Econ 101: Price Discrimination Redux

It occurs to me that one reason current Timbers season ticket holders snapped up the $99 tickets is this: many of them are probably Timbers Army folks who surmised - rightly - that there will be plenty of TA section tickets available when the general public gets to buy tickets and who also surmised - possibly correctly, we'll see - that if they bought $99 season tickets, they could resell them for a lot more than face value.

In other words, the $99 tickets were an arbitrage opportunity: buy them now and buy the regular TA section tickets later (it is general admission so it doesn't matter when you purchase them).  Then sell the $99 tickets later for more money.

Methinks the TA folks knew a good opportunity when they saw it...

RCTID!

Eco-nomics: Supply and Demand and the GM Volt

A Portland-based car writer, Edward Niedermeyer, has an Op-Ed in The New York Times today criticizing GM and the US government for what he sees as filings of the Volt:

...G.M.’s vision turned into a car that costs $41,000 before relevant tax breaks ... but after billions of dollars of government loans and grants for the Volt’s development and production. And instead of the sleek coupe of 2007, it looks suspiciously similar to a Toyota Prius. It also requires premium gasoline, seats only four people (the battery runs down the center of the car, preventing a rear bench) and has less head and leg room than the $17,000 Chevrolet Cruze, which is more or less the non-electric version of the Volt.

In short, the Volt appears to be exactly the kind of green-at-all-costs car that some opponents of the bailout feared the government might order G.M. to build. Unfortunately for this theory, G.M. was already committed to the Volt when it entered bankruptcy. And though President Obama’s task force reported in 2009 that the Volt “will likely be too expensive to be commercially successful in the short term,” it didn’t cancel the project.

Nor did the government or G.M. decide to sell the Volt at a loss, which, paradoxically, might have been the best hope for making it profitable. Consider the Prius. Back in 1997, Toyota began selling the high-tech, first-of-its-kind car in Japan for about $17,000, even though each model cost $32,000 to build.

By taking a loss on the first several years of Prius production, Toyota was able to hold its price steady, and then sell the gas-sippers in huge numbers when oil prices soared. Today a Prius costs roughly the same in inflation-adjusted dollars as those 1997 models did, and it has become the best-selling Toyota in the United States after the evergreen Camry and Corolla.

I think Neidermeyer makes some pretty fundamental logical errors. To start with, given production limitations, GM should set a price that does not leave too much excess demand, the rationale at this point for selling the Volt at below cost is only if supply far outstrips demand and they expect reasonable economies of scale.

Comparing it to the roll-out of the Prius is nonsense. Give that the Prius was really the first of its kind, Toyota was trying to build a market to get precisely these economies of scale. But fortunately for GM, Toyota has done all the heavy lifting. Hybrid electric cars are now an established part of the market. I can't see any reason to think that GM should sell the Volt at a big loss. I think GM has the luxury of selling it at the high price initially and lowering it to grow the market as costs come down.

The fact that the government has a substantial incentive program in place is a separate matter, surely GM can figure this in as it figures out the initial price and if demand is high enough, the subsidy will end up being almost entirely for GM, not for consumers.

Neidermeyer has a number of other complaints about the car itself: not big enough, not distinctive enough, etc. But this is for the market to decide, not a single car writer.  Over the next number of years we will see how the market feels about GM electric ventures and how well GM can parlay its initial investment in R&D into newer and better vehicles and technologies.  This will be the real test of GM and whether it has a future.

Econ 101: Price Discrimination

The Oregon State Beavers have finally learned a little something about price discrimination.  The Oregonian reports that they have increased seat sales by lowering prices - wow, who would have guessed? But you don't always want to sell every unit of a product that you can, especially when you have market power.  This is the lesson of the monopolist.

Consider the example of a downtown parking lot, you might wonder why, if a lot regularly has empty spaces, the lot owners don't just lower the price?  The reason is of course that to fill the lot they may have to lower the price so much that their total revenue actually goes down.  This is because they have to charge the same price to all of their customers.

The way around this is price discrimination which in this case means charging different customers different prices based on their willingness to pay.  Parking lots do a little of this, charging reduced all-day rates to customers that park before a certain time - the idea is that parkers who come in later in the day face a more competitive parking environment and are less price sensitive.

The general rule is that the more you can price discriminate the more you are willing to sell because selling more no longer means that you have to charge lower price to everyone. It is also generally true that the more you are able to price discriminate the more revenue you will be able to make.

In the case of a football stadium, price discrimination is easy: you can still charge a high price for the best seats while reducing the price of the more marginal seats, just as OSU has done.  Before you pass judgement on OSU for being so dense no to have figured this out before you have to realize that there is a constraint: you don't want to make it so attractive that folks that would normally pay for expensive seats find the good deal too tempting and would opt for the cheaper ones.  

An example of this that I have recently encountered is the current Timbers season ticket sales.  They started selling them first to 'priority groups' starting with current season ticket holders.  Now these would likely consist of some of the highest willingness-to-pay folks, but the Timbers also made a bunch of $99 season tickets available from the outset - and these were apparently so tempting even with their less desirable location that they were snapped up right away by the 'wrong' folks.

