By Bhagwad Jal Park, on November 17th, 2008
I arrived in the United States a few months ago with my wife. It was my first time to America, and I was looking forward to experiencing new things and enjoying myself. However, I am becoming aware that far from being everything that America is hyped up to be, the United States is terrible place to live.
In many respects, it seems vastly less developed than my own country – India. In this article, I will focus on just one aspect of it. Namely how consumers are happy to let big corporations walk all over them. I realize that coming from another country gives me a unique perspective on what I see is very wrong with the economic structure here.
Image Credit: MSH*
Let me take the first concrete example of what I mean. In India, a consumer has complete freedom as to which telecom company they want to stay with. Say I have a handset. Based on whose service I like, I can choose to use that handset with any telecom provider I choose. And next month if I want to change over to another one, I can do so immediately. I can just replace the SIM card with that of another company. This is perfectly legal and is very much the norm.
Imagine my surprise when I found out that in America you have to buy a phone attached to a particular firm (Either AT&T or T-Mobile or whatever)! Not only that, you are obligated to pay them every month, or else your credit history is tarnished. It’s amazing. How do customers put up with such shabby treatment? It seems as if the big telecom firms are holding customers to ransom. I say shabby, because compared to India where the consumer dictates terms, in America the big corporations call the shots. You can’t switch schemes without paying a contract breaking fee etc. In other words, the corporations have you locked in.
In addition, people here are forced to pay for incoming calls. Regular Americans seem to be okay with this. In India, if a telecom company started to charge incoming calls they would be laughed out of business. As I said, you can switch over anytime you want. In fact (and this is hilarious), a particular telecom provider (Virgin actually) pays consumers for incoming calls! Yet American consumers are unaware that they’re being fleeced. And in fact, what choice do they have? All telcos are the same. Even if they were willing to switch after paying the “Contract breaking fees”, it would be like jumping from the frying pan into the fire.
Moving on, I will now proceed to demonstrate that Internet companies also take advantage of their consumers and force their whims and fancies down their throats. As of now, what is to prevent say AT&T from imposing a cap of 50 GB download per month on their consumers? In fact, proposals to limit and even monitor traffic are in the pipeline. If Americans are outraged by such activities, who cares right? What choice do they have? Shifting to Comcast is no better! Once more, honest Americans seem unaware of the fact that service providers can do whatever they want by just imposing their policies down people’s throats.
This could never happen in India. And I know why. In India, most of the infrastructure for telephone lines and the Internet (Over 95%) is owned by the government and private companies lease it from the government. The government has it’s own telephone and Internet service (Called BSNL). If at any time the major Indian telcos decide to collaborate and shove a policy down the throats of the consumers (including raising the prices to any level they want), we will just shift en masse to the government service! For the government to change it’s policies is a different issue altogether. If the government suddenly decides to charge incoming calls, they will be voted out of power in a heartbeat. Thus it will never happen.
Before coming to America, I thought that complete privatisation was a good thing. Now after coming here I see that it leads to exploitation of consumers through cartels. Having certain infrastructure in the hands of the government is a saving grace for Indian consumers who love their freedom and hate restrictions. And the first opportunity I get, I am going back. America isn’t the land of the free that I thought it was. Enslavement by corporations, and being held to ransom by having your credit history checked at every point is the norm. And I never want someone to be looking over my shoulder like that.
By Bhagwad Jal Park, on November 7th, 2008
Today, we are going to discuss an interesting phenomenon in the world of game theory: namely, adverse selection. Frequently, game theory attempts to isolate and analyze curious phenomena and detect the essential elements that make it work. We can then try and manipulate these element to steer the game in a chosen direction.
The phenomenon of adverse selection occurs when several people are trying to obtain a particular goal, and the criteria which make the person either suitable or unsuitable to obtain that goal from the point of view of the entity and from the person trying to obtain it are diametrically opposite.
Let us take the example of a company who is trying to project to the world that only the most stylish and fashionable people wear their watches. To accomplish this, it decides to selectively sell their watches only to the most fashionable people in the world. From the point of view of the watch company, the people who must wear it must be really stylish and fashionable. However, the people who will most want to wear the watch will be wannabes. The wannabes will benefit most from the watch since, if they have the watch, they will be projected as stylish and fashionable. Hence, the watch company must be very suspicious of anyone who desperately wants to wear the watch.
