How to give and to receive feedback

Feedback shouldn't be something to dread. When done right,feedback in the form of appreciation gives people a clear picture of where they’re adding value, helps them understand their strengths, and provides opportunity for improvement.

From qz.com.

Wal-Mart and Amazon compete to sell the Star Shower Motion

Star Shower Price War Shakes Up Retailers
by: Sarah Nassauer and Laura Stevens
Dec 14, 2016
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: The battle for sales of outdoor projector Star Shower Motion shows how frequent online price changes have challenged the retail industry. "The battle for Star Shower Motion sales shows how Amazon's frequent online price changes have challenged the retail industry, changing how shoppers compare prices, how traditional retailers price goods and how product manufacturers look to sell their wares. It also illustrates how Amazon is willing to give up profits on a popular item in the hope of capturing more sales from shoppers and maintaining a reputation for having the lowest prices, even if that doesn't apply to every single item."

CLASSROOM APPLICATION: The article offers three interesting points for students to examine. First, retailers sell product lines, and a retailer might lower the price of one product so as to increase the profits of another. Second, retailers compete. Therefore, one retailer, Amazon for example, lowers the price of product to increase sales of other products. However, competitors may not experience the same product complementarities. Hence, in matching Amazon's price, other retailers may be pricing suboptimally. Third, other retailers may be upset with a manufacturer for selling its product to Amazon. In turn, these other retailers may drop the product.

QUESTIONS: 
1. (Advanced) "Mr. Khubani says he worries the weekslong price war has trained some shoppers to expect to pay less for the Star Shower Motion, part of why he is rethinking his strategy for next year, hoping to keep profit margins higher." Why would a manufacturer choose not to sell its product on Amazon? Describe the tradeoff between sales and the wholesale price of the product.

2. (Introductory) Why would Wal-Mart choose to match Amazon's price for popular products, despite a small share of the retail market for the products?

3. (Advanced) "Keeping everybody happy while we are selling on Amazon has become a challenge," Mr. Khubani said. Why are manufacturers concerned about keeping resellers (i.e., retailers) of their products happy?

Reviewed By: James Dearden, Lehigh University

How incentives work in socialist countries

How NOT to motivate physicians: lessons from Cuba

Cuba penalizes physicians for "not meeting quotas" on infant mortality.  How do they respond?

• When pregnancies are deemed risky, doctors have to coerce women to undergo abortion in spite of their wishes. 
•  On top of this, forced sterilization in some cases are an actually documented policy tool. These restrictions do reduce mortality, but they feel like a heavy price for the people. 
•  ...doctors ... lie about the statistics. One thing that is done by the regime is to categorize “infant deaths” as “late fetal deaths” – its basically extending the definition in order to conceal a poorer performance.

What happens when you adjust the infant mortality statistics?

• ...Cuba moves from having an average infant mortality rate ... to having the worst average infant mortality in that dataset – above that of most European and North American countries.

Pricing and price discrimination in the automobile market

Car Dealers Take Steps to Help 'Underwater' Buyers Trade Up
by: Adrienne Roberts and Christina Rogers
Dec 02, 2016
Click here to view the full article on WSJ.com

TOPICS: Pricing

SUMMARY: Customers who owe more than their cars are worth are getting financing incentives including rebates, long loan terms-even cash.

CLASSROOM APPLICATION: Students can evaluate the causes of underwater auto loans, the incentives that auto manufacturers and dealers offer to consumers who are underwater on current loans, and the effect of lower gasoline prices on the types of automobiles that consumers are purchasing,

QUESTIONS: 
1. (Introductory) What are the causes of the increase in the number of car owners who are underwater on their auto loans?

2. (Advanced) What is the effect of a decrease in gasoline prices on the willingness of consumers to trade in the vehicles they purchased when gas prices were higher?

3. (Advanced) Why would car manufacturers and dealers set lower prices for customers who are underwater on their auto loans than for customers who are not?

Reviewed By: James Dearden, Lehigh University

Hoteling and locational choice

https://www.youtube.com/watch?v=jILgxeNBK_8

Incentives matter

http://www.bbc.com/news/blogs-news-from-elsewhere-38208914 reports that visits to nursing homes in China increase when the home pays people to visit.

Startups and organizational design

This article describes the need for a change in organizational design that startups face when they grow. Here is a money quote:

"the company needs more structure for communications and decision-making".

The article talks about the need for good information flows and clear decision rights.

How Google refines the screens it uses for job applicants

This article in Quartz talks about interview questions Google used to use to screen job applicants and how data convinced them to stop using the questions.

