Carpe Diem

The economics of secondary markets: the case of Olive Garden’s unlimited, 7-week ‘Never Ending Pasta Passes’

pastaLast week the restaurant chain Olive Garden offered a limited supply (1,000) of pasta passes (the “Never Ending Pasta Pass”) for $100 that entitles diners to unlimited pasta at any Olive Garden restaurant nationwide during an upcoming seven-week period (September 22 to November 9), along with unlimited Coca-Cola, soup, salad and breadsticks. The pasta passes sold out immediately and guess what? The market value of seven weeks of unlimited pasta is apparently worth a lot more than $100 and there is now an active secondary market on eBay. The graphic above shows one completed auction for a Pasta Pass that had 23 bids and sold for $185.98. Other completed bids show the Pasta Passes selling for $180, $186.31, $191.50 and $175, so the market price seems to be converging at an average price of about $180-$185. Olive Garden is now saying that the pasta passes are not transferable and it’s trying to stop the secondary sales on eBay, but I don’t think that strategy is working because there are currently 26 listings on eBay for the pasta passes. Washington Post reporter Caitlin Dewey provides some sound economic analysis of the situation in her article “Olive Garden’s unlimited pasta pass ‘black market’ is actually a perfect illustration of why ticket-scalping works“:

Essentially, secondary markets develop to balance discrepancies between supply and demand, as created by the original ticket-venders. In this case, there are a limited number of Olive Garden pasta passes; the demand is high enough that people will pay incredible amounts of money for them; and yet — in its effort to generate social media buzz — Olive Garden sets the price point well below what the market is willing to pay. A mere $100 for seven weeks of pasta? That’s absurd. A plate of Olive Garden pasta is usually around $13. Even if you only use the pass three times a week during that period, and get one plate of pasta each time — which, let’s be real, does not even begin taking advantage of the deal — the pass is worth $273. At least. This, in essence, is the dirty economic secret of scalping, whether we’re talking about pasta or Beyonce tickets or anything else: Concert promoters and other sellers are quick to blame the scalpers for inflating prices, or companies, such as eBay and Craigslist, for failing to police them. In reality, the best way to stop people from reselling things is to charge more for those things to begin with. In an unsuccessful attempt to preempt the secondary market entirely, Olive Garden included a line about non-transferability in its pasta pass’s fine print. At the end of the day, though, there’s an easier solution: actually charge what people are willing to pay. For the pasta pass, that looks to be roughly $300.

MP: As I have pointed out many times before, we shouldn’t blame “tickets scalpers” for high prices on the secondary market, we should blame those who actually have direct control over the supply of tickets (or pasta passes) and the price of tickets (or pasta passes) – the sellers (artists, promoters, venues, sports teams, theaters, Olive Garden, etc.). There are only two reasons a secondary market exists for tickets (or passes) selling above face value: a) the sellers have under-supplied the tickets (or passes) relative to the demand, and/or b) the sellers have under-priced those tickets (passes) relative to the market price. If sellers want to eliminate the secondary market for tickets (passes) above face value, they can easily do that by increasing the supply of tickets (passes) and/or raising the price. In other words, the key factors: supply and price, are completely under the control of the sellers, and they therefore shouldn’t be blaming “ticket scalpers” and secondary markets when those markets only exist because of the sellers’ actions: under-supplying and/or under-pricing tickets/passes. Q.E.D.

Carpe Diem

Markets in everything: Philadelphia Eagles running back LeSean McCoy’s 20-cent tip receipt on eBay for $100k?

tipEagles running back LeSean McCoy stirred up some controversy about a week ago when he ate at the Philadelphia burger joint PTY (“Home of America’s Craaaziest Burgers”) with three friends and left a $0.20 tip on a $61.56 bill (see photo above). The controversy heated up when the owner of PYT posted a copy of the receipt on the restaurant’s Facebook page, and then things heated up even more when actor Charlie Sheen pledged $1,000 on Twitter for the server involved.

