Knowing and Making

Alan Sugar has belatedly discovered an important economic concept: the idea of incidence . The star of The Apprentice and former owner of Tottenham Hotspur has just realised that when new income pours into a competitive industry which relies on scarce resources, incumbent companies don't get to keep the money. The standard example of this in economics is farm subsidies. Although one might think farm subsidies are good for farmers, that is not really true. Because there's a fixed supply of farmland, whose price is determined by how much money a farmer can generate from it, all of the extra money is - eventually - captured by landlords in higher rents. Farmers might benefit in the short term, as this paper suggests , but when their leases are up for renewal the rent will go up. Football is no different - there's a limited number of talented players, and all the clubs want to buy them. So now that the Premier League makes £2 billion a year (twelve times the amount of 20...

Ofcom, the UK's communications regulator, has decided that mobile phone companies must cut the termination fees  they charge each other from 4.3p/minute to 0.5p/minute. This is the cost paid by, say, Vodafone to T-Mobile when I call a T-Mobile customer using my Vodafone handset. According to Robert Peston , these fees represent 16% of revenues for British mobile phone companies. Therefore, he says, they will try to make it up by increasing charges in other areas. There are a couple of problems with this view, however. The first is that for every Vodafone customer calling T-Mobile, there's likely to be a T-Mobile customer calling Vodafone in return. The numbers won't be exactly the same - perhaps T-Mobile customers are more stingy - but a large part of that 16% of revenues is cancelled out by costs that the telcos incur. These costs will disappear at the same time as the revenue. So instead of charging 15p/minute and paying 4p to another company, then receiving 4p l...

When Stephen Dubner announced a contest to guess the number of Google hits there would be for "SuperFreakonomics" on November 3, my thought process went something like this: There are about 11,000 results now. There are 1.3 million for "Freakonomics". As the SuperFreakonomics launch comes closer, it will be discussed more and more. But it is unlikely to get close to the total for Freakonomics - partly because many SuperFreakonomics pages will also have the word Freakonomics in them; partly because it's a sequel; partly because Freakonomics is a cultural phenomenon, surely beyond the original expectations, and the chances of Levitt and Dubner hitting two home runs in a row are low (nothing personal, guys, just stats). So somewhere in the 50,000-300,000 range is probably about right. I have no accurate way to predict where it will fall within that range But - just like The Price is Right - success in this contest does not correlate precisely with accuracy; inst...

Today I wasted 45 minutes on a contest to win a £9.99 book. Not rational at all - except for what I learned from the experience, and the satisfaction of feeling cleverer than 651 other contestants. Background information on the contest is here . In short, you need to guess how many Google hits there will be for SuperFreakonomics on November 3rd, two weeks after the eponymous book is published. This is the sequel to Freakonomics , so it should be popular. But how popular? Now this kind of contest has some interesting idiosyncrasies. Like guessing the price in The Price Is Right , or like guessing the weight of a nun - or whatever it is they do in travelling carnivals - your best strategy is not to try to accurately work out the weight. Instead, you should look at what other people have guessed and pick your number to maximise the chance that you'll be just a tiny bit closer than them. You might also recognise this strategy from the "beach vendor problem". In the simplest...

From the FT today : "Towards the end of the week several rivals said they had dropped internal restrictions on approaching Morgan Stanley clients when it became clear how much potential custom was available." Why on earth do investment banks have "internal restrictions" on approaching each other's clients? I appreciate that they would end up spending lots of time chasing new leads and winning new clients only to lose existing business to the other banks who start poaching their clients. They would probably end up reducing fees and increasing sales budgets without expanding the market much, just pinching share from each other. Maybe not an ideal result for the banks. But in any other industry that's called a cartel. Why should investment banks be exempt from competition law? If the public is taking the opportunity to get some reforms in return for its $700bn, this could be one to throw in. p.s. As usual, Martin Wolf's take on the issue is pretty sound.