Cable TV bundles

Why Does the Cable-TV Bundle Exist Anyway? 
by: Joe Flint
Jun 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Microeconomics

SUMMARY: Since the birth of cable TV, channels have been sold as a bundle. Until recently, it would have been a logistical nightmare for distributors to sell channels individually. Now reasons for such bundles are rapidly falling. Related Article: A looming contract dispute between CBS and AT&T's U-Verse pay-TV unit is raising questions ahead of AT&T's acquisition of satellite broadcaster DirecTV.

CLASSROOM APPLICATION: Instructors can create a case in which it is optimal for networks to bundle. For example, consider a case with two consumers. Individual 1 values ESPN at $25 per month and CNN at $10 per month. Individual values ESPN at $10 per month and CNN at $25 per month. The optimal price of unbundled networks is $25 per network. In this case, each person purchases one network. The optimal price of bundled networks is $35. With bundling, each person purchases the bundled networks.

QUESTIONS: 
1. (Introductory) What change is the structure of the market for video (including television, movies, and other video content) is causing cable TV providers to (partially) unbundle networks?

2. (Advanced) Consider a case with two consumers and two cable networks. Individual 1 values ESPN at $25 per month and CNN at $10 per month. Individual values ESPN at $10 per month and CNN at $25 per month. Suppose the cost to the cable provider of offering each network is zero. If the cable provider offers the networks unbundled, what is the profit-maximizing price and which people subscribe to which networks? If the cable provider sells the networks only through a bundle, what is the profit-maximizing price of the bundled networks? Which people subscribe to the bundled networks?

3. (Advanced) What is the rationale of CBS in acquiring DirecTV? Why is it important for CBS and U-Verse to reach a new agreement before the CBS-DirecTV merger is completed?

Reviewed By: James Dearden, Lehigh University

RELATED ARTICLES: 
AT&T and CBS to Face Off Over Contract
by Joe Flint and Thomas Gryta
Jun 09, 2015
Page: B5

Indirect price discrimination

Hospitals are rational. Is that good for patients and taxpayers?

Hospitals Discharge Patients to Maximize Medicare Payments, Study Finds
by: Anna Wilde Mathews and Christopher Weaver
Jun 09, 2015
Click here to view the full article on WSJ.com

TOPICS: Health Economics

SUMMARY: New research in Health Affairs confirms a Wall Street Journal analysis that found a pattern of long-term-care facilities discharging patients at lucrative times.

CLASSROOM APPLICATION: Students can evaluate the effect of Medicare payment rules on hospital discharge decisions. Instructors can present the Medicare-hospital relationship as a principal-agent problem with hidden information (in which the hospitals have private information about the health status of patients).

QUESTIONS: 
1. (Introductory) What is the evidence that long-term-care hospitals are responding to the financial incentives in their discharge decisions? Is this evidence refutable?

2. (Advanced) What is the principal-agent problem with hidden information? Is the case described in the article one of these problems?

3. (Advanced) Should Medicare use a step function (i.e., payment thresholds) to determine hospital reimbursements?

Reviewed By: James Dearden, Lehigh University

Rational Actor Paradigm, Incentives

Data analytics

The Saturday Essay. The Anti-Poverty Experiment
by: Jason Zweig
Jun 06, 2015
Click here to view the full article on WSJ.com

TOPICS: Behavioral Economics

SUMMARY: In the U.S. and abroad, a new generation of data-driven programs is testing ways to help the poor to save more, live better and find their own way to economic security.

CLASSROOM APPLICATION: Students can evaluate the policies based on research from behavioral economics to alleviate poverty. Instructors can stress the importance of empirically measuring the effectiveness of anti-poverty policies.

QUESTIONS: 
1. (Introductory) Define the term "randomistas"? The work of randomistas is based on which field of study?

2. (Advanced) In the developing world, is poverty caused by economic geography or a lack of modern infrastructure? What is the evidence to support your answer?

