Determinant's of elasticity and two cute videos on pricing

1. Foodie on the determinants of elasticity. Her lists varies slightly from the textbook’s list.
2. Click here to watch a clip from I Love Lucy on how (not) to set price.
3. Click here to watch a clip from The Hudsucker Proxy on Hula Hoops

Markups v. margins

1. http://www.accountingcoach.com/blog/gross-margin-markup.
2. this video on the relationship between margin and markup.

Optional material for aligning interests

1. This story from NPR is a great example of the effect of incentives. It is an account of a car dealership that earns a sizable bonus if it sells 129 cars in the month.
2. This video on the Cobra Effect. It has several examples of incentives that created unwanted responses.
3. This post from HBR discusses over-reliance on incentive compensation
4. The links from this post give two perspectives on the importance of monetary compensation schemes. Non-monetary incentives are useful complements to monetary incentives. (Pay attention in MGMT 641.)
5. View this clip.  (The instructor predicts that you will laugh.) Is the monkey that rejects cucumber rational?
6. View this humorous clip to see Captain Ron use incentives to prompt good effort.
7. View this humorous clip from Jerry McGuire. What motivates the football player?
8. Better than money? Geoffry James gives a list of 10 things he claims are more important to employees than money.
9. Here is a humorous critique of recognition rewards.
10. Millner’s blog, label = aligning interests. Even more from the instructor!
11. Froeb’s blog, label = Chapter 21
12. Read this report from Stern Stewart to see an example of the disadvantages of making a scheme complex.

Price discrimination against women

http://managerialecon.blogspot.com/2015/12/why-do-women-pay-more.html

Data analytics @ Spotify

http://qz.com/571007/the-magic-that-makes-spotifys-discover-weekly-playlists-so-damn-good/

On-Demand Pricing

Now Prices Can Change From Minute to Minute
by: Jack Nicas
Dec 14, 2015
Click here to view the full article on WSJ.com

TOPICS: Price Discrimination, Pricing

SUMMARY: Backed by vast amounts of data and powerful software, more businesses are varying prices by the day, the hour, even the minute. Online sellers have used such tactics for years, but frequent price changes are increasingly common in the physical world. "On average, consumers pay more as a result of [pricing based on demand and also supply conditions at a particular point in time], economists say. Dynamic pricing also affects who gets the goods in highest demand, favoring those willing to pay the most, while creating deeper discounts for shoppers who can buy when prices are low."

CLASSROOM APPLICATION: Students can evaluate the effect of "dynamic pricing" (i.e., basing prices at a particular point in time on the demand and supply characteristics at that point in time) on seller profits, consumer welfare, and economic efficiency. One important point for instructors to emphasize is that sellers changing prices according to demand and supply conditions can be the result of a technological change in measuring demand on the equilibrium process of a competitive markets. Due to the technological change, equilibrium prices adjust quickly. Alternatively, changing prices over time as a result of changing demand conditions can be the result of price discrimination with consumers selecting from a price-time of purchase menu.

QUESTIONS: 
1. (Advanced) Consider the statement: "Previously, a taxi at rush hour went to 'the person who happened to be on the right street corner,' said Ian McHenry, the president of Beyond Pricing, which helps homeowners price their rented guest rooms like big hotels. Now, rides go to people willing to pay more, and fewer people 'hit the jackpot and get that underpriced reservation or baseball ticket or open cab.'" Does this statement imply that prior to "dynamic pricing," markets experienced excess demand during peak demand periods? Does "dynamic pricing" improve economic efficiency?

2. (Advanced) Evaluate the statement: "'This is not a passing fad,' said Peter Fader, co-director of the University of Pennsylvania's customer-analytics initiative. Amazon is making dynamic pricing the norm, he said, 'and then it's going to become imperative for the brick-and-mortar players to figure out how to do this.'" Why is it imperative for brick-and-mortar stores to adopt the same pricing policies as those of online retailers? In terms of game-theoretic analysis, why is it a best response for brick-and-mortar players to do so?

3. (Advanced) Does the price discrimination based on demand and supply characteristics a particular points in time result in higher average consumer prices?

4. (Introductory) The article notes a case about highway pricing based on time-of-day or congestion. Does basing the price of highway use on the amount of congestion improve economic efficiency?

Reviewed By: James Dearden, Lehigh University

Transplant centers respond to incentives

http://managerialecon.blogspot.com/2015/12/repost-why-are-so-many-donated-kidneys.html

Is an extended warranty a screen?