This decision confuses me - I would have thought that they would not have reduced the price of seats to such a low price until after season ticket sales had been opened up to non 'priority' folks.  But I guess the $99 price was a marketing gimmick to get people to consider season tickets from the start.

The difficulty in trying to get the 'right' people (the low willingness-to-pay people) to buy the low price tickets is a general difficulty in price discrimination.  When you can't tell the willingness-to-pay of customers it becomes tricky to design a pricing scheme that gets people to self-select into the right categories.  Clearly if the goal of the $99 Timbers tickets was to get marginal fans to become season ticket holders, it failed.  So whether the Beavers were smart in reducing the price of these tickets depends on whether people that would not normally have attended a game buy them or whether customers swap high priced tickets for these.  Apparently, as overall sales have increased, it looks like mostly the former.

Each Year of Education Matters

States like Oregon are in a fiscal mess as a result of the recession and are being forced to go through some 'belt tightening.' In Oregon, since the state general fund is vital to education funding, this means some pretty severe cuts to K-12 education.

But does it really matter that much if a kid has a year or two of substandard education from such budget cuts through such measures as reduced instructional days or larger class sizes?

Yes.

New research by a gaggle of economists has found that the quality of a child's kindergarden itself has lifelong implications for children. Here is The New York Times' article and here is a follow up blog post. From the article:

How much do your kindergarten teacher and classmates affect the rest of your life?

Economists have generally thought that the answer was not much. Great teachers and early childhood programs can have a big short-term effect. But the impact tends to fade. By junior high and high school, children who had excellent early schooling do little better on tests than similar children who did not — which raises the demoralizing question of how much of a difference schools and teachers can make.

There has always been one major caveat, however, to the research on the fade-out effect. It was based mainly on test scores, not on a broader set of measures, like a child’s health or eventual earnings. As Raj Chetty, a Harvard economist, says: “We don’t really care about test scores. We care about adult outcomes.”

Early this year, Mr. Chetty and five other researchers set out to fill this void. They examined the life paths of almost 12,000 children who had been part of a well-known education experiment in Tennessee in the 1980s. The children are now about 30, well started on their adult lives.

On Tuesday, Mr. Chetty presented the findings — not yet peer-reviewed — at an academic conference in Cambridge, Mass. They’re fairly explosive.

Just as in other studies, the Tennessee experiment found that some teachers were able to help students learn vastly more than other teachers. And just as in other studies, the effect largely disappeared by junior high, based on test scores. Yet when Mr. Chetty and his colleagues took another look at the students in adulthood, they discovered that the legacy of kindergarten had re-emerged.

Students who had learned much more in kindergarten were more likely to go to college than students with otherwise similar backgrounds. Students who learned more were also less likely to become single parents. As adults, they were more likely to be saving for retirement. Perhaps most striking, they were earning more.

All else equal, they were making about an extra $100 a year at age 27 for every percentile they had moved up the test-score distribution over the course of kindergarten. A student who went from average to the 60th percentile — a typical jump for a 5-year-old with a good teacher — could expect to make about $1,000 more a year at age 27 than a student who remained at the average. Over time, the effect seems to grow, too.

...

The crucial problem the study had to solve was the old causation-correlation problem. Are children who do well on kindergarten tests destined to do better in life, based on who they are? Or are their teacher and classmates changing them?

The Tennessee experiment, known as Project Star, offered a chance to answer these questions because it randomly assigned students to a kindergarten class. As a result, the classes had fairly similar socioeconomic mixes of students and could be expected to perform similarly on the tests given at the end of kindergarten.

Yet they didn’t. Some classes did far better than others. The differences were too big to be explained by randomness. (Similarly, when the researchers looked at entering and exiting test scores in first, second and third grades, they found that some classes made much more progress than others.)

Class size — which was the impetus of Project Star — evidently played some role. Classes with 13 to 17 students did better than classes with 22 to 25. Peers also seem to matter. In classes with a somewhat higher average socioeconomic status, all the students tended to do a little better.

But neither of these factors came close to explaining the variation in class performance. So another cause seemed to be the explanation: teachers.

Some are highly effective. Some are not. And the differences can affect students for years to come.

This is, frankly, a staggering result. When I have talked about the Obama administration's emphasis on collecting and examining longitudinal eductation data I tell them that it represents a way of moving beyond test scores as measures of tecaher and school effectiveness. I emphasize that it allows us to focus on outcomes not test scores. This is a perfect example. I also emphasize that it is important to try reforms so that we can tell what works. In this case it is the amazing STAR study done in Tennessee.  As I have written about before both here and in The Oregonian the STAR study provides a unique opportunity to study the effect of class size - which was found to have real and important impacts.  But, as this study emphasizes, it is the teachers themselves that are the most important factor by far (and as I have said it is impossible to predict success in the classroom of potential teachers so it is important to have a way of rewarding the good ones and discouraging the bad ones).  


Anyway, what this study says is that kindergarden itself has lifelong consequences for kids and it is not hard to imagine that this is true, to varying degrees, of each individual year of education.  So these occasional budget slashing years are doing irreparable harm to our kids.  And as the follow up blog post emphasizes, unlike a lot of other effects, the effect identified in this paper (in terms of adult outcomes) are the same for rich and poor kids.  So everyone should be concerned.


