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