Australia after 3 years

I have been back in Australia this past week for the first time in over three years. Here are some brief impressions:

  • The airports are great. Even better than before, Security is no issue (I passed through in 30 seconds) and Canberra airport is now fantastic — world class as they say. Why airline lounges are still popular I have no idea as the terminal themselves are as good as lounges elsewhere in the world.
  • Broadband is terrible. If anything it appears to have deteriorated over the last 5 years (if such a thing is possible). People complain about it and they have legimate complaints. This is not about streaming video but just doing what is now normal business that has to be conducted from the home. For instance, relying on video conference calls is, for many, virtually impossible. Wireless, by contrast, is actually a better performance option. At the time, I liked the idea of the NBN as private investment had stagnated. Now I have to admit that I place some probability on the notion that Australia may have been better off letting Telstra run the show. In reality, the lack of vigilance on encouraging competition in this space is likely the big culprit. In Canada — no paragon for great broadband — I have 300Mpbs at home on cable from Rogers. The reason I have that is that there are three broadband cable competitors.
  • Nothing has changed with the Universities. Same issues, same challenges, same toying with the idea of spending $$$ on online education without any proven model existing anywhere. Oh yeah, they also throw money at startup incubators now.
  • Melbourne CBD is booming. Full of people and buildings. Large shopping malls. Indeed, it has to be the largest concentration of affluent people in the world not to have an Apple Store anywhere near them. What is the deal with that?
  • Coffee is wonderful. I mean really wonderful. Australia has that reputation and it is deserved. Virtually whereever you go you can get coffee that is equal to the best in the best cities elsewhere. The coffee you have to search for in other places is flowing in the streets. Why? I have no idea. It is not expensive but the barristas are competent and everywhere. Chains, by contrast, are far less prevalent. No Starbucks etc. Perhaps that tells us something.
  • People are the happiest with their government than I have ever seen. In my left leaning set, folks are talking about voting Liberal in the next election for the first time ever. Of course, that set prizes intelligence and the PM has that (especially in contrast to the previous one). But Australians tend to default to cynism. At this moment, that isn’t happening. It is nice to see.

Top Trump: The Game theory of the Trump endgame

pres15-001For those of us outside the US, the Trump entry into the US Presidential race so many months out from the actual election has been entertainment heaven. Sure, he is destroying the fabric of a great nation by bring horrific stereotypes and misinformation to the fore, but sometimes that is the price to pay for depravity.

But there is a strong sense that this will come to an end. There is no one who believes he will be the Republican nominee, let alone President. Our favourite prediction markets have the odds of the former at 7% and the latter at 3%; both actually higher than the priors of most. The real question is how long will he last. To be sure, as viewers our interests are in him lasting some time, but when we put our rational heads on, what prediction do we get?

To apply game theory to all this, we need to make some assumptions:

1. The GOP will not nominate Trump

2. For Trump, running and losing has more disutility than not running. I don’t know this for sure but I am willing to go with it. Trump doesn’t strike me as someone who wants to be tested.

3. For Trump, losing as a third party candidate involves less disutility than losing as the GOP nominee.

4. Trump could not stand to be at an event without being the centre of attention.

5. Trump is not really able to “work for it.” In other words, coming from behind isn’t in him.

That should do us to get some predictions.

First of all, let’s consider the actual primary race that starts early next year. The Iowa caucuses aren’t really that critical for leading candidates but New Hampshire is. The chances are, the field will have shrunk enough by then that, whomever is the alternative to Trump, will actually poll higher than Trump in New Hampshire. Thus, being at that race for Trump means losing.

Second, given this, he won’t run in that race. He has two options. First, to pull out for the GOP race prior to that and run as an independent. Second, to pull out of the race entirely for that citing medical reasons. This last one is appealing as a prediction as it satisfies Trump’s preference assumptions. If this is the case, however, he will want to do this when it was still the case that he had a chance in New Hampshire. That way he can claim “I was going to win, but what can you do?” Effectively, the Republican equivalent of Bobby Kennedy although with a healthier degree of endogeneity to the decision.

Third, what this means is that running as an independent isn’t likely to happen. When we get to just the point where the medical exit or mexit is feasible, the mexit option will be taken. So there will be no opportunity for the independent run at that stage.