And if this isn't a clarion call for a permanent rainy-day fund, I don't know what is.

Did the Stimulus Work? Two Economists Say 'Yes.'

The New York Times reports on a study by Alan Blinder and Mark Zandi:

Like a mantra, officials from both the Bush and Obama administrations have trumpeted how the government’s sweeping interventions to prop up the economy since 2008 helped avert a second Depression.

Now, two leading economists wielding complex quantitative models say that assertion can be empirically proved.

In a new paper, the economists argue that without the Wall Street bailout, the bank stress tests, the emergency lending and asset purchases by the Federal Reserve, and the Obama administration’s fiscal stimulus program, the nation’s gross domestic product would be about 6.5 percent lower this year.

In addition, there would be about 8.5 million fewer jobs, on top of the more than 8 million already lost; and the economy would be experiencing deflation, instead of low inflation.

The paper, by Alan S. Blinder, a Princeton professor and former vice chairman of the Fed, and Mark Zandi, chief economist at Moody’s Analytics, represents a first stab at comprehensively estimating the effects of the economic policy responses of the last few years.

“While the effectiveness of any individual element certainly can be debated, there is little doubt that in total, the policy response was highly effective,” they write.

...

But the new analysis might not be of immediate solace to officials in the Obama administration, who have been trying to promote the “summer of recovery” at events across the nation in the face of polls indicating persistent doubts about the impact of the $787 billion stimulus program.

For one thing, Mr. Blinder and Mr. Zandi find that the financial stabilization measures — the Troubled Asset Relief Program, as the bailout is known, along with the bank stress tests and the Fed’s actions — have had a relatively greater impact than the stimulus program.

...

Told about the findings, another leading economist was unconvinced.

“I’m very surprised that they find these big impacts,” said John B. Taylor, a Stanford professor and a senior fellow at the Hoover Institution. “It doesn’t correspond at all to my empirical work.”

Mr. Taylor said the Fed had successfully stabilized the commercial paper and money markets, but he argued that its purchases of $1.25 trillion in mortgage-backed securities have not been effective. And he said the Obama administration’s stimulus program has had “very little impact and not much to show for it except a legacy of higher debt.”

Portland Home Values: Case-Shiller May Numbers

Once again, I am farming this out entirely to the Wall Street Journal.  Portland's home values increased slightly from April and from the previous year, but what little improvement there was most likely is representative of the federal incentive programs.  Portland is, and always has been, unexceptional - middling in terms of increases and decreases in home values. Here is the WSJs chart:

Home Prices, by Metro Area

Metro Area	May 2010	Change from April	Year-over-year change
Atlanta	107.82	2.0%	1.7%
Boston	155.95	1.6%	4.8%
Charlotte	116.39	0.3%	-2.8%
Chicago	121.9	1.2%	-1.5%
Cleveland	105.85	1.0%	3.7%
Dallas	119.93	1.5%	2.9%
Denver	128.24	0.6%	3.6%
Detroit	68.29	0.7%	-2.5%
Las Vegas	102.35	-0.5%	-6.5%
Los Angeles	174.67	1.7%	9.7%
Miami	146.33	0.9%	1.2%
Minneapolis	122.63	2.8%	11.6%
New York	170.45	0.8%	-0.4%
Phoenix	111	0.9%	7.2%
Portland	147.98	1.2%	0.7%
San Diego	163.11	1.1%	12.4%
San Francisco	142.16	1.7%	18.3%
Seattle	146.82	1.2%	-1.4%
Tampa	138.29	0.9%	-1.5%
Washington	182.1	1.5%	7.4%

Source: Standard & Poor’s and FiservData

New President at Lewis & Clark

As the Oregonian reported today, Barry Glassner has been hired as the new president at my alma mater, Lewis & Clark College.  This appears to be an extraordinarily good hire, someone with a record of experience and success and will go along way to erase the memory of Thomas Hochstetter, the previous president whose appointment baffled me.  He was embarrassingly bad and a real lightweight professionally, I couldn't understand why the college could not find someone better.

Happily, the college seems to have punched well above its weight this time.  One suspects that Portland itself had a lot to do with it for his CV has no liberal arts college experience on it either as a student or professional. His choice is odd, given that he was on tack for a university president position, so one, in fact, hopes that it was the allure of Portland that brought him to LC because otherwise I would be suspicious.

I understand that 90% of his job is external relations and I wish him well, but I also hope that he strives to improve the quality and quantity of the academic research that college faculty engage in.  Good liberal arts colleges are focused on teaching but also have faculty that are engaged and current in their fields.  This has not always been the case at LC.

So welcome Professor Glassner, and good luck.

Sellwood Bridge

The Sellwood Bridge, which I cross to commence my commute to Corvallis, is now in the next phase of planning and looking for input. Above is the steel deck arch alternative which is my preferred bridge type. I think it is not nearly as ugly as the box girder type (think Glen Jackson I-205 bridge) and not inappropriately scaled like the through arch nor as showy as the extradosed. I also think that it matters as much what you can see from the top as how it looks from afar and this type crates a nice flat top with which to emphasize views. I also want the top to be pretty as well, with nice lighting and railing so you can't blow the entire budget on the structure itself.