Why Gadget Warranties Are (Almost) Never Worth It
by: Geoffrey A. Fowler
Dec 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Decision Making Under Uncertainty, Insurance

SUMMARY: Crunch the numbers, and you'll see there are very few reasons to buy AppleCare or other plans, Geoffrey A. Fowler says.

CLASSROOM APPLICATION: Students can examine the economics of extended warranties. The advice in the article: "Most extended warranties like AppleCare, or those from Asurion and SquareTrade, for broken, lost or stolen electronics are a bad deal. And in some cases, they're a downright rip-off.... Insurance makes sense on the big things in life, like your house or your health. The cost of fixing either can be astronomical. But the pain of repairing consumer electronics-even pricey ones like a laptop-is still relatively limited." That is, extended warranties are expensive and, when only small losses are possible, people should self-insure. The article also cites Richard Thaler about the behavioral economics issues involved in recommending not to purchase.

QUESTIONS: 
1. (Introductory) Characterize the type of consumers who should purchase extended warranties for electronic devices and the types who should not?

2. (Advanced) What is "mental accounting"? Does the decision to choose an extended warranty involve behavioral economics?

3. (Advanced) What is Richard Thaler's recommendation about purchasing extended warranties for electronic devices?

Reviewed By: James Dearden, Lehigh University

Pricing at drug @ $9,850 / month

How Pfizer Set the Cost of Its New Drug at $9,850 a Month
by: Jonathan D. Rockoff
Dec 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: A look at how Pfizer set a cancer medicine's price at $9,850 a month shows an elaborate process of testing the market and the views of doctors and health plans.

CLASSROOM APPLICATION: Students can evaluate process used by Pfizer to determine the price of one of its cancer drugs, Ibrance. The process includes determining the drugs that are in the same market, the patient benefit from the drug, and the willingness to pay by health plans. "The company wanted a price that would maximize its revenue without deterring health plans or keeping the drug from getting to patients it could help.... Hoping to smooth the drug's way onto health-plan lists of covered medications, Pfizer economists created a dossier containing data on clinical benefits and risks, plus-important to the plans-the likely effect on their budgets. The economists mined electronic health records, drug-prescription tallies and health-insurance claims to estimate the number of prescriptions, costs of treating side effects and monitoring patients for infections, and spending that might be avoided if the drug kept cancer at bay longer.

QUESTIONS: 
1. (Introductory) What factors do physicians consider when prescribing drugs?

2. (Advanced) What factors did Pfizer consider when setting the price of its new cancer drug, Ibrance?

3. (Advanced) What role did Pfizer's economists play in setting the price of the company's new cancer drug, Ibrance?

Plea bargaining

Opinion. The Injustice of the Plea-Bargain System
by: Lucian E. Dervan
Dec 04, 2015
Click here to view the full article on WSJ.com

TOPICS: Decision Making Under Uncertainty, Law and Economics

SUMMARY: Fearing harsh sentences, far too many defendants are pleading guilty and forfeiting their right to trial.

CLASSROOM APPLICATION: The article offers a good case to analyze decision making uncertainty. Students can examine how the length of the possible sentence based on a trial, the probability distribution over possible sentences, and the length of a plea deal affect whether an accused person accepts a deal. The accused's degree of risk aversion also affects the decision. Students can also discuss the ethics of plea bargain deals and of innocent defendants accepting deals.

QUESTIONS: 
1. (Introductory) Why are defendants overwhelmingly accepting plea deals? Discuss two issues: whether the police and judicial system is functioning well in the sense that mostly those who are arrested for crimes are in fact guilty; and whether plea deals lengths are set so that it is in the best interest of most defendants, whether guilty or not, to accept the deals.

2. (Introductory) Is it ethical that in the U.S. judicial system an overwhelming majority of defendants are accepting plea deals? What criterion should be used to evaluate whether a judicial system is ethical?

3. (Advanced) Consider the following scenario of an individual accused of a crime and facing the possibility of a trial. Let x represent the length in years of a prison sentence. The individual's utility function is U(x) = sqrt (10-x). If the person chooses to take his or her case to trial, the possible sentences are 0 (if the person is acquitted) and 10 years (if the person is found guilty). The probability of being found guilty is 7/10. What is the expected value in terms of years in prison of going to trial? What is the expected utility of going to trial? Suppose the accused is offered a plea deal of 8 years. Would the person accept the deal? What is the greatest time in prison that the person would accept as a plea deal?

4. (Advanced) Is the person risk averse with respect to the number of years in prison? How does the greatest plea deal the person would accept compare to the expected value in terms of prison years of going to trial? Discuss the relationship between risk aversion and the comparison of these two values?

