Outrageous Texting Charges and "A Beautiful Mind"

Congress is all bent out of shape over outrageous charges for text messages via cell phones. That provides a hook for a discussion of Nobel Laureate John Nash whose work was dramatized in the book and movie A Beautiful Mind. (I've just published a Google Knol on the Nash Bargain concept that earned Nash his fame.)

OUTRAGEOUS TEXTING CHARGES

I believe it costs the cellphone company only a fraction of a cent per text message. They are making excessive profits by charging 20 cents each. Some kids have run up multi-hundred dollar monthly bills by doing hundreds of texts a day.

OK, I agree the per text charge is obscene, so what should Congress do about it?

IMHO, (ALMOST) NOTHING!

I would favor a law or regulation that requires the cellphone companies to charge no more than the package plan cost in any given month. They have unlimited text plans that cost $30 and up a month, so the breakeven point is about 150 text messages a month. If an account uses less than the breakeven number of text messages (or air minutes, etc.) in a given month, they should be charged the per-unit amount. If they use more, the bill should be capped at the lowest available package plan rate. Beyond that, so long as consumers are made aware of the charges in advance, and have the ability to block text messaging if they don't want it, I think the cellphone companies should be allowed to charge whatever they want.

Let the market and a "Nash Bargain" (see discussion below) set the prices according to what the consumers are willing to pay. Texting is not a necessity of life!

(Phone service and text communication -e.g., email- are not monopolies anymore. My wife and I have a T-Mobile cellphone plan where we share 400 minutes per month with free weekend and evening calls. We blocked text messaging since we don't use it. Our landline phone was costing around $35/month so we cut our connection. Our home phones are now connected via the Internet to T-Mobile at Home for which we pay less than $13/month, including taxes and fees, for unlimited calls in the US including caller ID and voicemail.)

AMERICAN PUBLIC HAS TOTAL MISUNDERSTANDING OF COMPETITION IN AN "ELASTIC" MARKET

Our school systems do not teach anything about how prices are set in competitive markets - or even in a monopoly situation. Yes, if some item is a "necessity of life" and there is only one supplier, they can charge whatever they like, which is why we need protection from natural monopolies. If competitors in some market illegally collude to set prices, limit quantities, and divide markets, the government needs to intervene to protect citizens.

However, if people can live without some product or service, the market is "elastic" - meaning the price will vary with the quantity available, according to a "Demand Curve".

Did you ever learn about a Demand Curve in school? Even college? Most people think products and services should be sold at a price that is some reasonably small percentage above the cost of production and distribution. They think that any mark-up in excess of that reasonable percentage is immoral and should be illegal. They think that producers and retailers can inflate their profits as much as they'd like by increasing prices.

They do not understand that, in an elastic market, even a monopoly supplier can often INCREASE profits by DECREASING prices! Indeed, the best way to set prices in an elastic market is to match production quantities with consumer demand. It turns out that both maximizes consumer value and producer profits.

EXAMPLE OF A MONOPOLY IN AN ELASTIC MARKET

Say a company is the only supplier of a unique product that is nice to have but not a necessity of life. What should they charge for it? Should they set the price as high as anyone is willing to pay? Should they set the price to make their profit per unit as high as possible?

It turns out the answer to both questions is NO! They can actually maximize their profits by producing and marketing a quantity of product that is more than the quantity that would yield the highest per-unit profit.

The figures (from my Nash Bargain Advisor Excel spreadsheet) illustrate the situation. The heavy black line is the Demand Curve that indicates how the market price declines from about $12 per unit to $4 when the quantity on the market increases from 10 million to 100 million units. The thin red and blue curves indicate the production Cost Structures per unit for two alternate production facilities, as a function of the number of units produced. A producer (whether a monopoly or not) has to decide the optimum level of capital investment. Capital investment in more automated production facilities will increase initial, non-recurring costs, but may reduce incremental production costs by a sufficient amount to pay back the investment -or not- depending upon the number of units eventually sold and the market price when they are sold.