Fourth, which brings us to now. The first Republican debate is next week. Trump and nine others will be on the stage for a couple of hours. Think about that for a moment. Trump will be on stage with nine other people presumably with rules that will require him to spend 80 to 90% of the time listening to others speak. We are all tuning in to watch it. But to be sure, we are doing so because we don’t think that can happen.

Fifth, in addition, there is a strategy available to the other candidates. We can term it “Top Trump” or alternatively the “Quayle Fail.” Remember when Quayle stood there like a stunned mullet against Lloyd Bentsen. If one of the other candidates can get that reaction or sometime equally embarrassing from Trump, not only will Trump be out of the race but that candidate will become the leader. Basically, the “vanquished Trump” title is a game winner. But it will take something big and if someone can do it, they deserve kudos up the wazoo.

Sixth, just before you get too excited, the game theorist in me has to tell you that Trump will surely know about the “Top Trump” possibility. He’ll be watching for it. Obviously, if someone can do it, it is too late for him.

Seven, points 4 – 6, suggest that there is a reasonable probability that Trump will pull out of the debate or, at the very least, be off the stage early to destroy it. He’ll claim “why am I on a stage with all you losers” and that will be it. It is a clear win-win for Trump. A debate does him no good and carries risks — especially at this stage.

Will that mean that he forms a third party then and there or that he pulls out altogether shortly after with a mexit? Sadly, this is as far as my game theorist’s predictive lens will take me. My point is: I hope I’m wrong but our entertaining run seems like it will come shortly to an end.

Are we kidding ourselves on competition?

The traditional textbook model of competition in an oligopoly goes likes this. Firms choose prices and other variables (like product quality, advertising and R&D) to maximise their own profits and disregard the impact of their actions on (a) competing firms and (b) consumers; although with the latter since they want them to buy products they aren’t completely immune to their welfare. This model is essentially unquestioned but, in reality, it relies on a view of firm ownership that is markedly different from corporate reality. In particular, large firms are owned by shareholders (who may also be their consumers) but, more importantly, may be the shareholders of their competitors as well.

Let’s start with that latter notion. What it means is that the presumption that firms maximise their profits independent of their consideration for the impact on profits of competing firms is surely suspect. And it is disturbingly suspect. Consider a situation where there are 10 firms in a market and they compete with one another. Now suppose that all shareholders — say because they are following the dicta of diversification — allocate their wealth in equal proportion across those 10 firms. That means that each owner of the firm — even if there are thousands of these — cares equally about each firm’s profits.

So ask yourself: when those shareholders vote on the composition of boards or the management of the firm, or, importantly how the management of the firm is compensated, are they going to vote for managers who will care only about the profits of the firm they manage or about the profits more broadly? The answer is obvious: they will look to managers who manage in the interest of shareholders and so that means they care about all firm profits and not just the one of their own firm.

In a world where shareholders can get what they want, we won’t have competition in this outcome but, more likely, a collusive outcome. What is more, the firms won’t have to go to all the difficulty of violating antitrust laws to obtain this outcome, they will do it unilaterally. There are no laws against that.

To see how that might arise, think about, oh I don’t know, Comcast and Time Warner. These are cable companies/ISPs who are the largest of their kind in the US. I suspect that there is lots of cross ownership of mutual funds of each of these. Why? Because they happen to each focus on different regions in the US and so any mutual fund worth their salt would want to diversify their portfolio to hedge geographic risk. And so ask yourself: how readily would the boards of those companies improve massive infrastructure investments to expand the reach of their networks into the territory of the other? With cross-ownership, they wouldn’t have a powerful incentive. (Actually, we can now just add that to the list).

Now this isn’t just speculation. Jose Azar, an economist now at Charles River Associates, did his Princeton PhD on this topic. His theory paper is here and it builds on others including Gordon (1990), Hansen and Lott (1995) and O’Brien and Salop (2000). Frank Wolak and I came up with a similar set of issues related to cross-ownership and hedging in electricity markets (for vertical ownership) and verified anti-competitive consequences arising from this. But Azar, along with Martin Schmalz and Isabel Tecu have demonstrated that cross-ownership has anti-competitive impacts on the US airline industry. They find that cross ownership increases US airline prices 3–5%. When they use the event whereby BlackRock acquired Barclays Global Investors (a merger changing the shares of common ownership in airlines), they found such ownership could indicate 10% bumps in pricing with US airline ticket prices rising by 0.6% as a result of that merger alone.

