How does a company selling used luxury goods spot fakes? (signalling and conspicuous consumption)

A recent article in The WSJ made me think of both signalling theory and conspicuous consumption. But first, let's hear from a famous psychologist:



See RealReal’s Biggest Hurdle Will Be Keeping It Real After IPO: Seller of used Gucci dresses and Rolex watches fights fake luxury goods; 20 hours to vet a necklace. Excerpts:

"The startup sells preowned Louis Vuitton handbags, Gucci dresses and other designer items that people list on consignment."

"Key to its success is battling a booming trade in counterfeit goods and getting shoppers to trust it enough to pay $4,700 for a used Chanel jacket or $7,500 for a Rolex watch. Like other sellers of secondhand merchandise, RealReal gets almost no help from brands in identifying genuine products from copycats."

"That makes the authentication process time-consuming and filled with educated guesswork. It is also hard to scale as the company grows. It took 20 hours to measure every diamond in a Graff necklace the company vetted for sale this year, said Julie Wainwright, RealReal’s founder and chief executive, in an interview in January."

"Despite uncertainty over provenance, demand for previously owned luxury goods is on the rise, particularly among millennials who don’t attach a stigma to used products the way previous generations did. They see the secondary market as a way for fashion to be more sustainable by giving products a longer life. Designer brands have faced criticism in recent months for burning unsold goods. In September, Burberry Group PLC said it would discontinue the practice."

"Bain & Co. estimates that the U.S. luxury resale market totaled $6 billion in 2018. The overall U.S. resale market for clothing, accessories and footwear is far larger and growing fast. It is expected to reach $51 billion by 2023, up from $24 billion last year, according to GlobalData PLC, which prepared the research for a report published by online reseller ThredUP."

"RealReal employs more than 100 gemologists, watch and brand experts and art curators, who inspect items for “attributes such as appropriate brand markings, date codes, serial tags and hologram stickers,” according to documents it filed in connection with its stock offering. It also uses algorithms and data analytics and is working with the University of Arizona to develop technology to speed the inspection of gemstones, the documents say.

Graham Wetzbarger, RealReal’s chief authenticator, shared some clues his team uses to spot fakes in an October 2018 post on the company’s website. The heat stamp on an Hermès Kelly bag is located below the front strap and will be either silver or gold to match the hardware. The Balenciaga Triple S sneaker will always have four lines at the heel, according to Mr. Wetzbarger.

“All of the signature elements of the Kelly bag are copyable—that’s the whole problem with the counterfeit industry,” said Mr. Anthos, the seed investor.

Ryan Yagura, an intellectual-property lawyer, who polices websites for counterfeit goods but doesn’t work with RealReal, said: “The more expensive the item, the more money the counterfeiters spend to make it look real.”

The global trade in fake goods jumped 10% to $509 billion in 2016, the latest year for which figures are available, from $461 billion three years earlier, according to the Organization for Economic Cooperation and Development.

The brands are best-positioned to ferret out copycats. But so far they are unwilling to work with sellers of preowned goods. They worry that a booming secondary market will depress prices of first-run goods, industry executives said."

Related posts:

A fake job reference can be just a few clicks away.

Fake Economist Fools Portugal.

Slave Redemption in Sudan. (Fake slaves are sold to those who buy slaves and then give them their freedom)

Can A Product Work Just Because It's Expensive?. (fake medicine)

If It Pays To Have Friends, Can You Pay To Have Friends?. (you can hire fake boyfriends)

Study: Half of American Doctors Give Patients Placebos Without Telling Them.

Saudis grapple with fake street sweepers .

Rent a White Guy: Confessions of a fake businessman from Beijing (by Mitch Moxley in The Atlantic Monthly)

Can adding a phantom third story to their homes help families find a wife for their son?

Why do employers pay extra money to people who study a bunch of subjects in college that they don’t actually need you to know? Signaling

Mexicans buy fake cellphones to hand over in muggings
 
Conspicuous Consumption, Conspicuous Virtue, Thorstein Veblen (and Adam Smith, too!)

Does it help if hospitals post prices?

