Even after JetBlue screwed up big time, people are still going back:

Because JetBlue worked hard to acknowledge the importance of customer satisfaction early, the carrier has, in effect, built in a forgiveness contingency in it’s implied agreements with its customers.

Categories: Business and Economics, Incentive Centered Design, Marketing, Strategy, Travel
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Turner Broadcasting and their ad agency are paying the city of Boston $2 million after law enforcement there confused a glowing Mooninite advertising the new AquaTeen Hunger Force movie with a terrorist threat.  Half will be “goodwill” funds given to the agencies for training and equipment.  Does this mean they just got a million dollars for their screw up?  Will they use this to prevent a similar embarrassment?  Doesn’t this provide an incentive for police departments to overreact, forcing a settlement with corporations who will then pay up to prevent a PR disaster?  After all, none of the departments in 9 other cities, who figured out that a glowing Moon Man isn’t a bomb, got any free money.
The companies can’t say what I’m going to: Boston law enforcement overreacted and behaved in a bumbling and incompetent manner.  The more we are willing to kowtow to our fears of terrorism, the more effective it becomes as a tactic.

Categories: America, Entertainment Media, Governance, Incentive Centered Design, Law, Marketing, Television
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Prizes stimulate innovation better than grants:

BACK in the 1700s, prizes were a fairly common way to reward innovation. Most famously, the British Parliament offered the £20,000 longitude prize to anyone who figured out how to pinpoint location on the open sea. Dava Sobel’s best-selling 1995 book “Longitude” told the story of the competition that ensued, and Mr. Hastings mentioned the longitude prize as a model at that meeting back in March.

Eventually, though, prizes began to be replaced by grants that awarded money upfront. Some of this was for good reason. As science became more advanced, scientists often needed to buy expensive equipment and hire a staff before having any chance of making a discovery.

The internet is changing the economics of innovation and discovery.  Science is no longer expensive like it once was, it is within the realm of dedicated and educated hobbyists.  Robin Hanson, who the article discusses, is everywhere you find interesting information economics problems.

Categories: Business and Economics, Incentive Centered Design, Information Asymmetries, Information Economics, Information Markets, Matching Mechanisms, Science, Social Software, Strategy, Technology, Users as Partners
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Newly elected New York governor Elliot Spitzer is going to tie school funding to performance metrics:

Schools that do not perform well, he said, would be shut down. Educators who do not meet performance goals would be dismissed. A new accountability system would monitor how schools are performing academically and whether they are making the best use of their money, he said. Also, the schools will be judged on whether their academic programming is helping students perform better.

Categories: Education, Governance, Incentive Centered Design, Metrics, Politics
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Chris Anderson’s Long Tail Blog asks do artists who give their music away for free want to make money?

Many do, but they’re just smarter than most music industry execs. They understand the difference between abundance and scarcity economics. Music as a digital product enjoys near-zero costs of production and distribution–classic abundance economics. When costs are near zero, you might as well make the price zero, too, something thousands of bands have figured out.

Meanwhile, the one thing that you can’t digitize and distribute with full fidelity is a live show. That’s scarcity economics. No wonder the average price for a ticket was $61 last year, up 8%–in an era when digital products are commodities, there’s a premium on experience. No surprise that bands are increasingly giving away their recorded music as marketing for their concerts, which offer something no MP3 can match.

Categories: Business and Economics, Distribution, Entertainment Media, Incentive Centered Design, Information Economics, Marketing, Strategy
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According to Slate, an attempt to get a nobody elected to the NHL All Star Game has exposed gross incompetence on the part of the site administrators and league officials:

How did the Rory Vote-O-Matic work? According to Touesnard, online security at NHL.com was pathetic. The league tried to counter automated scripts by making voters decipher words embedded in distorted images—a system known as CAPTCHA. But the NHL used only 51 different picture files and each one had a predictable name, like “1.gif.” All the Rory hackers had to do was create a table that linked up each file name with the appropriate pass phrase. Touesnard coded up the Vote-O-Matic in just a few hours.

Incentive centered design problem for online voting, anyone?

My favorite tidbit:

Some have even gone so far as to suggest the whole thing was orchestrated by the league’s viral marketers, who have been pushing a fan-centered brand under the slogan “My NHL.” But it’s hard to imagine how anything positive could come from such a parade of scandalous incompetence.

Having viral marketers is stupid enough on its own.  Then giving them positive credit for something they didn’t start and subsequently blatantly mismanaged?

Categories: Business and Economics, Community, Governance, Incentive Centered Design, Information Economics, Information Markets, Marketing, Social Software, Users as Partners
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The most important cause of the increase in autism diagnoses was the Individuals With Disabilities Education Act, a federal law that required states to provide suitable education to autistics and to create registries for them. Autism has become a trendy diagnosis, and at times a useful one to stretch. “I am incredibly disciplined in the diagnostic classifications in my research,” Judy Rapoport, a senior child psychiatrist at the National Institutes of Health, tells Grinker, “but in my private practice, I’ll call a kid a zebra if it will get him the educational services I think he needs.”

Why there’s no autism epidemic in Slate.

Categories: Books, Education, Incentive Centered Design, Metrics, Science
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A study conducted last year for the Partnership for New York City, a business group, cited 2000 census data that showed about 35 percent of government workers in Manhattan drive to work, compared with 14 percent for those who work in finance. Kathryn S. Wylde, the president of the group, said that many city workers drive because they can park at no charge using parking placards obtained through their agencies.