And now it’s gotten even crazier that the receipt in question is being auctioned off on eBay, here’s a link to the listing, where there’s been 141 bids since the listing opened on Saturday, and the bidding is approaching $100,000 (as of 6:30 p.m. ET) – with four days left until the auction ends!

What’s going on here?

Update: LeSean “Shady” McCoy defended his 20-cent tip by saying it was a deliberate statement on the quality of service he received at the restaurant. “I tip on my service,” McCoy told ESPN. “There’s a difference between good service and bad service and just having a bad day. There’s a big difference between just being rude and disrespectful. That’s how that went.”

When I asked “what’s going on here?” I was wondering how that receipt could possibly have a value of $99,990 (current high bid), and I’m sorry I didn’t make that clear!

Carpe Diem

Monday morning linkage

1. Who’d a-Thunk It? Socialist (and beauty-obsessed) Venezuela has a shortage of breast implants?  “Unable to find the devices in doctors’ offices, some women are turning to the Venezuelan equivalent of the bartering website Craigslist, where sellers post pictures of black market implants of unknown origin sitting in sealed packages on kitchen tables, complete with stories of spouses who changed their minds and reassurances that the pouches remain sterile.”

2. Yet another university (Yale) calls for the marginalization of Ayaan Hirsi Ali. From the Yale Daily News, “Representatives from 35 campus groups and student organizations have signed a letter drafted by the Muslim Students Association that expresses concern over an event that is bringing a controversial speaker [Ayaan Hirsi Ali] to campus.” The letter and list of 35 signatories (the first one on the list is the Yale Women’s Center?) appears here at the blog of University of Chicago Professor Jerry Coyne, who provides this commentary:

This is a prime example of how Muslims have immunized themselves from criticism—by pleading “offended feelings”—and how other groups, including liberal ones, have fallen for this ploy because they hold a double standard: offenses committed by Muslims are not as reprehensible as the same offenses committed by others.

sandiego3. United States of SWAT. San Diego School District’s New 18-Ton Armored Vehicle (a $770,000 mine-resistant ambush protected vehicle, pictured above) Creates a Stir. As well it should! San Diego Unified School District Police Chief Ruben Littlejohn held a news conference to tell the alarmed public that “There will be medical supplies in the vehicle. There will be teddy bears in the vehicle.” Yeah, right.

4. Economic Death Wish. Minneapolis is the latest city that is considering imposing the equivalent of an annual tax of almost $16,000 on employers for each of their full-time, minimum wage workers. That would come from a proposed living/minimum of $15 per hour, a $7.00 per hour increase over the current $8.00 hourly minimum wage, which when multiplied by 2,080 annual hours of work, and adjusted for an additional 8.25% in employer payroll costs adds up to $15,796.60.

5. Ongoing Advances in Drilling Technology Fuel US Fracking Boom. From today’s Wall Street Journal article “Fracking Gives US Energy Boom Plenty of Room to Run“:

Skeptics of the U.S. energy boom say it can’t last much longer because it requires drilling an ever-increasing number of wells. But the boom already has lasted longer than anyone would have imagined just a decade ago and has more room to run. That’s because oil and natural-gas wells have become more productive—an unrecognized but potent trend that should keep the fuels flowing.

The U.S. oil-and-gas industry no longer spends its time trying to find new shale formations to tap. Instead, it focuses on finding ways to get more out of the formations it has found. And it is succeeding. As a result, the U.S. has become the world’s largest energy producer, natural-gas prices have remained low and U.S. oil output has helped prevent rising crude prices around the world.

Peak what?

6. Radical Math is a “Resource for educators interested in integrating ‘social and economic justice’ into their math classes,” because “Math has traditionally been seen as the domain of old, White men, and when students cannot identify with mathematics, it becomes harder to stay motivated, according to Critically Conscious Math, which tells us that “our premise of 2 + 2 = 4 ….is awfully naive.” YIKES!

7. Nanny Statism. Property rights took a hit this week when the Michigan Commission of Agriculture and Rural Development voted to take away protections for backyard farmers statewide — which will result in many small farms being shut down.