Entry in the market for razors

Online Upstart Harry's Razor Jumps Into Gillette's Turf
by: Saron Terlep and Khadeeja Safdar
Nov 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: When Target opened its razor aisles to online upstart Harry's Razor, Gillette paid the price. Within weeks, Harry's grabbed a 10% share of the retailer's cartridge sales and about 50% of razor handle sales.

CLASSROOM APPLICATION: Students can evaluate three issues: (1) entry into an established market, (2) whether a retailer should have multiple or single suppliers of products, and (3) the relationship between products sold by a retailer and the prices of the products.

QUESTIONS: 
1. (Advanced) Should a retailer create competition among suppliers? Alternatively, should a retailer have a dominant supplier? What are the benefits of having a sole supplier of a product? What are the benefits of having multiple suppliers?

2. (Advanced) What opportunity did Gillette create for Harry's? That is, does Gillette produce an inferior product? Does Gillette earn positive economic profit?

3. (Introductory) Do retailers like Target earn lower profits on razor blades in order to sell complementary products?

Reviewed By: James Dearden, Lehigh University

How to bargain in politics?

http://qz.com/838321/nonviolent-communication-the-scientifically-proven-step-by-step-guide-to-having-a-breakthrough-conversation-across-party-lines/?utm_source=Quartz+Morning+Brief&utm_campaign=79ea024f53-EMAIL_CAMPAIGN_2016_11_17&utm_medium=email&utm_term=0_1ff2527dbb-79ea024f53-55459981

How to bargain in politics?

http://qz.com/838321/nonviolent-communication-the-scientifically-proven-step-by-step-guide-to-having-a-breakthrough-conversation-across-party-lines/?utm_source=Quartz+Morning+Brief&utm_campaign=79ea024f53-EMAIL_CAMPAIGN_2016_11_17&utm_medium=email&utm_term=0_1ff2527dbb-79ea024f53-55459981

How to bargain in politics?

http://qz.com/838321/nonviolent-communication-the-scientifically-proven-step-by-step-guide-to-having-a-breakthrough-conversation-across-party-lines/?utm_source=Quartz+Morning+Brief&utm_campaign=79ea024f53-EMAIL_CAMPAIGN_2016_11_17&utm_medium=email&utm_term=0_1ff2527dbb-79ea024f53-55459981

New threat from a substitute product in the diamond market

DeBeers Tries to Counter a Growing Threat: Man-Made Diamonds
by: Scott Patterson and Alex MacDonald
Nov 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Innovation, Marketing

SUMMARY: A team of scientists working for De Beers is scrambling to stave off a looming threat that could tarnish the luster of natural-mined diamonds: high-quality man-made stones.

CLASSROOM APPLICATION: Students can evaluate the effect of an increase in the supply of man-made diamonds, which are imperfect substitutes for natural-mined diamonds, on the diamond market. An interesting psychological and marketing issue is the reason why despite identical physical characteristics, some people prefer natural-mined diamonds to man-made ones.

QUESTIONS: 
1. (Advanced) Lab-grown diamonds are "disrupting" the diamond industry. What is a disruptive innovation?

2. (Advanced) Why is the perception of relative scarcity important in creating consumer value of diamonds?

3. (Introductory) If man-made diamonds are physically identical to natural-mined diamonds, then why do some people prefer natural-mined diamonds?

Reviewed By: James Dearden, Lehigh University

Disparate examples of game theory and the rational actor paradigm in action

Business World. Donald Trump and Vladimir Putin's Troublemakers
by: Holman W. Jenkins, Jr.
Nov 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Economic Incentives

SUMMARY: The Kremlin has a stake in promoting email leaks that suggest America is as kleptocratic as Russia. This week's Business World column is about two incentive problems. First, "Dictators can be-but aren't necessarily-trapped into ever-increasing repression by fear of retribution over the means they used to gain power." Second, "The U.S. Army loads more checklist requirements on junior officers and their units than they can possibly comply with, leaving junior officers little choice but to become practiced at deciding which requirements to meet and which to lie about."

CLASSROOM APPLICATION: Students can evaluate the effect of pressures (i.e., incentives) that lead to unethical behavior, such as ever-increasing repression by dictators and lying and cheating by employees.

QUESTIONS: 
1. (Advanced) The column notes "tit-for-tat strategies." Describe these strategies. In games such as the prisoner's dilemma, how can the use of tit-for-tat strategies promote behavior that increases the payoffs of the players involved in the game?

2. (Introductory) What causes dictators to ever-increasingly repress their citizens?

3. (Advanced) Why does setting impossible standards for employees to meet result in unethical actions like lying and cheating by employees?

