I’ve been reading How to Price by Oz Shy. The book describes itself as “A guide to pricing techniques and yield management”. In other words, fancy forms of pricing compared to just setting a single price for everyone. The following diagram sums up the basic idea:

At the monopoly price shown, you make profit of the green rectangle. However you’re leaving some surplus on the table. The top triangle is surplus that consumers who bought your product get because they were willing to pay more than the price you charged. The lower triangle is profit you could have made from consumers who were willing to pay more than your marginal cost of production but were excluded by the price you charged. How to Price is basically about how firms can capture these two triangles as revenue. It goes through the standard things like bundling, menus of two-part tariffs and peak-load pricing, as well as more unusual topics like advance booking, overbooking and refund strategies.

The book is well written and clear, but I found it a little disappointing. Each chapter covers one pricing technique and starts off with a numerical example to illustrate the basic idea, which is fine. This is then followed by a “general formulation”, which is not really general but just the special case of linear demand or some other very strong assumptions. This generates a lot of hairy-looking algebra but doesn’t give any further insight into what’s going on beyond the numerical example. I would have preferred to see a more general exposition, although that would raise the difficulty level considerably. I found myself skipping over the “general” parts of the book and just trying to learn from the examples.

One interesting feature of the book is that it sketches out computer algorithms for implementing the various pricing techniques. Again these are not terribly general as they assume some input data in a particular form, but it does give you some insight into how you could write a program to set prices.

Another issue is that the book lacks material on empirical techniques. Obviously implementing complex pricing strategies requires some fairly detailed knowledge of your customers’ demand characteristics, which I suppose could be estimated with some fancy econometrics. Shy is very up-front that the book does not cover this material (he says so in the very first paragraph of the preface). He suggests that since preferences vary so much over time, econometric techniques are not very helpful, and trial-and-error is a better approach. Personally if it were possible I’d go for econometrics first, and then fine-tune things with trial and error.

Anyway, overall it’s not a bad book if you just want to get the basic intuition behind various pricing techniques, and then you can follow up the references for the gory details, and find another book about econometrics of demand estimation (anyone know a good one?). It’s also not very expensive at around US$35 for the paperback. I’ll give How to Price 3 stars.

I mainly read economics journals, but I’ve just discovered the nerdy-sounding Journal of Computer-Mediated Communication. It’s an open-access online journal and the latest issue has some papers that look very interesting, for example:

Every Blog Has Its Day: Politically Interested Internet Users’ Perceptions of Blog Credibility: This study employs an online survey to examine U.S. politically-interested Internet users’ perceptions of the credibility of blogs. The article focuses on the influence of blog reliance compared to motivations for visiting blogs in determining blog credibility. The study found that blogs were judged as moderately credible, but as more credible than any mainstream media or online source. Both reliance and motivations predicted blog credibility after controlling for demographics and political variables. Reliance proved a consistently stronger predictor than blog motivations. Also, information-seeking motives predicted credibility better than entertainment ones.

The Creative Commons and Copyright Protection in the Digital Era: Uses of Creative Commons Licenses: As digital technology thrusts complexity upon copyright law, conflict has escalated between copyright holders desperate to institute a vigorous enforcement mechanism against copying in order to protect their ownership and others who underscore the importance of public interests in accessing and using copyrighted works. This study explores whether Creative Commons (CC) licenses are a viable solution for copyright protection in the digital era. Through a mixed-methods approach involving a web-based survey of CC licensors, a content analysis of CC-licensed works, and interviews, the study characterizes CC licensors, the ways that CC licensors produce creative works, the private interests that CC licenses serve, and the public interests that CC licenses serve. The findings suggest that the Creative Commons can alleviate some of the problems caused by the copyright conflict.

Social Network Profiles as Taste Performances: This study examines how a social network profile’s lists of interests—music, books, movies, television shows, etc.—can function as an expressive arena for taste performance. By composing interest tokens around a theme, profile users craft their “taste statements.” First, socioeconomic and aesthetic influences on taste are considered, and the expressivity of interest tokens is analyzed using a semiotic framework. Then, a grounded theory approach is taken to identify four types of taste statements—those that convey prestige, differentiation, authenticity, and theatrical persona. The semantics of taste and taste statements are further investigated through a statistical analysis of 127,477 profiles collected from the MySpace social network site between November 2006 and January 2007. The major findings of the analysis include statistical evidence for prestige and differentiation taste statements and an interpretation of the taste semantics underlying the MySpace community—its motifs, paradigms, and demographic structures.