The heavy red and dashed blue curves indicate the profit per unit as a function of the number of units produced. You might think the maximum overall profit occurs when the profit per unit is maximized, but you would be wrong! The figure below illustrates the overall profit (or loss) for Alpha and Beta alternatives as a function of quantity produced. It turns out that, up to a point, lower market prices lead to greater sales quantities and lower per-unit production costs and that is what yields the maximum profit.

The overall profit for the alternative Cost Structures is maximized with a market quantity of 65 million for Alpha and 62 million for Beta, assuming each is a monopoly in a given market. This corresponds to a market price of $7.20 to $7.36 per unit. If the monopoly produces too few units, say 10 to 14 million, it will get $11.68 to $12 per unit, but will lose money overall. On the other hand, if produces too many units, say over 70 million, there will be a glut on the market and overall profits will go down substantially.


A COMPETITIVE MARKET AND A "NASH BARGAIN"

The insight John Nash brought to Economics and that gained him the Nobel in Economics for 1994 is that the situation is the same for multiple producers in a competitive marketplace. If two or more companies produce the same or similar products in an elastic market, such as Burger King and McDonalds or HP and Acer, it is to their advantage to collectively produce a certain number of units, neither too few nor too many.

If there are too few fast-food restaurants in a given geographic area, they may be able to charge a bit more per burger, but they will sell fewer as potential customers choose to eat at home or to go to full-service eateries. On the other hand, if there are too many fast-food places, they will have to reduce prices drastically to attract customers and their overall profits may decline or turn into losses.

The same is true for PC makers. As production quantities have multiplied, prices have come down sharply and features have improved dramatically. This, in turn, has increased sales to the point of nearly 100% market penetration in the US and other westernized countries. More and more people have at least one PC and some have a desktop plus a laptop, and other families have one for each member of the family. (My wife and I have one desktop plus three laptops between us.) With the economic slowdown, however, there may be too many units on the market and prices may drop to the point where some producers face losses and have to cut back production or drop out of the market.

So, how can competitors in an elastic market adjust production quantities such that they can each make a fair profit? Well, they could collude and fix quantities and prices and divide markets to increase their profits. However, that would be totally illegal!

Using game theory, John Nash came up with a way to reach "equilibrium" without illegal collusion. His solution is for each competitor to use their own Cost Structure and estimate the Cost Structures of competitors and calculate the quantity they should produce, assuming others are rational and will do the same. (The highlighted part of the previous sentence is the most important part. If competitors are not rational, or if they try to "cheat" by producing too many units, the Nash Bargain will not work.)

The Nash Bargain Advisor (see my Knol) calculates the optimal quantities each competitor should produce to maximize their own self-interest, assuming others "cooperate" by doing the same in a rational way. The Nash Bargain Advisor also calculates the consequences if one or more producers "cheat" and over-produce more than their optimal quanitiy, or, if one or more producers under-produce due to miscalculation or disruption in supplies or production facilities.

Ira Glickstein

Jackson or Ayatolahs

[From Joel] There is a certain irony in the fact that between Farrah Fawcett and Michael Jackson's deaths, there is almost a complete blackout of news from or discussion about Iran. At a crucial moment in history, one has to wonder about whether the fundamental premise of the mullahs is right. That premise (as relayed to me by an Egyptian colleague) is that men are dogs and need a strong leash to prevent them from descending into degeneracy. While Iranian students try to wrest a bit of personal freedom from their government, we see that the worship of pop icons move them off center stage. In the end will the death of Michael Jackson do more to muzzle the revolution in the streets of Teheran than the shutting down of the internet? Is humanity doomed to oscillate between slavery and liberty, neither of which they can handle? Were Plato and Aristotle right about the impossibility of sustained democracy? With respect -Joel

The Sunspots are Coming! The Sunspots are Coming?

This colorful image is not an aboriginal prayer rug, but plenty of folks at NASA are "praying" it is evidence long-delayed Solar Cycle #24 has started or is about to start. As I reported last month in An "Inconvenient" Minimum and back in January in Where Have All the Sunspots Gone?, NASA previously predicted SC#24 would start late 2006 or early 2007. It is at least two years late.

