Thursday, July 01, 2004
Amnesty economics
As I was getting my haircut, I overheard an ad on the radio promising amnesty to Blockbuster patrons carrying balances from late fees; all you have to do is show up at a store. Presumably, some people rent a video, turn it in late at the drop-box, and then avoid renting a new video because they'd have to pay a late fee (the marginal price of rental is, in this case, perhaps $20!). Blockbuster wants to be able to rent these customers new videos at the market price (or in fact, any price above marginal cost), and in some cases may be willing to give up the late fee to get them back.
An interesting problem, an interesting solution, and my mind is warped enough that the first thing I thought was "oh, that's a time inconsistent solution!" Because if Blockbuster gets in the habit of issuing amnesties, a person carrying a big late fee balance may wait for the next one, rather than paying.
The executive who pushed this idea may have promised it was a one-time revenue enhancer, but if it works, they'll be tempted to do it again.
Or maybe I've just been reading too much monetary economics today...
An interesting problem, an interesting solution, and my mind is warped enough that the first thing I thought was "oh, that's a time inconsistent solution!" Because if Blockbuster gets in the habit of issuing amnesties, a person carrying a big late fee balance may wait for the next one, rather than paying.
The executive who pushed this idea may have promised it was a one-time revenue enhancer, but if it works, they'll be tempted to do it again.
Or maybe I've just been reading too much monetary economics today...
