Minimum Price for Alcohol

The UK government laid out proposals today to raise the price of alcohol, or rather, set a minimum price per unit. This minimum price will be 45p. Meanwhile the Scottish parliament is trying to introduce a minimum price of 50p per unit. Will it make any difference?

The responsiveness of demand to changes in price is called 'elasticity' by economists, and there is much debate over how 'elastic' consumers' preferences are. If you respond to a small increase in the price of alcohol by drastically cutting back how much you consume, you are displaying highly elastic preferences for alcohol. If, on the hand, a small price rise wont impact what you consume at all, then you are displaying highly inelastic preferences for alcohol.

The government clearly thinks people's preferences over alcohol are elastic, or there would no point introducing the new minimum price. But the issue has other ramifications. I may consume less cheap supermarket lager but more in the local pub instead. Or I may even buy black market alcohol. In other words, the change in the price of alcohol will impact demand for other goods. Measuring the total impact of a price change gets very complicated very quickly.

How consumers react to the minimum price is crucial. Research by the University of Sheffield suggests people will buy 4.3% less alcohol (see BBC article), a small but not insignificant reduction. The government has decided that on the back of such research the best way to change behaviour is through prices. Only time will tell whether people will respond by drinking less...

Book Review - Prisoner's Dilemma

What links the H-bomb, playing chicken and the Cuban missile crisis to game theory?

The answer, according to William Poundstone, is the famous game called the prisoner's dilemma (see here for a fun example). His 1992 book Prisoner's Dilemma is not recent (I was a toddler back then) but is still both fascinating and relevant.

Poundstone's approach is to carefully weave together a biography of John von Neumann and a potted history of the nuclear arms race with examples of fun games. The end result is an utterly gripping read (between you and me I read it in lectures) that never fails to surprise (whether you be an economist or normal).

So as not to ruin the book I'll only share one example of H-bomb game theory...

First, read this fun example of a brilliant game to play with your friends.

Now, the 'Dollar Game' is special because it induces buyers regret. Those who bid inevitably wish they hadn't! There is a rapid escalation. Before we know it, both bidders are wishing they were back where they started. But they always have an incentive to go one higher. They do not want to be left in second place. This is not dissimilar to the nuclear arms race.

The analogy starts with America building the A-bomb at the end of WWII. Understandably, Russia could not contemplate being out gunned so they got one. So the USA understandably got more A-bombs. So did the USSR. So America built the H-bomb. So Russia did too. And so on. The starting position led to escalation and both states ended up in a worse position than at the start when neither had any nuclear bombs: They had spent a lot of money on no tactical advantage. If they had coordinated they could have stopped at some point (i.e. just having one A-bomb each). Sadly for both nations this was never likely to happen.

In fact, the more Poundstone delves into the cold war the more analogies crop up. Coincidently (or not) the people who originally created game theory, such as John von Neumann, also created the bomb.

I highly recommend you read Prisoner's Dilemma so that (if nothing else) you can start to see real life conundrums through game theory spectacles, and what spectacles!

Genre: Economics/Behavioural Economics
Accessibility: 10/10
Accuracy: 9/10
Readability: 9/10
Usefulness: 7/10
Verdict: Very, very interesting!

Fair Coffee?

As a Masters student I am frequent visitor to the Arts and Social Science Graduate Centre at the University of Nottingham. Possibly the best thing about the Grad Centre (other than the absence of pesky undergrads, obviously) is the coffee machine which offers all types of tea and coffee for 25p. This makes it a hot attraction compared to the other machines of campus which charge at least 90p and especially compared to Costa which charges anything over £2.50.

Apparently in the first five weeks of term the Grad Centre machine served 5000 drinks, making it the busiest machine on campus.

Then, this week, the price doubled to 50p. No warning. No apology. The cost of coffee just doubled overnight. Outrageous! So unfair!

My reaction was probably not dissimilar to many. But why is it unfair for the price to rise? I have happily paid £3 for a coffee elsewhere, and it's not like going without coffee will kill me (I'm not an Arts student). If the price had always been 50p I would have had no complaints. It's just supply and demand.

People's perception of fairness is a very interesting area of study within behavioural economics.

For example, is it unfair for a shop to put up the price of shovels when it snows? An economist would answer no and point to the laws of supply and demand. A consumer, however, might think it exploitation.

