Wednesday, April 30, 2014

Firing the Owner

In the aftermath of Don Sterling's racist comments, Adam Silver, the NBA Commissioner will seek to force him to sell the LA Clippers. This could have at least two Managerial Economics implications.

First, Sterling may be more than willing to comply. If he were still the owner at the start of the next season, we could expect more bad publicity and possible fan boycotts. With fewer fans and fewer ticket sales, the value of the franchise falls. However, if the Clippers are sold to a neutral party, more of these fans might still come to games. The value of the team is undoubtedly lower than it was last week, but the drop in value is a sunk cost. Going forward, selling to a different owner would be moving an asset, the team, to a higher valued use.

Second, the other team owners are likely to be on-board with the forced sale. Not only would the Clipper's tickets sales fall but likely the ticket sales for other teams would fall when the Clippers come to town. That is, the various teams in a league are complements. Local fans like their home team to win. But after accounting for that, ticket sales are higher when both the home and visiting team are strong. Anything that makes fans not like one of the teams diminishes the value of the whole league "platform." For example, the NY Yankees baseball team is consistently a contender for a pennant. So when they visit even mediocre teams, attendance rises.

Monday, April 14, 2014

Getting Mechanic Performance Pay to Work Better

C. Kirabo Jackson and Henry S. Schneider have an interesting new paper, "Reducing Moral Hazard in Employment Relationships: Experimental Evidence on Managerial Control and Performance Pay." Mechanics work on commission but do not seem to be pointing out to the customer all of the repairs that could be done. In the experiment, management provided auto mechanics with checklists of possible repairs to be filled out when a customer arrived so that possible additional repairs were not overlooked. The checklists worked - repairs and mechanic performance pay both increased. This was quite profitable for the firm. However, the additional repairs increased the mechanics' hours to the point that, when the three-week experiment ended, the mechanics abandoned using the checklists. The extra income was not worth their time.

This suggests two possible solutions for the employer to keep mechanics using the checklists. They could simply require checklists be used and monitor compliance. Or they could cut into the profits and increase the mechanics' commission rate to make it worth their while.

Why outlet stores?

I just returned from the annual IIOC meetings in Chicago, where I saw an interesting paper on outlet stores of a national retailer that sells handbags.  (I am guessing it was Coach).

Their outlet stores have lower prices, are further from population centers (consumers travel 20 miles to get to an outlet stores instead of 9 to get to a regular store), and carry older products (16 months old vs. 10 months at regular stores).

A new paper suggests that outlet raise profitability by "crimping," a kind of price discrimination that prevents cannibalization of higher priced stores by making outlet stores unattractive to high-value consumers.

Since richer people have higher demand for nearby stores that sell newer products, the retailer can make more money (19% higher profit) by selling lower priced, older handbags at outlet stores located further from population centers.

If this makes you mad (see our earlier post, Only Schmucks pay Retail), then take the time to drive to an outlet store and purchase a lower-priced handbag.

Friday, April 11, 2014

85% of public pension will go bankrupt, unless

... they earn a 9% rate of return.  Bridgewater associates released its own stress test of public pensions this week.  What it found is not pretty:

Public pensions have just $3 trillion in assets to invest to cover future retirement payments of $10 trillion over the next many decades, Bridgewater says. An investment return of roughly 9% a year is needed to meet those onerous obligations.

Unfortunately, they are expected to earn only 4%.  If this happens, 85% of them go bankrupt.  

Wednesday, April 2, 2014

FLASH: consultancy finds inefficiency in government

A government consultant has just concluded that the government's civil service system is outdated.  As we have blogged before (Managing a Government Agency), we have to
  1. figure out what the government should be doing, 
  2. measure performance towards the objective, and then 
  3. link pay to performance. 
The consultancy finds something similar:
“There also is an absence of clarity and consequence regarding individual and organizational performance. Top performers seldom receive sufficient rewards, poor performers are rarely fired or demoted, and managers are not held accountable for how well they manage employees or the outcomes of the work they oversee.”

Tuesday, April 1, 2014

Nissan Renault Alliance

It was reported last month that the two automakers have agreed to develop 70% of their vehicles jointly along a "common module family" CMF method.
Under CMF, the major categories of vehicles, by size, are developed according to common engineering of front underbody, engine, cockpit, rear underbody, and electrical/electronic architecture. For example: The wand that controls headlamps and highbeams will be the same in all future Nissan and Renault subcompacts, allowing both companies to benefit from large-scale purchases from fewer suppliers.

The supply chain can create value by eking out cost savings from scale economies in some components. To do so, would-be rivals choose to cooperate so that their suppliers can enjoy scale economies. Thus, the vertical arrangement benefits from the horizontal arrangement.