Reviewed By: James Dearden, Lehigh University

Reblog: Organizational design at Wells Fargo

https://managerialecon.blogspot.com/2016/11/wells-fargo-are-economies-of-scope-big.html

Reblog: minimum advertised prices as form of price discrimination

https://managerialecon.blogspot.com/2016/11/minimum-advertised-prices-as-form-of.html

Transfer pricing

What would determine the price ATT charges Time-Warner to stream content when the two are subsidiaries of the same parent? ATT provides a wireless network. Time-Warner produces movies and TV shows.

How does an increase in the price affect

1. ATT
2. Time-Warner
3. ATT's competitors
4. Time-Warner's competitors

Was ClassPass the victim of asymmetric information?

http://nymag.com/thecut/2016/11/classpass-got-rid-of-its-popular-unlimited-plan.html

1. Who knows whether they want to take a large number of classes or a small number, the customer or ClassPass?
2. What type of user signs up for the unlimited plan?
3. Who is more likely to take a class when they are considering costs and benefits, someone on the unlimited plan or someone who is not?

Does FB have a "“virtually insurmountable competitive advantage"?

http://www.marketwatch.com/story/facebook-earnings-growth-wont-stop-70-profit-jump-expected-2016-10-31?utm_source=Quartz+Morning+Brief&utm_campaign=f7771806f8-EMAIL_CAMPAIGN_2016_11_02&utm_medium=email&utm_term=0_1ff2527dbb-f7771806f8-55459981

An analyst says so. Is he correct? Why or why not?

Amazon's strategy

Amazon.com Can't Neglect Its Retail Roots
by: Steven Russolillo
Oct 27, 2016
Click here to view the full article on WSJ.com

TOPICS: Strategy

SUMMARY: Amazon.com's success in the cloud is well documented, but it must show its core retail business can eventually be highly profitable, too.

CLASSROOM APPLICATION: The article offers a mix of strategy and conditions for entry into new markets. Turning the concept of entry into strategy, "Amazon.com Inc. boss Jeff Bezos is fond of saying 'your margin is my opportunity.'" The article also notes that fixed infrastructure costs can be a deterrence to entry. "Massive investment in Amazon's warehouse and delivery infrastructure makes its position increasingly difficult to challenge."

QUESTIONS: 
1. (Advanced) Comment on Jeff Bezos' statement 'your margin is my opportunity' and the perfect competition condition of free entry and exit.

2. (Introductory) Why is Amazon's position increasingly difficult to challenge?

3. (Advanced) "Amazon Web Services, the cloud-computing unit, will be affected by the offsetting trends of rapid growth and brutal competition that has left much of the market commoditized." What is the relationship between the perfect competition condition of identical products and the equilibrium profits in perfect competition? In the cloud computing industry, would the perfect competition conditions of zero transactions costs and complete information also be satisfied?

Reviewed By: James Dearden, Lehigh University

Talk about fast entry!

http://qz.com/771727/chinas-factories-in-shenzhen-can-copy-products-at-breakneck-speed-and-its-time-for-the-rest-of-the-world-to-get-over-it/

Does a guaranteed return reduce risk or shift it?

http://qz.com/791481/guaranteed-returns-are-a-terrible-idea/

Compensation in law firms

Law Firms Demote Partners as Pressure Mounts Over Profits
by: Sara Randazzo
Oct 11, 2016
Click here to view the full article on WSJ.com

TOPICS: Compensation

SUMMARY: Faced with client pressure to keep down costs and industry competition to achieve the highest profits, law firms now frequently assess which lawyers are worthy enough for the top rungs of partnership.

CLASSROOM APPLICATION: Based on the article, students can evaluate the compensation structure of law firms. Instructors can pose the question about why law firms are organized as partnerships, in which partners share in the revenues that each brings to the firm.

QUESTIONS: 
1. (Introductory) During a decrease in demand for legal services, why do law firms demote partners?

2. (Advanced) Why are some lawyers valuable to a firm despite the limited revenues that bring to the partnership?

3. (Advanced) Why are law firms organized as partnerships in which partners share in the earnings of the firms?

Reviewed By: James Dearden, Lehigh University

Is traffic congestion a prisoner's dilemma?

One Driver Can Prevent a Traffic Jam
by: Sue Shallenbarger
Oct 12, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Game Theory

SUMMARY: Proponents advise jam-busting techniques, such as preventing bottlenecks, letting others cut in.

CLASSROOM APPLICATION: Students can evaluate whether drivers in heavy traffic are playing a prisoner's dilemma. If so, they can explain driving behavior that makes everyone driving in heavy traffic worse off.

QUESTIONS: 
1. (Advanced) Evaluate the following statement as a cause of traffic congestion: "Selfishness takes hold, and people don't necessarily think much about the common good."