In Slate, Eric Posner and Glen Weyl took these results to their logical conclusion: that we should consider banning mutual funds or anyone from holding shares in competing companies. This confounded and shocked the Financial TimesMatthew Klein but he clearly was struggling to understand the basic industrial economics of the situation and also the power of Azar et.al.’s empirical findings.

In reality, the Posner-Weyl policy is on the risk averse side of the equation. Shareholders influence companies by voting and so it is the median voter who matters. In this regard, so long as 51% of shares in companies are owned by funds or people who do not have shares in competitors, we don’t need to be concerned. Of course, how we think about a policy that restricts competitive cross ownership remains an issue here but this is, at least, a softer place to start. My guess, however, is that we can come up with a formula for sufficient asymmetries in cross ownership to assure us that any anti-competitive hanky panky isn’t going on.

But there is another issue which I believe is likely to be more related and of importance for the wealth inequality and power story that Posner and Weyl concern themselves with: i.e., that wealthy shareholders are likely to exercise market power and harm consumers overall. That issue is that the relationship between the distribution of shareholders and the distribution of consumption across firms will be important. As Joe Farrell (1985) pointed out in 1985, if firms are owned by shareholders in equal proportion to their consumption levels, then shareholders would vote to self-regulate any firm’s market power (see also Mas-Colell and Silvestre (1991)). This would be a great outcome and would apply even if the shareholders had holdings across competing firms. Of course, the distribution of wealth is actually more uneven than the distribution of consumption, so this great outcome is unlikely to arise. However, thinking about shareholders more fully will lead us to consider these ownership issues and how they relate to market power more extensively.

The point here is that we cannot really ignore this issue as economists or as policy-makers. We have “known” about it for decades. Now’s the time to take it seriously.

Did the University of Queensland suppress a study?

Possibly and so I am putting the question out there in the hopes a journalist might investigate.

But first some context. In 2013, Redzo Mujcic and Paul Frijters (a frequent blogger here) published a study demonstrating unconscious discrimination on the part of bus drivers in Brisbane. Today, Ian Ayres took to the New York Times to promote the study’s findings.

As they describe in two working papers, Redzo Mujcic and Paul Frijters, economists at the University of Queensland, trained and assigned 29 young adult testers (from both genders and different ethnic groups) to board public buses in Brisbane and insert an empty fare card into the bus scanner. After the scanner made a loud sound informing the driver that the card did not have enough value, the testers said, “I do not have any money, but I need to get to” a station about 1.2 miles away. (The station varied according to where the testers boarded.)

With more than 1,500 observations, the study uncovered substantial, statistically significant race discrimination. Bus drivers were twice as willing to let white testers ride free as black testers (72 percent versus 36 percent of the time). Bus drivers showed some relative favoritism toward testers who shared their own race, but even black drivers still favored white testers over black testers (allowing free rides 83 percent versus 68 percent of the time).

The study also found that racial disparities persisted when the testers wore business attire or dressed in army uniforms. For example, testers wearing army uniforms were allowed to ride free 97 percent of the time if they were white, but only 77 percent of the time if they were black.

Wow. That’s quite a result and certainly the sort of thing we want our social scientists to be doing. No wonder Ayres raised it in the NYT. I did wonder, therefore, why I hadn’t heard much about it.

A possible answer came from Ian Ayres in a follow-up post at Forbes.

Professors Mujcic and Frijters deserve our thanks for authoring a study that is not only illuminating about what white privilege means.  But their employer, the University of Queensland, has not thrown them a parade.  After the City of Brisbane complained that the study encouraged fare evasion, the University initiated a complaint process against Professor Frijters and has ordered the authors to suppress this important paper.  Blessed are those who are persecuted for righteousness sake.  Instead of being persecuted, the authors should be praised for offering us a model for civil rights testing in the new millennium.

Now that is some allegation. If it is true it is shocking to an incredible degree. Not just that the City of Brisbane complained to the University but that the University, my alma mater, actually went so far as to suppress a paper.

I did a quick — but hardly investigative search — to see what this might all be about but didn’t come up with anything. But I think a response at the very least from UQ is required.