Those who are really stylish and fashionable will not want to wear the watch so badly since their reputation is already made and they gain little from wearing it.
Adverse selection is characterized by the fact that people who most want to obtain something are typically the least worthy to have it.
Image Credit: stark23x
This manifests itself beautifully in the case of insurance companies. Regardless of what anyone says, insurance is essentially gambling. Insurance students will cut my throat out for saying this, but when all the smoke clears, it’s pretty obvious that when you take out an insurance, you’re hedging your bets.
Since insurance companies want to maximize their profits, they will want to have the odds stacked on their side. This means that they will want to give insurance to people who are least likely to demand a payout from them. On the other hand, those who most badly want insurance will be the people who are most likely to demand a payout.
A person who is old and has several ailments would love to have cheap insurance, whereas a young man in perfect health will have less to gain. However, insurance companies want the young man to sign up for insurance and not the old person. This is adverse selection in its most characteristic form.
It’s actually somewhat tragic. Giving insurance only to those who don’t want it completely defeats the purpose of insurance from the customer’s point of view. What’s the big idea of refusing insurance to those who need it most? That’s like selling pizza to a person who isn’t hungry! However, adverse selection doesn’t apply in the case of pizza.
Since insurance companies don’t play fair by testing people and even excluding some people from insurance based on their riskiness, the people who want insurance are perfectly justified in trying to fool the insurance companies by hiding their ailments. It’s a dance, and the outcome all depends on whether the insurance company can discover the hidden ailments of the person or not.
There is no stable solution to this. In other words, no Nash equilibrium exists. One of the parties will always wish that they had – or didn’t have – insurance, or the insurance company will always wish that they had – or didn’t have – a certain person’s business. A zero sum game. In the end, both parties can be happy only if they assess the situation differently. That is, each thinks that they have outwitted the other.
By Bhagwad Jal Park, on October 30th, 2008
Can you imaging inventing something new and refusing to patent it? We game theorists are a greedy lot. While not doing anything actually illegal, we show no mercy when it comes to an opportunity to make lots of money. In this latest nefarious article, I am going to demonstrate how it is in your best interests to keep silent about your latest invention when it suits you.
First we must understand a key concept in game theory called a “holdup.” A holdup is a situation where you are able to demand almost any amount of money from a person because they have no choice but to pay you or suffer incredible losses. This isn’t just restricted to extorting money at a petrol bunk. Holdups are frequently seen in businesses.
For example, suppose all the pilots in a particular airline decide that they’re not getting paid enough. All they have to do is to go on a collective strike and ask for a 300% raise. Assuming that there are very few pilots around, such a strike will have a compelling power. The reason is twofold. First of all, being a pilot is a specialized skill. And second, the cost of paying a pilot is minimal compared to the cost of maintaining an airplane. So if the airline stops operating because of the pilot strike, they can hardly save any money by not paying the pilots since their fixed costs on machines, etc., is sky high anyway. The pilots are trying to “holdup” the airline company.
Image Credit: Ismael Olea
In fact, the threat is so real, that certain governments have imposed rules on how long skilled labor such as pilots can go on strike.
Such a strike would not work in McDonald’s for the reasons mentioned. The labor is pretty unskilled, and a strike would hurt McDonald’s much less since McDonald’s would save on employee fees which are pretty high. So if the employees threaten to strike (remember that the more people who strike, the more difficult it is to maintain the strike since a strike is like a cartel), McDonald’s would simply fire them and hire more workers since they are easy to replace. Thus, an attempted “holdup” of McDonald’s would not succeed.
Patent law gives inventors the potential to holdup companies that rely on the patent. Wouldn’t it be nice if I had a patent on the technology used to create integrated circuits (IC)? Every single chip company in the world would pay me money, and I would be a rich man with no worries (financially at least).
But suppose I’m a manufacturing company, and I have several ways to manufacture a particular product. I must check beforehand whether any of the steps involved in a particular method have a patent on them. If they do, then I must either come to an agreement with the patent holder to pay her a reasonable sum of money before I Invest heavily into it or choose another method.