8. Will the Next Classroom Disruption Be in 3-D? Facebook’s Virtual-Reality Company Thinks So.

Carpe Diem

The Law of Demand and the minimum wage: It applies to number of hours worked, not the level of employment

minwagePosts on CD about the minimum wage always generate a higher than average number of comments, and Friday’s CD post (“Do Demand Curves Slope Down or Not?“) was no exception – there have been 46 comments so far. Most of the minimum wage debate centers on the issue of whether minimum wage increases have any effects on employment levels. Specifically, does the empirical evidence point to any significantly negative effects on employment levels following minimum wage hikes, as clearly predicted by economy theory? Some empirical evidence like the much-cited 1994 study by Card and Krueger found “no indication that the rise in the minimum wage reduced employment” at fast-food restaurants in New Jersey following a minimum wage increase to $5.05 per hour compared to nearby fast-food restaurants in Pennsylvania where the minimum wage remained constant at $4.25.

Let me attempt to reconcile the apparent inconsistency between: a) economic theory, which clearly predicts a negative relationship between the minimum wage and the quantity of unskilled workers demanded by employers, and b) some of the empirical evidence that finds no negative employment effects following minimum wage hikes. Here’s the key point: The negative relationship predicted by economic theory is not: a) between minimum wage hikes and the number of unskilled workers employed, but b) between minimum wage hikes and the number of unskilled work hours demanded by employers.

The two charts above help to illustrate that difference:

In the top chart, we see a negative relationship between an increase in the minimum wage and the number of hours of unskilled work demanded by employers in the 12-month period following the increase in the hourly price of unskilled labor (to capture the effects on future hiring). Like an increase in the cost of any other labor input or other input like food, energy, raw materials, machinery, equipment rental, or building rent, employers facing a 39% increase in the cost of unskilled labor (from $7.25 to $10.10 an hour) would have no other choice than to reduce the number of unskilled work hours – it would simply be a necessary strategy for survival. As I pointed out recently, a minimum wage increase to $10.10 per hour would be the equivalent to an annual tax of more than $6,000 per full-time worker earning the minimum wage.

The various strategies employers might use to reduce their demand for unskilled work hours over the 12-month period following a 39% minimum wage hike might include: a) reducing the number of hours worked per week by entry-level unskilled workers, e.g. cutting their hours from 40 to 30 per week, or from 30 to 20, etc., b) reducing the number of unskilled workers currently employed through layoffs, c) reducing the number of unskilled workers that employers might have previously been planning on adding to staffing levels in the future, d) substituting skilled workers for the now relatively more expensive unskilled workers, and e) investing in technologies that would substitute automation, mechanization, robotics, and self-serve options for unskilled workers. Although the effect of a 39% minimum wage hike on employment levels might be uncertain, the negative effect on the number of hours of unskilled labor demanded by employers would be much more certain and predictable according to the Law of Demand. 

The bottom chart shows graphically how it would be possible that an increase in the minimum wage might not adversely affect the number of unskilled workers employed by looking at the relationship between the average weekly compensation for unskilled workers (and not the hourly monetary wage) and the number of unskilled workers.

Suppose that employers realistically respond to a 39% increase in the minimum wage by: a) cutting hours for minimum wage employees and b) reducing or eliminating  non-monetary forms of compensation that might include free or reduced cost food, merchandise, uniforms or parking, bonuses/profit-sharing, educational reimbursement, paid holidays and company parties/picnics, health care benefits, etc. Following a reduction in hours and non-monetary benefits, the average compensation per minimum wage employee might be unchanged, as could be the number of workers employed at the minimum wage. That is, if the employer can completely offset the monetary increase in the minimum wage by a reduction in hours and fringe benefits, there will be no need to reduce overall staffing levels. In that case, empirical evidence may find no negative relationship between increases in the minimum wage and employment levels, even when there’s a predictable and negative effect on the number of hours of unskilled work demanded by employers.

Bottom Line: It’s more accurate to say that the Law of Demand predicts: a) a negative relationship between higher wages and the number of hours of unskilled work demanded by employers, rather than b) a negative relationship between higher wages and the number of unskilled workers employed. Therefore, it’s possible that a minimum wage hike won’t always negatively affect employment levels for entry-level unskilled workers, but will affect the number of hours demanded by employers for unskilled labor. That’s how we can reconcile the apparent inconsistency between economic theory and some of the empirical evidence…..