3. (Advanced) Fill in the blank. In theory, people consider all relevant information to make objective judgments about risk, reward and the best choices they can afford. In fact, however, people in all walks of life: ________. Why are these factors problematic to the poor but not to the middle class?

4. (Introductory) What are the policies to reduce poverty noted in the article that the randomistas have discovered?

Reviewed By: James Dearden, Lehigh University

OPEC

The article described below reports on OPEC's recent meeting. Google the title if the article does not load when you click on the link.

Here are some questions to consider.

1. Why are the countries pumping more oil that the limit they set?
2. What is happening to the willingness of countries to abide by output restrictions? Why?
3. Do Russia and the US oil producers benefit or lose when OPEC sets and abides by output restrictions?

OPEC Keeps Output Unchanged
by: Summer Said, Bill Spindle and Benoit Faucon
Jun 06, 2015
Click here to view the full article on WSJ.com

TOPICS: Cartels, Oil Markets

SUMMARY: OPEC on Friday said the cartel would keep its collective output level unchanged at 30 million barrels a day, the second time in six months it decided to take no action amid a global glut of crude and weak oil prices.

CLASSROOM APPLICATION: Students can evaluate the cause of OPEC's reduced market power. They can also evaluate the benefit to non-OPEC oil producers of the cartel's output restrictions.

QUESTIONS: 
1. (Introductory) Why has OPEC decided to keep its collective output unchanged?

2. (Advanced) Why has OPEC's role in the world's oil market fundamentally changed in the past year?

3. (Advanced) Which OPEC nations are expressed satisfaction with the group's decision to allow members to unilaterally set the amount of oil they extract? Which are dissatisfied?

Reviewed By: James Dearden, Lehigh University

Game Theory, Oligopoly

Lies, damned lies, and accounting

This article describes how costs accountants record in their books fails to reflect accurately opportunity costs.

Label: Costs

Why is Verizon un-bundling?

Economics textbooks describe bundling as a way for firms to engage in indirect price discrimination. Why then, would Verizon un-bundle?

Verizon Breaks Pay-TV Bundle as Competition Mounts
by: Shalini Ramachandran and Ryan Knutson
Apr 17, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Pricing

SUMMARY: Verizon said its FiOS service will allow customers to choose only certain groups of channels they want to watch. Related article: NBCUniversal and Fox joined ESPN in attacking Verizon for introducing slimmer, cheaper packages of pay-TV channels that they argue violate existing deals.

CLASSROOM APPLICATION: Students can evaluate two dimensions of Verizon's move into mixed bundling. First, Verizon's move into mixed bundling appears to be in response to growing cord-cutting and viewing options. Second, although the article does not address price discrimination, students can evaluate whether base packages plus add-on channel packs is a form of price discrimination.

QUESTIONS: 
1. (Introductory) Why is Verizon moving toward channel packs?

2. (Advanced) Is Verizon's offer of a base package plus channel packs a form of price discrimination?

3. (Advanced) Why do big networks like ESPN have power to require a certain percentage of Verizon's customer base while smaller networks do not?

4. (Introductory) Why are media giants balking at Verizon's new TV bundles?

Labels: Pricing, e-business

Crowdfunding

This article describes some adventures and mis-adventures of crowd investors.

Does asymmetric information exist in the market for crowdfunding? If so, what problems does it cause and are the problems worse for crowd investors than for more traditional investors (banks, private equity funds, bondholders, stockholders)?

Asymmetric information

Bet on a Boiler

I wonder if the "Bet on a Boiler" program described in the article has adverse selection or moral hazard problems.

The Weekend Interview. How to Save American Colleges
by: Kate Bachelder
Apr 25, 2015
Click here to view the full article on WSJ.com

TOPICS: Education

SUMMARY: The Purdue president Mitch Daniels on freezing tuition, how to reduce student debt, and busting the accreditation cartel.

