House to House

The editing house of Florentine Films is located in a small town without a lot of housing options, so I live instead 18 miles southeastish in a more respectably-sized place called Keene, where I let a room in a house owned by a middle-aged couple. Instead of a house tour, I put together a video of my autumnal commute from home to work.

As you watch, you may find yourself asking these questions:

• For reasons of video quality and safety, shouldn’t Jeff have mounted the camera instead of holding it? (Maybe!)
• Why does Jeff’s camcorder overexpose everything? (It’s cheap!)
• Are Ken Burns’ films, which have audiences in the tens of millions, really edited in an unmarked house on the corner of a residential street in a sleepy village? (Yes!)
• If Jeff is working in an editing house, how come he fails so miserably when cutting a home video? (Irony!)

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Lot Price

Readers should know by now I love me some economics, but many of its practitioners in recent years have done their discipline a disservice by inflating its explanatory power to cover all decisions made by all people at all times.  My heart is thus sent a-flutter when simple standard economics can be applied appropriately to a problem and do some good. Take parking:

Yes! We’ve got  a supply of parking spaces, we’ve got demand for them, now use prices to match them up! Now, as Felix Salmon notes, there’s  no reason the pricing couldn’t be more dynamic and variable (which would help on the demand side), and as Matt Yglesias says, cities could leave parking space construction to the purview of private people  (which would help on the supply side). Nonetheless, an improvement over the status quo thanks to good economics.

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Flight

I realized at some point in my long journey back to South Carolina last week that I hadn’t let my blog readers know my year-long stay in Rwanda was at an end. I had a lot of time to think a lot of things during that trip, as it started at approximately 8:00 am EST on Friday May 14 and lasted until about 10:00 AM EST on Monday the 17th. In lieu of an introspective post examining my time in Rwanda (which may come later), I’ll succumb to the lesser allure of commiseration and list off my fantastical sojourn:

• Hour 0 – Check-in at Kigali International Airport for a flight to Addis Ababa which should depart in approximately two hours. I am mentally prepared for the three flight, 24-hour long journey.
• Hour 2 – Told that the flight would be delayed three hours.
• Hour 6 – Told the flight would be delayed another few hours. Minor riot in the airport office, as passengers insist to hear someone at the other airport confirm a plane was actually on its way.
• Hours 12-15 – Take-off for the first leg, a few-hour flight to Addis.
• Hour 15 – Land in Addis, missing my connection to Dulles by an African sky.
• Hour 16 – Find out Ethiopian Airlines had default booked me on the next flight following the same route as my original itinerary, which would not be leaving for another 36 hours or so.
• Hours 16-19 – After a remarkable show of patience by a travel companion who was heading as far as DC, I with him secure an alternative route via London, departing in about 12 hours.
• Hours 19-28 After receiving hotel voucher and grabbing checked luggage, spend several daylight hours convalescing in a comfortable hotel room. I am already slightly jet-lagged, despite having completed only ~10 percent of the trip in terms of miles.
• Hours 34-46 – Flight to London takes off
• Hour 46 – Land in Heathrow, confirm I am still on standby for my last connecting flight to Charlotte.
• Hours 47–55 – Washington-bound
• Hours 55-56 – Land, find out my bags are at a different claim, get bags, check them back in for standby flight to Charlotte
• Hours 57-60 – Luxuriate in relative leisure of fast wireless, a plethora of food and drink options, and empty comfortable chairs.
• Hour 61 – Feel an ember of hope at discovery that I am first on the standby list.
  • Info display flashes ice into my soul as I realize all seats have been bought and everyone has checked in.
  • A last spark of joy as gate  guy tells me headcount is missing one and says I should take off down the gangplank without even looking at ID or my boarding card.
  • After being placed in last empty seat on the plane, I try to ignore the dread feeling that the man whom I passed on the tarmac talking to airport personnel was the missing passenger and “rightful” holder of my seat.
  • The dread is realized, for about a minute after being seated I am told I must deplane.
  • Exit the plane, walk back up the gangplank against the current of passengers boarding another flight.
• Hour 62 – Head to customer service to find next flight
  • Resist urge to let tears of indignity fall by evaporating them with the self-righteous anger I feel as other passengers in the queue loudly decry how awful their missed connection is for them.
  • In a bit of good news, discover there’s a flight direct to my hometown in SC the next morning, so I can bypass Charlotte and a 90-minute drive.
  • In a bit more bad news, discover my bags made the flight I missed and were halfway to Charlotte.
  • Seeing as it was about 11 PM, use some weird payphone like device in the terminal to book a room at a nearby hotel.
• Hours 63-70 – Sleep fitfully in a $200/night airport Marriott paid for in cash.
• Hour 72  – Flight to final destination finally departs. Finally.
• Hour 74 –  I arrive.
• Hour 84 – My bags arrive.