No one can tell if the old cycle has ended until the new cycle has built up some steam over about a six month period. Well, the above Sunspot Prayer Rug may provide new evidence they may be able to declare SC#24 actually started last December or January.

DESCRIPTION OF FIGURE

The vertical axis is latitudes on the Sun, with the Sun's equator at the middle. The horizontal axis is years, from mid-1994 to the present. The red-yellow bands represent solar jet streams, thousands of miles below the surface of the Sun.

The vertical blue line at the left indicates when SC#22 ended and SC#23 started. Note that the start of a solar cycle is marked by a jet stream that initiates at about 45º North and South latitudes and spreads up and down as the years go by. SC#23 began in 1997 when the jet stream from SC#22 got down to what they call the "critical latitude" of 22º. NASA is excited that the jet stream from SC#23 is now down to about that critical latitude! That, they say, could (finally) mark the start of (long-awaited) SC#24.

DISCUSSION

Well, they could be correct - or not. The black contours on the Sunspot Prayer Rug represent sunspot activity. Note that the black contours representing SC#22 end in 1997. Nearly simultaneously, new black contours representing SC#23 sunspots begin in the mid-latitudes.

A possible problem with the NASA interpretation is that the SC#23 sunspots end in mid-2008, but the SC#24 sunspots have not cranked up yet, a year later. This is very different from the transition between SC#22 and SC#24 when the new cycle started in earnest immediately after the old cycle ended. Why is this transition so different from the previous one? Could the year-long sunspot pause indicate a more fundamental change in the Sun's internal, natural cycle behavior? Perhaps the idea that a new cycle will begin when the jet stream gets to 22º latitude does not apply in the current and very different situation?

HOW YOU CAN HELP NASA

A few weeks ago, I added a new feature to this Blog where you can watch the day-to-day development of the next sunspot cycle. Have a look in the right-hand column, just below the Dilbert comic for a NASA-supplied image of the Sun. That image will change daily and allow you to help NASA look for sunspots.

WHY DO YOU CARE ABOUT SUNSPOTS?

As described in a previous posting on this Blog, there is an historical connection between periods of low sunspot activity and cooling trends. If the start of SC#24 is further delayed, it is likely it will peak later and at a lower level than originally expected. If we are lucky enough to get a series of weak sunspot cycles, that may provide decades of cooling that may counteract the estimated 0.5ºC actual warming our Earth has experienced over the past 150 years.

Although CO2 levels continue to increase at a rapid pace, it appears the Global Warming trend has abated, or perhaps reversed a bit, over the past ten years. A bit of Global Cooling will give us breathing room to correct our excessive release of previously-sequestered carbon (coal, oil, gas) into the atmosphere. Right now, the politicos are hell-bent on imposing the Cap & Trade Scam that will further destroy our economy and not reduce Global Warming very much. Let's hope they will reject that approach and work on something more conservative that will actually work, such as the Revenue-Neutral Carbon Tax .

Ira Glickstein

Is Revolutionary Technology Disruptive in a Positive Sense?

The photo depicts Iran's President, Mahmoud Ahmadinejad, as being frightened by a (computer) mouse - a metaphor for the computer and internet technology currently being used to protest the sham election.

We usually speak of "revolutionary" technology in a purely technological sense - a new hardware or software device that radically changes how we work or entertain ourselves. We call unexpected innovations that improve a product or service and disturb markets "disruptive technology".

Technological advances have changed history, mostly in a positive direction, at least since the invention of moveable type printing in 1439 by Johannes Gutenberg, a German goldsmith. That invention, some 600 years ago, led to an unprecedented era of political change that has greatly increased standards of living, freedom, and liberty we residents of the Earth enjoy. Each of us owes his or her freedom to Gutenberg and others who have invented and used revolutionary technology to enhance the power of the people.

Martin Luther used the printing press to further the Protestant Reformation. People with revolutionary ideas have managed to get the word out despite attempts by the Pope and others to license the printing press.

Censorship in the Soviet bloc was evaded by "Samizdat", a Russian pun for "self, by oneself publishing", where free thinking individuals used typewriten carbon copies, xerox copies, and audio tapes to pass along forbidden materials. Fax technology allowed written materials to be transmitted by ordinary telephones and that has been used to organize revolutionary activities.