Reviewed By: James Dearden, Lehigh University

How did Blockbuster solve the double marginalization problem?

http://managerialecon.blogspot.com/2015/12/repost-how-did-blockbuster-solve-double.html

Could vertical integration (Blockbuster produces its own content or studies opening video rental stores) have been an efficient alternative?

When did return on investment begin to measure success?

http://qz.com/569738/the-dupont-invention-that-forever-changed-how-things-work-in-the-corporate-world/

Part-time work and the app economy

http://qz.com/472246/the-industrial-revolution-of-our-time-is-changing-the-way-we-work/

On leadership

http://www.realcleardefense.com/articles/2015/11/23/what_29_years_in_the_navy_taught_me_about_leadership_108709.html

Older posts on organizational architecture

http://edlikeseconomics.blogspot.com/search/label/Organizational%20Architecture

Amazon has a strategy for its retail business

This article implies that Amazon has build a moat around its competitive advantage and is about to reap the rewards from doing so.

Lock in & the Cloud

http://www.wsj.com/article_email/cloud-computing-promises-fall-short-1447292389-lMyQjAxMTA1NTE0MzAxNzM0Wj

What determines whether or not a doctor prescribes a stent?

Inappropriate Stent Procedures Decline, Study Shows
by: Ron Winslow
Nov 10, 2015
Click here to view the full article on WSJ.com

TOPICS: Health Economics

SUMMARY: A new study suggests cardiologists have curbed overuse of a flagship procedure for treating heart disease that has been cited as a high-profile example of waste in the U.S. health care system.

CLASSROOM APPLICATION: The article offers two interesting economic issues associated with stent implant decisions. First, "upcoding" may explain the reason for the measured reduction, but not an actual reduction, in unnecessary stent implants. The incentive issue is whether doctors are implanting stents for financial gains, despite the possibility that the costs of doing so outweigh the benefits. "But concern arose about a decade ago that many cardiologists were implanting the devices in patients with stable disease and few if any symptoms." Second, "Several studies, including a large trial called Courage, challenged whether the benefits of stents in such patients outweighed the risks and questioned the economic cost to patients and the health system. By some estimates, one in six stent procedures was inappropriate, sparking criticism of cardiologists and prompting calls to rein in use of the devices."

QUESTIONS: 
1. (Introductory) Do physicians have an incentive to overuse certain medical procedures like stent implantation?

2. (Advanced) What is "upcoding"? What is the incentive of a doctor ordering a stent implant on a patient to upcode?

3. (Advanced) How would an economist measure whether upcoding is a response to a change in medical policy or reimbursements for procedures?

Reviewed By: James Dearden, Lehigh University

Strategy in the Internet Economy

Facebook, Amazon and Other Tech Giants Tighten Grip on Internet Economy 
by: Don Clark and Robert McMillan
Nov 06, 2015
Click here to view the full article on WSJ.com

TOPICS: Internet

SUMMARY: Computing hardware has long served as the critical backbone of business operations. Today, the Internet economy is powered by an infrastructure that has become virtual, and is controlled by a small handful of tech giants.

CLASSROOM APPLICATION: Students can evaluate the effect of economies of scale and network externalities (which are not mentioned in the article) on barriers to entry and ultimately the market power of the noted tech companies.

QUESTIONS: 
1. (Introductory) Evaluate this statement in terms of economies of scale and barriers to entry into the relevant industries: "All of these companies are operating in industries where scale is rewarded and where there is a very high level of capital intensity required to even hope to compete," said Karl Keirstead a senior analyst with Deutsche Bank Securities.

2. (Advanced) Evaluate this statement in terms of the market power of tech firms: "These companies are delivering online search, messaging, advertising, applications, computing and storage on demand-which has positioned them not only to empower business but to extract extraordinary value as it grows." Interpret "positioned them" in terms of economies of scale and barriers to entry.

3. (Advanced) Define "natural monopoly" and "network externalities." Do economies of scale and network externalities in the noted tech industries drive barriers to entry and ultimately the market power of the established players in these industries?

Reviewed By: James Dearden, Lehigh University

Loss leaders in the computer hardware markets

The author of this article argues that firms selling computer hardware must focus on capturing market share early in the product life cycle and that doing so requires the firms to sell at a loss in early phase. He argues that decreases in costs will make the product profitable in later phases and that the profit gained then from the market share gained when then produce was a loss leader will more than make up for the early losses.

One question: What keeps price or market share from falling in the later phases?