CLASSROOM APPLICATION: Students can discuss and evaluate whether it is "where you go to school" or "how you go to school" that determines economic wellbeing and job satisfaction, the reasons for increasing college tuition, and reasons for students to fail to acquire critical thinking and writing skills during college.

QUESTIONS: 
1. (Introductory) Evaluate whether it is "where you go to school" or "how you go to school" that determines economic wellbeing and job satisfaction.

2. (Advanced) According to Mitch Daniels, what are the problems with the Free Application for Federal Student Aid?

3. (Advanced) More than 35% of college students at a range of four-year institutions showed no growth between freshman year and commencement in areas like critical thinking and writing, according to research by Richard Arum and Josipa Roksa in their 2011 book "Academically Adrift: Limited Learning on College Campuses." Where does the fault lie for this lack of improvement in critical thinking and writing skills?

4. (Advanced) The interview states, "Mr. Daniels also offers a quick economics tutorial about 'Giffen goods,' products for which demand grows even as their price increases-like, say, a college education today." What are Giffin goods? What are Veblen goods? Which is higher education : a Veblen good or a Giffin good?

Reviewed By: James Dearden, Lehigh University

Labels: Education, Asymmetric information

Asking for raises

http://www.theatlantic.com/business/archive/2015/04/ask-a-hostage-negotiator-whats-the-best-way-to-talk-about-a-raise/391943/

Negotiations

Culture v. rewards

This article from AP reports that the City of LA is suing Wells Fargo. Wells Fargo states that 

1. "'Wells Fargo's culture is focused on the best interests of its customers and creating a supportive, caring and ethical environment for our team members'" and 
   
2. its customers have, on average, "more than six products per household".
   

The lawsuit claims that

1. "Wells Fargo executives pushed employees to sell more than 10 products to customers based on whether they were a regular customer, had wealth-management accounts or were a business owner".
   
2. "Branch employees had to sell a certain number of financial products each day, according to the complaint, even if there wasn't the foot traffic available to meet those quotas. Employees were also encouraged to sell multiple products to family members and friends to meet quotas".
   

Which determines culture more: slogans or incentives?

Labels: Rational Actor Paradigm, Aligning interests

Using social media to avoid asymmetric information

This article from Quartz reports that PayPal co-founder Max Levchin is starting an online consumer finance startup called Affirm. Here is a money quote:

Since many of its customers are under age 30 and have little credit history, traditional assessments of borrower risk don't cut it, Levchin tells Quartz. So instead of just using popular credit score data (such as the widely used FICO score), Affirm brings in a bunch of other data from public sources such as Facebook and LinkedIn. It turns out, the amount of time a person has been employed can be a good indicator of creditworthiness since it helps explain how consistently cash comes in, Levchin says.

"You can't replace the traditional debt to income ratio with your Facebook friend count, but you can use nontraditional data to reduce risk and better analyze customers," he says.

Labels: Asymmetric information, e-business

Chipotle's ads

Business World. Chipotle vs. Science
by: Holman W. Jenkins, Jr.
May 02, 2015
Click here to view the full article on WSJ.com

TOPICS: Advertising

SUMMARY: Health-food advertising depends on the eagerness of the customer to be fooled. "Over the years the courts, in enforcing the Lanham Act, a federal law banning false advertising, have carved out a considerable zone for 'puffery.' Puffery, as one case puts it, is 'an exaggeration or overstatement expressed in broad, vague, and commendatory language. Such sales talk is considered to be offered and understood as an expression of the seller's opinion only, which is to be discounted as such by the buyer.'... Of course, because such advertising depends on the eagerness of the customer to be fooled, a better solution than lawsuits might be an education system that lowers the general level of idiocy in the population."

CLASSROOM APPLICATION: Students can evaluate whether the advertising presented in this week's Business World column improves consumer welfare. If consumer preferences are rational (about GMO foods for example), then the information provided by the advertising noted in the column could improve consumer welfare. However, if the advertising is persuasive, then perhaps consumer welfare is reduced.