Update: Here’s another thought. Some studies find no significant employment effects when comparing employment levels of unskilled workers before and after an increase in the minimum wage. But that doesn’t capture the possible increases in the number of unskilled workers employed that might have taken place without an increase like 39% in the minimum wage from $7.25 to $10.10. For example, suppose that employers had been planning to expand their operations over the next several years and had planned to increase staffing levels of unskilled workers by 1-5%. Following the minimum wage hike, they cancel plans to expand their operations and instead maintain current staffing levels by reducing hours and benefits. Therefore, we might find that a 39% increase in the price of hiring unskilled workers had no significantly negative effect on current employment levels, even when there could be a significantly negative effect on the number of unskilled workers hired in the future! The 1-5% planned future increase in hiring unskilled workers never happens; but those jobs that weren’t created aren’t visible and aren’t accounted for when we try to calculate the negative effects of the minimum wage.

Carpe Diem

July was another record-setting month for North Dakota oil, as Bakken oil fields top 1M barrels/day for second month

ndoil

Oil drillers in North Dakota pumped out 1.11 million barrels of oil per day (bpd) in July, setting another new monthly all-time record high for the state’s crude oil production (see blue line in chart), according to oil production data released Friday by North Dakota’s Department of Mineral Resources. July marked the fourth straight month that daily oil production in the Peace Garden State exceeded one million barrels. Another important production milestone was reached in July, as average daily crude oil output from the state’s shale-rich Bakken oil fields topped one million bpd for the second straight month (see brown line in chart), joining an elite group of only ten oil fields in world history whose daily output exceeded one million barrels at peak production. Oil production in the Bakken has increased more than 7X over the last 5 years, from only 146,783 bpd in July 2009 to 1.047 million bpd in July of this year.

Here are some other highlights of North Dakota’s record-setting oil output in July:

1) The state’s average daily oil production increased in July by 27% (29.2% for Bakken oil) compared to a year ago. Remarkably, in only the last two and-a-half years, oil production in North Dakota has more than doubled from 547,326 bpd in January 2012 to 1.11 million bpd in July.

2) Due to improvement in drilling technologies, the daily oil produced from each well in North Dakota averaged 102 barrels in July (130 barrels per well in the Bakken), matching the record-setting level in June. In 2009, the daily oil per well in North Dakota was only 52 barrels, so the productivity of oil extraction in the state has more than doubled in only five years.

3) For the 12th consecutive month starting last summer, North Dakota’s oil production in July represented more than 12% of all US crude oil, and was actually nearly 13% in July. Five years ago in June of 2009, North Dakota produced only 4% of total US crude output, and the state’s oil production was about half of oil production in both California and Alaska. Due to the phenomenal growth of oil output in the shale-rich Bakken oil fields, North Dakota surpassed California and Alaska in 2012 to become the country’s No. 2 largest oil-producing state and in July the state produced 13% of all US crude oil.

4) In dollar terms, the oil produced in North Dakota in July had a daily market value of $115 million at the average oil price during the month of $103.59 per barrel for West Texas Intermediate (WTI). For the entire month of July, that would put the market value of North Dakota oil at almost $3.6 billion, setting a new all-time record for the dollar value of the state’s monthly oil output.

5) The Bakken oil fields in western North Dakota produced more than one million bpd in July for the second straight month (see brown line in chart), setting a new all-time monthly output record, which also represented a new record high 94.3% of the state’s monthly oil production. In contrast, the Bakken region produced less than 9% of the state’s oil output at the beginning of 2007, before breakthrough drilling techniques (hydraulic fracturing and horizontal drilling) were able to tap into a bonanza of unconventional oil in the shale-rich areas of western North Dakota. As mentioned above, the Bakken now joins an elite group of only ten super-giant oil fields worldwide to ever produce more than a million barrels of oil per day.