Remembering Whitlam

Gough Whitlam was the first prime minister I was aware of. Actually, I recalled yesterday that I had seen every Australian Prime Minister since (up until the current one) in the flesh. What other country is that possible?

I saw Whitlam for the first time, in the flesh as it were, when I was 5 year’s old. It is one of my earliest memories. We were at Coogie Beach. I thought we were there for the clown show but, in fact, we were there to hear Whitlam speak. I remember him shouting at the crowd — that is what one of his speeches sounded like. It is clear in my mind today as I thought about it ever since.

A year or so later, he was part of another very early memory. I remember a newspaper on November 12th 1975 with the headline “Dismissed.” I asked my father what that was about and he told me that the PM had been sacked. I asked why and he said that he had lied. My parents, you might guess, were not Whitlam supporters.

Fast forward another 7 years or so later and I watched the wonderful ABC Mini-series, The Dismissal. It was before the Hawke election. There is a moment in many people’s lives when their political leanings are set. I personally think there is a large element of choice to that — especially for people who have not known personal suffering in their childhoods. That series was my moment. It made me left leaning and pro-economy at the same time. The Whitlam government was both (think pipelines not saving rainforests). I softened each of these since then (in fact, on the environment, I flipped from my 14 year old days). But that series was the moment and I was outraged that it had happened. Suffice it to say, I was no fan of Fraser; at least, not until recently when he joined Twitter and became the voice of reason in Australian politics.

Everyone has a politician that is formative to them. For me, Whitlam was that person at a ridiculously young age. He may have been PM for only 4 years of his 96 but what a 4 years it was.

[Update: my parents tell me that they voted for Whitlam on at least three occasions. So I guess I was wrong about my inference there.]

Take note Australia

One of the more shameful acts of recent years was the failure of successive Australian governments to put in place marriage equality. Now it looks like the United States will get there first.

To underscore this I command Judge Posner’s decision the other day striking down the Wisconsin and Indiana bans on same-sex marriage. To wit:

Formally these cases are about discrimination against the small homosexual minority in the United States. But at a deeper level, as we shall see, they are about the welfare of American children. The argument that the states press hard- est in defense of their prohibition of same-sex marriage is that the only reason government encourages marriage is to induce heterosexuals to marry so that there will be fewer “accidental births,” which when they occur outside of marriage often lead to abandonment of the child to the mother (unaided by the father) or to foster care. Overlooked by this argument is that many of those abandoned children are adopted by homosexual couples, and those children would be better off both emotionally and economically if their adoptive parents were married

Once again, shame Australia shame.

And another thing … on broadband and Telstra

Kwanghui Lim posted a link to this post from Cloudfare on what they pay for transit around the world. As you will see from this table, Australia is the most expensive region — by a long, long way.

And the reason:

Australia is the most expensive region in which we operate, but for an interesting reason. We peer with virtually every ISP in the region except one: Telstra. Telstra, which controls approximately 50% of the market, and was traditionally the monopoly telecom provider, charges some of the highest transit pricing in the world — 20x the benchmark ($200/Mbps). Given that we are able to peer approximately half of our traffic, the effective bandwidth benchmark price is $100/Mbps. 

 To give you some sense of how out-of-whack Australia is, at CloudFlare we pay about as much every month for bandwidth to serve all of Europe as we do to for Australia. That’s in spite of the fact that approximately 33x the number of people live in Europe (750 million) versus Australia (22 million). 

 If Australians wonder why Internet and many other services are more expensive in their country than anywhere else in the world they need only look to Telstra. What’s interesting is that Telstra maintains their high pricing even if only delivering traffic inside the country. Given that Australia is one large land mass with relatively concentrated population centers, it’s difficult to justify the pricing based on anything other than Telstra’s market power. In regions like North America where there is increasing consolidation of networks, Australia’s experience with Telstra provides a cautionary tale

Suffice it to say, there is something outrageous going on here. At some point, this is going to bit Australia back and it won’t be pretty. This is clearly an issue that Malcolm Turnbull should look into as soon as possible.

Behold! The NBN Cost-Benefit Analysis

After slamming the last Government for not doing a cost-benefit analysis on the NBN, Malcolm Turnbull has produced the goods. My view on cost-benefit analysis remains unchanged: if you have already decided what to do, a cost-benefit analysis is of no help except for vindication.