I do not like to write about macroeconomics and related issues, because they’re not my areas of expertise, and I honestly know very little about them. However, let me indulge just once. Recently I’ve been reading Memories of Silk and Straw by Dr. Junichi Saga (the English translation). Dr. Saga was a medical doctor in rural Japan, and the book is based on his interviews with his elderly patients about their lives around 1900 - 1925. We do not often think of Japan as a poor country, but 100 years ago it was. The book is very well written and describes in detail the poverty in which many rural Japanese lived at that time.

As a person who’s spent his entire working life in front of a computer earning an above-average income, it’s hard to comprehend the lives that these people lived. Imagine working all day doing physical labour, six or seven days a week, in all seasons, just to earn enough money to feed your family rice and maybe a few vegetables. Not owning any property, and no insurance to cover you against sickness or injury. Imagine living with the stress of knowing that injuring yourself at work could mean starvation for your family. Of course, it wasn’t all misery; people have an amazing way of finding happiness even in the worst of situations. Still, I have no data to back this up, but I’m guessing that the poorest person in Japan today has a quality of life that’s better in every measure than the average rural peasant of 100 years ago.

Now, I’m speculating again, but I guess that the life of a Japanese peasant a century ago is not too different from that of many Chinese, Indians and Africans today. Reading these stories made me really appreciate what a tremendous difference economic growth can make to people’s lives. If I were to start my training as an economist over again, I’d think seriously about studying growth and development. I think the potential for economics to improve people’s lives by helping to raise productivity and living standards is equal to or greater than the potential of medicine or any other field to do the same.

Since I’m speculating a lot here, let me do a little bit more. I’m not an environmental economist either, but it seems that the growth paths that Japan and the other first-world countries have taken over the past 100 years are not sustainable from an environmental point of view. However, to deny economic growth to those currently living in poverty seems, to me, to be immoral and unconscionable. The challenge, therefore, is to figure out how to achieve sustainable growth. And now I started to sound like a politician, so I’d better stop.

Memories of Silk and Straw is a very interesting book for many reasons. On growth and development issues, I enjoy Dani Rodrik’s blog. On environmental issues, the Environmental Economics blog is awesome.

An update to my earlier post about economics books that are available for free download (legally) — I’ve found two more very good textbooks available:

Short Course on Nonlinear Pricing, by Robert Wilson (1999). This seems to be essentially the same as Robert Wilson’s excellent book on nonlinear pricing.

Industrial Organization: A Strategic Approach, by Jeffrey Church and Roger Ware (2000). This is a very good intermediate industrial organization textbook.

From now on I’ll be maintaining my list of downloadable books on this page in the ‘resources’ section of my site.

Some authors of economics books and textbooks have generously allowed online versions of their books to be downloaded for free. Here’s a list of a few relatively recent books that I’ve found. If you know of any others, please let me know. And, if you like a book and can afford it, show your support for the author by buying a copy.

Introduction to Economic Analysis, by R. Preston McAfee (2007). ‘Open source’ intermediate undergraduate microeconomics textbook. Website also has slides for teaching.

Lecture notes in Microeconomic Theory, by Ariel Rubinstein (2006). Advanced microeconomic theory textbook.

Introduction to Modern Economic Growth, by Daron Acemoglu (2007, draft). Advanced economic growth theory.

Bargaining and Markets, by Martin J. Osborne and Ariel Rubinstein (1990). Advanced bargaining theory textbook.

Invisible Engines, by David Evans, Andrei Hagui and Richard Schmalensee (2007). Non-technical book about two-sided software platforms.

Modelling Bounded Rationality, by Ariel Rubinstein (1998). Game theoretic models of bounded rationality (advanced).

Economics and Language, by Ariel Rubinstein (1996). The economics of language and language of economics.

There is also the Library of Economics and Liberty, which has many digital copies of historical economics texts available for download.