But what I think matters little, what we all think is the key, so go and tell them what you think.

Portland and Exports

Just how important are exports to the Portland economy?  Very. This is from a new Brookings Institution report on metropolitan areas export activities.

Sudeep Reddy in the Wall Street Journal's Econ Blog writes about the report:

The Obama administration wants to double U.S. exports in five years. But most of the nation’s metropolitan areas aren’t properly equipped to ramp up export sales, says a new Brookings Institution report.

Metro areas need a “re-education” about the value of exports, said Bruce Katz, who authored the report with Emilia Istrate and Jonathan Rothwell of the think tank’s Metropolitan Policy Program. “There’s a weird disconnect in this country,” Katz said in an interview. In other major exporting nations, “there really is a natural translation of national policy to metro implications.”

Like many other studies, the Brookings report to be released Monday says exports can be a key source of U.S. growth and job creation. And it concludes that the federal government needs to push harder on negotiations around exchange rates, trade agreements and enforcement of existing trade laws.

But it also offers recommendations specific to local and regional concerns: 1) Federal and state governments should give metro areas support on export promotion, innovation through research and development, freight planning and data-collection policies. 2) Metro leaders must improve their exporting abilities and learn from the few metro areas that actually developed and implemented successful export strategies.

The report quantifies for the first time the level of export production (in both goods and services) in the top 100 U.S. metro areas, along with profiles for each area showing key industry sectors for exports and growth rates.

The top five:

New York-Northern New Jersey-Long Island, NY-NJ-PA (led by chemicals)
Los Angeles-Long Beach-Santa Ana, CA (computer and electronic products)
Chicago-Naperville-Joliet, IL-IN-WI (machinery)
Houston-Sugar Land-Baytown, TX (chemicals)
Dallas-Fort Worth-Arlington, TX (computer and electronic products)

The study also found that four metro areas doubled the inflation-adjusted value of their exports over a five-year period from 2003 to 2008, before the downturn hit. (The Obama administration goal calls for doubling the nominal value of U.S. exports over five years from their low point in 2009.) The four areas: Houston, mostly through sales of chemicals; Wichita, Kan., through its aviation sector; Portland, from computer and electronics products; and New Orleans, from oil refining. [emphasis mine]

Hmmm...this sounds a lot like the stuff I have been pushing save for the lack of emphasis on education (though the R&D stuff usually happens in partnership with universities). Here is the report on Portland. As I have mentioned many times Oregon is well above average in terms of states that rely on exporting abroad (not surprising give our west coast location perhaps) but this is also true of Portland. The logical assumption was this was true, but it is nice to see hard data.

Here are some interesting graphs and charts from the report.  These show the outsized relative importance of exports to Portland (fitting for a city named Portland I suppose).

This shows the absolute importance of trade to Portland.

Here is where it all goes.

Interestingly, the share of stuff going to China is quite a bit lower than in the state as a whole. I am not entirely sure what explains this (I have not dug into the data deep enough) but I suspect timber products and agriculture.  I am also surprised that as much computer and electronic manufacturing is going to Mexico and Canada as China.  But there you are - this is why it is nice to have facts to talk about.

Oregon Budget Mess, Part 2

From the O:

At a minimum make this in real dollars, not nominal, but if you really want to inform, take out the federal dollars and put this in terms of percent of state GDP.

By the way, this is the construction site across the street from my office (which is located behind the photographer). Remember the wee little roller that was causing unsettlingly large tremors in my 100+ year-old brick building?  This is the reason.  When this cascade subduction quake-zilla thingy goes down I hope I am no where near my office...

The Oregon Budget Mess - Myths and Reality

In an otherwise very solid piece on the Oregon budget crisis by Harry Esteve in The Oregonian, there are a few high profile misfires.  I am most disappointed in this list which I think is misleading:

Eight reasons Oregon is in deep budget trouble
1. Recession: Unlike past economic troughs, this one was too deep, too vicious to muddle through with nips and tucks.
2. No sales tax: Our heavy dependence on income taxes to pay for schools and state programs leaves us vulnerable when jobs dry up.
3. Failure to apply spending brakes: Lawmakers went on a spree in 2007 that came back to bite them.
4. Dinky savings accounts: The state's first-ever rainy day fund, established in 2007, was all but depleted within two years.
5. Ballot measures approved by voters: Property tax limits, longer prison sentences, kicker rebates and mandatory parks spending leave little wiggle room when income stalls.
6. Public employee benefits: Most state employees get fully paid medical insurance. And the retirement system, despite rollbacks and changes for newer employees, still has old guaranteed returns and present retirement contributions that add up to soaring future costs.
7. Federal stimulus: It saved jobs for two years, but now it's going away and the economy did not recover fast enough to replace it.
8. The kicker: If the economy takes off faster than state officials anticipate, Oregon could be sending money back to individuals and corporations while cutting schools and services.