2. (Advanced) What is the prisoner's dilemma? Are drivers in heavy traffic playing a prisoner's dilemma? Each driver does strictly better leaving no gap in front of him or her. However, collectively drivers do better if everyone leaves a gap.

3. (Introductory) Why is a driver leaving a gap in front of his or her car analogous to a person holding a door for others?

Reviewed By: James Dearden, Lehigh University

Contract thery uses the Rational Actor Paradigm to determine optimal contracts when information is costly and asymmetric

Nobel Prize in Economics Awarded to Oliver Hart and Bengt Holmström for Work on Contract Theory
by: Charles Duxbury and Mike Bird
Oct 11, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Contracts

SUMMARY: The 2016 Nobel Prize in Economic Sciences was awarded jointly to Oliver Hart of Harvard and Bengt Holmström of MIT for their contributions to contract theory.

CLASSROOM APPLICATION: The article informs students about this year's Nobel Prize recipients and offers brief statements about the theory of contracts. Instructors can use the article to inspire students to investigate the economics issues involved in contracts.

QUESTIONS: 
1. (Advanced) Why are contracts and a well-functioning legal system to enforce them important to the functioning of an economy? Research question. Distinguish a "complete contract" from an "incomplete contract."

2. (Advanced) What are the incentive issues in the design of contracts for executive compensation?

3. (Introductory) What is an example of a pitfall in the design of a contract for example between a buyer and supplier?

4. (Advanced) What is the incentive problem created by a government bailing out a failed bank?

Reviewed By: James Dearden, Lehigh University

Does McDonald's need a new strategy?

Questions:

1. How should McDonald's respond to entry by "better burger" chains? 
2. Is this response consistent with its current strategy?
3. If the response is consistent with its current strategy, do you think the strategy positions McDonald's to have a sustained competitive advantage?
4. If the response is not consistent with its current strategy, do you think the McDonald's is revising its strategy and, if so, will the new strategy position McDonald's to have a sustained competitive advantage?

McDonald's Knows It's Losing the Burger Battle : Can It Come Back?

by: Julie Jargon
Oct 07, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: New, "better burger" chains are pulling in customers with gourmet, made-to-order hamburgers, a tactic McDonald's is struggling to mimic. The company is working on improved flavors and customized ordering, a goal in conflict with its need for speed and low cost.

CLASSROOM APPLICATION: Students can evaluate McDonald's burger strategy: frozen vs. fresh patties, made-to-order vs. mass burgers. The strategy about product attributes involves cost, consumer preferences, preparation time, and competitors' product attributes.

QUESTIONS: 
1. (Advanced) How does the entry of made-to-order hamburger chains affect McDonald's strategy?

2. (Advanced) What is the tradeoff McDonald's faces when deciding whether to serve fresh or frozen burgers? How do the costs of the two types of burgers, consumer preferences, and competitors' products affect the tradeoff?

3. (Introductory) Should McDonald's improve the quality of its current burgers or should it attempt to compete head to head with made-to-order burger chains?

Reviewed By: James Dearden, Lehigh University

Hold-up = price discrimination in the market for apartments

Some Big U.S. Cities See Apartment Rents Fall for First Time in Years
by: Laura Kusisto
Oct 05, 2016
Click here to view the full article on WSJ.com

TOPICS: Supply and Demand

SUMMARY: Apartment rents declined in some of the country's priciest cities during the third quarter, a dramatic reversal that could signal the end of a six-year boom for the U.S. rental market.

CLASSROOM APPLICATION: Students can evaluate the effect of an increase in the supply of apartments and a decrease in job growth, which causes a decrease in demand, on apartment rents. The article also notes a "hold-up problem": Landlords typically drive a harder bargain on renewals because they know residents would rather avoid the hassle of moving.

QUESTIONS: 
1. (Introductory) What is the effect of an increase in the supply of apartments on rents?

2. (Advanced) What is the effect of a slowdown in job growth on rents?

3. (Advanced) Why do landlords typically drive a harder bargain on apartment lease renewals?

Reviewed By: James Dearden, Lehigh University

Who benefits when Delta Lloyd’s executive board rejects a takeover bid

http://www.wsj.com/articles/delta-lloyd-rejects-nn-groups-takeover-bid-1475820920

Questions:

1. Did Delta Lloyd reject the bid or did the executive board of Delta Lloyd reject the bid?
2. Prior to the bid, did the buyers and sellers in the stock market believe that Delta Lloyd's "capital position [and] opportunity to improve further capital generation and dividends” warranted a 30% increase in the market value of Delta Lloyd?
3. Whose opinion of the value of a company is more accurate, the buyers and sellers in the stock market or the executive board? 
4. Did the offer help or hurt shareholders relative to their position before the bid?
5. Could the shareholders benefit from the executive board's decision to reject the bid? If so, how?
6. Could the members of the executive board benefit from the decision to reject? If so, how?