See One State’s Effort to Publicize Hospital Prices Brings Mixed Results: New Hampshire’s experience suggests what the Trump administration move may—and may not—accomplish by Melanie Evans of The WSJ. Excerpts:

"As the Trump administration moves to make confidential hospital prices public, New Hampshire’s dozen years of experience with price transparency suggests what it may—and may not—accomplish.

New Hampshire has one of the most comprehensive and oldest hospital price-transparency laws in the U.S. It posts prices charged by individual hospitals for magnetic-resonance imaging, gall bladder surgery and other services on a state website in an effort to give patients information they need to shop for more affordable options.

The disclosures have helped lower costs—though not by large amounts—and only a minority of residents are taking advantage of them, according to health-care spending experts who have studied New Hampshire’s experience.

“It’s not that clear-cut that it’s a home run,” said Ateev Mehrotra, an associate professor of health policy and medicine at Harvard University, who studies how consumers use price information and New Hampshire’s efforts."

"Price-transparency supporters say shining a light on pricing will bring competition to hospitals and thereby lower costs. Yet health policy experts and economists say it could have the opposite effect, as low-price hospitals seek to match their higher-price competitors. It also could remove an incentive for a hospital to offer select insurers a discount for fear others will want it."

"Prices for MRIs and other imaging services with publicly listed rates fell 1% to 2%"

"One obstacle to New Hampshire’s effort, health-care spending experts say, has been the challenge of finding the right price to feature on the website. Health care bills for one procedure typically include prices for numerous items, such as medical specialists, scans and lab tests.

New Hampshire officials decided to bundle prices for services provided under a single procedure"

"The state posts median prices"

"Although shoppers don’t get exact prices on the website, the median price has helped users identify hospitals, clinics and other locations that are less expensive"

[Consumers] "may lack incentives to comparison shop because they have generous insurance plans or have already met their deductibles for the year."

Are CEOs overpaid?

Below is something I submitted to the San Antonio Express-News (it was printed in the paper on June 22 https://www.mysanantonio.com/opinion/commentary/article/Are-CEOs-really-overpaid-14029195.php)

Chris Tomlinson seems to think that CEOs are overpaid because of a rigged system where CEOs sit on corporate boards that determine their pay (“Corporate boards to blame for high CEO pay,” June 17). Yet he never demonstrates that they are, in fact, overpaid.

Here is what George Mason University economics professor says on the issue in his latest book Big Business: A Love Letter to an American Anti-Hero: “CEOs are paid less than the value they bring to their companies. More concretely, CEOs capture only about 68–73 percent of the value they bring to their firms.”

University of Chicago economist Steven Kaplan has found in his research that “CEO pay is largely determined by market forces” and that “CEOs are strongly paid for performance. And boards do monitor CEOs.” This hardly seems sinister.

So, at the very least, the question is in doubt. Businesses that pay too much for any resource they need, be it labor (even the white-collar kind) or capital, will not last long in a competitive economy.

Yes, some CEOs make very large salaries. But claims that they “get paid 500 times more than the median employee” can be misleading.

University of Michigan economist Mark Perry has looked at such studies. For example, they use total compensation, including bonuses and stock options for CEO pay while cash-only pay for part-time rank-and-file workers.

That misses the fringe benefits part of compensation going to workers like health care. Also, there is a difference in hours worked, with CEOs putting in 50-60 hours a week while the average worker is assumed to work 33.7.

CEOs are more likely to be in their prime earning years, too. Workers in their 40s and 50s make more than older and younger workers.

If these issues are taken into account, Perry finds that Fortune 500 CEOs get paid 104 times what the median worker gets paid. That is still a large difference, but only about 20% of what Tomlinson says.

But again, are the CEOs overpaid? It is very easy for outsiders to see the big pay gap and simply conclude it is not fair. But the information to conclude that might not be easily available to journalists and the general public.

If CEO pay is unfair, should we cut it and give more money to workers? How much would that be?

Perry estimates that, for 2017, if we could take all the compensation for the Fortune 500 CEOs and give it to the workers, the average worker would make $66 more a year. This would have little impact on their lives, so the high CEO pay is not harming the workers.

But what if we look at the CEOs of all companies, and not just those of the Fortune 500? Things change even more dramatically.