A prediction market for science

http://qz.com/545682/a-futures-market-could-help-fix-one-of-the-biggest-problems-in-science/

Old posts on asymmetric information

http://edlikeseconomics.blogspot.com/search/label/Asymmetric%20Information

Game Theory in Batman

Batman, Joker robs bank. Is agreeing to kill the “alarm guy” consistent with Nash equilibrium? Saying that the gun was empty when the robber knew it was not? Believing the robber when he said the gun was empty?

Old posts on Game Theory

http://edlikeseconomics.blogspot.com/search/label/Game%20Theory

One way to maintain 3rd degree price discimination - lie to them!

http://consumerist.com/2007/03/02/best-buy-confirms-the-existence-of-its-secret-website/

Want to bet on who wins the Presidential races?

https://www.electionbettingodds.com/

GM trys to curb discounting

This article from the WSJ is a great introduction to pricing, framing, the trade-off between margin and volume, price discrimination, and differentiation.

Health insurance premia on ACA exchanges are rising

Premiums for Health Insurance Bought on Exchanges to Climb in 2016
by: Stephanie Armour
Oct 27, 2015
Click here to view the full article on WSJ.com

TOPICS: Health Economics, Insurance

SUMMARY: The Obama administration said many consumers will see noticeable premium increases when buying coverage on insurance exchanges in 2016, acknowledging what many health-care experts had predicted.

CLASSROOM APPLICATION: Students can enumerate the possible reasons for increases in health insurance premiums: increases in health care costs; and changes in the health statuses of the insurance pools. "The law requires companies to sell policies to anyone regardless of their medical history, and with only limited variations on premiums. Insurers, who have priced plans for 2016 in part based on what they experienced in 2015, also faced higher costs in part due to rising prescription-drug prices, and they saw lower-than-expected payouts from a federal program that aims to offset carriers' risk by providing funds to companies with costlier, sicker consumers."

QUESTIONS: 
1. (Introductory) Why are health insurance companies raising premiums? Do the substantial increases in premiums indicate the Affordable Care Act has failed in reducing the cost of health care?

2. (Advanced) What is the effect on health insurance premiums of the Affordable Care Act's requirement that insurance companies must sell policies to anyone regardless of their medical history, and with only limited variations on premiums?

3. (Advanced) What is the effect of increases in health insurance premiums on the ability of low-income households to purchase coverage?

What determines how far a real-estate agent will drive to show a house?

Pricey Gas Leads to Lower Home Prices 
by: Adam Bonislawski
Oct 23, 2015
Click here to view the full article on WSJ.com

TOPICS: Supply and Demand

SUMMARY: When the cost to fill a tank is high, real-estate agents won't drive as far to market a property, concludes a paper by two universities. From the related article: "A recent study in the Journal of Housing Research from faculty at Longwood University in Farmville, Va., finds that for every mile between a property and its listing agent's office, average time on the market goes up 0.36% and the overall likelihood of selling goes down 0.5%. To put that in more concrete terms: Taking two equivalent houses-one down the block from its listing agent and the other 15 miles away-the one farther away will take roughly 5% longer to sell and has a 7.5% lower chance of selling at all." Evidently, according to the author's new paper, as gasoline prices increase, this distance-from-the-office effect is exacerbated.

CLASSROOM APPLICATION: Students can evaluate the effect of gasoline prices on the willingness of real estate agents to show homes that are further from their offices and therefore on the prices of these homes. One interesting issue is whether this gasoline-price effect is larger for younger real estate agents.

QUESTIONS: 
1. (Introductory) What is the effect of an increase gasoline prices on the willingness of real estate agents to show homes?

2. (Advanced) When deciding whether to show homes that are closer to their offices or ones that are further away, why would less-experienced agents be more influenced than experienced ones by increases in gasoline prices?

3. (Advanced) What is the effect of increases in gasoline prices on homes that are closer to job centers and ones that are further from job centers?

Prediction markets

http://restud.oxfordjournals.org/content/early/2015/05/13/restud.rdv014.abstract

Does "death spiral" = "lemons market"?

http://nypost.com/2015/10/19/obamacare-is-entering-its-dreaded-death-spiral/

"Free" shipping

More Retailers Offering Free Shipping on Returns
by: Loretta Chao
Oct 12, 2015
Click here to view the full article on WSJ.com

TOPICS: Marketing

SUMMARY: Retailers are making free returns available to more online customers, delighting consumers but raising costs for the companies.

CLASSROOM APPLICATION: Instructors can present three points about the article. First, the choice whether to offer free shipping on online returns may be a prisoner's dilemma. Second, they can also highlight the point that a current costly decision (to offer free shipping on online returns) may have future benefits (retaining customers). Third, because "free shipping" is not free, consumers may be higher prices when the policy is implemented, which means that consumers who tend not to return products may be made worse off by the policy.