If I’m foolish enough to blindly set up my manufacturing plant in a way that utilized a method that has a patent on it, the patent holder can holdup my firm. They can demand outrageous fees for allowing me to utilize that method since it will cost me millions of dollars to set up a new plant that avoids that step.
But suppose I do the research beforehand and find that no one holds a patent for a particular step, and I build my factory around it. After this, a clever inventor reveals that he has just now got a patent for a particular method that my plant utilizes, and I’m screwed. The crafty inventor had purposely delayed his patent on that technique so that when I did a check, nothing showed up. Now after my plant is complete, he has completed the process and obtained a patent. He is now in a position to hold up my firm.
So if you’re thinking of obtaining a patent, it is worthwhile for you to hold off a little bit and wait till a firm invests heavily into a product or process which utilizes your invention. Then you must strike and obtain a patent and keep holding up the hapless firm! I can well imagine professionals having dozens of unpatented inventions, keeping a keen lookout for an opportunity to pounce on a company that will utilize one of their inventions.
Yes, we game theorists are crafty. Nothing wrong in that, is there?
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By Bhagwad Jal Park, on October 24th, 2008
In an earlier article of mine on the dependance of Windows on Piracy, I promised a discussion on whether or not software piracy should be considered as theft. Well, here we are, and I would like to demonstrate how piracy is not theft.
To start of with, let us define theft. The commonly accepted definition is “the taking of someone else’s property without their consent“. The two keywords that need to be looked at here are “taking” and “consent”. I am going to demonstrate in various different ways why software piracy does not come into the same category as theft. My first argument is with the word “take”.
First of all, the word “taken,” as it was originally used, was meant to imply that what you take is no longer there with the owner. In fact, the root of the word piracy itself betrays what it is supposed to mean. Pirates stormed ships forcibly, looted the occupants (not to mention murdered and God knows what else), and took away things that left the original owners without them.
This clearly doesn’t apply to piracy of music CD’s and software. If I download a song from a server, then the original copy is intact and nothing has been lost. To put a different spin on it, if I light a candle, and you (without my consent) light another candle from my flame and run away, can I charge you with having stolen my light? Is that piracy? I don’t think so.
Of course, all software companies and music companies have the right to make it as difficult as possible for people to copy and run their software. Which brings me to my second point as to why I don’t consider piracy as theft.
Image Credit: decoder72
I quite understand the meaning of the term opportunity cost. The primary gripe with piracy is that it causes lost sales. This assumption is dubious at best or remarkably overstated. For this argument to ring true, the assumption must be made that if a user illegaly downloads a song, he or she would have purchased it. If the user never intended to purchase the song, then downloading the song illegally has not caused any sort of lost sales.
In fact, this is much more often true than not. The overwhelming majority of people who illegally download software would never have bought it if they were unable to get if for free. So this argument falls flat.
My final argument is an extension of my earlier article on how to charge different prices for your products. Companies usually adopt pricing policies that confer an additional benefit to those who pay high prices. For example, business class passengers in airplanes have shorter lines. Conversely, they make it difficult for customers who are price sensitive and want to save money to ensure that only those who are willing to make some sort of a sacrifice can get the lower priced products. The example is that of discount coupons which force customers to go through all the hassle of cutting out and saving useless bits of paper in order to get a discount.
Piracy can be looked at in this light. It is never easy to download something illegally. You have to find a source, try and crack it, are in constant fear that updates will change something and render the software useless, etc. This is the reason why people pay money for software. They do it to avoid hassles. The very fact that people choose to buy software instead of trying to get it for free demonstrates this. The end result is this: People who would never have bought the software anyway are the ones who usually try and download music and software illegally. The others buy it to avoid the hassles of using non-genuine software.
The fact that people are still buying music and paying for software illustrates this principle. They pay for software even though they can get it for free. As long as companies make it as difficult as possible for their software to be copied illegally (it doesn’t have to be impossible), they will not lose sales since those to whom the software is worth the price will purchase it.
A lot of people of course, have different points of view on this, believe that you should go to an online store and purchase software, and they are most welcome to share with our readers why they feel that piracy is theft or provide further reasons as to why it is not.