Personal computers and printers made it easier for individuals to create revolutionary writings and distribute them via floppy discs or telephone modems.

Of course, the invention of the internet and the World Wide Web has eclipsed all the previous revolutionary technology! Despite attempts by oppressive governments to stiffle dissent and filter internet content, ingenious individuals have found ways to get around these limitations of freedom.

Today, in Iran, the free-thinking dissidents are using the latest communications media, blogs, Flickr, Twitter and cell phone photos and videos to bypass official limitations on communications. Good luck to them!

Ira Glickstein

PS: See Guardians at the Gates are Gone - Freedom of the Press !!! and the links in the right-hand column under the "Freedom" image. Today in the US and most of the rich world, anyone can publish a blog or a "print on demand" book that anyone in the world can access - with no need for official approval or even an agent.

The Goode Family - Worth Watching!

Have a look at a new prime-time animated series that lampoons the politically correct, totally green "Goode Family"! (ABC, Fridays, 8:30PM)

Click to view free clips online. (The clips start automatically after the obligatory commercial.)

From the ABC website:

"... Gerald and Helen Goode ... live by the motto WWAGD ('What Would Al Gore Do?'). Gerald, a college administrator, and Helen, a community activist, are determined to obliterate their carbon footprint on the planet: They're zealous vegans, they drive a hybrid, and they recycle everything possible. ...

"But despite their best efforts, something always goes haywire with their politically correct plans. Like adopted son Ubuntu - Gerald and Helen thought they were doing the right thing by adopting a baby from Africa, only to learn that Ubuntu was South African . . . and white. Now a teenager, he eagerly tries to embrace the Goodes' love of things like crafts and organic gardening, even though deep in his gene pool is a drive towards more blue collar pursuits ...

"Teenage daughter Bliss is constantly mortified by her parents (especially her mom's efforts to talk openly, girlfriend-to-girlfriend, about sex). ... Helen's SUV-driving, meat eating dad, Charlie, thinks her efforts to save the planet are just a waste of time. Neighbor Ray Johnson is bemused at the Goodes' attempts to refer to him by the right ethnic catch phrase ('African American'? 'Person of color'?) ..."

Please have a look and post your comments!

Ira Glickstein

PS: You can watch the hilarious Series Premier - Pilot of "The Goode Family" and other full episodes online - click here then click on "Watch free episodes". Select "Series Premier" for a good introduction to the characters and premise.

"Team of Rivals" by Doris Kearns Goodwin

I just completed reading Team of Rivals - The Political Genius of Abraham Lincoln - a prodigious book of 757 pages plus two dozen pages of photos. According to the LA Times "Barack Obama loves it. ... it seems to be offering a template for the new administration. 'Lincoln basically pulled in all the people who had been running against him into his Cabinet,' is the way Obama has summarized Goodwin's thesis, adding, 'Whatever personal feelings there were, the issue was how can we get this country through this time of crisis.'"

I enjoyed reading it and now have a better understanding of Civil War history, the controversy over slavery, and the founding of the Republican Party. However, I had the feeling Goodwin was sugar-coating Lincoln's "political genius" and placing too much importance on his speaches and good humor and intentions, and missing the real story of how the Civil War was run (badly) and won (finally - with horrendous death and destruction on both sides). I recommend the book and would like to see comments by others who have read it and other books about this period in US history.

Like all of you, I learned about the Civil War in school and from other reading, but I was unaware of some details until I read this book:

The Civil War was Inevitable

The North and South had different economic interests. The South primarily exported cotton and imported manufactured goods. They needed low labor costs and low tariffs so they could buy the best quality and lowest cost manufactured goods from foreign sources and sell their cotton more readily. The North was a developing manufacturing center and needed tariff protection against foreign competition. They also needed federally-subsidized transportation infrastructure for waterways and railroads.

