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?