Perry reports that the average salary for 21,550 Chief Executives in 2014 was $216,100, according to the BLS. That is only 4.4 times the salary of the average worker. That paints a very different picture than what we commonly see.

And guess what? When we look at all CEOs, not just the Fortune 500, there are occupations that get paid more. In 2015, Business Insider reported nine such occupations, all in medicine, with surgeons about 30% above CEOs.

We all want prosperity to be widely and fairly shared. But the way to do that is by teaching people skills that are in demand while having a growing economy. Maligning business and demonizing CEOs is not the way to do it.

Is the interest rate the Fed pays banks on reserves now more important than the Federal Funds Rate?

The Federal Funds Rate is set (maybe influenced is better) by the Fed. It is what banks pay each other when they borrow to meat their required reserves. But this market is smaller than it used to be. So maybe the Federal Funds Rate is not what matters any more. And maybe the sectors of the economy that are most affected by interest rates make up less of the GDP than they used to.

See Has the Federal Reserve Lost Its Mojo? The central bank has less control over market interest rates today than at any time in its history by Phil Gramm and Thomas R. Saving. Excerpt:

"When the Federal Open Market Committee’s meeting concluded last month, reporters focused on the federal-funds rate, announcing that it would be held constant at 2.25% to 2.5%. Unnoticed by even the financial media, and unmentioned in the lead section of the FOMC’s statement, was its decision to cut the interest rate the Federal Reserve pays on bank reserves—a rate that, unlike the fed-funds rate, still has a direct effect on the money supply. The Fed cut the rate paid on reserves because the market yield on one-year Treasurys had fallen below it, inducing banks to build up excess reserves. When banks expand reserve holdings, the money supply contracts—so the Fed was forced to act.

But it wasn’t enough. Because market rates have continued falling since the last FOMC meeting, even the lower rate that the Fed now pays on reserves is 0.35 percentage point higher than Friday’s yield on one-year Treasurys and 0.25 point above the yield on 10-year Treasurys. The return differential has caused banks to increase excess reserves by 5.5%, or $65 billion, over the past month. The size of these yield spreads and the buildup of excess reserves virtually guarantee that the Fed will again cut the interest paid on reserves at Tuesday’s FOMC meeting.

The rate paid on reserves receives too little attention. As a result of the unprecedented monetary easing of the Obama era, when the Fed bought or offset 45% of all federal debt issued—more than five times the amount it bought to support the World War II effort—commercial banks now hold massive excess reserves. By paying interest on reserves, the Fed effectively converted them into income-yielding assets, giving banks an incentive to hold excess reserves instead of expanding credit and the money supply. As banks became awash in liquidity, they all but stopped engaging in borrowing and lending in the overnight fed-funds market. The fed-funds market has contracted 80% since 2008, meaning the fed-funds rate has almost no direct effect on monetary policy."

Related article: Fed Stimulus Just Ain’t What It Used to Be: Federal Reserve may cut rates soon, but its efforts may have less oomph due to changes in the U.S. economy by Justin Lahart of The WSJ. Excerpt:

"A big reason is that the role of some of the most interest-rate sensitive industries in the labor force—the ones that hire like crazy in response to low rates—has been greatly diminished, argue economists at the Federal Reserve Bank of Kansas City. In 1980, construction and manufacturing accounted for about 25% of total U.S. employment. By the time the 1990-91 recession began, that had fallen to 21%, slipping to 18% before the 2001 recession and 15% ahead of the last recession. Now it is at 13%.

Another important difference between this last expansion and previous ones is that housing, after falling by so much in the downturn, had such a modest comeback. Home sales remain below their late 1990s levels, when the U.S. population was lower, and housing’s direct share of gross domestic product is now at levels which in other periods would have been associated with recession. The share of Americans who own the home they live in also has fallen.

Although lower rates might stimulate home sales a bit, a variety of forces are weighing on housing, including out-of-reach prices. This matters because housing is one of the ways that rate cuts have traditionally boosted the economy. Lower mortgage costs prompt people to buy not just a house but many other things—furniture and appliances—that go with it.

Mortgage refinancing—another avenue for lower rates to make their way into consumer spending—also might be lacking. Many homeowners already refinanced during the years coming out of the recession, locking in ultralow rates.

