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I have a simple system for organizing recipes. I try out recipes I find in cookbooks, blogs, magazines, whatever. When one hits I do the following.
- Take a picture of it.
- Write down a list of the ingredients I wouldn’t typically have stocked.
- Email the above plus a link to the recipe (or what page in what cookbook) to myself.
Because the time you really need recipes is when you are shopping and you see, say some really good looking okra and you need to know what else to get. You pull out your iPhone, you search for okra in your mail folders, you get a picture and a list of ingredients. You go home and cook.
The picture is absolutely key. Think of your cookbooks at home. Which recipes do you most often cook? Its the ones with the beautiful photos in the middle of the book. The photo reminds you how yummy its going to be. Wouldn’t you love to cook this tonight?
Here is some simple market power analysis of Apple’s use of the iPhone as a platform. Think of it as a device you have to buy in order to obtain services from sellers who use the iPhone platform. The kinds of services you can buy are voice calls (currently from AT&T), music (currently from Apple via iTunes but also via third-parties like Pandora), and applications (from third-party developers via the app store.)
Apple controls the platform, so it can decide whether to provide a service itself (as with iTunes), and if not who provides each service, whether the provider will be exclusive (as with AT&T), and what price to exact from the transaction. Of course, Apple also sells the handset to you and all of the above factors in to how much you are willing to pay for the iPhone.
Here is a basic principle of monopoly power that is central to these decisions. Whether Apple wants to exclusively provide a service or allow a competitive supply from third-parties depends on which of its customers will benefit from the service. Suppose the service has similar benefits for all iPhone users. Then Apple can allow the service to be competitively supplied (as with the App Store) and capture the benefit by raising the price of the iPhone.
On the other hand, if the service will most valuable to those iPhone users who already have a high willingness-to-pay for the phone (the so-called infra-marginal users,) then Apple wants to exclusively provide the service (or contract with an exclusive provider.) The reason is that the price of the iPhone handset is determined by the marginal user. In order to raise the price of the phone itself to capture the benefit to high-end users, too many marginal users would be price out of the iPhone and profits would go down. Instead, Apple captures the value of high-end services (like 3G voice and data) by controlling the supply and pricing the service separately.
The cynical way to interpret this is to say that Apple’s exclusive contract with AT&T is simply a way to extract surplus from high-end users. The more charitable interpretation is that without this exclusive contract, as a monopolist, Apple would have less incentive to make the phone compatible with high-end services.
Developer Kalid Shaikh has been banned from the iPhone App Store. By conventional welfare measures this would seem to be a big blow to efficiency:
As the MobileCrunch article points out, a search at AppShopper.com shows 854 apps by Shaikh. The majority of Shaikh’s apps seemed to be data on a specific subject simply pulled from the web without providing any other original or unique content. Most apps were priced at $4.99 and this banishment could represent lost sales of thousands of dollars per day. Shaikh reportedly has admitted that the goal was not to produce valuable apps but to focus on monetization instead. All of Shaikh’s apps have already been removed from the App Store and can no longer be purchased.
Perhaps conventional welfare measures would need to be amended in this case. Note however, that removing one large supplier of what is essentially spam from the App Store will not affect the equilibrium quantity of spam. (And this is not Apple’s stated reason for removing him.)
Smartphones are valuable because they make it possible to substitute tasks over time and across locations. As a result we are freer to be where we want to be when we want to be even if we have work to do. So when you see, say a parent thumbing away on his iPhone at an otherwise family function, before you judge him remember that without his iPhone he might not be there at all.
As a part of a broader revival of Section 2 of the Sherman Act, the anti-trust division of the Department of Justice, under Obama appointee Christine Varney, has opened a review of potentially anti-competitive practices by the dominant telcom providers. One specific issue that has received attention is exclusionary contracting between wireless carriers (AT&T) and handset manufacturers (Apple iPhone.) The FTC is reportedly also exploring these contracts. Exclusive contracts bind a manufacturer’s handsets to specific carriers thereby hindering or preventing end-users from migrating to other carriers. The widespread nature of these contracts may create a barrier against entry by new, smaller wireless providers who cannot offer their users handsets that compete with the top models.