QUESTIONS: 
1. (Advanced) Consider a game in which each of two online retailers decides whether to offer free shipping on returns. Suppose each retailer's payoffs are the following: 10 if both retailers offer free shipping; 15 if the retailer offers free shipping, but the competitor does not; 5 if the competitor offers free shipping, but the retailer does not; and 12 if neither retailer offers free shipping. What type of game are the retailers playing? What is the Nash equilibrium of the game? What is the dilemma in the game?

2. (Introductory) What is the long-term effect to a retailer of a customer having to pay to return a product to the retailer?

3. (Advanced) No shipping is "free." Classify the type of consumer who is made better off by the offer of free shipping for online returns and the type of consumer who might be made worse off.

Reviewed By: James Dearden, Lehigh University

What behaviors does tipping induce?

http://qz.com/524279/a-new-york-restaurant-empire-is-finally-ending-the-injustice-of-tipping/

Writing Well

I am not the only person concerned about poor writing in business: http://qz.com/522824/jack-dorseys-jargon-free-firing-memo-edited-to-remove-the-jargon/. 

I think that the suggested revisions improve the memo and that additional revisions would make it even better. Additional revisions would improve the focus of the memo and replace colloquialisms with plain speech. Follow this link to see the additional revisions I suggest: https://docs.google.com/document/d/1knMJUDHD4tbNqiBPmCbKNLFKWEDId_2hQqD2qFXGJNg/edit?usp=sharing.

Lock-in

http://readwrite.com/2015/10/08/amazon-web-services-cloud-ambitions

Prediction markets

Here is a post about a way for firms to get good information about the profitability of offering a new product or process: http://marginalrevolution.com/marginalrevolution/2015/10/corporate-prediction-markets-work-well.html. Economists like prediction markets because they align the incentives of the bettor and the person seeking information and because price is a good summary of the publicly available information.

RAP

Signals

http://managerialecon.blogspot.com/2015/09/good-video-on-signalling.html

Asymmetric information

Snapchat

https://blog.joemanna.com/progressive-snapshot-review/

Asymmetric information

Incentives?

Whose interests are served when a Board rejects an offer as too low when the offer exceeds the current market value? http://www.reuters.com/article/2015/10/06/us-sabmiller-results-idUSKCN0S00O320151006

The largest shareholder likes the deal: http://www.bloomberg.com/news/articles/2015-10-07/ab-inbev-bids-104-billion-for-sabmiller-after-offers-rejected.

Follow up: http://money.cnn.com/2015/10/13/investing/ab-inbev-sabmiller-beer-merger/index.html.

RAP

Does college attended help resolve adverse selection in the labor market?

If so, Deloitte may be in for a rude awakening: http://qz.com/513028/deloitte-no-longer-wants-to-know-which-university-its-job-applicants-attended/

Here is a related article: http://www.theatlantic.com/business/archive/2015/10/reverence-bachelors-degree/408346/.

Asymmetric information

When 2 is better than 1

This article reports that Alcoa is splitting into two companies.

1. Would a breakup  be more or less likely when economies of scope are significant? 
2. Would a breakup be more or less likely when both companies serve the same customers?
3. Would a breakup be more or less likely when both companies have similar strategies?

Organizational structure

A useful paper in a economics journal?

This article reports that checklists + monitoring their use results in better performance of employees but checklists without monitoring does not. The results indicate that helping employees to remember what to do and increasing what supervisors learn about what employees are doing are the drivers that increase performance.

Here are two takeaways.

1. Tell people you supervise clearly what you want them to do, if possible.
2. Monitor their behavior to learn what they do.

Extrapolating the takeaways suggests that

1. Supervisors should think hard about exactly what they want employees to do.
2. Supervisors should communicate clearly to employees what they want the employees to do and coach them to do these things,
3. Supervisors should monitor what the employees do.
4. Supervisors should communicate to employees what the employees are doing well and what they need to do to improve.
5. .The reward structure should reward employees for what they do well and should not reward them for what they do poorly.
6. It the supervisor cannot communicate clearly to employees what they want employees to do, they better be able to communicate clearly what they want the employees to accomplish. If you can't identify good behavior, you better be able to identify good outcomes.

Aligning interests @ Chipotle

Here is a review and compensation scheme that appears to work well: http://qz.com/493971/inside-chipotles-extremely-intense-39-point-checklist-for-good-management/

Why Shell and not Eni?

Shell just announced that it is ceasing its exploration for oil and gas in offshore Alaska. However, Eni plans to "bring online its 100,000 barrels a day Goliat project in the Barents Sea, that field was discovered more than a decade ago and had billions of dollars spent on bringing it to production before oil prices plunged."