Bottom Line: July was another stellar month in “Saudi Dakota,” with average daily oil production surpassing one million bpd for the third straight month, and establishing yet another new record high for the state’s oil output at 1.11 million bpd. The state’s shale-rich Bakken oil field reached an important energy milestone by producing more than a million barrels a day in July for the second consecutive month.

The shale boom continues to make the Peace Garden State America’s most economically successful state – with growth in employment and personal income that lead the nation, the lowest state jobless rate in the country for the last 67 months starting in January 2009 (2.8% in July), an enviable and whopping state budget surplus approaching $2 billion, the highest state GDP growth in 2013 of 9.7%, strong housing and construction markets (more than 1,000 permits for single-family homes were issued in both June and July, setting new all-time monthly records), thousands of landowners who have become millionaires from oil and gas royalties (estimated oil royalty payments of more than $17 million every day in July, at 15% of the approximately $115 million in market value calculated above), jobless rates in eight of the state’s 53 counties at or below 2.0% in July (with Williams County at only 0.9%, the lowest county jobless rate in America), and starting hourly wages at the Williston ND Walmart of $17.20 — 2.4 times the state’s minimum wage of $7.25, and even above the $15 per hour “living wage” that is being proposed in some cities around the country and by fast-food workers for their industry (see photo below).

North Dakota’s economic success, job creation, and energy-based prosperity is being driven by the development of the state’s vast energy resources, especially the vast oceans of shale oil and shale gas in the state’s Bakken region. The Peace Garden State, along with Texas, are the shining stars of The Great American Energy Boom, which continues to be the strongest reason to be optimistic about the US economy.

Carpe oleum.

walmart

Carpe Diem

Saturday morning linkage

taxi1. Chart of the Day: NYC taxi medallion prices remained flat again in August at $1.32 million for a corporate medallion (flat since May 2013) and $1.045 million for an individual medallion (flat since July 2013). Is this the Uber/Lyft/Gett effect?

2. Can they pass the sniff test? Body odor is among 52 criteria that officials at San Diego International Airport use to judge taxi drivers. Anyone who flunks the smell test is told to change before picking up another customer. I somehow think Uber doesn’t have to worry about this problem….

cartoon3. Cartoon of the day.

4. Sharing Economy. Peer-To-Peer Airport Car Rental Startup FlightCar Raises Another $13.5 Million, Led By GGV Capital, via Techcrunch.

trend5. Excuses, Excuses and More Excuses…. An updated list from The Hockey Schtick of at least 29 32 36 38 39 41 51 52 excuses for the 18-26 year statistically significant ‘pause’ in global warming (see chart above) including recent scientific papers, media quotes, blogs, and related debunkings.

6. School Lunch Backlash. Michelle Obama’s overbearing federal school food regulations have convinced a record number of students to bring their lunches from home. Lunchrooms across the country are experiencing significant revenue loss, and increasing waste due to a requirement that all students take a fruit or vegetable, whether they eat it or not. As a result, many districts are opting to forego their federal funding to serve students food they want to eat. Source.

7. Dumb Regulations. Indiana Brewhouse Complies with Dumb State Law Using Microwaved Hot Dogs and Canned Soup, via Reason.

8. The Simple Economics of Adjunct Professor Abuse. Kevin “Angus” Grier explains the situation as follows: The supply of adjunct professors is very large relative to the demand, so of course adjunct professors end up teaching college classes for as little as $2,000 per course. The culprit? Not the PhD students, but the hundreds of US universities that continue to recruit, fund, and use them as research assistants and teachers, and eventually graduate thousands of PhD students every year in numbers that far exceed the demand for full-time academic positions in most fields of study.

9. Housing Options. A college professor and interim dean left his home and now lives in a 36-square-foot dumpster via The Atlantic.

10. VIDEO of the Future of Healthcare? The free market’s answer to Obamacare – the Surgery Center of Oklahoma, see accompanying article here.