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By Bhagwad Jal Park, on October 21st, 2008
As an impartial observer, I’ve often wondered why, when I go to a restaurant in a group and order a dish, do they bring my order along with everyone else’s, and then serve my food that I ordered to everyone on the table! For example, if I order six dumplings, and there are six people in the group, the waiter will casually give each person a dumpling, and I get only one. Whereas I ordered six thinking that I would eat all of them. As a result, my hunger is not satiated.
Also, if I want to eat well, I must have the dishes that others have ordered which I may not like. My wife says that this is good etiquette, and that my not understanding this simple fact highlights my lack of social graces. As a person with a suspicious mind however (and a game theory one at that!), I have a different take on the issue.
When a group goes to a restaurant, either they all share the bill equally or each pays for themselves. It is considered less awkward and simpler if the group (all things being equal), split the bill equally. This means that as an individual, when I want to order something on the menu, the price of whatever I order drops proportionately to the number of people on the table. For example, if an item I want (say king prawns) costs $50, then I will only have to pay $10 if my group has five people.
Now I have no control whatsoever on what other people order. By not ordering anything expensive, I can’t guarantee that others will do the same. Therefore, it is in my best interests to order everything I want without looking at the price since I will never again get an 80% discount! True, others may share my meal, but in an expensive restaurant, you’re usually not paying for the raw materials of the food itself but for the ambiance, the nicely dressed waiters, etc.
Image Credit: Matt and Kim Rudge
Since we assume that each person in the group is rational and is thinking just like me, they will order expensive things too, and so the total bill turns out to be extremely high. A variation of the prisoner’s dilemma actually.
Of course, if it was decided beforehand that each person will pay for what they order, then I will be much more circumspect about what I decide to eat. I can’t afford to pay $50 for 5 shrimps!
Knowing this, it is in the restaurant’s best interests to ensure that everyone shares the bill equally, since only then will each person go berserk with their orders. Therefore, they must operate in such a way that it becomes very difficult to gauge who has eaten what.
One of the ways to do this is to serve everyone’s dish to everyone under the cloak of “etiquette”. In fact, I won’t be surprised if they invented the practice in the first place since and started calling it Good Manners. Good Manners it may be, but it’s also good business sense.
Of course, if you’re a greedy person and want to sample expensive food that you would never normally eat, you must get into a group of people you don’t know very well and who are not very well off. You must then convince them to go to an expensive restaurant so that you will be the only one to order expensive food and make them share the bill. I would assume you can only do this a couple of times before your group started to feel the pinch.
Sometimes however, a person’s personality can be so captivating and charming that others forgive them. Or say you’re a beautiful woman in the company of four men, they will not only forgive you, but fall all over themselves in fighting over your bill. You can then show how independent you are by paying “your share,” when actually you’ve shifted over all the expensive food’s cost to your lackeys!
By Bhagwad Jal Park, on October 3rd, 2008
Piracy, it has been claimed, causes the loss of billions of dollars worldwide. I’m not about to launch into a discussion of whether or not that is true (perhaps another day?), but one thing has always bothered me: why doesn’t Microsoft (a good example) stop piracy of Windows, once and for all?
It’s easier than you might think. A company that has amazing technological and financial resources at its command should actually find it quite a trivial matter to simply enforce over the Internet the policy of a unique copy of Windows being installed on just one computer. I believe it can certainly be done. Why then has it not happened?
To answer this, we need to understand the facts about something called “network externalities.” In game theory, the term “network externalities” relates to the phenomenon of something becoming more valuable simply because more people use it. Since it’s more valuable, even more people use it, and it is, therefore, a self-propagating mechanism.
Image Credit: purprin
For example, the telephone is an amazingly useful piece of technology. But how would you like to be the only one having a telephone? I’m betting you wouldn’t. Who would you call? Who would call you? Without other people having a telephone, the instrument is worse than a paperweight! The more people who have a telephone, the more people you can call and who can call you back. The value of the telephone increases simply because more people use it.
This means that products that have network externalities associated with them and have a large user base might completely wipe out the competition even though their product is of a poor quality. Since the value of a product can increase due to the number of people using it and not because of its inherent quality, a dominant product can get away with having a worse product than the competition.