An example of contracting costs

Trouble Brewing in the Craft Beer Industry
by: Tripp Mickle
Sep 28, 2016
Click here to view the full article on WSJ.com

TOPICS: Supply and Demand

SUMMARY: The proliferation of small breweries has left owners struggling to find enough specialty hops, contributing to a sudden slowdown in craft beer sales and fueling fears among farmers that they are headed for a supply glut.

CLASSROOM APPLICATION: Students can analyze two points related to economics. First, the supply of beer by small breweries is constrained by the supply of hops they use as inputs. Second, farmers that grow specialized hops for small breweries accept risk that the demand for the hops will not pan out and that the breweries may not survive.

QUESTIONS: 
1. (Advanced) What factor is causing a suboptimal supply of hops used in brewing craft beer?

2. (Introductory) What is the effect of the limited supply of specialized hops on the supply and price of craft beer?

3. (Advanced) Describe the risk that farmers face when growing specialized hops.

Reviewed By: James Dearden, Lehigh University

Questions:

1. What risk does the hop farmer want to eliminate when signing a contract with a brewer?
2. What risk does the brewer want to eliminate when signing a contract with a hop farmer?
3. Can you structure a contract to satisfy both parties? How or why not?

Is Amazon integrating backward?

Amazon's Newest Ambition: Competing Directly With UPS and FedEx
by: Greg Bensinger and Laura Stevens
Sep 28, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: To constrain rising shipping costs, the online giant Amazon.com is building its own delivery operation, showing the extent of its ambition and also setting up a clash with the company's shipping partners.

CLASSROOM APPLICATION: Students can analyze three economics issues in Amazon's entry into the delivery business: economies of scale, barriers to entry, and delivery reliability.

QUESTIONS: 
1. (Advanced) How does Amazon help UPS and FedEx lower the cost per package delivered?

2. (Advanced) What are the barriers to entry into the delivery business?

3. (Introductory) Why is the reliability of package delivery, especially during the holiday season, important to Amazon?

Reviewed By: James Dearden, Lehigh University

Some questions

1. Why do analysts say, "Keeping packages under its own control just over longer distances could save Amazon around $3 or more on a typical delivery"?
2. What specialized investments occur when Amazon uses UPS for delivery services?

A good explanation of adverse selection and Obamacare

http://www.nytimes.com/2016/09/25/upshot/football-team-at-the-buffet-why-obamacare-markets-are-in-crisis.html?ref=business&mtrref=undefined&gwh=B8ED683EFEB6C4E5B641AB874710CE3F&gwt=pay&_r=0

Is this an example of a threat from a substitute product?

http://money.cnn.com/2016/09/24/technology/diy-epipen-affordable-alternatives/index.html

Adverse selection in the grass-fed beef industry?

Why Grass-Fed Beef Is on a Roll
by: Ellen Byron and Sarah Nassauer
Sep 21, 2016
Click here to view the full article on WSJ.com

TOPICS: Adverse selection, Supply and Demand

SUMMARY: Once a niche luxury, grass-fed beef is showing up in ballpark burgers and on Wal-Mart shelves. People splurge on the leaner meat despite questions about its labeling and flavor.

CLASSROOM APPLICATION: Students can examine the reasons for the increased demand for grass-fed beef. They can also discuss whether adverse selection is an issue in the industry, which leads for the call from some grass-fed beef producers for strict labeling standards.

QUESTIONS: 
1. (Introductory) Why are people willing to pay more for grass-fed beef than for conventional beef?

2. (Introductory) What is the effect of the increased demand for grass-fed beef on the equilibrium price and quantity of grass-fed beef?

3. (Advanced) Define adverse selection. Would the grass-fed beef market be subject to adverse selection?

4. (Advanced) Why do grass-fed beef producers with strict standards call for strict grass-fed beef certification?

Reviewed By: James Dearden, Lehigh University

Was Wells Fargo unique?

http://money.cnn.com/2016/09/22/investing/wells-fargo-fake-accounts-banks/index.html

Maybe this is why the rational actor paradigm sometimes fails

http://www.independent.co.uk/news/world/australasia/psychopaths-ceos-study-statistics-one-in-five-psychopathic-traits-a7251251.html?platform=hootsuite

Online shopping in rural America

E-Commerce Is a Boon for Rural America, But It Comes With a Price
by: Laura Stevens
Sep 12, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: E-Commerce

SUMMARY: E-commerce is transforming rural America by providing small-town residents with big-city conveniences and the latest products. But serving these consumers is expensive for retailers and delivery companies.