Is Eni committing a Sunk Cost Fallacy?

Lock in

iPhone6s: Apple's Best Trap Yet
by: Geoffrey A. Fowler
Sep 23, 2015
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: The newest iPhone makes it even harder for users to ever switch to another phone-but Geoffrey A. Fowler wonders: Is that so wrong?

CLASSROOM APPLICATION: Students can examine issues of lock-in and switching costs among products, related especially to social networks. "Very few Apple apps and services are available for other kinds of phones. To switch would be like packing up and moving to a new city. That's easy enough if you're alone, but the iPhone is as much a social network as it is a phone. To bring along everyone you care about, and every gadget you own, is more effort than most people can take on."

QUESTIONS: 
1. (Introductory) What would be the effect on the prices of Apple products of the company building consumer switching costs? What would be the effect on future sales?

2. (Advanced) Why is it important to Apple to build network externalities associated with the company's products? That is, why is it important to make texting seamless among iPhone users?

3. (Advanced) Why is increasing the cost of switching from Apple products an important issue to Apple? Does Apple design its software and hardware to increase this cost?

Reviewed By: James Dearden, Lehigh University

Is big better?

Health-Care Providers, Insurers Supersize 
by: Anna Wilde Mathews
Sep 22, 2015
Click here to view the full article on WSJ.com

TOPICS: Health Economics, Mergers

SUMMARY: Five years after the Affordable Care Act helped set off a health-care merger frenzy, the pace of consolidation is accelerating, transforming the medical marketplace into a land of giants.

CLASSROOM APPLICATION: Instructors can present the factors that are causing horizontal and vertical mergers in hospital systems. They can also introduce increased profit of the systems as the goal of mergers, and present that economies of scale and scope or increased market power lead to the increased profits.

QUESTIONS: 
1. (Introductory) What factors are causing mergers in health-care systems? What is "horizontal integration"? What is "vertical integration"? Why do these mergers involve both horizontal and vertical integration?

2. (Advanced) What are "economies of scale" and "economies of scope"? Do economies of scale and scope exist in the health-care industry?

3. (Advanced) Do mergers in health-care systems increase the market power of the systems?

4. (Advanced) Moody's Investors Service found that the median operating margin for the 50 largest nonprofit hospital systems it monitors was 3.4% last year, but for the 50 smallest it was just 1.5%. Does this fact indicate economies of scale and scope in health-care systems? Does it indicate market power?

Reviewed By: James Dearden, Lehigh University

Organizational structure

Someone needs to apply RAP

"For something this deceitful and stupid, a corporate mea culpa is not enough. Volkswagen must explain how something like this could happen, and identify those who came up with the idea and authorized it." (http://www.nytimes.com/2015/09/23/opinion/what-was-volkswagen-thinking.html?ref=opinion).

This article says that the organization structure of VW played a big role: http://www.nytimes.com/2015/09/25/business/international/problems-at-volkswagen-start-in-the-boardroom.html?_r=0.

Follow this link for another example: too: http://www.cnn.com/2015/09/21/us/salmonella-peanut-exec-sentenced/

RAP

Pricing Decisions

This article is a good example of the topics we will discuss in our next meeting. 

Lululemon Sales Rise, Gross Margin Declines

by: Lisa Beilfuss
Sep 11, 2015
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: Lululemon Athletica Inc. reported a one-percent increase in second-quarter sales, but the gain came at the expense of a gross margin that declined sharply from a year earlier.

CLASSROOM APPLICATION: Using demand and cost functions for a product in which a manufacturer has market power, students can evaluate the tradeoff between sales and unit profit (= price : average cost). They can then examine the conditions under which Lululemon would optimally lower price, and as a consequence reduce unit profit, to increase sales.

QUESTIONS: 
1. (Advanced) Define profit margin. Define unit profit. What is the relationship between the two concepts?

2. (Introductory) What factors have caused Lululemon's profit margin to decrease?

3. (Advanced) Suppose a firm is operating on a segment of its average cost curve in which average cost is increasing in output. If the firm, which has market power, lowers its price to increase sales, will the firm necessary experience a decrease in unit profit?

4. (Advanced) Is it possible that Lululemon is increasing profits by lowering prices of its products, despite a decrease in profit margin?

Reviewed By: James Dearden, Lehigh University 

Predictive software

http://www.wsj.com/articles/the-data-driven-rebirth-of-a-salesman-1442534375

Pricing books

This article is a great example of pricing.