The review is reported to be at an early stage and may not lead to a formal investigation, but as this develops there are a few basic economic arguments to keep in mind. To start with, there is the benchmark “Chicago School” view which starts with the observation that exclusionary contracts require the voluntary agreement of the handset manufacturers. The manufacturers internalize the costs of the entry barrier because without entry they will have fewer competitive carriers to sell their phones to. Therefore, exclusive contracts must compensate manufacturers for this loss impying that these contracts will be in place only when the total surplus from exclusion exceeds the cost, i.e. when it is efficient. The Chicago argument is a longstanding pillar of regulatory policy that still holds sway today. From the article:
Jon Muleta, former wireless bureau chief of the FCC, said exclusive handset deals won’t be an issue the government can pursue on antitrust grounds unless major handset makers say they’re being forced into the deals. “The equipment providers enter into these deals willingly,” Mr. Muleta said.
The Chicago argument ignores the costs to end users from reduced competition in wireless service. It would apply only if manufacturers internalize all of the benefits to consumers from increased competition. But under any reasonable model of the wireless market structure, end-user consumer surplus would increase with more competition for wireless service and this becomes an externality relative to the parties in the Chicago bargain.
Secondly, the Chicago argument has been discredited as it takes a naive view of the way contract negotiation would work. Implicitly, the Chicago argument assumes that handset manufacturers must be compensated at least what they would earn if entry were to occur. But scale economies imply that a new carrier will enter only if sufficiently many, or sufficiently large, manufacturers remain free of exclusive deals. The dominant carriers can use a “divide and conquer” strategy which exploits the difficulty for handset manufacturers to coordinate severing their exclusive deals. Without this coordinated threat, manufacturers cannot extract the compensation envisioned in the Chicago argument, and again efficiency breaks down.
The definitive references here are Rasmusen, Rasmeyer, and Wiley “Naked Exclusion” and a follow-on comment by Segal and Whinston, both in the American Economic Review.
There is a separate defense of exclusive contracts, often cited and also reflected in the article.
Paul Roth, AT&T’s president of retail sales and service, told Congress last month that the billions of dollars the company invests in its network and services would be put at risk if government were to “impose intrusive restrictions on these services or the way that service providers and manufacturers collaborate on next-generation devices.” Mr. Roth said there is plenty of competition and innovation in the wireless industry.
AT&T’s tremendous investment in its 3G network will pay off only because of its exclusive deal with Apple to market the iPhone. Thus, it is often argued that exclusive contracts are in fact pro-competitive as they reward investment with profits that would otherwise be subject to hold-up or competed away. I will take up this argument in a subsequent post.
Should texting, emailing and browsing be banned in meetings? This article discusses the current climate.
Despite resistance, the etiquette debate seems to be tilting in the favor of smartphone use, many executives said. Managing directors do it. Summer associates do it. It spans gender and generation, private and public sectors.
A few years ago, only “the investment banker types” would use BlackBerrys in meetings, said Frank Kneller, the chief executive of a company in Elk Grove Village, Ill., that makes water-treatment systems. “Now it’s everybody.” He said that if he spotted 6 of 10 colleagues tapping away, he knew he had to speed up his presentation.
While I would always prefer to have my iPhone handy, I would volunteer to keep the meeting smartphone free. And that is not because I want the undivided attention of my colleagues. If we all deprive ourselves we create high-powered incentives to keep the meeting as short as possible. That sentiment is echoed here:
Mr. Brotherton, the consultant, wrote in an e-mail message that it was customary now for professionals to lay BlackBerrys or iPhones on a conference table before a meeting — like gunfighters placing their Colt revolvers on the card tables in a saloon. “It’s a not-so-subtle way of signaling ‘I’m connected. I’m busy. I’m important. And if this meeting doesn’t hold my interest, I’ve got 10 other things I can do instead.’ ”
One of the highly touted features of the iPhone is the abundance of applications available for near-instantaneous download and seamless installation. In traditional Apple fashion, in order to keep full control of the software environmnet and maintain this seamless experience, Apple exercises strict control over which apps are made available through the app store. Short of jailbreaking your phone, there is no other way to install third-party software.
The process by which apps are submitted and reviewed strikes many as highly inefficient. (It also strikes many as anti-competitive, but that is not the subject of this post. There are legitimate economic arguments supporting Apple’s control of the platform and for my purposes here I will take those as given, although for now I remain agnostic on the question.) Developers sink significant investment producing launch-ready versions of their software and only then learn definitively whether the app can be sold. There is no recourse if the submission is denied.