CLASSROOM APPLICATION: The article informs students the effect of the shift in shopping by rural Americans from brick-and-mortar stores to online retailers.

QUESTIONS: 
1. (Advanced) The article states that online retailers sometimes lose money on products sold to rural customers. Why would online retailers set their pricing and shipping rates that result in losses on products sold to these customers?

2. (Introductory) Which results in lower shipping costs: sales at traditional brick-and-mortar stores or sales by online retailers?

3. (Advanced) Is Wal-Mart's strategic move into groceries a response to the growth of online retailing? Are households who shop at Wal-Mart for perishable groceries more likely to purchases consumer products at the retailer?

Reviewed By: James Dearden, Lehigh University

Unintended consequences of an incentive compensation scheme?

http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts-bank-fees/index.html

"The phony accounts earned the bank unwarranted fees and allowed Wells Fargo employees to boost their sales figures and make more money."

How could WF reduce the chances of similar mistakes AND maintain a program that encourages employees to cross-sell?

Addendum:

Wells Fargo to Pay $185 Million Fine Over Account Openings
by: Emily Glazer
Sep 09, 2016
Click here to view the full article on WSJ.com

TOPICS: Principal-Agent Problem

SUMMARY: Wells Fargo, the largest U.S. bank by market value, must pay $185 million related to a regulatory enforcement action over "widespread illegal practice" around account openings, sales targets and compensation incentives. The bank fired about 5,300 employees during the government's examination. Related article: The San Francisco bank, with its folksy stagecoach logo, has positioned itself as a solid, Main Street lender that avoided the excesses of the financial crisis. That image is now in danger.

CLASSROOM APPLICATION: Students can examine the effect of sales incentives on the decisions by Wells Fargo employees to pursue underhanded sales practices. "The sales tactics and practices, which were fueled by an incentive structure that rewarded employees on the more products they sold, got out of hand, according to regulators."

QUESTIONS: 
1. (Introductory) Why do sales incentives create the willingness of employees to engage in underhanded sales practices?

2. (Advanced) What is the "principal-agent problem"? Is the Wells Fargo case an example of workers (agents) not acting in the best interest of a principal (Wells Fargo)?

3. (Advanced) What actions could Wells Fargo take to regain its positive reputation?

Reviewed By: James Dearden, Lehigh University

Unintended consequences of an incentive compensation scheme?

http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts-bank-fees/index.html

"The phony accounts earned the bank unwarranted fees and allowed Wells Fargo employees to boost their sales figures and make more money."

How could WF reduce the chances of similar mistakes AND maintain a program that encourages employees to cross-sell?

Unintended consequences of an incentive compensation scheme?

http://money.cnn.com/2016/09/08/investing/wells-fargo-created-phony-accounts-bank-fees/index.html

"The phony accounts earned the bank unwarranted fees and allowed Wells Fargo employees to boost their sales figures and make more money."

How could WF reduce the chances of similar mistakes AND maintain a program that encourages employees to cross-sell?

What is the relevant cost of keeping a store open?

Macy's Fix for Department Store Woes: Fewer Stores
by: Suzanne Kapner
Aug 12, 2016
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: Macy's said it would close 100 stores, admitting that some locations were worth more as real estate than retail outlets as shoppers continue to spend more online and at discount chains.

CLASSROOM APPLICATION: Students can examine Macy's rationale for closing stores, the effect of the closings on Macy's share prices. They can also characterize the opportunity cost of locating Macy's in mall retail space.

QUESTIONS: 
1. (Advanced) What would Macy's announcement that the company is closing stores result in higher share prices? Why would the announcement result in higher share prices of competitors?

2. (Advanced) Does the following statement speak to the opportunity cost of locating Macy's department stores in retail spaces? Does the statement imply that the Macy's being closed are unprofitable in an accounting sense? "Most of these stores are underperformers or in weak locations" but the company also will close a few locations because "desirability as a redevelopment opportunity exceeds their value to us as a retail store," Macy's finance chief, Karen Hoguet, told analysts Thursday.

3. (Introductory) Why is Macy's closing stores? What is the effect of the opportunity to purchase clothes online on the demand for clothes sold at brick and mortar stores?

Reviewed By: James Dearden, Lehigh University

More moral hazard in health care

Big Driver of Medicare Spending: Doctors Doing More Tests in Their Offices

by: Christopher Weaver and Coulter Jones
Aug 10, 2016
Click here to view the full article on WSJ.com

TOPICS: Health Economics, Moral Hazard

SUMMARY: New medical devices allow doctors to test patients themselves, leading to fast-growing Medicare payouts, according to the latest data.

