Tuesday, September 16, 2014

Should you travel to India for your Hepatitis C cure?

Gilead, the company who invented Solvadi, a pill that cures hepatitis C, has just announced its global price discrimination scheme.

In the US, a twelve week regimen of the $1000 pills costs $84,000, while in India a the same treatment costs only $1800.

The price difference could pay for a pretty nice 3 month vacation to India.

What is the number one business book on iTunes today?

Vanderbilt and Owen's own Brendan Moynihan's "What I learned losing a million dollars."

Listen to his podcast on the Tim Ferris show.
“One of the rare noncharlatanic books in finance.”
– Nassim Nicholas Taleb, author of The Black Swan and Antifragile
“There is more to be learned from Jim Paul’s true story of failure than from a stack of books promising to reveal the secret formula for success…this compact volume is filled with a wealth of trading wisdom and insights.”
– Jack Schwager, author of Hedge Fund Market Wizards
The newest book in The Tim Ferriss Book Club (all five books here) is a fast read entitled What I Learned Losing a Million Dollars. It packs a wallop.

Is RG III a sunk cost?

No, but the draft picks the Redskins paid for him are.  The  NY Times has more:

The moment the owner Daniel Snyder signed off on trading those draft picks to the St. Louis Rams to get Griffin, those picks were gone forever. Poof! Never coming back. 
From that point, the strictly logical approach would have been for coaches and management to treat Griffin like any other rookie who had great potential but a lot of work to do to live up to it. That doesn’t mean that they should have plopped him on the bench every time he made an errant throw. Of course he needed (and, apparently, still needs) to learn the pro-level game, and it’s worth sacrificing wins today if you are getting a more skilled player for the longer run. No one argues that the 1998 Indianapolis Colts should have parked Peyton Manning on the bench amid his 3-13 rookie season. 
But there are plenty of indications that rather than treat Griffin like another promising but unfinished player, both fans and, at times, the team’s coaches seem to view him through the prism of what was paid to get him.

Strategy is simple...become a monopolist

WSJ has an essay from the head of PayPal who reminds us that capturing value is more important than creating value:

...U.S. airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google,GOOGL -0.56% which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry's profit margin that year. Google makes so much money that it is now worth three times more than every U.S. airline combined.

Tuesday, September 9, 2014

Is "artharitis" a good excuse for price fixing?

I first heard that expression from a defendant in a price-fixing trial brought by the Justice Department against a gas station owner in Iowa.  The defendant called the gas station across the highway every morning to ask what price he was charging.  Since she had to match his price (otherwise she would sell no gasoline), she argued that a simple phone call would save her one more painful trip up the ladder to change the price on the sign. 

At first I thought it was just rural slang, but when I saw the jury foreman walk in with a pair of jeans so loose that you could see the top of his inter-gluteal crevice (one of my students who is also a surgeon gave me that expression when he saw me struggling to avoid saying “butt crack” in class), I suspected it was part of the trial strategy.   The defendant's attorney wore a rumpled white linen suit and spoke with a thick accent, which contrasted with the attorneys and economists from “the Federal Government in Washington, DC.” All of us were wearing dark suits and speaking with no accent.  Her attorney used the expression again in his closing argument to chastise us for wire-tapping an old widow who was coping with her “artharitis” as best she could.

Needless to say, we lost the trial--we got “home fried.”  But years later, when I ran this case past two second-grade classes, I got a unanimous conviction.  Of course, I first had to explain that antitrust cops (my daughter was surprised that I had been a cop) enforce laws that make it a crime to discuss prices with your competitors.  One of her classmates who almost cried when I explained to her that the Sherman Act covered conversations with her friends.  The idea that there are some things that you cannot share with your best friend was extremely upsetting to her.  

Monday, September 8, 2014

REPOST: The force that Porter forgot

The force that Porter forgot

Preston McAfee was the first to realize that Michael Porter's famous industry analysis leaves out one crucial force: cooperation from complements. A new article, How Companies Become Platform Leaders, offers a framework for thinking about strategy in industries like telecommunications where success requires creating an "ecosystem" of complementary products.

A company must first decide whether to pursue a "product" or a "platform" strategy:
Put simply, a product is largely proprietary and under one company’s control, whereas an industry platform ... requires complementary innovations to be useful, and vice versa. An industry platform, therefore, is no longer under the full control of the originator, even though it may contain certain proprietary elements.
One of the biggest mistakes a company can make is to pursue a product strategy and fail to recognize the platform value of their product. The best example of this is perhaps Macintosh computer which, due to its early technological lead, could have become the dominant platform for personal computing. Instead they priced high, failed to encourage complementary innovotion, and let Microsoft become the dominant platform.