Then, there is the increased caution Americans seem to be taking with their finances since the financial crisis, leaving the saving rate substantially higher than before the recession. Even a decade later, memories of the severity of the downturn may still be too fresh for people to respond exuberantly to lower rates.

It could take more than just rate cuts to get the economy really going again."

What about all this plastic pollution?

I use the book The Economics of Public Issues as a supplemental book in my principles classes. It often chapters on trash, recycling and plastic bags.

The San Antonio Express-News ran an article by Chris Tomlinson called Solving plastics pollution takes more than just banning bags. Excerpts:

"More than half of all plastic by weight is used only once before going to a landfill or the ocean"

"Only 7 percent is recycled, but only once, before it goes to a landfill."

"Most marine plastic waste comes from Asia, and overwhelmingly from China, India and Thailand. More than 86 percent of the plastic found in the ocean was dumped first in either an Asian or African river and flowed to the sea."

"Plastics play an essential role in solving our other global problem: climate change. Plastics make things lighter, which means they require less energy. Plastics can seal buildings and coat windows to provide insulation and save on climate control.

Some plastic items should be banned, but most improve our lives. They need to be recycled."

"The root cause of plastic pollution is not what most people imagine. The solution is more complicated than they would prefer, and simple slogans will take us down the wrong path. Cleaning up the plastic pollution smothering the planet requires industry, consumers and government to compromise - not vilify one another."

Do We Have A Zombie Economy?

See When Dead Companies Don’t Die: The policies created to pull the world out of recession are still in place, but now they are strangling the global economy by Ruchir Sharma in The NY Times. He is author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World” and is the chief global strategist at Morgan Stanley Investment Management.

This ties in to some recent posts I did on the recovery and Joseph Schumpeter (links below). Excerpts:

"Since the end of the recession, the economy has grown at about 2 percent a year in the United States and 3 percent worldwide — both nearly a point below the average for postwar recoveries.

What explains the longest, weakest recovery on record? I blame the unintended consequences of huge government rescue programs, which have continued since the recession ended."

"Once the crisis hit, however, governments erected barriers to protect domestic companies. Central banks aggressively printed money to restore high growth. Instead, growth came back in a sluggish new form, as easy money propped up inefficient companies and gave big companies favorable access to cheap credit, encouraging them to grow even bigger."

"Central bankers had hoped that low interest rates would spur investment, increasing productivity and boosting growth. But a recent paper from the National Bureau of Economic Research shows that low rates gave big companies an incentive and means to grow bigger. As their power grows, workers’ share of national income has been shrinking, fueling inequality — and anger.

Four airlines and three rental car companies account for more than 80 percent of the American travel markets."

"Start-ups represent a declining share of all companies in Britain, Italy, Spain, Sweden, the United States and many other industrialized economies. The United States is generating start-ups — and shutting down established companies — at the slowest rates since at least the 1970s."

"Zombies now account for 12 percent of the companies listed on stock exchanges in advanced economies and 16 percent in the United States, up from 2 percent in the 1980s. Companies are surviving in the “zombie state” for longer, depleting the productivity of healthy companies by competing with them for capital, materials and labor."

"The problem, however, is that government stimulus programs were conceived as a way to revive economies in recession, not to keep growth alive indefinitely. A world without recessions may sound like progress, but recessions can be like forest fires, purging the economy of dead brush so that new shoots can grow. Lately, the cycle of regeneration has been suspended, as governments douse the first flicker of a coming recession with buckets of easy money and new spending. Now experiments in permanent stimulus are sapping the process of creative destruction [see link below about Joseph Schumpeter] at the heart of any capitalist system and breeding oversize zombies faster than start-ups.

To assume that central banks can hold the next recession at bay indefinitely represents a dangerous complacency. Corporate debt levels continue to rise; government debts and deficits continue to rise. If there is a sudden break in confidence, the damage will be that much greater and governments may find themselves too broke to stem it."

Related posts:

What ends expansions? (or what causes recessions according to Alan Blinder and Austan Goolsbee).

The current expansion is close to a record, so what might be the potential risks of it ending?.

Joseph Schumpeter, Capitalism and Intellectuals

Are business cylcles imbedded in longer cycles called financial cycles?