The issue of slavery added emotional fuel to the fire. Prior to the War, most northerners, including Lincoln, were content for slavery to continue in the South. After all, it was embedded in the Constitution (slaves counted as 3/5ths of a person for Congressional allocation). Even the Fugitive Slave Law, which required escaped slaves in free states to be forcibly returned to their masters, was supported as a necessary evil. Most of all, northerners wanted to settle the vast western territories with free labor. They expected slavery to die out naturally, over time.

Had the South agreed to limit slavery to where it existed, there would have been no War. But, to this they could not acquiesce. They needed to expand their labor-intensive agriculture industry into Missouri and beyond to Kansas and other western territories. They wanted the white settlers to democratically decide if newly-formed states would be slave or free. If all new states were free, they realized their political position would deteriorate, northern radicals would stir up slave revolts, the Fugitive Slave Law would not be enforced, and the entire structure of their economy and culture would collapse.

A series of compromises, from 1830 to 1850, allowed some increase in the number of slave states. This was too much for northerners and too little for southerners. The two major national parties, the Democrats and Whigs, struggled to maintain unity. Finally, the Whigs (Lincoln's original party), joined with remnants of the Know-Nothings and some War Democrats to form what became the Republican Party. Their platform was preservation of the Union, protective tariffs, and federal support for infrastructure.

War was inevitable when southern states began to seceed and claim possession of federal forts in their territory. Most northern Democrats, such as Steven Douglas (who ran against Lincoln for President in 1860) favored further concessions. After Lincoln won the election, the Democratic Party split into northern and southern wings and, with the firing on Ft. Sumter, the Civil War, percollating for decades, formally began.

The Emancipation Proclamation was Issued Late in the War

The Emancipation Proclamation was issued in January 1863. That was nearly two years after Lincoln was elected, southern states seceded, Ft. Sumter was fired upon, and the Civil War began. It applied only to territories held by Confederates where the President had no power to enforce it. Slavery continued in the border states under Union control where it had existed before the War.

Lincoln Was Incredibly Generous and Held No Grudges

If Goodwin is to be believed (and I accept her version with only a bit of hesitation) Lincoln was the most generous, kindly, and unselfish politician who ever lived. He retained members of his Cabinet who were openly disloyal and continued to support generals who were timid and incompetent and who defied his orders way beyond the time they should have been replaced. His Secretary of the Treasury, Salmon P. Chase was a major competitor for the Republican Presidential nomination and, while in Lincoln's Cabinet, he disloyally plotted to replace Lincoln at the next election. He remained in office way too long. After Chase's fourth combative resignation, lincoln finally took him up on it. He later nominated Chase to the US Supreme Court!

Lincoln finally found General U. S. Grant who is depicted by Goodwin as the most perfect general you can imagine, despite his excessive drinking. Grant won the war with aggressiveness and determination, and way too many deaths.

Loss of Life Was Horrendous

Goodwin recites the numbers of deaths of northern and southern soldiers in a matter-of-fact way. In my mind, I contrasted the loss of 3000 on 9/11 and the subsequent loss of several thousand American soldiers in Iraq and Afghanistan since then, with the much larger losses during the Civil War. For example, it was common to lose five, ten, or twenty-thousand in a single battle. Considering the smaller base population, the total losses during the Civil War would be equivalent to losing over a million soldiers now.

Parallels with Obama Administration

Lincoln's main rival for the Republican nomination was Willian Seward from New York State. He became Lincoln's Secretary of State, and, eventually, his most loyal supporter. President Obama, like Lincoln from Illinois, appointed Hillary Clinton, his main Democratic primary rival and also from New York, as his Secretary of State!

Ira Glickstein

Bet on Google for Solar Power?

A Reuters story today says "Google Inc is closing in on its goal of producing renewable energy at a price cheaper than coal..."

That is GREAT news! I'd bet that Google and other profit-making enterprises, spending moderate amounts of their own money, are much more likely to hit "pay dirt" that all the government investment in the world.

"Google's Green Energy Czar Bill Weihl said the odds of success had gone up in the last year or so from a long shot to a real possibility of demonstrating working technology in a few years. 'It is even odds, more or less, I would say,' he said in an interview with Reuters. 'In, you know, three years, we could have multiple megawatts of plants out there.'"

