Tuesday, March 31, 2015

Advertising Elasticities

The US is somewhat unique in that we allow pharmaceutical ads to target consumers, albeit with plenty of FDA scrutiny. Is it doing any good? A new paper, "Ask Your Doctor? Direct-to-Consumer Advertising of Pharmaceuticals," by Sinkinson and Starc estimates how responsive consumer demand is to TV advertising.

We find that a 10% increase in the number of a firm's ads leads to a 0.76% increase in revenue, while the same increase in rival advertising leads to a 0.55% decrease in firm revenue. Results also indicate that a 10% increase in category advertising produces a 0.2% revenue increase for non-advertised drugs. 

These translate into elasticities of  0.076, -0.055 and 0.02, small but positive. Moreover, they claim that most of the effects come from new customers patients, rather than existing customers patients switching between competitors. For all of the econometricians out there, the clever identification strategy they use to get exogenous variation in the number of ads is the crowding out effect from local political advertising.

Friday, March 27, 2015

Update: zero-based budgeting in the government?

All the apparent success of zero-based budgeting in the private sector raises the obvious question, "why not use it for the government."  Apparently, it was tried before:  in 1977, Jimmy Carter ordered the executive branch to implement it.  However, without reforming the civil service protection of government employees (lifetime tenure, and very difficult to fire or reward), it was predictably unsuccessful.

A Republican, Mr. Pyhrr said one of his wishes is that more government entities would embrace zero-based budgeting to make the kind of necessary changes that companies, such as Heinz, are making. “But that is a long discussion,” he added.

Thursday, March 26, 2015

How do you create demand for your consulting tools?

Threaten to take over companies that fail to use them.

If a company is poorly run, or is not minimizing costs, it creates an opportunity for someone to take over the firm, fire incumbent management, and implement the cost-reducing schemes.

In fact, when 3G announced its intention to acquire Kraft, its stock went up by 36%, in expectation that 3G would implement their "zero-based budgeting" at the target firm.

Other food and beverage companies are embracing 3G’s financial tool, in part out of fear that they, too, could become targets of activist investors or stronger rivals. Big packaged-food companies have been particularly appealing targets for zero-based budgeting. 

So what does zero-based budgeting do?

[it] requires managers to plan each year’s budget as if no money existed the previous year, rather than using the typical method of adjusting prior-year spending. That forces them to justify the costs and benefits of each dollar every 12 months. 
...zero-based budgeting is a symbol of the new reality for U.S. business: Activists are pressing at all sides, giving managements little room for slack or bloated budgets. This ethos has seeped into nearly every boardroom, prompting pre-emptive steps that emulate the activists themselves. 
The effects of this change are improved shareholder returns and dividends. But on the flip side, it has made the work for employees more rigorous and, some would argue, more ruthless. 
At Heinz, ... 3G quickly set out to make deeper changes, paring staff at its Pittsburgh headquarters and gutting individual offices in favor of open floor plans. It slashed Heinz’s overall head count by about 1,480, or 4% of the world-wide workforce, shut several factories and grounded corporate jets.

Sounds like a good management tool for the government.

Thursday, March 19, 2015

Make the rules or your rivals will: Germany bans Uber

When formulating a business plan, you have to pay attention to the regulatory environment.  Otherwise, your rivals can accomplish through regulation what they cannot accomplish in the market:  From Competition Policy International

A German court on Wednesday banned Uber from running services using unlicensed cab drivers and set stiff fines for any violations of local transport laws by the pioneering online taxi firm. 
Uber, worth an estimated $40 billion making it the world's most valuable venture-backed start-up, has set out to revolutionise local transport services worldwide, from taxis to carpools to fast-food delivery. 
The latest case, brought in the Frankfurt regional court by German taxi operator group Taxi Deutschland against UberPOP, is one of more than a dozen lawsuits filed in countries across Europe in recent months against the San Francisco-based company.