Let’s take the case of Windows. Most people install Windows on their PCs. Why? One major reason is that there is a lot more software that is written for Windows than for, say, Linux or the Mac OS. Why is there more software for Windows? Say I’m a developer and I’m just going to start writing code for my new software. Should I write it for the Windows platform or for another one? If I write it for, say, Linux, then no one using Windows can use my software. Since the overwhelming majority of people use Windows, I would get a better payoff if I wrote my software for Windows because there are more chances of people buying it.
So the more number of people who use Windows, the more software there is out there for it, and, therefore, when I purchase a new computer, I would choose one that has Windows running on it because of the larger amount of software available for it.
Windows has a dominant market leadership in the OS world simply because it has a dominant market leadership! Such is the self-propagating nature of network externalities. Now let’s assume that Microsoft stops piracy completely. Almost all of India, China, and other Asian countries would be forced to use another software simply because, in these countries, the price of Windows is too high for almost anyone to purchase. In India, people would maybe buy Windows if they could purchase a copy for Rs. 200. That means $5! You think Microsoft is ever going to sell Windows for $5? No way.
So now that half the world has stopped using Windows since there is no more piracy, Windows has lost the only advantage it ever had – a dominant market leadership. When half the world starts using Linux, for example, then more developers will write software for Linux, and so even more people would buy it. It might happen that Windows will never recover from this shock (since you cannot improve your position unless you improve your position – a catch-22 situation).
This is the real reason why Microsoft will never stop piracy. They know that if they do, then half the world will stop using Windows, and they figure that, if that happens, they’re doomed.
By Bhagwad Jal Park, on September 23rd, 2008
Let’s try and reason together on what offshoring is fundamentally doing to the economy. Economic situations are complex only because of the large number of factors that need to be taken into consideration for a given situation. However, the factors themselves are usually simple.
By taking a single factor and removing the rest, we can follow up on the effect and thus be able to understand the direction in which it takes us. Let us do this with offshoring. We will be touching on issues like the meaning of wealth to the printing of money. Keep in mind, that we aren’t professional economists. Just following up on some ideas that are interesting.
So what is offshoring? Offshoring, or outsourcing, means the taking of a job and giving it to someone else who is in another country. Obviously this person needs to be paid, albeit at a lower cost. Now an economy works by everyone contributing something. This means that the customer who is at a supermarket is actually serving someone else somewhere. So a customer in a grocery store can become the salesman in a shoe shop, and a teller in the grocery store will become the customer in a shoe shop.
 Image Credit: re-ality
So all employees are customers for someone else. If there was just one big corporation in the whole country, then all the employees of that corporation would also have to be it’s customers. This is necessary for the circulation of money. The employees of this big corporation will buy goods from it with the same money that they receive in salaries from that very corporation. So it goes round and round.
In real life, there is more than one corporation, but the basic principle does not change. Money that is handed out as salaries is flushed back into companies that give out the salaries after passing through many hands. For example, a man gets paid to work in a grocery store. He uses the money to buy shoes and pays the owner of the shoe shop who then uses that money to buy groceries and pays the grocery store owner. What goes around comes around.
Now what happens in offshoring? I can see two interesting things happening. First of all, when you pay a person in another country, the person is not going to use that money to buy goods in your country. That money is gone forever from the economic system. Second, that person is going to spend money in her country that has not come from any business generated in that country.
Let us look at the first point. Since money has gone out of the system never to return, the total amount of money in the country has gone down. And since the total amount of money is finite, logically, this cannot continue forever unless new money comes in. Most of the time, offshoring is one way. That is, if one country offshores to another country for a cost advantage, then the offshoring country will not provide services back for the destination country because it is by definition more expensive. So the offshoring country only outsources and does not return the favor.
This means that the new money can only come from printing extra money. If this doesn’t happen, then the cost of goods in the offshoring country will fall because there is now less money chasing more goods. If this happens, then the cost advantage in offshoring will slowly be nullified! It makes your head spin.
Conversely, the cost of goods in the providing country will increase because there is more money chasing fewer goods since the goods or services are being exported out. This means that, due to inflation, the cost advantage of the providing country will be gradually reduced, and offshoring will become even less viable.