#1 is clearly correct, this is the worst recession since the great depression, there is no way to escape its downward pull.  But #2 is simply wrong.  As I have illustrated in this blog through a rather extensive bit of research, a sales tax would not solve anything as consumption and income are very highly correlated.  Sales taxes are almost as volatile as income taxes.  It is the shift away from property taxes that contributed most the the current volatility of state revenues - which is alluded to in #5.  [Though Ironically de-coupling property taxes from market values helped a tiny bit as the housing crisis hit] #6 is also misleading.  I don't know of a full accounting for all state employees, but the relatively generous benefits I get as a state employee are more than outweighed by the much lower salary I get relative to my peers.  I accepted a salary that was 25% below a competing offer when I moved back in 2006.  I had a very, very strong preference for living in Oregon, but we are at a competitive disadvantage amongst those without such preferences.

I do agree most strongly with #4 as you all well know.  In fact I think a good rainy-day fund built into the kicker would render the kicker question (#8) moot.   I think this is the #1 priority for the state legislature going into the next session.

Beeronomics: Econ 101 - The Cost of OBF Beer

By the way, as an aside, with my little rumination on the price of a token at the OBF remaining the same for eons, it occurs to me to point out that while the price may not have risen for beer the cost certainly has.

To phrase this as a question for my students and other economics groupies: the buzz tent aside, all of the beer require one token a pour, so do all of the beers cost the same?  Answer: no.

To see why you have to think like an economist.  In economics the true cost of something includes the opportunity costs, what you have to forego to get it.  Well, at the OBF some popular beer have long lines while for others you can walk right on up. Thus the costs are different - the more popular beers cost more because you have to wait longer, thereby foregoing the opportunity to chat with friends and the like.

So when I say the price of the tokens has not changed, that is not the same as saying the cost has not gone up - it has, in the form of bigger crowds and longer waits.

Class dismissed.

Financial Regulation and the Volker Rule

As seen by The New Yorker.

Beeronomics: The Oregon Brewers Festival

I got back from my little vacation just in time to fulfill my annual obligation to meet up with old Lewis & Clark College buddies at the OBF.  We bumped our little rondez-vous up to Thursday this year as it has gotten so popular that even meeting on Friday at the Noon opening exposes us to uncomfortably large crowds.  Fortunately Thursday is still reasonable and the weather yesterday couldn't have been more delightful.

But this raises the question in my mind (and in the mind of my fellow economics major): why after all these years is the price essentially the same as it ever was - or in real terms even cheaper? Put another way, why don't they double the prices and start to limit the crowds?  This suggestion was met immediately with derision form our humanities major friends who considered the suggestion elitist and just the sort of crap you could expect from economists.  I suspect that the answer is in the objective function of the OBF organizers.  The festival is supposed to be a showpiece for craft beer and the more people they can expose the better.  They want the festival as big as can be.  For those of us who dislike crowds fortunately there is still Thursday, which is reasonable in terms of population.  I shall get nowhere near the festival today or this weekend.

But you should: there are some great beers to be sampled.  I particularly liked Boundary Bay's German Tradition Double Dry Hopped Pale Ale.  It was excellent and the German Tradition hops interesting if a little astringent.  This year's Collaborator Pilsner is a real winner and will be an excellent choice for the weekend which is supposed to get hot.  Green Flash's LeFreak is interesting and great - hoppy Belgian.  FInally for you hop heads look no farther than THE HOPOPOTAMUS inspired Hop Valley Alpha Centuri Binary IPA.  Er, what were those hops again?  Ah yes, Simcoe, Cascade, Amarillo - a coincidence? I think not.  And I have become a huge fan of Kolsch, especially on hot summer days, so if you are looking for a refreshing beer in the 90-something degree heat try the Three Creeks Creekside Kolsch.  You will not be disappointed.

Oh and for the love of all that is good and true: avoid the Three Skulls Hop The Plank IPA, it is horrible.

Sadly THE HOPOPOTAMUS was not invited, but based on the AGs recent interpretation of the homebrew law, the OLCC would have banned its consumption anyway.

Anyway, go, have fun and explore good beers.  One obvious trend that mimics the local scene is the rise of Belgian styles, so this is a great opportunity to get to know those as well as the traditional hop forward styles we Northwesterners love.

Oh and check out all of the banners flying in the tents.  These things are getting seriously old now and there are as many defunct breweries represented as thriving ones.  Which just goes to my point about the inherently turbulent nature of the business.

Soccernomics: The Timbers, The Beavers and Paulson

Ross William Hamilton/The Oregonian

The folks that think that the PGE Park makeover for soccer is folly must believe that Merritt Paulson is a naive rube. I think they misunderestimate him. Paulson appears to be a sharp businessperson and, from my small sample of personal interactions with the Timbers front office, he appears to have created an top-class organization, at least on the business end of the deal. I recently purchased my season tickets and had a few questions and concerns was very impressed by the response I got. I even complained recently about the abrupt logo change after buying the boy a t-shirt and got a very professional and courteous response from the company contracted to sell Timbers merchandise.  I think Merritt saw an opportunity in soccer and Portland and has been shrewd in exploiting it and navigating the treacherous waters of local politics.

The news that Paulson is likely selling the Beavers comes as no surprise, with no future in Portland and soccer in the ascendancy, Pauslon's best bet right now is to focus on the Timbers. But don't think he is taking a bath on his Beavers investment: he bought the Beavers and Timbers together in 2007 reportedly for around $16 million and is in negotiations to sell off the Beavers alone for $20 to $25 million. Not bad  for a three year ROI - shrewd indeed.

