Applying Economics to Artistic Masterpieces

In Wednesday's NY Times, there is an article discussing whether there is a pattern to how works of art are priced. The article discusses the work of economist David Galenson who has found that great artists usually fall into one of two categories:

1. "Young Geniuses:" like Picasso, Van Gogh, or Gauguin, who create their most valuable works early in their career and are innovators who spend little time on their artwork.

2. "Old Masters:" like Jackson Pollock or Paul Cezanne, who create their most valuable works of art late in their career and spend a lot of time perfecting and experimenting with their artwork.

Galenson then uses these two categories to explain patterns in the creation of artwork and to predict the prices that the works of art will sell for.

One of the main topics of the article is how there is a lot of resistance to applying these economic and statistical techniques to the field of art. So my question would be, what do you think of Galenson's ideas? Is it an example of trying to bring everything under the economics/statistics umbrella without regard to whether it fits? Why do you think there is so much resistance to Galenson's work?

Another Couple Thoughts on Friedman

To add to Kroger's well-put post, Milton Friedman is the father of the author of Hidden Order, which we are currently using in class, and I will add one link: a tribute written about 10 years ago by economist Greg Mankiw. The reason I am linking to that article is that is has a quote from Milton and his wife summarizing their views on policy:

The Friedmans are best known for their articulate and unwavering defense of the free market. Their policy objective is, simply, "the promotion of human freedom." This goal, they tell us, "underlies our opposition to rent control and general wage and price controls, our support for educational choice, privatizing radio and television channels, an all-volunteer army, limitation of government spending, legalization of drugs, privatizing Social Security, free trade, and the deregulation of industry and private life to the fullest extent possible." Milton and Rose were libertarians--aggressively vocal libertarians--before libertarians were cool.

IKEA Doesn't Follow the Textbook Example

Here is an article that discusses IKEA's unique policy on selling umbrellas:

The umbrellas are huge (3 people can fit underneath), colorful (in IKEA's signature blue and yellow with a big company logo), and made of good quality materials (strong cloth, steel shaft, large wooden handle). Exactly the kind of umbrella you want to carry when it's raining.

A small sign hangs nearby:
IKEA UMBRELLAS
Sunny Day .............. $ 10.
Rainy Day .............. $ 3.

This strategy is contrary to one of the most basic examples in supply and demand analysis: when it is raining and the demand for umbrellas is high, firms can charge a higher price to make higher profits.

The author of the article thinks that IKEA's strategy is a good one (though he does not give any empirical evidence). What do you think? Is IKEA's policy leaving money on the table? Or can you think of reasons why it would be a good idea for them to go against the textbook example?

(Source: Newmark's Door)

Finding Underpriced Goods on eBay

There is a business called eBooBoos whose sole business model is to find auction items on eBay that are misspelled (eBay does not have a spell checker). The idea is that when items are misspelled, people will not be able to find them, and therefore, they will be priced too low.

Another example of the ridiculous range of businesses that exist.

(Source: Marginal Revolution)

No Such Thing as a Free Drug

Marginal Revolution links to an NBER paper that compares the pharmaceutical industry in Europe to the pharmaceutical industry in the US. In Europe, phramaceutical prices are regulated by the government and are therefore lower. An unsurprising consequence:

Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

The abstract of the article also discusses how US firms spend 15% more on research and development than European pharmaceutical companies.

The main point is not that the regulations are bad necessarily (you then get into an equity vs. efficiency argument), but that you can't lower prices on drugs without knowing that this action will have negative consequences somewhere else.

Burrito = Sandwich?

In this unit, we have talked about how companies try to set up barriers to entry in their markets. Apparently, a Panera Bread bakery in a Massachusetts mall wrote into their contract that no other sandwich shop could open in that mall. They then used that clause to try and stop a Mexican burrito place from opening in the mall.

This leads into a court having to rule whether a burrito is a sandwich. The court ruled in favor of the burrito place saying that a burrito is not a sandwich.

(Source: Greg Mankiw's Blog)

Herd Mentality of Shoppers

An article in The Economist this week discusses how companies are trying to increase sales by taking advantage of consumers' herd mentality: that they are more likely to buy what other consumers buy.

The idea is that, if a certain product is seen to be popular, shoppers are likely to choose it too. The challenge is to keep customers informed about what others are buying. Enter smart-cart technology. In Mr Usmani's supermarket every product has a radio frequency identification tag, a sort of barcode that uses radio waves to transmit information, and every trolley has a scanner that reads this information and relays it to a central computer. As a customer walks past a shelf of goods, a screen on the shelf tells him how many people currently in the shop have chosen that particular product. If the number is high, he is more likely to select it too.

As evidence that this will work, the author references a market where people download previously unknown songs based on how they are ranked by previous downloaders and the recommendation system that Amazon uses.

Do you think this strategy will have a significant impact on sales in grocery stores? Personally, I am not sure that people buy what is "popular" when buying groceries as much as when buying music or books, but I may be underestimating the herd mentality that buyers have in general.

Strategy for Dealing with Telemarketers

Economist Andrew Samwick has a novel strategy that he uses to deal with unsolicited phone calls. It is definitely an economic approach to the problem, factoring in the cost and benefit decision of the telemarketer:

Second, hanging up immediately is the non-cooperative response to this problem. When the Samwick household receives unsolicited phone calls (and I'm talking about you, Car Store), we employ either of two strategies that have a common element. If the VoxSon is feeling punchy, we let him answer the phone and have a little fun. Otherwise, we answer the phone, possibly responding that we will "go get" the person in question, and then just put the phone down.The common element here is that we keep the offender on the line as long as possible. This prevents the offender from bothering the next household on the call list until the offender terminates the call. This is the way to tax the resources (i.e. time) of the offender, making the enterprise less profitable and thus less likely in the future. If we all cooperated to employ this strategy, we would all be better off for it.

The key is increasing the cost of making unsolicited phone calls, thereby affecting the cost-benefit decision of the telemarketing company. Now, the main problem that I see with his strategy is that it also imposes a small cost on himself because he cannot receive or make any calls while he has the phone off the hook (but if you are having your dinner interrupted by the call, then that is probably not a problem).

Any other strategies that you think would work to prevent the phone calls?

(Source: Vox Baby)