Wednesday, October 28, 2009

Is Apple Dumb?

Josh Wright:

The Economist seems to think so, relying on evidence from this new paper by Joel Waldfogel and Ben Shiller. Waldfogel and Shiller find that, relative to uniform pricing at $.99, alternative pricing schemes including two part tariffs and various bundling schemes could raise producer surplus by somewhere between 17 and 30 percent. Those are large numbers, which raises the obvious question: why is Apple leaving so much money on the table? Or are they? I doubt it.

Reading the Economist article reminded me of something that I heard from both Armen Alchian and Ben Klein at different points during my UCLA days. If your model is not predicting the behavior of real world agents you have a choice — blame the model for not predicting the actions of the agents or blame the economic agents for not acting like the predictions of the model. The right answer is very, very rarely to blame the economic agents.

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