From the NYTimes, via the Freakonomics Blog. Talk about an Incentive Centered Design problem. Unlike Detroiters, however, at least New Yorkers have public transportation as a viable option.

Categories: Community, Incentive Centered Design, Metrics, Travel
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Suppose that two retailers, East Side Tires and West Side Tires, are advertising the same tire for $50.

If East Side Tires cuts its advertised price to $45 while the West Side price stays at $50, we would expect that some of those customers on the west side of town would be willing to travel a few extra minutes to save the $5.

East Side Tires would then sell more tires at a lower price. If the increase in sales was large enough, its profits would rise.

Hal Varian discusses whether price-matching or price beating guarantees help reduce prices.

Over the summer, I used a similar argument in a discussion about why gas stations accross the street from each other can charge different prices and still be competitive.

(Via Greg Mankiw)

Categories: Business and Economics, Incentive Centered Design, Marketing, Strategy
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The Freakonomics Blog is also now talking about truth markets (is it information market day or something?):

An excerpt, which they excerpt from a letter:

I think the guy who talked about having a trustworthiness rating for individuals is on the right track. Except, anything that distracts users from making immediate changes (such as logging in, or a notion that I have to build my reputation to have an equal voice) could be the death of wikipedia. My approach to improve wikipedia would be to include an “information liquidity” metric along with each page, similar to a stock’s trading volume. Pages could be grey-scale coded based on the page change history, with high-volume pages appearing darker, more solid. Of course this can be gamed, but here gaming has visible artifacts. As far as accuracy goes, I think this would solve Stephen’s objection because the informational backwaters—pages with lower liquidity—would appear visually distinct from the heavily modified. In machine learning there’s a construct called a Boltzmann Machine (aka simulated annealing machine) which describes the dynamics of systems like wikipedia, but it requires a metric like volume/liquidity/energy. An alternative approach to social networking for solving accuracy/trust problems is this one, which I’m very intrigued by, but the system isn’t big enough yet to bear out the promises.

Categories: Incentive Centered Design, Information Asymmetries, Information Economics, Information Markets, Social Software
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I’m organizing a panel at the Business School’s Futurtech conference on users as partners in the product development process. Here’s a draft of my proposal:

The internet has transformed the way user communities organize themselves. Firms can directly interact with their customers, gauging interest, getting feedback on early betas, and seeking direct input for product features. For better or worse, customers and users are now much more integrated partners in the product development process, and how a firm interacts with their user communities has a direct impact on their success or failure.

Some industries have been dealing with these issues for a long time. Software platform vendors, like Sun, Microsoft, and Apple, have a long history partnering with their developer communities to ensure a rich application eco-system and benefit from network effects. Others, like video game publishers, are realizing the importance of monitoring user activity as their products become more social and their users more organized. Many studios, like Bungie, Nintendo, and Blizzard have seen major product shifts based on community feedback, and have dedicated community managers who interact with, excite, empower, and pacify users regularly. Finally, there are those who are new to this level of customer involvement in the creative process. Movie studios have recently started to produce films based on on-line petitions (serenity), change scripts based on internet buzz (Snakes on a Plane), and even solicit input for upcoming films (Transformers).

All of this brings up a number of questions. What is the roll of the user in the creative process? How can firms keep hardcore users happy without alienating the vast majority of customers? Who owns community-generated product contributions? What can companies do to empower their user community? How can they control them when they run amok? What is the best way to track what’s on the community’s mind?

Any comments, suggestions, or criticisms are welcome. Feel free to drop me an e-mail or leave it in the comments.

Categories: Futurtech, Incentive Centered Design, Information Economics, Social Software, Users as Partners
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Via Tyler Cowen at Marginal Revolution:

Our argument can be briefly summarized: Attorneys are “knowledge workers,” who differ from other employees because they essentially carry around key firm assets in their brains. The knowledge assets these lawyers control—an understanding of the needs and interests of clients—are obviously of greatest value when used with specific clients. This specificity gives individual attorneys considerable leverage over their employers. By threatening to “grab and leave” with an important client, attorneys can leverage an increased share of their firm’s revenues. The up-or-out partnership system found in large law firms has evolved over time as a workable resolution to this particular problem. By forming partnerships and firing experienced attorneys who are not promoted to partnership positions, law firms limit the opportunity for experienced attorneys to grab and leave with the firm’s valuable clients. Grabbing and leaving is more important in legal partnerships than in conventional firms because law firms cannot readily establish property rights over the knowledge essential for serving particular clients.

He also has a different exerpt.

The argument applies to most professional services firms, like large management consulting firms. In these types of firms, partners handle client relationships – especially sales – while the actual work is left to the lower level associates. Partnership is the carrot at the end of the stick as well as a method for keeping experienced and talented associates from breaking out on their own. The up-or-out model keeps the number of partners small, their quality high, and incentivises low level associates.

Organizations in knowledge industries need to realize how fluid their customer relationships are, and how important it is to manage those relationships. Dworin Consulting helps firms and non-profits identify their stakeholders’ needs and develop customized strategies for engaging them. In addition, Dworin Consulting helps organizations design incentive schemes, like up-and-out promotion, to align employee motivations with group goals.

For those interested in the full paper, it’s available here, or here.

Categories: Careers, Incentive Centered Design, Information Asymmetries, Information Economics, Law, Matching Mechanisms
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