Where does this end? The only way to prevent this is for the offshoring country to print more money and thus keep the amount of money in circulation constant. But then this means money is being printed for the sole purpose of buying goods and services from outside. This will lead to disastrous consequences for the value of the currency.
Of course, this is just one extremely simplistic view. If we factor in the fact that the economies of both countries are growing, then it becomes a race to see which is more: the rate of offshoring or the growth of the economy? In other words, are you paying others more than you are earning yourself?
I hope you’ve enjoyed this discussion and will post your comments in order to give a better insight into the dynamics of this complex and exceedingly interesting issue.
By Bhagwad Jal Park, on September 16th, 2008
I’m going to pull a leaf right out of The Matrix here. Well, perhaps a few leaves from David Hume as well. This article is going to deal with the ultimate goal of virtual worlds. We have already taken the first stumbling steps towards it with sites like Second Life and Google’s Lively. The idea is to envelop ourselves in a virtual computer world where there are counterparts for everything that we have in the real world.
The sites mentioned above are only the first steps, and they are already tremendously addictive. There are games that are shared online by tens of thousands of players, called massively multiplayer online role playing games (MMORPG) where people are so involved in their online worlds that they frequently forget about their real world.
Let’s take this to the extreme. A time will come when technology will enable us to plunge headlong into the virtual world literally. We will be able to forget what is happening around us and experience the virtual world as if it were the real one. Like The Matrix, some probe will be pushed into us, and we will be able to live in worlds of our own creation.
Just imagine being able to be in a world where you are God. Artificial intelligence that will pass the Turing Test will already be so advanced that you will be able to have a family in the virtual world and raise them in the same way the real world allows you to. If you have any fantasies, then this is the place for you. You could indulge in whatever you want without any thought of repercussions; you can have the perfect body and could have an entire harem of beauties at your beck and call.
Image Credit: signalstation
Indeed, who will want to come out of this perfect world? It will be the ultimate addiction. Humans will be quite content to live inside them, keeping their real world bodies alive by being fed by tubes on the outside. I’m not being facetious. I’m dead serious. That’s what will happen if everything is unimpeded.
Real world relationships will dwindle and then become almost extinct. Who wants an imperfect or unsatisfying relationship when you can have the best, most handsome or beautiful and sweetest spouse (or many spouses!) in your own world where you are God?
The economic system as we know it will collapse utterly. People will not want anything else other than the ability to spend time online in their worlds. It will be available as a utility bill like the Internet. People will spend all their money buying online time (with a little for being fed by drip), and manufacture of all goods and services will drop to zero. Housing is perhaps the only industry that will remain, but not as we know it. All that will be needed will be dormitories where our bodies can lie, and thousands of such bodies can fit into one house.
Of course, any company that controls online access will flourish, and the industry will be responsible for 95% of the economy, if not more. It’s a scary thought, but one that we currently find repulsive only because we haven’t gotten accustomed to it. Once in that situation, it will be the most natural thing in the world.
The question now remains as to what work will people do to earn their money to buy online time. If the demand for all products is zero, then what possible work will be left? Perhaps online time will then be a free service, which no one can possibly gain by earning money.
I’m sorry if all this sounds a bit Orweilian. But this is where I see the future heading, and what can be done to stop it?
By Bhagwad Jal Park, on September 12th, 2008
We learned a few pricing strategies in a previous article about how to make customers self-select and get them to pay as much as they are willing to pay for your product. However, it assumes that all of your customers value your product equally. In reality, your product will be valued differently by different people.
Let’s assume you’re selling jeans and business trousers. The trousers will be of lesser value to a teenager and the jeans, say, will be of lesser value to an office-goer. Ideally, you want to be able to sell to both of these people. But if you set a high price for jeans, then the office-goer will not buy it, and if you set a high price for the trousers, then the teenager will not buy it.
As usual, our most direct strategy will never work. Namely asking the customer what they are willing to pay for it! No. We crafty game people need a more subtle approach.
So what are we looking for in such a strategy? We want to arrange things in such a way that both the office-goer and the teenager will buy both products for as much as they are willing to pay for each. To illustrate this, we need to plug in some numbers.