If you decide on a platform strategy, then the authors recommend one of two strategies, coring or tipping.
"Coring" is using a set of techniques to create a platform by making a technology "core" to a particular technological system and market. ... Examples of successful coring include Google Inc. in Internet search and Qualcomm Inc. in wireless technology.

"Tipping" is the set of activities that helps a company "tip" a market toward its platform rather than some other potential one. Examples of tipping include Linux's growth in the market for Web server operating systems

Sunday, September 7, 2014

Friday, September 5, 2014

How to tell if your resources give you a sustainable competitive advantage

According to the RBV view of strategy a resource can give you a sustainable competitive advantage only if the above conditions are met.

Some examples from HBS:

Valuable resources can take a variety of forms, including some overlooked by the narrower conceptions of core competence and capabilities. They can be physical, like the wire into your house. Potentially, both the telephone and cable companies are in a very strong position to succeed in the brave new world of interactive multimedia because they own the on-ramp to the information superhighway. Or valuable resources may be intangible, such as brand names or technological know-how. The Walt Disney Company, for example, holds a unique consumer franchise that makes Disney a success in a slew of businesses, from soft toys to theme parks to videos. Similarly, Sharp’s knowledge of flat-panel display technology has enabled it to dominate the $7 billion worldwide liquid crystal display (LCD) business. Or the valuable resource may be an organizational capabilityembedded in a company’s routines, processes, and culture. Take, for example, the skills of the Japanese automobile companies—first in low-cost, lean manufacturing; next in high-quality production; and then in fast product development. These capabilities, built up over time, transform otherwise pedestrian or commodity inputs into superior products and make the companies that have developed them successful in the global market.

Thursday, September 4, 2014

REPOST: should we raise the minimum wage?

Should we raise the minimum wage?

Mark Perry has a nice piece on proposals to raise the minimum wage from $7.50 to $10, a 38% increase.  He begins with research that finds an elasticity of demand between  -0.1 and -0.15 or a 2-3 percent reduction in employment from a 20 percent increase in the minimum wage.
Accordingly, a 38 percent increase in the minimum wage to $10 per hour would reduce teenage employment by between 3.8 and 5.7 percent.  And what would that mean for the number of jobs eliminated and the increase in the jobless rate?  
If the 38 percent increase in the minimum wage to $10 per hour had the minimum effect of reducing teenage employment by “only” 3.8 percent, that would put 171,000 currently-employed teenagers out of work and increase the teen jobless rate almost three full percentage points to 26.6 percent.  At the high end, a 5.7 percent reduction in teen employment would put almost one-quarter million teenagers out of work and drive the teenage jobless rate up to 28.1 percent, the highest rate in history. 

REPOST: Why are Turkey prices 9% lower at Thanksgiving?

The NY Times explains the debate among economists who worry about such things:

The most intuitive and popular explanation for a high-demand price dip is that retailers are selling “loss leaders.” Stores advertise very low prices — sometimes even lower than they paid their wholesalers — for big-ticket, attention-grabbing products in order to get people in the door, in the hope that they buy lots of other stuff. You might get your turkey for a song, but then you also buy potatoes, cranberries and pies at the same supermarket — all at regular (or higher) markups. Likewise, Macy’s offers a big discount on select TVs on Friday, which will ideally entice shoppers to come in and buy clothes, gifts and other Christmas knickknacks on that frenzy-fueled trip.

When you price complementary products (chapter 12) it makes sense to reduce the price.  An alternate explanation is from the demand side:

Consumers might get more price-sensitive during periods of peak demand and do more comparison-shopping, so stores have to drop their prices if they want to capture sales. Perhaps, during the holidays, the composition of consumers changes; maybe only rich people or people who really love turkey buy it in July, but just about everybody — including lower-income, price sensitive shoppers — buys it in November. Or maybe everyone becomes more price-sensitive in November because they’re cooking for a lot of other people, not just their nuclear families. 
“People are a little less picky about what they’re buying for other people,” explains Judith Chevalier, an economics professor at the Yale School of Management. “Let’s say I prefer Coke over Pepsi. If I’m buying for myself, I’ll probably buy Coke even if it’s more expensive. But if I’m buying soda for a party, I have no reason to think everyone else also prefers Coke, so I’ll go with whichever brand is cheaper.”

If turkey demand becomes more price elastic around Thanksgiving then we know that it makes sense to reduce price (Chapter 6).  A related explanation is that prices dont change, but rather the more price sensitive consumers substitute toward the cheaper brands. 
 One paper looking at canned-tuna prices argued that this kind of brand substitution was the primary case for an overall decline in price during Lent. It turns out that the cheapest tuna brands aren’t significantly discounted during Lent, but because the cheap brands temporarily accounted for a much higher share of overall sales, they dragged down the average price of a can of tuna.

HT:  Sam