I, for one, will be sad to see them go and sad at the loss of the lazy summer evenings and afternoons in PGE Park watching baseball.  It is great to know you can walk up, buy a general admission ticket and find a great seat.  But the fact is that PGE Park just doesn't work for baseball in Portland but is great for soccer and soccer is on the rise.  The World Cup ratings bonanza experienced by ESPN and Univision evidences a growing appetite for the sport in the US.  Here is a great recent article from Fortune about the Timbers and Beavers:

FORTUNE -- Portland, Ore. is the city of a thousand nicknames. "Stumptown," perhaps its oldest, harkens back to the region's logging roots. "Beervana," a nod to the city's renowned craft brew scene, is another favorite. Rumor has it, violent protests prompted George H. W. Bush's staff to christen the city "Little Beirut." But if Henry Merritt Paulson III has his way, "Soccer City USA," may become Portland's next big moniker.

The son of former Treasury secretary Henry Paulson, Merritt, who goes by his middle name, bet big on Portland's underserved sports market in 2007, when he convinced his family to buy the AAA baseball Portland Beavers and minor league soccer Portland Timbers for an estimated $16 million. Four years later, the investment may begin paying off when, riding the wave of post-World Cup popularity, the Timbers become Major League Soccer's 18th franchise in 2011, and Paulson, a 37-year-old former NBA and HBO executive, becomes the league's youngest owner.

"The timing is terrific," says Paulson, overlooking the field from his PGE Park office. Tall, thin, and with a collection of baseball and soccer gear strewn about his office, he looks like he could rip off a batting practice session at any moment -- but the constant ding of emails hitting his inbox shows how unlikely that is.

"Anybody who's doubts soccer's relevance need only look at the ratings and the attention that the World Cup has received here in the states," he says. "The awareness and the interest is at a high point."

On the other hand, interest in Portland Beavers baseball couldn't be any lower. Since being named a charter member of the Pacific Coast League in 1903, the team has existed as various franchises under a slew of different owners, and it has been affiliated with an array of major league teams.

Currently, the Beavers are the top farm team for the first place San Diego Padres. But on this day, most of the Beavers' 19,566 seats will sit empty as fewer than 2,500 fans tip the turnstiles to watch the team's ninth inning rally fall short. The Beavers have played in multi-use PGE Park since 1956, and currently share the stadium with the Timbers. But next year, under the MLS's $35 million expansion agreement, they will be evicted. The MLS mandates that their teams play in soccer-specific stadiums. So after $31 million of public and private-funded renovations, there will be a new pitch in Portland, but it won't be for baseball.

MLS's Game Plan

The MLS's edict is grounded in savvy business planning, as the league hopes to dodge financial troubles that have plagued past, now-defunct American soccer leagues. "The MLS has built itself for the long haul," says Paulson. "It's been fiscally conservative and prudent, as well as successful in developing soccer specific venues, which is crucial." According to MLS Commissioner Don Garber, soccer-specific stadiums are necessary to maximize revenue through premium seating, television-optimized sight lines, scheduling priority, and increased advertising opportunities, including naming rights.

Considering the league's track record, it's hard to argue with Garber's recommendations. Founded with the proceeds of the U.S.-hosted 1994 World Cup, the league began with ten teams in 1996 and will number 20 teams by 2012. In 2007, MLS also saw considerable growth after the 2006 World Cup, with David Beckham signing with the Los Angeles Galaxy, the signing of a 10 year $100 million clothing and equipment deal with Adidas, and with Toronto -- one of its most profitable teams -- joining the league.

Expansion fees, which are somewhat commensurate with team values, have also climbed in recent years. For example, Toronto payed $10 million to join MLS in 2007, while the Seattle Sounders paid $30 million to join in 2010. Montreal, the next team to join after Portland and Vancouver, B.C. launch in 2011, will pay $40 million to become a member in 2012. The fees give teams rights to operate a club in their market, the opportunity to join the board of governors, and an ownership share in MLS's marketing arm.

If Seattle's success is any indication, the potential for Portland and Vancouver is promising. The Sounders were just named Professional Sports Team of the Year by Sports Business Journal, beating competition from the NBA, NFL, NHL and MLB. Partially owned by Paul Allen, the team plays at the Microsoft (MSFT, Fortune 500) co-founder's Qwest Field, and averaged 30,000 fans per home game in their 2009 debut season. In 2010, the stadium expanded its soccer capacity to nearly 36,000 seats, and has continued to sell out every match along the way. "In my view, this is one of the most successful launches of a pro sports franchise ever," says Garber.

With about 20,000 seats, Portland can't match Seattle's attendance, but the league still expects it to perform well and hopes some Pacific Northwest rubs off on the team. As a minor league soccer squad, they already pack the stadium and recently sold out a "friendly" exhibition match against Seattle in just six days.