Jeans – Value to teenager: 100. Value to Office-goer: 50
Trousers – Value to Teenager: 50. Value to Office-goer: 100
Image Credit: inju
Ideally, we want the teenager to pick up both the jeans and the trousers for 100 and 50 respectively, spending a total of 150. We want the office-goer to buy the jeans and the trousers for 50 and 100 respectively. We want both to spend 150, and we want to net 150+150 = 300.
Clearly setting a single price for the garments isn’t going to do us any good since then either the teenager or the business person will end up either not buying it, or paying a lower price than they are willing to pay for it. The strategy to follow is that of bundling.
Bundling means that we package both the garments together and sell the bundle for 150! We wrap them nicely in a plastic bag and indicate that the two are inseparable. Now both the teenager and the office-goer can buy the bundle for a price of 150, paying as much as they would normally be willing to pay for each item. Our net gain is 300, and the office-goer as well as the teenager need never know of our clever manipulation.
There are several instances where certain items are worth different values to different people, and in situations like this, bundling can be very effective. If you remember the days of Nintendo, you would see (and you still do) cartridges that have something like 10,000 games in 1 at a reasonable price. How was this possible? The idea was that some people like certain games more than others. The best way to sell them was to put all the games together and hope that there will be something in the bundle for everyone. Selling them separately meant that almost no one would buy each game individually, but by bundling them, you ensure that you sell all of them.
This approach really works well for software since it is so easy to replicate. For bundling to work, you need to be able to manufacture the goods cheaply as well as have the goods be of varying worth to different people. When used properly , it can be a very effective strategy even for physical goods, just like the jeans and trousers example above.
By Bhagwad Jal Park, on September 8th, 2008
How many of us remember what we studied in college? Unless your degree is a technical degree, and years later, you are in a field that calls directly upon that knowledge, the chances are strong that you have forgotten even the most basic information in your college textbooks. Even technical students are most unlikely to remember the exact details of how they proved a particular theorem or how they derived a certain result.
If no one remembers their college education, why is it prized so much? Is is really valuable, or is it only socially acceptable to have a college degree, and why?
Welcome to the world of signaling. In real life, it is often extremely difficult to make accurate judgments about anything. Is a person good or bad? Is a second hand laptop going to die out on you as soon as the sale is completed? Is a candidate for a job really as qualified as he says he is? How strong is a competitor for a market? However, in spite of the difficulty of making these judgments, we are called on to do it every day. So what do we do in these situations? What strategy do we employ to maximize the chances of a correct decision?
Image Credit: MacIomhair
The truth is, even if we could take all the trouble to make an accurate decision, we usually don’t have the time for it. So in real life, we look for signals. Signals are indications that give us a quick idea of the item or person that we’re trying to evaluate. Haven’t you ever judged a book by a cover? Often it’s very difficult to tell in advance how good a book is going to be. We simply have to judge it based on the limited information that we have – and that happens to be it’s cover.
When gazelles are frightened by the roar of a predator, they give a little jump into the air. This is meant to signal to the predator that they are very fit and can easily outrun it if it decides to give chase. The predator can use the limited information in the jump to make the assessment of which gazelle is the slowest or least fit in a particular group so that he can chase it down and not make the mistake of attacking a fit one.
Coming back to our discussion of the college education, even though none of us remember or make use of the information in college in real life, we all know that college is difficult to go through. A person who has gone through college has signaled that they are at least hard working and smart enough to have done so. Conversely, we must assume that a person who doesn’t have a college education hasn’t been smart or hard working enough to do so. If a person is indeed good enough and motivated enough to pass college, then why haven’t they gone ahead with it? This is the real value of going through college, not that the knowledge will help you in later life. It won’t. But it’s a signal to the outside world that you are fit.
Since people rely on signals so much, it then becomes very important to manipulate signals to ensure that people assess you correctly. Unfortunately, the most reliable signals are reliable simply because they are difficult to manipulate. It would be impossible for an unfit gazelle to jump to a good height. However, sometimes, it is possible to send out a signal deliberately at a cost to yourself to make your assessor obtain an erroneous impression of your true capabilities. More on how to do this in my next article.
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