QUESTIONS: 
1. (Introductory) What is puffery? Does the Lanham act, which bans false advertising, prohibit puffery as well?

2. (Advanced) What is the distinction between informative advertising and persuasive advertising? What are examples of informative advertising? What are examples of persuasive advertising?

3. (Advanced) Is Chipotle's announcement that the company plans to stop using genetically modified ingredients persuasive advertising, informative advertising, or possibly both?

4. (Advanced) What is the effect of informative advertising on consumer welfare? That is, does this type of advertising make consumers better off?

Labels: Monopolistic competition, advertising

Disney at war

Disney, Theater Operators Battle Over New 'Avengers'
by: Erich Schwartzel
May 05, 2015
Click here to view the full article on WSJ.com

TOPICS: Contracts

SUMMARY: A movie-theater trade group says owners aren't happy Disney imposed new conditions on venues seeking to show the latest "Avengers." Among the changes: when cinemas can offer matinee discounts or alternate showings of "Avengers" with other movies on the same screen; and new payment rules that the National Association of Theatre Owners said could over the long term raise prices for everyone.

CLASSROOM APPLICATION: Students can evaluate whether Disney's proposed box office revenue sharing arrangement would lead to higher movie ticket prices and whether Disney's higher share of box office revenues is due to the studio's increased market power. The article notes an interesting issues relevant to optimal ticket pricing. To sell complementary goods -- popcorn and soda -- theaters have an incentive to lower ticket prices.

QUESTIONS: 
1. (Introductory) Does the article offer evidence that Disney's market power has increased?

2. (Advanced) A NATO letter to Disney notes "illegal vertical price fixing under state and federal antitrust laws." What is vertical price fixing? Is it possible that Disney's proposed contract with theater operators could result in higher movie prices?

3. (Advanced) Why would Disney want matinee prices to end a time earlier than the one preferred by theater owners?

4. (Advanced) How do concession sales affect the profit-maximizing ticket prices set by theater operators?

Reviewed By: James Dearden, Lehigh University

labels: Vertical relationships, pricing

Google Buy Buttons

Can Google Outsell Amazon and eBay?
by: Alistair Barr and Rolfe Winkler
May 20, 2015
Click here to view the full article on WSJ.com

TOPICS: Internet

SUMMARY: Google will launch buy buttons on its search-result pages in coming weeks, a controversial step by the company toward becoming an online marketplace rivaling those run by Amazon.com and eBay.

CLASSROOM APPLICATION: Students can evaluate Google's rationale for launching buy buttons on search-result pages and responses by retailers to Google's move.

QUESTIONS: 
1. (Introductory) Why is Google launching buy buttons on search-result pages? What is it doing so on only mobile device searches?

2. (Advanced) What are retailers' concerns about Google move? What is Google doing to mollify the concerns of retailers? Are retailers who offer products on "Shop on Google" made better off by Google's move?

3. (Advanced) The article notes that Google's buy buttons on search-result pages represents a delicate balance for the company. What is the delicate balance?

Reviewed By: James Dearden, Lehigh University

Labels: Game Theory, e-business

Elasticity and the Super Bowl

here is a cool article involving demand, elasticity, and the super bowl! 

http://www.forbes.com/sites/prishe/2013/09/19/super-bowl-xlviii-pricing-a-lesson-in-demand-elasticity/

The article discusses ticket prices on the rise, mark ups, and also evaluates consumer surplus.The conclusion is that there will be higher 
face prices for marquee seating at this year's Super Bowl.

Pricing decisions, elasticity

Shortages in chocolate leading to higher prices

Here is an article about how chocolate is decreasing, but how the demand for chocolate remains the same. This article shows the basics of economic demand. Prices are increasing due to the decrease of chocolate availability.

http://www.newser.com/story/198705/the-world-is-running-out-of-chocolate.html

Supply and demand in action