A loud, raucous group calling themselves "the Timbers Army" occupies an entire section of PGE Park and stays on its feet the entire game. Away from the pitch, Adidas makes its North America headquarters in North Portland while Nike's (NKE, Fortune 500) worldwide nerve center is in nearby Beaverton. Local youth soccer participation levels are through the roof, and the area's televised soccer viewing is among the highest in the nation, says Garber. "There's clearly something very special taking place in the Pacific Northwest as it relates to soccer," he adds.

[Read the rest at Fortune]

The lingering question is why hasn't Portland supported the Beavers in greater numbers? Theories abound about whether the city is a 'baseball' town and I don't really know the answer, but decent MLB ratings on Portland TV suggest something else about the reality of professional sports in this media saturated age: when the best is easily available in your home, going out to watch minor league baseball feels like a compromise - especially for a town the size of Portland.  I just don't think minor league sports work well in big cities anymore.  I have a sense that a MLB team would be well-supported, but who knows?  We'll probably never find out.

Anyway, as for me, I have my Timbers tickets and am looking forward to the atmosphere that the new PGE Park will provide for soccer and for never-ending advocacy of moving the small time stuff out so that the Timbers can play on grass. I will miss the Beavers though and those lazy nights at the Park with friends and kids.

Economist's Notebook: Paying Students for Grades

I am about to go off on another short vacation, but this one will be without the internets (and phone, and cell phone and television and newspaper) so no posting until Friday after this post today.

And no time for a proper blog post today except for a quick comment on a Susan Neilsen column on Sunday about paying students for achievement.  In her column she is skeptical (but I am not sure that anyone has seriously suggested this as a state-wide policy, have they?) and mentions some disappointing results from a Harvard econ prof.  That prof would be Ronald Fryer and he has indeed had poor results from paying disadvantaged students for good grades.

What is interesting is something Steve Coate told me recently when I had lunch with him and three other present and former Cornell faculty who were all in town to attend the Western Econ Assoc. Annual Conference.  Steve had recently had a visiting prof. stint at Harvard and recalled that, during a conversation, Fryer had explained that the problem with paying kids for results is that they don't understand the production function.  What he meant by that is that it is no good paying kids to get As when they have no idea how to go about earning As.  What you have to do, Steve recalled him saying, is pay them for the process of learning, like some money for reading ten pages of a textbook.  Apparently there is some division among Harvard faculty about whether this is Fryer's opinion or what the data say themselves, but I found it interesting and reasonable.  Let's just say that it sounds notional and there may not yet be the data to support the theory.

Okay, that's all I got.  See you on Friday.

Beeronomics: For Great Northwest IPAs

I am in full vacation mode again for a few days while relatives are visiting, so I leave you with this bit of eye candy.  This is from a great NW IPA - off contest that I held with some friends.  They are, in L-R order, Ft. George Vortex, Pelican's IPA, Bear Republic Racer 5 and Ninkasi's Total Domination IPA.  Not pictured: THE HOPOPOTAMUS, which was there in a bottle but never got opened.

The Ft. George was in a growler that was by then two days old, so it was not at its freshest peak so it was at a disadvantage, but it was clearly the most fecund: it smells, tastes and feels alive and all in the best possible senses. Racer 5 is probably the other beer that has that floral essence infused and it is no accident that these two are the two unfiltered beers.  Both Pelican and Ninkasi are cleaner in that sense, a crisper mouthfeel and taste.  What I find remarkable about the Total Domination is the balance between crispness, flavor and nose. It was my pick when pressed - it is a phenomenal beer.  But the really good news is that you don't have to pick and you can let your love of variety (a general assumption in economics about peoples preferences, by the way) carry you away to the far reaches of the beer cooler in the market.

When I demanded that they pick one, the others found it hard to choose a favorite as well, especially since, after a few sips of each, all subtlety is lost - you palate has been nuked.  Since the Vortex was slightly stale, the other winners were Racer 5 and Ninkasi, but the Racer 5 pick was thought to be for Pelican (see below).  We all agreed that you cannot go wrong with any of these.  In fact, they were picked because they represent my very favorite beers over all.  I wanted to add a Hair of the Dog Blue Dot to this flight, but alas it is not in season (oh please, Alan Sprints, make this a year round beer!) and I would have added Double Mountain's IRA, but they do not bottle and I had been in Astoria not Hood River.  So I recommend any of these without reservation and since Ft. George is not available in a bottle, get it when you can.  Double Mountain is easy to find in Portland, but for some reason the IRA is not - always with the Hop Lava.  That's what a cute name buys you, I guess.

Oh and, by the way, we started this as a blind test but we all found it easy to tell which was which.  Almost immediately there was a consensus.  Except for one problem, we all mixed up the Pelican with the Racer 5.  Which, in retrospect, is embarrassing - they don't seem alike at all, especially the way they look.

THE HOPOPOTAMUS would have stood up pretty well against these beers but I decided not to add it as I wanted to keep it a fair fight.  We did later crack my latest attempt at a NW Best Bitter.  Which is getting there but still a work in progress.  I switched to Whitbread Ale yeast and got some surprising results.

Anyway, got to go entertain the in-laws.  Have a great weekend - pick up one of these beer and let me know what you think.