Carpe Diem

Despite proven academic success of NYC’s charter schools, the mayor and unions are waging a war on city’s charter kids

Success Academy Charters Grades Black (%) Hispanic (%) Free Lunch (%) Statewide Performance 2014 (%)
Harlem Success Academy 1 K-6 80.1 17 77.7 96.7
Harlem Success Academy 2 K-4 77.9 20 75 97.8
Harlem Success Academy 3 K-4 64.3 30.9 80 99.5
Harlem Success Academy 4 K-5 73.5 20 78.5 97.8

The profiles of four Harlem charter schools, operated by Success Academy Charter Schools are displayed above, based on new 2014 data from the SchoolDigger website and national school database. All four Harlem Success Academy charters serve primarily minority student populations (all are 93.5 to 97.1% black and Hispanic) and low-income households (75 to 80% of students at these schools qualify for free or discounted lunch), and yet all are ranked academically higher than about 97% of all schools in New York state based on 2013-2014 standardized test assessments in math and reading.

What a truly amazing academic success story! Harlem Success Academy 3, an elementary school where 95.2% of the students are black or Hispanic and 80% are from poor households who qualify for free or discounted lunch, performed better on standardized reading and math tests than 99.5% of all elementary schools in the state.

Q1: With those kinds of impressive, eye-popping academic results for some of the city’s most at-risk student populations in Harlem, couldn’t that proven record of academic success be replicated in all public schools? Wouldn’t you think that these Harlem charter schools would be recognized as academic models for the rest of the city and the state? After all, the students at all four of the Success Academy charter schools in Harlem are performing at the same or higher level as students in the tony and upscale Scarsdale school district, where about 90% of the students are white or Asian, less than 1% are black, 0% of the students qualify for free/reduced lunch, and the median household income is $221,531.

A: Yes, except for a few major obstacles. The Success Academy charter schools are run by Eva Moskowitz, and her network of charter schools hire only non-union teachers, who are paid well but can be fired for non-performance. So the New York City teacher unions hate Eva Moskowitz despite her “off-the-charts success” at educating black and Hispanic kids in some of the poorest neighborhoods in the city. Likewise, instead of being thrilled that so many of the city’s low-income, minority students are being educated so successfully, the new New York mayor Bill de Blasio hates charter schools just as much as the entrenched teacher unions (who are a main part of his political base of support) and he is in a ferocious battle to stop Eva Moskowitz and the spread of charter schools.

Bottom Line: In a saner and more sensible world where students and learning are really the No. 1 priority, the educational establishment (including members of the teacher unions and the NYC mayor) would be “falling all over themselves” to copy the proven educational success of charter schools like the ones in Harlem profiled above. But in the insane world of New York City where unionized teachers have a stranglehold on public schools, the liberal mayor and liberal teacher unions are waging a war on the city’s successful charter schools like the ones operated by Success Academy Charter Schools. Preservation of the status quo and a continuation of the current failed public school model, and preserving its power, are the primary concerns of the teachers unions and their administrative enablers, which now includes the new New York mayor.

Q2: What’s happened, I thought liberals were supposed to be the ones who most want to help, not hurt minorities and poor people? How does waging a war on minority charter school students from low-income households in NYC fit into the liberal agenda of helping the poor?

Update: In the comment section, Paul takes issue with the term “war on charters” and thinks it crosses over the line into unnecessary hyperbole. Perhaps, but that’s the term (or “battle”) that is frequently used to accurately (I think) describe de Blasio’s strategy, here are examples of news reports on Mayor de Blasio’s war on New York City’s charter schools predominantly poor and minority students attending charter schools. (I would concede it’s not a war on the charter schools, but a war against the poor black and Hispanic kids who attend them.)

De Blasio starts his war on charter schools

New York’s de Blasio boots charter schools from city space (“…de Blasio took off the gloves in his battle with education reformers…”)

De Blasio Starts the War on Charter Kids

Cantor accuses de Blasio of waging a ‘war’ against children in N.Y. charter school debate

City Council revives war with charter schools after de Blasio makes peace

Parents blast De Blasio’s war on charter schools

Kevin Chavous on John Stossel regarding Mayor de Blasio’s war on charters (“No other country in the world would shut down schools that work.”)