E-Book Sales Fall After New Amazon Contracts
by: Jeffrey A. Trachtenberg
Sep 04, 2015
Click here to view the full article on WSJ.com

TOPICS: Contracts, Pricing

SUMMARY: E-book revenue is falling, and some people in the publishing industry say it is partly because of the higher prices that have resulted from new contracts negotiated with Amazon.

CLASSROOM APPLICATION: Students can examine the relationship between the pricing model used in setting retail book prices and the quantity demanded of books and book revenues.

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the retail prices of e-books on the quantity demanded of e-books? What is the effect of an increase in the retail prices of e-books on the quantity demanded of hardcover books?

2. (Advanced) Are hardcover books economic substitutes for e-books? Is it possible that a decrease in the price of e-books would result in a decrease in the quantity of hardcover books demanded?

3. (Advanced) Describe agency pricing and the wholesale model for pricing. Are publishers necessarily made better off in moving from the wholesale model to agency pricing?

4. (Advanced) An increase in e-book prices associated with a shift from the wholesale model to agency pricing results in a decrease in retail e-book revenues. Is it possible that the profits of publishers could increase by this shift in pricing policy and resultant decrease in retail e-book revenues? Consider two issues: the publishers' shares of e-book revenues and the sales and revenues from hardcover books.

Reviewed By: James Dearden, Lehigh University

Piece rate v. subjective, holistic evaluation criteria

This article discusses the advantages of piece rates even when some of the pieces are missing: http://organizationsandmarkets.com/2015/07/20/piece-rates-and-multitasking/. One implication of the article is that identifying the "best" compensation scheme is difficult and complicated.

How not to write well

http://www.mcsweeneys.net/articles/an-interactive-guide-to-ambiguous-grammar

Performance reviews

The article takes a dim view of traditional performance reviews and "rank and yank": 

http://www.bbc.com/capital/story/20150826-the-dreaded-performance-review.

Label = Aligning interests

--

Edward Millner, Professor

Department of Economics, Virginia Commonwealth University

Snead Hall, B3145

301 West Main Street, Richmond VA, 23284-4000

804.828.1718

I never teach my pupils. I only attempt to provide the conditions in which they can learn.

- Albert Einstein

Does growth result in more profit?

This article in the WSJ describes Wal-Mart's struggles to increase sales and what is happening to its profit. Here are some questions.

1. How would you evaluate the costs and benefits of "investment in wages, better stores, and e-commerce"?
   
2. How would you evaluate the costs and benefits of increasing the number of work-hours employed?
   
3. What are margins? " "In the near-term, [Simeon Gutman, retail analyst at Morgan Stanley] said, 'it's not a question of if margins are going to fall, it's a question of how far.'

Labels: Pricing decisions, all-or-nothing decisions, employment decisions

Building an ethical business culture

This answer says that the first step to building an ethical business culture is to "to go with your gut when hiring: look for a cultural fit, [Simon Webley, research director at the Institute of Business Ethics in London] said by email. No matter how big the company is, you can find out if a candidate shares your values by grilling him or her during interviews, Webley said." It also recommends 

1. Creating and publicizing  a code of ethics and including ethics training
2. Structure teams so that people are encouraged to work together
3. Lining up your compensation structure with collaboration
4. Act on your values

I have a question: "How effective are interviews at screening ethical people?"

Label: Aligning interests

Cost of capital

This article in the WSJ describes the difficulty of measuring economic profit.

Label: All-or-nothing decisions

All or Nothing

Robert Griffin III and the Sunk Cost Fallacy

This opinion from the NYT argues that the Redskins may be falling prey to the sunk cost fallacy. 

Occupational Licensing

This opinion in the WSJ argues that one barrier to upward mobility is overly restrictive occupational licensing requirements imposed by state and local governments. The writer thinks that governments should eliminate requirements when its cost to benefit ratio is greater than one.  

SUMMARY: Cost-benefit analysis and 'lookbacks' could lift the unnecessary burdens of occupational licensing. "A widely overlooked part of Paul Ryan's antipoverty plan draws attention to the problem of occupational licensing, and it rightly calls on states and local governments "to begin to dismantle these barriers to upward mobility." But how? The answer, we think, lies in the adoption of a rigorous cost-benefit test. That test would impose new discipline on what state and local governments do-and it would eliminate unjustified barriers to job creation and economic growth."

CLASSROOM APPLICATION: Students can examine the effect of state and local regulations on entry, competition, prices, and economic efficiency of industries. Students can examine occupational licensing for example.

QUESTIONS: 
1. What are "regulatory lookbacks"?