Beeronomics and Economist's Notebook: Creative Destruction, Shut-Down Conditions and Roots

Word that Roots Brewing was in trouble has been passed around for quite some time now, and recently John Foyston reported on the fact that Roots was up for sale, but it was still a bit of a shock (and quite sad) to get the word that Roots was closed for good.

But while the beer enthusiast in me is saddened, the economist in me sees this as (curiously perhaps) a sign of a very healthy beer economy in Portland.  A few weeks ago I attended Greenlight Greater Portland's annual Economic Summit and, while talking to Joe Cortright, Rich Read of The Oregonian came up and we were talking about the economy and small businesses. I was quoted as saying that it doesn't bother me to see many start-ups fail and what I meant by that is that in a healthy competitive economy many new ideas will be tried, will try to find markets and will not succeed because of other better ideas or more well-run businesses. The key is that new businesses are tried - and in a healthy marketplace only the best ones will survive.  Survival of the fittest if you will, but in economics we call this process of new and better ideas and businesses taking the place of established ones as 'creative destruction' and we view it as a good thing. [The term was popularized, though not coined, by Joseph Schumpeter] In Portland it is quite shocking to get bad food or bad service in a restaurant because there are so many great ones out there that if you don't do it very well, you won't last.  This is a good thing.  What would be bad is if we didn't see this dynamic and mediocre businesses succeeded.

Let me say straight out that Roots problems were not with the beer itself, which was fantastic, but with other aspects of the business.  My own history with Roots is troubled: the only two times I went to the pub with the intent to get a meal at lunch, I found the pub closed when it was supposed to be open.  I have bought their beer in the bottle many times, but I was one of the customers that got a bottle that shouldn't have been on the shelf, it was, quite simply, bad.  Complaints of bad service at the brewpub abound and with so many great choices for brewpubs around town, it is not hard to see why Roots quickly found itself in trouble. The point is it probably wouldn't have been in trouble in an economy in which there was not much brewing going on, so what the closure of Roots symbolizes is that, regardless of how wonderful the beer was, there is so much other wonderful beer being produced and served in Portland.  Long live Beervana, indeed.

The other thing that Roots' demise made me think of is the example of short-run and long-run shut down conditions that we typically talk about in a variety of economics classes, especially intermediate micro.  In econo-speak the short-run is any amount of time in which there are fixed costs.  Take for example a lease on a building in SE Portland: if you sign a one-year lease and you are on the hook for the lease payment regardless if your business is open or not.  In this case, it may make sense to keep the business running even if you are loosing money.  Why? Well, if you are able to cover your variable costs (labor, electricity, inputs, etc.) and part of your fixed costs (maybe one-half of your lease payment) it is better than shutting down and having to pay your entire fixed cost without any revenue.  In the long-run (a time period in which there are no fixed costs) you would shut down, because you would not renew the lease and so negative profits are a sufficient shut-down condition.

It would be great to see Roots rise again, perhaps as a commercial brewery only, but with the rapidly evolving dynamic of the local beer scene, it is hard to see Roots capturing the attention of the local beer crowd again.  Just like a chef who closes a restaurant, it may be time for Craig Nicholls to re-invent himself and his beer company.  And I think Roots will be far from the last brewery to close locally, with so many new places opening up, the forces of creative destruction will be pretty fierce.  Even though craft beer continues to whittle away at the market share of the macro-brewers, it is likely that the struggles to find shelf-space, tap handles and pub crowds will become more and more intense.  But just like the wonderful and creative food scene that has arisen in Portland, this dynamic is likely to create better and better beers and pubs.  So embrace it, I say.

Oregon June Unemployment: 10.5%

Oregon's unemployment situation remained stuck in a rut last month with a dismal jobs performance of 3,600 jobs lost on a seasonally adjusted basis.  Not much time to expound on this today, but it kind of speaks for itself.  Depressing

Beeronomics: Beer Pints Per Mile

A comment on my post about how to choose airline travel for maximum efficiency directed me to the AirScape Engineers Blog wherein I found this wonderful little chart (more on the specifics of the calculations can be found there):

Mode	kW-h/km	kcal/mile	Miles/gallon	kW-h/mile	beer-pints/mile
Bicycle	0.0361	50	629	0.058	0.23
747	0.2521	350	90	0.407	1.59
Electric Car	0.1550	215	146	0.250	0.98
SUV	1.5128	2098	15	2.440	9.54
Train	0.0820	114	277	0.132	0.52

Now, why "Beer Pints Per Mile" isn't the metric of choice in the field is beyond me - it is brilliant!  Here is how I figure it: distance from my house to the Pilsner Room, Deschutes Portland Pub, Rogue is about 6 miles, or 12 miles round trip.  Thus by riding my bike, which I always try and do, burns about 3 pints.  It is rare that I even make it to three pints unless I am lounging for many hours, so essentially my beer consumption is entirely guilt free!  HUB is only about 3 miles, so a round-trip is only 1.5 pints, but then they serve their beer in crazy 13-point-something ounce glasses so I am good for about two.  It would be interesting to know how walking fares in this comparison.

Anyway, time for a biking-themed shirt that says "powered by pints"!

And, by the way, AirScape is an Ashland (or Medford?) based company that sells house fans to use natural ventilation to cool houses.  Cool.