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Making the Grade

Weirdly, in the past dozen posts or so I’ve had a proclivity to pen successive posts on the same topic. I haven’t planned it at all, but for some reason one post on my traffic troubles spawned several more over the next few days and less than 24 hours after writing a post touching on the difference between finance and economics I decided to write a lengthy post doing present value calculations of gym pricing plans.  And now, here I am about to write another post on gas prices–my blog has its reasons of which reason knows not.

Anyway, let’s get to it, shall we?

It seems consumers who buy mid-grade fuel are missing out on an arbitrage opportunity, as mixing regular and premium will give you the same fuel for a cheaper price (.pdf):

Midgrade is a redundant product offering, easily and almost costlessly replicated by mixing existing regular and premium products. Indeed, this redundancy is widely known and exploited by … just-in-time mixing at the retail pump from separate underground regular and premium storage tanks. … It is rare to see a consumer create a midgrade by buying from two retail feedstocks at a single retail gas station. This is true despite the overwhelming evidence that consumer midgrade mixing is almost uniformly the least costly way to buy retail midgrade.

It’s puzzling that midgrade prices remain inflated when such an easy cost-saving measure could be adopted by consumers. The authors suggest at the end of the paper that for some reason competition across octanes in the retail market is not equal. I would suggest it’s a simple information asymmetry: people like me have no idea you can mix fuels at all, much less that you can approximate a medium grade by mixing regular and premium. If the information became more widely known, prices would fall.

As for me, the way I saved money when gas was four bucks a gallon was to downgrade from premium to regular, despite my car manual’s recommendations and my father’s protestations. Some deft working of the Google machine quickly revealed the truth:

The main advantage of premium-grade gas is that it allows automakers to advertise a few more horsepower by designing and tuning engines to take advantage of premium’s anti-knock properties. But auto engineers generally agree that if you use regular in a premium engine, the power loss is so slight, most drivers can’t tell.

“I go back and forth, and I’m hard-pressed to notice” whether there’s regular or premium in the tank, says Jeff Jetter, principal chemist at Honda Research and Development Americas. He drives an Acura designed for premium.

HT: OB

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Profitable Pretext

Here’s a counterintuitive article:

Feeling sorry for gas stations as prices plummet? Don’t.

Although retail gasoline prices have fallen 55% since mid-July, wholesale prices have plunged even more sharply – 68%, according to the Oil Price Information Service. As a result, retailers have enjoyed record profit margins since mid-September.

“Guess what? They’re making substantially more money at $1.89 (a gallon) than they were at $4.29,” says OPIS chief oil analyst Tom Kloza.

The article gives three reasons for the increased profits:

1. The credit card fees the gas stations must pay are charged as a percentage of the sale, so the decrease in price has led to lower fees.
2. When prices are falling, customers will not fill up completely, hoping to take advantage of further falls in prices. This means they make more trips to the pump, and more importantly, to the convenience store, where gas stations earn most of their profits.
3. Falling prices give station managers some space to fatten their margins, since consumers aren’t as sensitive to price as is the case when prices are high and rising.

There’s so much good applied economics here a teacher could fill up a day talking about it. For sake of symmetry, however, I’ll content myself to three points as well.

1. People buying less gas in the hope of getting a better deal tomorrow is a good case study for what happens with deflation. In an economy with deflation, or a general sustained decrease in prices, people will hold off making purchases, which reduces economic activity, which reduces prices, which delays purchases, etc. and possibly leads to a deflationary spiral from which it is difficult to escape (See: Great Depression).
2. That margins can be thicker at lower prices is a nice lesson about how sensitivity to changes in price is based in part on the price point itself. In gas, just like many other things, people tend to be more sensitive about a change in a high price, and less sensitive when a low price changes (here’s a textbook graph). When people are less sensitive, managers can charge a higher price without hurting demand.
3. The last point is found in the following quote at the end of the article:

Not all retailers are cheering. Shaukat Zakaria, a partner in Lone Star Petroleum, which owns 30 stations in Texas, says the oil bust has dampened local consumer demand, intensifying price competition and cutting margins to 12 cents a gallon recently.

Mr. Zakaria gets the causality backwards. The oil bust didn’t dampen demand, the weaker demand caused the oil bust.  This is a similar mistake that is made by consumers when they see high oil prices coinciding with high oil company profits;they tend to see the profits causing the high prices rather than the high prices causing the high profits.

As I finish this post, I realize that to some this post will have been lengthy and tiresome, but I also chuckle to know that you, yes YOU, Dear Reader, will now assuredly think of me the next time you pull into the gas station–just try not to. My aura will be as unquenchable as the stench from a bit of gas dripped carelessly onto a shoe.

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