Wednesday, March 18, 2015

Power tool importer prevents free-riding with RPM

Resale Price Maintenance, or RPM, is a contractual arrangement between an upstream manufacturer (or importer) and a downstream retailer that specifies either a minimum or maximum retail price.  These contracts are illegal in most antitrust jurisdictions, and viewed skeptically in the others.  

So it was somewhat of a surprise that Australia's Competition and Consumer Commission (ACCC) allowed Tooltechnic, an importer of high end power tools, to specify a minimum resale price to prevent "free riding" by discount dealers on its high end Festool brand.  Consumers had been shopping at the high end retailers, and then buying the Festool products are lower-priced retailers who did not provide as much retail service.

Festool products are complex, with a high level of features and functions, and are aimed predominantly at professional users. Tooltechnic believed that provision of retail services such as pre-sales technical advice, product demonstrations, and “try-before-you-buy” arrangements, as well as post-sales services such as customer training and provision of consumables and accessories, would help to expand demand for the brand even if retail prices included a margin sufficient to fund those services. 
 However, retailers who provided these services were increasingly losing out to competitors who chose a simpler no-frills model, and the problem of free-riding was exacerbated by the increased accessibility of on-line sales. Tooltechnic chose RPM as a solution after judging that other approaches, such as imposing detailed contractual obligations on retailers, granting exclusive retailer territories, or restricting on-line sales permissions, would be unworkable or less effective as a means of boosting sales.

Congrats to the the ACCC for reaching a reasonable decision, and to the Economists at RBB for their role in educating a skeptical government agency.

If you subsidize religion, you get more of it

When the state of Israel was founded in 1948, Premier David Ben-Gurion granted yeshiva students state financing and exemption from army service to rebuild Torah scholarship that was destroyed in the Holocaust (NY Times).  At the time, there were only 400 students who qualified for the subsidy.  

Today, they make up 10% of the population, and half of them live below the poverty line, dependent on subsidies to survive.   Rabbi Amsellem, a member of parliament, is telling them to go to work:

“Torah is the most important thing in the world,” Rabbi Amsellem said in an interview. But now more than 60 percent of ultra-Orthodox men in Israel do not work, compared with 15 percent in the general population, and he argued that full-time, state-financed study should be reserved for great scholars destined to become rabbis or religious judges. 
“Those who are not that way inclined,” he said, “should go out and earn a living.” 
Because the subsidies are tied to the number of children each family has, the problem is likely to get bigger.  Fertility rates among the ultra orthodox (7.6 children/woman) are several times higher than the general population.

Saturday, March 14, 2015

How should you trade the strengthening dollar?

ZeroHedge critique's Goldman's advice to buy US stocks with big domestic sales:
...the only issue with that is that it bets the farm on a US consumer who, as the past three months of plunging retail sales and contracting consumer (and mostly credit card debt), and surging savings rate have shown, is once again fully tapped out.

Friday, March 13, 2015

Currency wars as a prisoners' dilemma

As the European Central Bank prints more money, and lowers its interest rates, demand for the euro in the foreign exchange market falls because capital leaves the country to find better return abroad.  This weakens the euro which makes its exports less expensive, and stimulates employment in the domestic economies of the Eurozone.  

Of course, this also weakens export driven economies like those in Asia (and in the US), which could lead to a "currency war" where rival central banks print money and reduce interest rates to keep their own currencies low.  

South Korea ... currency fell 0.5% against the dollar and 0.7% versus the euro on the news. 
Thailand’s decision to cut rates Wednesday also helps its exporters, who have been complaining recently about the baht currency’s relative strength. 
No matter what the rhetoric is from central bankers, many of them are hoping that rate cuts help lower the value of their currencies versus those of their neighbors. 
“They’re thinking of it in the context of currency wars,” said David Mann, chief economist in Asia at Standard Chartered Bank.
As the MBAOracle.com says:  

Use game theory to figure out where self interest is taking you; if you don’t like where that is, change the rules of the game.