CLASSROOM APPLICATION: Instructors can use the article as a case of moral hazard with hidden information. One issue to analyze is whether the financial incentives offered by Medicare cause excessive use in the sense of economic efficiency of medical treatments.

QUESTIONS: 
1. (Advanced) Define moral hazard. What is moral hazard with hidden information? Would a physician profiting from ordering medical tests for patients create an environment of moral hazard with hidden information?

2. (Introductory) Does the article offer anecdotal evidence that changes in Medicare sets up payments for new services causes inefficiently excessive use of the services?

3. (Advanced) Does a physician's exceptional use of a medical test or treatment in which the physician owns the necessary equipment indicate that the physician is responding to financial incentives? What other factors could explain the physician's exceptional use? How could economists determine whether the financial incentives motivate the physician?

Reviewed By: James Dearden, Lehigh University

Limitations of the Rational Actor Paradigm?

https://www.washingtonpost.com/news/wonk/wp/2016/03/15/why-we-should-give-up-trying-to-make-people-less-sexist/ dicusses how biases exist and how the difficulty in removing them. It talks about problems and solutions when making employment decisions and during negotiations.

What determines salaries?

Why There is No Science in Your Salary
by: Lauren Weber
Aug 03, 2016
Click here to view the full article on WSJ.com

TOPICS: Labor Economics

SUMMARY: An improving labor market and fair-pay laws are prompting companies to rethink the way they set salaries and, in some cases, implement a formal compensation structure or philosophy to guide their decisions. Related article 1: The ad hoc process of making salary decisions based on factors like a candidate's competing offer or the budget handed down by a distant finance team is looking less tenable to a lot of human-resources executives. Related article 2: Questions about pay equity may be moving into the boardroom. Among nonemployee corporate directors, women and minorities make less than their nondiverse counterparts, according to latest research.

CLASSROOM APPLICATION: Instructors can use the articles to introduce important practical issues in salary determination, paying particular attention to pay equity. One point is that pay is determined as a function of job and market data and managerial discretion. Pay inequities can creep into salary determination mostly through the use of managerial discretion.

QUESTIONS: 
1. (Advanced) How should prior salaries be used in determining salaries of new employees?

2. (Introductory) Why did female hires at Google in 2015 receive a 30% bigger raise over their prior salary than male new hires?

3. (Advanced) Should employers use data from the labor market when setting salaries? Should employers respond to offers made by other firms to attract star employees?

4. (Advanced) Is setting salaries an art or a science? What does it mean for an economic process to be an art?

Reviewed By: James Dearden, Lehigh University

RELATED ARTICLES: 
What is the Best Way to Pay Workers?
by Lauren Weber
Aug 03, 2016
Page: B6

Pay Inequality Poses a Concern in Boardrooms, Too
by Rachel Feintzeig
Aug 03, 2016
Page: B6