2.When considering whether to implement new regulations, is it important for legislators and regulators to examine the economic consequences of doing so? What are the relevant economic consequences? Why is cost-benefit analysis an appropriate methodology for evaluating government regulations?

3. Who suffers the most from occupational licensing requirements?

Reviewed By: James Dearden, Lehigh University

4. Who benefits the most from occupational licensing requirements?

Wednesday, January 30, 2013

Regulations and Rent Seeking

CNNMoney posted this article. It is a nice list of regulations that prevent entry and competition. It could be a nice way to introduce a discussion of the government's role in regulating market inefficiencies and the danger that government regulation becomes rent seeking. The example about taxicabs could also spur discussion about the entry and exit decisions and what determines the price of medallions.

Monday, January 21, 2013

Ice Cream Wars

Clip here for an NPR story on Ice Cream Trucks in Chicago. It touches on vertical relationships, rent seeking, incremental analysis, and collusion.

Friday, January 18, 2013

What can we learn about pricing from Lucy Ricardo?

Click here to view a clip from I Love Lucy on how (not) to set price. It is a good introduction for Bertrand pricing in an undifferentiated duopoly, strategy, whether a marginal sale is profitable, and the shut-down decision.

Want lots of rehabilitative therapy?

How Medicare Rewards Copious Nursing-Home Therapy
by: Christopher Weaver, Anna Wilde Matthews, and Tom McGinty
Aug 17, 2015
Click here to view the full article on WSJ.com

TOPICS: Economic Incentives, Health Economics

SUMMARY: For U.S. nursing homes, Medicare's rules can provide a financial incentive to increase rehabilitative therapy for patients who may not benefit from extra care.

CLASSROOM APPLICATION: Using marginal benefit and marginal cost, students can evaluate the influence of financial incentives on medical decisions. They can also evaluate how economists could determine whether nursing homes are providing inefficiently high levels of care.

QUESTIONS: 
1. (Introductory) Does the Medicare payment mechanism for physical and occupational therapy provided by nursing homes described in the article account for the benefits of the care?

2. (Advanced) Would it be feasible for Medicare to design a payment mechanism for providing nursing home physical and occupational therapy that accounts for the benefits that individual patients would receive?

3. (Advanced) Use marginal benefit and marginal cost to analyze a nursing home's choice of the amount of physical and occupational therapy for a patient covered by Medicare? With Medicare's current payment system in place, why would a nursing home potentially set a resident's physical and occupational therapy at exactly 720 minutes per week?

Reviewed By: James Dearden, Lehigh University

Labels, Rational actor, moral hazard

Subway

Subway's Salad Days Are Past 
by: Julie Jargon
Aug 14, 2015
Click here to view the full article on WSJ.com

TOPICS: Strategy

SUMMARY: Subway, suffering through its biggest slump in years, is testing just how sprawling a fast-food chain can get before it becomes too big.

CLASSROOM APPLICATION: Students can evaluate the decision by a parent company like Subway whether to sell new franchises and the decision whether to own outlets or franchise them. Students can also evaluate the factors that have caused a decline in Subway's revenues.

QUESTIONS: 
1. (Introductory) What factors are causing Subway's reduced revenues?

2. (Advanced) How does a parent company determine the optimal number of franchises to sell? Consider the statement, "Subways aren't cannibalizing each other and that restaurants in the most Subway-dense markets actually have higher average sales."

3. (Advanced) Why have fast-food companies like McDonald's and Wendy's been selling corporate-owned outlets to franchisees?

Reviewed By: James Dearden, Lehigh University

Labels: Strategy, Organizational architecture

Pricing decisions

http://qz.com/481830/how-will-chinas-fastest-growing-smartphone-brands-ever-make-money/

--

Edward Millner
URL: sites.google.com/site/EdwardMillner

Big data

This story from the BBC describes how Pizza Hut Restaurants UK is using data. Here are some good quotes.

1. "It's easy to see results and take the wrong read of them"
2. "The answer ... is to run control experiments, much in the same way that they test for the efficacy of new drugs."
3. "'We saw 40% growth in some of our really big investments, which was truly transformational,' says Mr Platt. 'Before we started, average customer spend was about £9, now it's around £11.'"
4. "Data analytics and continuous testing help us to draw the right conclusions from evidence - something that humans are not naturally good at."
5. We are prone to "cognitive bias", or wonky thinking, because we don't weigh up the evidence correctly or ignore it altogether, swayed by our prejudices, emotions and lack of logic."

Ranking employees

This article reports that the effect of public rankings of employees depends on whether the culture is individualistic or collective. I wonder how the rankings affect compensation.

Dilbert on economists