Google plans to use "solar thermal" technology that generates steam to drive electrical generators, rather than photo cells that turn sunlight directly into electrical power.

Wikipedia has a fine item about solar thermal and they include a number of photos. The first photo above shows a parabolic trough of mirrors. They reflect sunlight to a fluid pipe that is most likely inside an evacuated tube to reduce convective heat loss. The second photo above shows an array of flat mirrors that reflect sunlight to a central collector. In both cases, the collected heat is turned into steam to drive electrical generators.

A SOLUTION TO GLOBAL WARMING?

As readers of this blog know, I am a "realist" on global warming. I acknowledge that we have had significant actual warming of about 0.5ºC over the past 150 years and I am concerned about the rapid increase in atmospheric CO2. While I do not believe human activities are responsible for more than about 0.1ºC of this warming, and I do not think we can do much about that 0.1ºC on a practical level, I do believe we should take conservative actions to reduce the continuing rapid rise of CO2. Solar energy (along with nuclear, wind, and biomass) is one carbon-free avenue we should explore.

I commend Google for their work in this area!

Ira Glickstein

TED - Irrational Decision-Making

Here is another great TED talk that asks the question: "Are we in control of our own decisions?"

The answer is NO! This could be applicable to our previous discussion of Empathy and the Court. This TED talk clearly demonstrates how our emotions and other non-rational factors control our decision-making much more strongly than reasonable logic.

For example, the person on the far left is "Tom" and the one on the far right is "Jerry". The figure in the top middle is a distorted version of "Jerry" to make him look ugly. The middle bottom is an ugly version of "Tom".

When presented with the top form, and asked who they would date, most picked good-looking Jerry. When shown the bottom form, they picked good-looking Tom. Amazingly, the ugly choice totally changed the results of the selection process!

The TED presenter, Dan Ariely, uses several other examples to show how our decision process may be totally altered by the presentation of undesirable, non-chosen alternatives.

HOW DOES THIS BEAR ON PROFESSIONAL DECISION-MAKING?

Well, if a decision is close between two alternatives, which is always the case for hard decisions in business (or the Supreme Court, where, by definition, cases are almost always close choices), a good strategy could be to introduce a slightly "ugly" version of the choice you want the deciders to make.

For example, a prosecutor could include the death penalty as an option, even if he or she thought a 20-year sentence is most appropriate. The "ugly" death penalty option would make it more likely the jurors would settle on a long sentence. Given a choice between 10 years and 20 years, they might pick 10. If the death penalty was added to the menu, they would be more likely to choose 20 years.

The other lesson I take from this TED talk is that professionals should adopt methodologies that, to the extent possible, exclude emotional factors. For example, my Decision tool "forces" the deciders to consider multiple factors and weights in reaching a decision.

Ira Glickstein

Constitutional Convention

[From JohnS] The Constitution was written at a time when the United States was an agrarian society; today in our industrial society, the phraseology of parts of the Constitution and amendments makes it difficult to apply the intent of its authors to modern situations. Provisions are available to modify the constitution through the amendment process.

How many current legal conundrums could be resolved by amending the constitution? Many, maybe most. After 200 + years, we should consider convening a constitutional convention to study the intent of our founders and place their intent in line with American society today by proposing appropriate amendments. Once submitted by the constitutional convention any amendments would have to follow the process of approval defined in the constitution.

Our founders found it necessary within 3 years to add 10 amendments (the Bill of Rights) to achieve acceptance in their day and it seems logical that additional changes are needed after so many years.

The principal value of convening a constitutional convention is to allow the members and their contemplation of issues to remain outside of the political environment until ready for presentation to the Congress. Members of the convention should not be members of congress or otherwise be politically involved, they should remain beyond pressure from special interest groups and their ilk, as is the Supreme Court today. I am inclined to think that their discussions and debates should be closed.

Convention members could probably be chosen by a process similar to choosing Supreme Court members. Likely members would be constitutional scholars and lawyers specializing in constitutional law but others would be needed to provide a broader understanding of today’s needs.

A constitutional convention seems appropriate. Maybe, it should be automatic every 100 years or so.