Behavioural economics has shed a lot of light on what people consider fair and what they do not, but for now I'll conclude by simply noting that my degree in economics was not enough to stop me thinking a rise in the price of coffee was fair.

Working Hard?

There are many ways in which employers use incentives to encourage employees to work hard. I recently heard of one company with a particuarly ineffective one.

The firm in question is an exam board based in the UK. Each summer they employ hundreds of people to perform relatively simple tasks such as counting exam papers and checking that examiners have added up the marks correctly. The work is highly repetitive and each worker may see thousands of papers in total. The employees are initially hired for several weeks, but the company then keeps on the workers it wants for some weeks afterwards. Obviously, the incentive for most workers is to be kept on for the additional weeks.

So how, you may be wondering, does the company use this potential extra work as an incentive to encourage high productivity?

Not very well, it turns out.

Their only mechanism for measuring productivity is simple: The number of mistakes each employee makes on exam papers. This is flawed. Take an example: two people who each make one mistake per 10 papers they process. Derek is highly motivated to get the extra work and processes 500 papers in a day, while Herbert is not motivated and only processes 100. According to the company's measure, Derek has made the most mistakes and is thus less productive. Thus Herbert should be kept on.

According to my secret whistle-blower there is another flaw in the system. The line managers who decide whom to keep on are largely motivated to keep fun, interesting people in the office (being surrounded by boring people for weeks on end is no fun at all). Who are they likely to think is fun and interesting? The people who stop working to have a nice chat with them on a regular basis. Thus those who are less productive because they are constantly seeking conversations with their bosses are more likely to be kept on than those working too hard to have a natter.

In conclusion, this is a clear case of tragically poor incentivisation that is unfair on those who work the hardest, not to mention bad for the company in question.

Food Shopping Survey Results

The results are back from the survey that I carried out last week (after analysis on Stata).

(For a more technical critique please see here)

Headline result:

• The more often people shop for food, the more likely they are to think that they buy items of food out of habit. I think the most likely explanation for this is that people who shop more often have more opportunity to create habits - the reinforcement mechanism is stronger if you buy food twice a week compared to fortnightly. However, it was only significant at the 10% level and so it is not conclusive evidence.

Other notable results:

• There is no connection between whether people consider themselves a 'creature of habit' and whether they think they buy items of food out of habit. I find this surprising. I suggest that this might be because creature of habit could be seen as a positive character trait, while buying food our of habit could be seen as lazy. Thus the result could be because people are trying to present themselves in a positive light (even if only to themselves).
• There is no connection between the extent to which people think they consider the price of food and whether they think they buy items of food out of habit. I find this surprising. I expected a negative relationship. At the very least I expected that asking people about whether they looked at prices might prompt them into saying they bought less out of habit, but no significant effect was found.
• There is no systematic difference between male and female respondents.

In conclusion, none of my hypothesised variables affected whether people think they buy items of food out of habit (apart from how often they go shopping). Obviously, I find this surprising.

Food Shooping Survey Critique

Let me start this critique with a disclaimer: If I read these survey results in an academic journal I would not treat them as highly robust. I am ok with this. It was not intended to be a highly robust investigation into consumer perceptions, rather I undertook the survey to get a flavour for consumer thinking and research. I have learnt a lot, both about consumers and about how to go about consumer research.

Reasons why my survey is not highly robust:

• There were no incentives for accurate answers.
• The sample size was small (72)
• The sample was found through facebook and GuruHogg and as such is not representative of the whole population (although it was never intended to be).
• Internet surveys are only ever going to sample those who use the internet.
• 10% significance is not enough. 5% significance is required. The result that increasing how often you go shopping by one shop a week increases perceptions of purchasing habit by 17% is not highly robust.

What I would do different for more robust results:

• Offer incentives.
• Recruit a larger sample.
• Recruit the sample from a more diverse section of society.
• Ask better worded questions: fewer dummy variables.
• Use an experiment rather than a survey!

Regarding my opening foray into consumer research:

SurveyMonkey is a great piece of kit, but has it's flaws too. Notably, if you only use their free service then it is time consuming to input the results into Excel. Also, you can only ask 10 questions using their free service which is highly restrictive. Stata, however, is a highly powerful and useful statistics software that was able to do everything I asked of it and more.