IBM moves from telecommuting to co-locating

This article in qz.com discusses some of the costs and benefits of telecommuting and "co-locating". Co-locating = working together in the same office building. It raises several interesting questions in my mind.

1. Do the relative costs and benefits depend on the type of work?
2. How has the development of new forms of communication and interaction affected the relative costs and benefits?
3. Where is the equilibrium wage higher, in a telecommuting job or one that requires the employee to be in an office during work hours?

Digital Monitoring of Employees

This Marketplace story describes some of the ways that employees can use devices to monitor digitally what the employees are doing: http://www.marketplace.org/2017/02/22/world/meet-workplace-sensors-are-watching-you.

1. How could an employer assess digitally the traits of job applicants to determine which ones to hire?
2. How could an employer monitor digitally what employers are doing or producing to determine which ones to reward monetarily or to promote?

The End of Employment?

Questions to consider.

1. Are wages lower for contract workers than employees? If wages are lower, why?
2. Are transactions costs of hiring, supervising and firing lower for contract workers than for employees? Why or why not?
3. Does employment of contract workers instead of employees increase the firm's flexibility? If so, why?

The End of Employees
by: Lauren Weber
Feb 02, 2017
Click here to view the full article on WSJ.com

TOPICS: Labor Economics

SUMMARY: Never before have big employers tried so hard to hand over chunks of their business to contractors. From Google to Wal-Mart, the strategy prunes costs for firms and job security for millions of workers.

CLASSROOM APPLICATION: Students can examine the rationales for the outsourcing of jobs. The reasons fall into two categories : increased flexibility and lower costs.

QUESTIONS: 
1. (Introductory) What are the reasons covered in the article's cases for companies choosing to outsource jobs?

2. (Advanced) According to the article, what is the effect of the outsourcing of jobs on the likelihood that workers are promoted from lower-level positions to higher-level ones, from the mailroom to the executive suite?

3. (Advanced) Why is it that no one knows how many American work as contractors?

Reviewed By: James Dearden, Lehigh University

Here is a summary: https://www.thefastlaneforum.com/community/threads/the-end-of-employees-wall-street-journal.72709/

See http://www.nakedcapitalism.com/2017/02/the-end-of-employees.html for a contrarian review.

See http://www.forbes.com/sites/lizryan/2015/08/13/is-this-the-end-of-employment/#52b332f332d6 to see advice for a contract worker.

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.

Reblog: Organizational design at Wells Fargo

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

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?

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?

Why Organizations Fail

Taken from https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf

Why do organizations fail?

“Organizations fail due to incentive problems (agents do not want to act in the organization’s interests) and bounded rationality problems (agents do not have the necessary information to do so)” (https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf, p. 137).

“Agents fail to act together because they do not want to (an incentive problem) or they do not know how to (a bounded-rationality problem). Incentive problems arise due to the presence of asymmetric information or imperfect commitment, which lead agents to act according to their own biases or preferences rather than in the interest of the organization (e.g., Holmstrom 1979; Shavell 1979). Bounded-rationality problems arise due to agents’ cognitive limitations and finite time, which means that even if they want to, agents cannot compute the solution to every problem, nor can they make themselves precisely understood by others (e.g., Simon 1955; Marshack and Radner 1972; Arrow 1974)” (https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf, p. 138-9) .

What creates incentive problems?

https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf identifies 4 reasons that employees (agents) and owners have different interests.

1. Short-Termism (p.141)
2. Decentralized Authority and Coordination Failures (p. 147).
3. Communication failures (p.155)
4. Inability to Adapt to Change Due to Organizational Rigidities (p. 163)

What problems occur in the absence of incentive conflicts?

https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf identifies 2 failures in the absence of incentive conflicts.

1. Hierarchy and the Allocation of Talent (p. 175)
   “organizational failures arise when those giving directions lack the required talent” (p. 176)
2. Coarse Communication and Code Incompatibility (p. 179)

What conclusions do the authors draw?

https://dl.dropboxusercontent.com/u/2021568/GRPublishedJELFinal.pdf draw 6 conclusions.

1. “One general thread throughout our survey concerns the danger of high-powered incentives attached to objectively measured outcomes. … high-powered incentives drive individuals to seek high-probability payoffs in the short term at the expense of exposing the organization to low-probability, catastrophic failures (section 2) and also drive individual effort away from cooperation among team members (section 3)” (p. 183).
2. “The general response suggested by the literature to multitasking failures has three components” )p. 183).
1. “rely on low-powered incentives and on incentives linked to inputs, rather than outputs (Prendergast 2002)” (0. 183).
2. “ the firm is a “subeconomy” and can use a broad set of tools—including decision rights, task assignments, relational contracts, culture, and hierarchies—to solve the motivation and coordination problems it faces” (p. 183).
3. “ to avoid multitask issues, organizations can rely variously on: selecting the “right” type of agents, such as agents who are intrinsically motivated by the aims of the organization (Prendergast 2007, 2008); developing an identity (Akerlof and Kranton 2005; and Bénabou and Tirole 2011); and creating a sense of mission (Dewatripont, Jewitt, and Tirole 1999)” (p. 183).
3. “Another critical source of failures is miscommunication (section 4) …  Truthful communication requires aligned incentives within the organization, for which not only monetary incentives, but also intrinsic motivation in the form of identity or mission, is desirable” (p. 183).
4. “Our survey also suggests that managers must be mindful of the long-term consequences of their decisions (section 5). …  our analysis illustrates how short-term efficiency gains must be weighted against the constraints they place on future cooperation and change” (pp. 183-4).
5. “Finally, organizations must resolve coordination failures in the presence of bounded rationality (section 6)” (p. 184).
6. “A broad message of organizational economics is that organizations exist when there are contractual imperfections and other limitations on collective action that make markets even less effective than organizations. Our models highlight a variety of such imperfections and show how they are responsible for the (mostly inevitable) trade-offs we identify inside organizations” (p. 184).

Older posts on Organizational Architecture

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

Older posts on Theory of the Firm

http://edlikeseconomics.blogspot.com/search/label/Theory%20of%20the%20Firm

Older posts on transactions costs

http://edlikeseconomics.blogspot.com/search/label/Transactions%20Costs

What should Yahoo do?

Yahoo is a great case study of organizational architecture and strategy.  Marissa Mayer, its CEO, wants to sell parts but can't decide which parts. The answers would depend on which actiivities fit together to make a stronger Yahoo and which activities are better controlled within the firm than outside of it. See

1. http://www.reuters.com/article/us-yahoo-assets-idUSKCN0W52F2 and 
2. http://www.nytimes.com/2015/12/10/technology/yahoo-alibaba-spinoff.html?_r=1.

Can government create wealth?

This article says, "Yes": http://www.dailykos.com/story/2011/4/13/966696/-

What's wrong with vertical integration?

http://www.bloomberg.com/news/articles/2016-02-24/tesla-battles-general-motors-over-right-to-sell-cars-in-indiana reports that Indiana is considering a law that would make illegal Telsa's current vertical integration. Telsa currently produces and sells cars to consumers. All other manufacturers are required by law to sell to dealers who, in turn, sell to consumers.

Two questions:

1. Is GM trying to restrict entry?
2. Does a law that restricts vertical integration serve the public?

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?

Older posts on organizational architecture

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