Sunday, May 31, 2009

Are Two Prices Better Than One?

In Australia, it's been the custom for home sellers to list two prices, a minimum and a maximum. The practice has turned up in suburban Long Island, reports Marcelle S. Fischler in The New York Times.

…Ms. Karekinian has joined a small group of pricing pioneers on Long Island: Rather than settling on one number for her five-bedroom colonial, she opted for a “value range price” of $999,000 to $1,194,876. She decided to adopt the tactic in listing the property last fall with Carol Poetsch of Prudential Douglas Elliman’s East Meadow office.
“I am not just going to say I want $1.3 and that’s final,” Ms. Karekinian said, signaling her flexibility but vowing that she won’t sell below the range. “Now I’m flexible — not stupid flexible, but flexible.”

Prudential Douglas Elliman is said to have begun using the strategy in 1996. The Times says that 180 homes in Nassau County and 360 in Suffolk County are currently listed by a range.
One advantage is obvious: Buyers scanning listings online usually set a minimum and maximum price, and these are round numbers (often chosen from a menu on the listing site). In the example above, a buyer whose maximum price was $1 million would presumably see a house listed at "$999,000 to $1,194,876," but not a house listed at a single price higher than a million. (Of course, this depends on listing sites being able to handle price ranges.)
I can think of a couple of other reasons why this may work. The range probably acts like an advertised reference price. Discount stores will have price tags saying something like "$14.99 COMPARABLE VALUE OF $25.00." Empirical studies and retail practice confirm that customers, even those who know better, are more likely to buy at $14.99 when reminded that they could be paying more elsewhere. In the case of a house, buyers will figure that if they can get it near the low end of the listing range, it's a bargain.
I suspect the biggest advantage of this trick may be simple confusion. Just about everyone knows that a listing price of $X typically signals that the seller is willing to accept a good deal less than $X. In this market, few sane buyers are going to offer list price. Having two prices upsets this comfortable strategy. Do you offer the low price of the range? Less than the low price? Or do you make an offer somewhere in the range? Maybe you really, really want the house and want to make a preemptive offer. Do you offer the high price?
All of the above make a certain amount of sense. Range pricing is likely to spread out the bell curve of offers. Since sellers choose an offer from the high end of the bell curve (or did, back when there were buyers) that ought to result in higher transacted prices.
Prudential apparently has some weird algorithm for devising its range prices. Another example given in the Times article is a Cape Cod listed at $399,000 to $458,876. The $399,000 is easy to understand. But where did they get $458,876, with six significant figures?

Tuesday, May 19, 2009

Do Credit Card “Deadbeats” Get a Free Ride?

In credit card industry parlance, a "deadbeat" is a customer who pays his bill in full each month, incurring no finance charges. Since most cards have no annual fee, deadbeats pay nothing for use of the cards. In recent days, there's been much speculation that the "free ride" is over. Congress' credit card reform bill is due to be on Obama's desk by Memorial Day. The purpose of the bill is to limit the fees and penalties imposed on those who don't pay their monthly minimums (the folks the rest of us might actually call "deadbeats"). Understandably, banks aren't crazy about the bill. They've been hinting that they'll take it out on the other deadbeats. This might involve discontinuing rebate programs or grace periods and introducing annual fees.
I'm a hard-core deadbeat. I don't pay fees or interest, and I get free credit between the time I make a purchase and pay for it. That adds up. Assuming a 6 percent cost of funds, one month's free interest amounts to a 0.5 percent "rebate" on everything I buy. That's not all. My main card (get this: a "Platinum Rewards Visa Card" issued by State Farm Bank) gives me an additional 1 percent rebate on purchases, good for paying my home insurance premiums. Since I'm going to pay my insurance anyway, that's as good as cash.
Am I getting a free ride? Not really. I am paying for that 1.5 percent total "rebate," just not in ways easy to see. Merchants pay credit card companies a service fee for all credit card purchases. The fee usually ranges from 2 to 4 percent. When gas stations first starting taking credit cards, they offered a "cash discount" rather than a "credit surcharge." The credit card companies knew enough behavioral economics to demand that. Increasingly, transactions are electronic, and that means there's always a third party getting a cut. Today, to do business with Amazon, iTunes, or car rental places, you basically have to pay by credit card. Ergo, these businesses build the 2 to 4 percent fee into their prices. That means I pay 2 to 4 percent more than I would otherwise, in order to give the credit card issuer its cut. The issuer than refunds 1.5 percent to me. It's still made a profit of 0.5-2.5 percent (less its expenses) on the transaction. As long as the expenses are less than 0.5-2.5 percent, the issuer is making money off deadbeats.
Banks may well use the new credit card regulations as an pretext to test how price-sensitive their customers are. Would you really give up your credit card if you had to pay a $35 annual fee? (My answer: no, not for the one card I really use. I would cancel a bunch of rarely-used cards in my wallet.) Issuers are unlikely to do anything that causes too many customers to cut up their cards. The business—even the deadbeat business—is too profitable.