Nonetheless, there is another unintended consequence of doing one: the Minister in charge of it all has to explain it. Well I have to admit that I was impressed by Malcolm Turnbull’s “on the fly” professorial treatment at the Guardian. There aren’t many politicians who can explain optimisation while at the same time using the notion of ‘marginal utility’ correctly but there you have it.

What is nice about the cost-benefit structure is that it grounds the debate and makes assumptions clearer. For instance, Turnbull argues that on the supply-side costs of middle of the road technologies (that support fibre to the node) are falling (or improving in their quality) at a faster rate than technologies that support fibre to the premises. I’m not sure whether that is the case but if it is, then that is support for fibre to the node. Turnbull also does not assume that technology is changing the ‘utility’ function that drives the demand for broadband. However, as many will argue, this assumption would, based on experience, not be valid. What the analysis forces people to do, therefore, is explain precisely how demand conditions are changing rather than ‘this is more and I want more.”

But let’s turn to the report itself. I’ve skimmed it because, frankly, that is all the exercise deserves (given that it won’t impact decision-making and all). The first odd bit is that the benefits and costs are not relative to say not having done anything years ago but relative to what they are intending to do. That means that if that is the best, it will have the highest ‘net benefit relative to the reference case.’ But that doesn’t mean that it has a positive net benefit overall. To be sure, as a matter of economic decision-making, net benefits relative to the status quo is a good approach but in a document like this it triggers some scepticism.

Moving on, the report is useful in that it provides some assumption testing. For instance, the report concludes that at the current level of willingness to pay (WTP) for broadband (I’ll return to how this is measured below) then the current government policy has higher net benefits than the FTTP policy of the previous government. But as Turnbull’s little lecture tells us, if WTP grows then the optimum will shift. The report says that, in a decade’s time, the optimum will shift is WTP is 250% higher than it is today (i.e., it grows at about 13% per annum). Now, let’s think about what that means. It does not mean that people use two and a half times more broadband than they do today. Instead, it means that their WTP for very high speed broadband will be two and a half times more than today. 

To get a sense of that, consider what the equivalent thing would have been from the perspective of 2004. There was no YouTube so the demand for broadband speeds of today would have been driven by YouTube. My guess is that (based on current Telstra broadband prices) that WTP of the marginal consumer increased from close to zero to over $50 per month. Thus, the WTP growth criteria was easily met which is why we have high speed cable running past most urban households. The point is that it is not that hard to imagine a new product coming out that does, in fact, drive WTP growth of the order that changes the optimum network. (Virtual reality comes to mind as a possibility but, the difficulty here is that it is hard to tell). That said, the fact that 6 years ago, a government believed that demand in four years would be high enough to justify FTTP looks somewhat silly.

On to WTP itself. The report uses ‘choice modelling.’ This is a standard way of trying to extract consumer willingness to pay. The issue faced is that when it comes to some products, consumers may not fully understand what they are payiing for. So the methodology includes some random sample who are given a lesson in broadband speeds and capabilities. This allows them to derive a WTP estimate for broadband today. This is a much better approach than the craziness that we have seen in the past on broadband in Australia and, it looks pretty reliable as far as these things go. 

The problem is that (a) it cannot possibly take into account new products and (b) it is based on private values. The first problem is endemic to these exercises. As I pointed out, an analysis in 2004, would have likely got the optimal network spectacularly wrong and what the report does not really grapple with is that it may be wrong in the same way again in 2014. That said, we move beyond our ability to do objective analysis when we get into technological forecasting but it is worth emphasising that this issue doesn’t go away.

The second problem is more critical. We have to remember that this is largely a public investment. The relative comparator is that the investment is all private. That scenario is not really investigated (as far as I can see) and so it is surely the case that we want the public benefits from this government policy to be enumerated and not simply a calculation of private ones. I guess that is too much to expect in this world but it still remains that the NBN is a massive public outlay mostly benefiting the rich. If it could bring real competition that would diffuse the benefits to the wider population but I am yet to see a plan as to how that is going to emerge.

