The more they can push their prices up toward that goal the better the facilities they can provide will be. That’s all reasonably virtuous.

I have a bad feeling that the distribution of load imposed by the customers is power-law in shape; but the willingness to pay isn’t. Which is why on the high end you get the heavy user free-loading illustrated above. On the low end you get a long tail of users who are charged far more than they will ever consume in services. The entire thing’s a mess.

I have noticed that some very high end hotels have health clubs that don’t suffer from these problems. They, presumably, are subsidized by the hotel’s guests. In a few cases they even sell a reasonably priced membership in a transparent fashion.

The YMCA is a good special case. As a not for profit they can do their value pricing by using needs based analysis. Their prices are clearly stated on a sheet of paper at the front counter. At the bottom of the sheet it invites you to speak with them if you can’t afford the price they are offering. At the same time solicit donations from the better off members of their community. It’s interesting how this doesn’t suffer from the sleaze problem. It also means that when you gain entrance to the club and the public good isn’t as wonderful as you might hope your reaction isn’t that you have been mislead, but rather that a group of good people are doing the best they can with limited resources. Which, if your well off, might lead you to donate.

At the same time the Y’s model for how to fund the club doesn’t resolve some of the problems outlined above. They still have some members who draw off 100 times more services than others – i.e. free loaders. And the club are always a bit under provisioned, the water a bit chilly, the equipment a a bit run down. The community is generally very convivial; particularly if it makes you happy to see hordes of elderly and children using the club around you.

The private health clubs have eroded some of the communities common cause around the Y. That has weakened the Y as an institution. For example the Y wasn’t able to raise money to build a new branch in downtown Boston recently.

Petrol and Gas

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I filled up the car yesterday for $2.19 a gallon. That’s not the typical price here in the Boston area, getting that price requires a detour over to the low price gas zone nearer the gasoline terminal. But it is weird. That’s less than we were paying Rita and Katrina laying waste to US oil and refinery capacity in the Gulf region; and that source of supply hasn’t come back on line.

Why is it so low? I think it’s because both the international regulators and the market over reacted and we are now bathing in petrol sent over by from Europe.

Heat is on at my house. Wholesale natural gas hasn’t rebounded like petrol has. It’s still going for about twice last years prices and some people think we might see a shortage this year. In New England a big slice of our electric power is produced from natural gas. The state has relaxed some environmental protection rules so some older oil based electric plants might be able take a bit of the pressure off the natural gas supply.

But the key fact I draw out of all this is that petrol is a lot more fungible in world markets compared to natural gas. And in the near term US is on it’s own when it comes to natural gas. LNG supply isn’t going to fill the gap – the supply isn’t there and the terminals to accept the supply are don’t exist.

Here’s a bizarre thought. What happens when people to realize that the cheapest most abundant source of fuel this winter is petrol? Most people have no idea how dangerous petrol is.

There are snow flakes outside my window at this very moment.

Weird Economic Constant Discovered

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I find this graph wierd, it reveals a correlation between the miles driven in the US and our GDP. It is a constant! $3.37 of GDP per mile driven. How can it be that this number has remained a constant? The fleet gets more efficient, no effect. The fleet gets less efficient, no effect. The internet, no effect. Productivity explodes, no effect.  Price of gas?  No effect.  It’s just plan weird.

I got a flat tire once while traveling and the guy from AAA who came to fix it was a wealth of information about the health of the economy. He felt his business was great indicator. Apparently so. It implies that such a huge portion of the American economy is intimately tied up in complementary relationships with the automobile that everything that isn’t, health care for example, is just noise in the GDP.

Gini For Various Nations

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This table shows recent entries from the data reported here.

Nation Gini Year
Austria 23.7 2001
Sweden 25.7 2002
Netherlands 25.8 2001
Bosnia and Herzegovina 26.1 2001
Luxembourg 26.6 2001
Hungary 26.7 2002
Slovak Republic 26.7 2002
France 27.0 2002
Czech Republic 27.3 2002
Germany 28.0 2003
Albania 28.1 2002
Ireland 28.9 2001
Belgium 29.3 2001
Ethiopia 29.7 2000
Finland 30.3 2003
Slovenia 30.7 2002
Australia 30.9 2002
Croatia 31.0 2001
Switzerland 31.1 2002
Kazakhstan 31.3 2001
Bangladesh 31.7 2000
Greece 32.3 2001
Macedonia, FYR 33.2 2002
Taiwan 33.9 2003
Indonesia 34.1 2002
Belarus 34.2 2002
Spain 34.6 2002
United Kingdom 35.0 2003
Poland 35.3 2002
Estonia 35.5 2003
Latvia 35.8 2002
Armenia 35.9 2002
Italy 36.4 2002
Canada 36.5 2000
Tanzania 36.7 2001
Bulgaria 37.0 2002
Norway 37.0 2002
Portugal 37.1 2001
Egypt 37.8 2000
Serbia and Montenegro 37.8 2001
Jamaica 38.6 2000
Israel 38.9 2001
Denmark 39.0 2002
Lithuania 39.0 2002
Mauritania 39.0 2000
Romania 39.1 2002
Turkey 39.8 2000
Tunisia 40.6 2000
Ukraine 41.8 2002
Thailand 42.7 2001
Moldova 43.6 2002
Cameroon 44.2 2001
Uruguay 44.5 2000
China 44.9 2003
Georgia 45.4 2002
Venezuela 45.8 2000
United States 46.4 2003
Sri Lanka 46.9 2002
Madagascar 47.4 2001
Singapore 48.1 2000
Uzbekistan 48.1 2001
Kyrgyz Republic 49.0 2002
Russian Federation 49.1 2002
Peru 49.3 2000
Philippines 49.5 2000
Costa Rica 50.1 2000
Azerbaijan 50.8 2002
Mexico 51.1 2002
Argentina 52.3 2001
El Salvador 53.8 2000
Nicaragua 54.2 2001
Uganda 54.6 2000
Ecuador 56.0 2000
Colombia 57.4 2000
Panama 57.8 2000
Chile 59.5 2000
Guatemala 59.8 2000
Brazil 61.2 2001
Bolivia 63.3 2000

Gini is a metric of wealth inequality. Wikipedia has a description though the curves it shows are more symetric than the real world distribution. Gini is a percentage. In a nation with perfectly equitable distribution of income it is zero and in a nation where one household controls all the wealth it is 100. It is the percentage of the income dollars (or what ever) shifted from lower to higher incomes.

Good practice demands that this table be taken with a great deal of care. The methods used to sample the populations of the various countries are so diverse and the quality of the samples taken vary widely. There is a very good overview of how hard it is to get good data like this in the discussion materials that come with the data here.

It amazes me that a statistic so central to economic analysis can be so hard to find.