Wednesday, May 13, 2009

Priceless Painting Marked Down to $6 Million

How much is a Michelangelo painting worth? Until recently, that question was academic. The Sistine Chapel frescoes aren't going anywhere, and only three portable Michelangelo paintings were known: a masterpiece in Florence's Uffizi Gallery and two unfinished works in London's National Gallery. Today Fort Worth's small and scrappy Kimbell Art Museum announced it had bought Michelangelo's earliest known painting, The Torment of St. Anthony.
Or did it? The New York Times write-up places a question mark in the headline ("By the Hand of a Very Young Master?") and brims with qualifications. It notes that one prominent Michelangelo expert, Michael Hirst, was a doubter. But Metropolitan Museum curator Keith Christiansen examined the work in the Met lab and believes it's authentic. The Met will be showing the work this summer, before it goes to Fort Worth.
You will find no reservations about authenticity in the Kimbell's press release, nor in the Texas media. The Dallas Morning News reports,

The Kimbell refuses to reveal what it paid, and no one in art circles is willing to put a price on a Michelangelo painting. Sotheby's won't guess what the Kimbell paid. It offers up its 2002 sale of a Peter Paul Rubens work, The Massacre of the Innocents, for $69 million as comparable, although rarity wasn't a factor as eight Rubens paintings sold at auction in 2002.
What most experts say is there's no Michelangelo precedent. "Priceless" is the consensus. But apparently there is a price for priceless. "We were able to afford it," says Lee, whose institution estimated that it had an endowment of $350 million in February.

The New York Times is (slightly) more forthcoming: "Although no one will disclose the price, experts in the field say they believe the figure was more than $6 million."
"Priceless" marked down to $6 million plus? That's not so surprising, really. Nobody knows what an authentic Michelangelo painting should be worth—and this isn't a positively indisputable Michelangelo. When you look at the history of ambitious reattributions, the odds aren't so good. Lately, pocketable Michelangelos have been crawling out of the woodwork. Last year, the Italian government spent over $4 million on a wooden crucifix purportedly by Michelangelo. Experts aren't so sure. One, Francesco Caglioti, felt that "The attribution wrongs Michelangelo, as well as the history of 15th-century Florence." He said that "every time something beautiful emerges, they attribute it to a famous name. It would seem like everything done in Renaissance Florence can be attributed to 10 people with a thousand hands."
In 1996 a scholar decided that a marble cupid in the French Embassy, New York, was by Michelangelo. It got a lot of press at the time and also a lot of negative verdicts from experts. After a while, the excitement died down.
For the sake of argument, suppose there was a magic machine that was able to determine the accuracy of any attribution. Scan the object (objet), type in the supposed creator, and it gives you a yes-or-no verdict. We try it on the Kimbell painting, and it says it's by Michelangelo. How much would it be worth then?
Well, it's not a great time to be selling nonessentials. Even so, an authentic Michelangelo would almost have to fetch 9 figures. Middling Picassos topped $100M pre-recession, and so did Gustave Klimt's greatest painting. Wonderful as Klimt is, he wouldn't necessarily make a list of the 100 greatest artists, or Western artists even.
The Kimbell painting would not be Michelangelo's greatest by a long shot. He would have been only 12 or 13 when he painted it, and it's a mere copy (in paint) of a famous print by Schongauer. It would still be in the ballpark of 100M, easy.
And if it was shopped around and sold for just over $6 million, that would count as a vote of no confidence. According to The New York Times,

Asked why the Metropolitan didn’t try to buy the painting, Mr. Christiansen replied: “The timing wasn’t right. We had other acquisitions on the dock.”

I doubt they're buying anything as important as an original oil and tempera painting by Michelangelo. The subtext is that Christiansen couldn't convince the Met's powers that be that it was authentic.
The Kimbell purchase illustrates two classic determinants of prices. One is risk-aversion. Nobody wants to buy something unless they're sure it's all they hope it is.
Dealers are in business to make money. They don't automatically ship masterpieces off to Fort Worth. Most of the world's great museums don't have a Michelangelo. The Louvre doesn't. The Getty doesn't, nor the U.S. National Gallery. Presumably the dealer, Adam Williams (who bought the painting for $2 million) made sure these and other institutions and collectors were informed of the painting. An easy-credit deal could have been arranged. That it wasn't implies that no other well-heeled buyers were sufficiently interested.
Why? Because the deciders-in-chief fretted that the painting wasn't by Michelangelo. Whoever approved the purchase would look like a fool, if and when it was shown to be a fake.
From a strict risk-neutral stance, the Kimbell purchase may make sense. Let's say that the chance it's authentic is 10 percent (hugely pessimistic, going by the press release). Then the expected value is 10 percent of 9 figures, or 8 figures. The presumptive 7 figure price looks great.
That's not the way museums (or most collectors) think, of course. They may be crass but not in that way. They demand 100 percent certainty and pay a premium for it.
The purchase also illustrates the "winner's curse." In an archeotypic, Ayn Rand free market, the highest bidder is whoever wants the commodity most. All well and fine. Introduce a note of uncertainty. The commodity may be what it seems to be and may not. In that case, the high bidder is whoever has the most optimistic estimate of the odds. This too could be fine, assuming that high bidder knows more than everyone else does. But suppose the high bidder is simply more unrealistic (not an unrealistic assumption).
I imagine that all museums and collectors concur in the pre-eminent importance of Michelangelo in the grand narrative of European art history. It appears, however, that there are great differences of opinion about the probability that this particular painting is by Michelangelo. This makes it likely that the high bidder will be an outlier on the attribution controversy.

Thursday, May 7, 2009

The Why of "Free" WiFi

WiFi is free at midprice hotels, and costs as much as $19.95 a day (plus tax) at expensive ones. A New York Times piece investigates the mystery and blames "branding agreements." In a 2008 survey, 49 percent of luxury or upscale hotels charge for WiFi, versus 16 percent for economy and budget properties. WiFi is most likely to be free at midprice chains, where all but 5 percent offer it free.