(Just recently, we witnessed an extreme example of the kind of deadweight loss that can result. A fully licensed, full-featured Commodore64 Operating System emulator, 1 year in the making, was just rejected from the app store. )
Unfortunately, this is an inevitable inefficiency due to the ubiquitous problem of incomplete contracting. In a first-best world, Apple would publicize an all-encompassing set of rules outlining exactly what software would be accepted and what would be rejected. In this imaginary world of complete contracts, any developer would know in advance whether his software would be accepted and no effort would be wasted.
In reality it is impossible to conceive of all of the possibilities, let alone describe them in a contract. Therefore, in this second-best world, at best Apple can publish a broad set of guidelines and then decide on a case-by-case basis when the final product is submitted. This introduces inefficiencies at two levels. First, the direct effect is that developers face uncertainty whether their software will pass muster and this is a disincentive to undertake the costly investment at the beginning.
But the more subtle inefficiency arises due to the incentive for gamesmanship that the imperfect contract creates. First, Apple’s incentive in constructing guidelines ex ante is to err on the side of appearing more permissive than they intend to be. Apple knows even less than the developers what the final product will look like and Apple values the option to bend the (unwritten) rules a bit when a good product materializes. While it is true that Apple’s desire to keep a reputation for transparent guidelines mitigates this problem to some extent, the fact remains that Apple does not internalize all the costs of software development.
Second, because Apple cannot predict what software will appear it cannot make binding commitments to reject software that is good but erodes slightly their standards. This gives developers an incentive to engage in a form of brinkmanship: sink the cost to create a product highly valued by end users but which is questionable from Apple’s perspective. By submitting this software the developer puts Apple in the difficult position of publicly rejecting software that end users want and the fear of bad publicity may lead Apple to accept software that they would have like to commit in advance to reject.
The iPhone app store is only a year old and many observers think of it as a short-run system that is quickly becoming overwhelmed by the surprising explosion of iPhone software. When the app store is reinvented, it will be interesting to see how they approach this unique two-sided incentive problem.
Update: Mark Thoma further develops here. He didn’t ask in advance for permission to do that, but if he did I would have given encouraging signals but then rejected it ex post.
(I have taken to titling my posts in the style of an Alinea dish.)
I was reading one recent morning to my 2 year old boy a story from Frog and Toad. In this story, Toad is grumpy about Winter but Frog talks him into coming for a sleigh ride. Once the sleigh gets going really fast, Toad begins to forget all of his complaints and enjoy the ride. Unbeknownst to Toad, Frog is knocked off the back of the sleigh as the sleigh starts to hurtle faster and faster down the hill. Despite the sleigh being without a driver and completely out of control, Toad begins to feel more and more secure and at peace with the Winter.
Of course, something is going to happen to bring it all crashing down on Toad. In fact, what happens is not that the sled crashes into a tree, at least not yet. What happens is a crow flies by and upon hearing Toad describe what a wonderful ride he and Frog are having, points out to Toad that Frog is not behind him anymore. Its only after learning that there is nobody at the wheel does Toad panic and cause the sleigh to crash.
This is a recurrent theme in children’s literature. I think the quintessential expression of it is from the cartoons, especially the roadrunner/coyote cartoons. Here is the image. Coyote is chasing roadrunner through some rugged canyonland along a steep ridge and the chase brings Coyote to a cliff. He is so focussed on finally nabbing the roadrunner that he does not notice that he has run off the cliff. He keeps running. In mid-air. But then at some point he looks down and notices that there is no ground beneath his feet and at that moment that he falls to back to Earth. (At which point he turns to the next page in his ACME catalog and the chase is on again…)
If you run off a cliff you should make sure you are running fast and that the opposing cliff is not too far. It also helps to be like the roadunner: looking down is not in his nature and he always makes it to the other side.
I think of Obama’s first 100 days as running off a cliff. We have a pretty good running start. So far we are not looking down. I hope we get to the other side before somebody does. And please, pay no attention to the crows.
What does Melinda Gates want that the rest of the four of us have?
When I think of a subject to post about but I am too busy to mold it right then I write an email to myself with a few words that are supposed to remind me of the thought when later I have the time and context to flesh it out. But I have an iPhone which likes to take my self-email shorthand which it doesn’t recognize and “correct” it its best guess of what I mean.
Tonight, I received an email from myself with the following subject: “duct virc.” And now I have no idea what that was supposed to be about.
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