Hotdogonomics

Some more business reading while we’re at it. I was at the Met last weekend on the final day of the excellent Francis Bacon show, and, on my way in, I got a hot dog for $2.00. “Good deal,” I thought. “Great dog.”

I got home to find a post called Hot Dog Vendor Economics on the NYT’s Freakonomics Blog. Daniel Hamermesh writes,

A Slate article mentions that the annual price of a hot-dog stand license near the Metropolitan Museum of Art in New York City is $362,201. Licenses are very limited and are bought at auction. The price presumably reflects the economic rent associated with the particular site (the price would be a lot lower in the middle of Central Park). Yet at a fixed cost of $1,000 per day, how can a hot-dog vendor make enough money to cover his variable cost, including the value of his own time?

Hamermesh runs the numbers and sees that it’s possible to turn a profit, but only a slight one. Many of the commenters see it differently, and run through a variety of other models for the hot dog vendors’ business. One of the more interesting comment threads I’ve read in a while. Hamermesh makes one big mistake, in my opinion, in pricing a drink at $1.00. Mine was actually $3.50. It seems the hot dogs could be a bit like bar snacks: they get you in the door and get you to buy the pricier beverages in order to wash them down.

Spending more to win than to lose

NYT profiles the new “entertainment shopping” site Swoopo, in which bidders spend $0.60/bid on to snag deals on bikes, watches, small electronics, and other impulse buys. They report:

This month, a new 40-inch Samsung TV, which normally sells for $1,500, sold for $67.92, and a white LG refrigerator with a price tag of $1,498 went for a cool $77.90.

But there’s an enormous catch:

[Critics say the site preys] on human foibles, like the tendency of people to overlook the small increments of money they spend to pursue alluring discounts. These critics also say that players face long odds in Swoopo’s auctions, where they must compete against people in the United States, Britain and Germany. And they say that Swoopo is making a nice profit on each item when all the bidding fees are tallied. Competing bidders spent a cumulative $2,337 in their losing effort to buy the $1,498 refrigerator, for example.

Absolutely incredible. Price and psychology, dangerously interlinked. The unemployed 27-year-old piping draftsman who’s profiled in the piece confesses that occasionally he’s spent more winning an item than it would’ve cost to buy in a store.

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It would be hard, especially given the current state of the world, for me to recommend a program more worth your time than Niall Ferguson’s excellent The Ascent of Money. Based on his bestselling book, I saw it in its original BBC version, but it came to PBS in January and is now available to watch in its entirety online. In six parts, Ferguson, a financial historian at Harvard Business School, traces the development of representative (or paper) money and the system of banks (from the Italian bianchi, or benches) that supported it, then bonds and bond markets, then credit and credit markets, stock and stock markets, real estate and its many crises (savings-and-loan, subprime, etc), and finally, the rise of a transnational conglomerate ecnonomy Ferguson dubs “Chimerica,” in which China plays the banker as the U.S. plays the borrower, and our fates and fortunes become ever-increasingly intertwined as a result. In each episode, Ferguson offers not only a systematic explanation of how these markets work, but also examples from remote and recent history that illustrate the role money plays in shaping history and defining our relationships to one another. Watch this tonight. When you’re finished, you might want to glimpse into the future by reading Ferguson’s retrospective history of the year 2009.

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“With five times as many locations worldwide as McDonald’s, Starbucks, Burger King and Wal-Mart combined, Western Union is the lone behemoth among hundreds of money transfer companies. Little noticed by the public and seldom studied by scholars, these businesses form the infrastructure of global migration, a force remaking economics, politics and cultures across the world. Last year migrants from poor countries sent home $300 billion, nearly three times the world’s foreign aid budgets combined. Western Union’s dominance of the industry casts it in a host of unlikely new roles: as a force in development economics, a player in American immigration debates and a target of contrasting attacks.” NYT on Western Union, complete with a fascinating map detailing the movement of migrant money across the globe.

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“There are five rational pirates, A, B, C, D and E. They find 100 gold coins. They must decide how to distribute them. The Pirates have a strict order of seniority: A is superior to B, who is superior to C, who is superior to D, who is superior to E. The Pirate world’s rules of distribution are thus: that the most senior pirate should propose a distribution of coins. The pirates should then vote on whether to accept this distribution; the proposer is able to vote, and has the casting vote in the event of a tie [since this is the right of the proposer]. If the proposed allocation is approved by vote, it happens. If not, the proposer is thrown overboard on the pirate ship and dies, and the next most senior pirate makes a new proposal to begin the system again.” A classic of Game Theory in Economics, the results of the Pirate Game’s simple rules may surprise you.