Mobile termination: Zero is a good place to start

Last week I did an interview with Phil Dobbie for CommsDay on the ACCC’s approach to the setting of rates that carriers pay each other to terminate calls. I argued — as I did 15 years ago — that marginal cost rather than Total Service Long-Run Incremental Cost makes more sense and will generate more welfare without cutting investment incentives. It has the advantage of being a light-handed approach, computationally easy to calculate and good for consumers. And if you are concerned about Telstra not having incentives to build out mobile networks in regional areas remember they do get a virtual monopoly on customers in those areas so they are hardly suffering.

I’m about 8 minutes in.

At one point I talk about asymmetry in network size and whether that matters. As Philip Williams pointed out years ago that argument is a red herring. To see that, suppose that one network is 99% of the customers and another network has 1% of the customers. Suppose that customers call people independent of what network they are on. That means that the share of calls made to the customer on the small network is 1% while the probability that a customer on the small network calls someone on the large one is 99%. So the total amount of termination revenue earned by the small network is 1% times 99% times the termination charge while the termination revenue earned by the large network is 99% times 1% times the charge. It is easy to see that the termination revenue earned by each network is exactly the same. Thus, having a higher charge does not favour or discriminate against the larger network.

How did the Snowden revelations impact behaviour?

This week the Australian government announced what seems to be an extraordinary piece of legislation.

Spies who leak sensitive information will face tough new penalties of up to 10 years’ jail and internet firms could be forced to store customers’ data for up to two years under sweeping national security reforms.

Prompted in part by the leaks from renegade US intelligence contractor Edward Snowden, the Abbott government will on Wednesday introduce legislation clamping down on intelligence officers who leak to journalists, lawyers and other members of the public.

Separately, Attorney-General George Brandis has given his strongest hint yet that the government will move ahead with controversial ”data retention” laws.

This would mean basic records of internet communications such as emails and Skype calls would have to be stored by providers for up to two years to help intelligence and law enforcement agencies carry out investigations and prosecutions.

Indeed, it appears to go further.

Australian journalists could face prosecution and jail for reporting Snowden-style revelations about certain spy operations, in an “outrageous” expansion of the government’s national security powers, leading criminal lawyers have warned.

A bill presented to parliament on Wednesday by the attorney general, George Brandis, would expand the powers of the Australian Security Intelligence Organisation (ASIO), including creation of a new offence punishable by five years in jail for “any person” who disclosed information relating to “special intelligence operations”.

The person would be liable for a 10-year term if the disclosure would “endanger the health or safety of any person or prejudice the effective conduct of a special intelligence operation”.

Suffice it to say this seems to fly way over the bar that we would normally want to protect free speech and freedom of the press; not that these are enshrined in the Australian constitution in the way they are in the US.

To appreciate the impact of policies designed to curtail the dissemination of disclosures, it is useful to actually go to the evidence. A few months ago, Alex Marthews and Catherine Tucker provided that evidence in this paper. Here is the abstract:

This paper uses data from Google Trends on search terms from before and after the surveillance revelations of June 2013 to analyze whether Google users’ search behavior shifted as a result of an exogenous shock in information about how closely their internet searches were being monitored by the U. S. government. We use data from Google Trends on search volume for 282 search terms across eleven different countries. These search terms were independently rated for their degree of privacy-sensitivity along multiple dimensions. Using panel data, our result suggest that cross-nationally, users were less likely to search using search terms that they believed might get them in trouble with the U. S. government. In the U. S., this was the main subset of search terms that were affected. However, internationally there was also a drop in traffic for search terms that were rated as personally sensitive. These results have implications for policy makers in terms of understanding the actual effects on search behavior of disclosures relating to the scale of government surveillance on the Internet and their potential effects on international competitiveness.

What this suggests is that moving to a culture and policy regime where it is widely known that citizens are under surveillance has a multiplier effect on their behaviour — making them fearful of investigated terms that they might guess would be part of that surveillance. If you look on page 33-34 of the paper you might well be surprised at how broad that brush is. While one could read this as supporting bans on such disclosures so that the bad guys keep searching and can be surveilled, it is not at all clear who was changing their behaviour. It may just be people who wanted to monitor their own government and perhaps bring to light governmental bad behaviour.

One thing is more certain, this adjustment is suggesting that moves like this one for the Australian government may be actually upsetting more citizens than they think and that might well add up in terms of votes. I’m sure that will be of interest to politicians who think supporting this legislation is innocuous.