An example of backward integration

Easily Integrate These Wall Street Journal Articles in Your Class

advertisement Special Student Rates! Your students are eligible for the lowest rates - 75% off! They'll receive full digital access on their laptops, smartphones and tablets, plus the print edition 6 days a week. They can subscribe at WSJ.com/studentoffer. Be sure to share this information with your students. THIS WEEK'S ARTICLES Google Profits Surge on Strong Ad Demand How Mobile Games Rake In Billions Telecoms Consider Fee Hikes, as Fierce Price War Plays Out Inside Verizon's Gamble on Digital Media Why There is No Science in Your Salary Google Profits Surge on Strong Ad Demand by: Jack Nicas Jul 29, 2016 Click here to view the full article on WSJ.com TOPICS: Advertising SUMMARY: Google parent Alphabet said quarterly profit soared 24%, the second internet giant in two days to report blockbuster earnings driven by consumers' rapid shift to mobile devices. CLASSROOM APPLICATION: Students can evaluate the effect of the rise in smartphones on Google's revenues from click ads. The increase in the use of smartphones has increased the demand for click ads, which in turn has increased Google's revenues from click ads. Instructors can emphasize the point that a new technology, smartphones, has increased the demand for a product, click advertising. QUESTIONS:  1. (Advanced) What is the effect of the rise of smartphones on internet use? What is the effect of the rise in internet use on click advertising? 2. (Introductory) Why are companies increasingly willing to advertise on smartphones? 3. (Advanced) Why has Google in particular benefited from the rise of smartphones? Reviewed By: James Dearden, Lehigh University How Mobile Games Rake In Billions by: Sarah E. Needleman Jul 29, 2016 Click here to view the full article on WSJ.com Click here to view the video on WSJ.com  TOPICS: Price Discrimination SUMMARY: Behind a pair of recent multibillion-dollar deals in the mobile videogame industry is an expertly crafted weapon: virtual goods sold inside apps for as little as 99 cents a pop. In-app purchases let players spend real money to bypass ads, acquire skills or grow powerful quickly. CLASSROOM APPLICATION: Students can evaluate the evolution of mechanisms within mobile videogames to increase the likelihood that players purchase in-game tools to improve the playing experience. One interesting class of mechanisms involves behavior-based price discrimination: "Data on players' behavior also are used to strategically tweak prices for virtual goods in real time." QUESTIONS:  1. (Introductory) Is the use of a countdown clock within a game a tool used by game developers to price discriminate? 2. (Advanced) What is "behavior-based price discrimination"? What are examples of behavior-based price discrimination noted in the article? 3. (Advanced) Evaluate the statement, "Developers have gotten savvier about giving players more free things to do to keep them hooked until they start spending." Does getting hooked on a game imply that the player's demand for continued and faster play is more price inelastic? Does the higher price inelasticity imply that the player is more willing to pay to play a game without imposed delays? Reviewed By: James Dearden, Lehigh University Telecoms Consider Fee Hikes, as Fierce Price War Plays Out by: Thomas Gryta Aug 01, 2006 Click here to view the full article on WSJ.com TOPICS: Competition, Pricing SUMMARY: Big U.S. wireless carriers have reported second-quarter results that suggest prices have stabilized, and some are even talking about possible increases. CLASSROOM APPLICATION: Students can evaluate factors that have causes wireless providers to contemplate price increases. In particular, students can examine whether the maturing of the wireless market leads firms to increase prices. In the analysis, if all subscribers of a particular plan offered by a firm, Verizon Wireless for example, pay the same price, then if Verizon lowers its price to attract new customers, it lowers its price for existing customers as well. Because the probability of attracting a customer that is new to the market could be greater than the probability of attracting a competitor's customer, Verizon may be more willing to lower its price to attract new customers. Therefore, as the number of new customers falls, the company may raise prices. QUESTIONS:  1. (Advanced) Why would wireless carriers set lower prices to attract new customers who have entered their market, and set higher prices in the competition to steal one another's customers? 2. (Advanced) In simple economic models with one product and one time period, does price equal revenue per unit sold? The article notes average revenue per user (per month). Why do wireless carriers use average revenue per user as a metric to measure their performance? Why do wireless carriers distinguish average revenue per user from plan prices? 3. (Introductory) Why would the coming new iPhone spark a fresh round of promotions? Reviewed By: James Dearden, Lehigh University Inside Verizon's Gamble on Digital Media  by: Ryan Knutson, Ben Fritz, and Mike Shields Aug 02, 2016 Click here to view the full article on WSJ.com TOPICS: Mergers, Vertical Integration SUMMARY: Verizon's purchase of Yahoo is the latest move by the telecom to expand into Hollywood and Silicon Valley. The plan is to own and distribute online content and use data collected from mobile phones to target advertising to tens of millions of users. CLASSROOM APPLICATION: Students can examine Verizon's rationale in acquiring Yahoo, and instructors can use this case as an example of vertical integration. QUESTIONS:  1. (Advanced) What is "vertical integration"? Is Verizon's acquisition of Yahoo an example of vertical integration? Is Verizon's move into online media an example of vertical integration? 2. (Advanced) How would Verizon generate revenue from distributing online content? 3. (Introductory) What is the effect of the increased competition for Hollywood content on the price of the content?

Google profits from switch to mobile devices

Google Profits Surge on Strong Ad Demand
by: Jack Nicas
Jul 29, 2016
Click here to view the full article on WSJ.com

TOPICS: Advertising

SUMMARY: Google parent Alphabet said quarterly profit soared 24%, the second internet giant in two days to report blockbuster earnings driven by consumers' rapid shift to mobile devices.

CLASSROOM APPLICATION: Students can evaluate the effect of the rise in smartphones on Google's revenues from click ads. The increase in the use of smartphones has increased the demand for click ads, which in turn has increased Google's revenues from click ads. Instructors can emphasize the point that a new technology, smartphones, has increased the demand for a product, click advertising.

QUESTIONS: 
1. (Advanced) What is the effect of the rise of smartphones on internet use? What is the effect of the rise in internet use on click advertising?

2. (Introductory) Why are companies increasingly willing to advertise on smartphones?

3. (Advanced) Why has Google in particular benefited from the rise of smartphones?