Monday, July 31, 2017

Who is the world's largest automaker?

Forbes reports that during the first half of 2017, Renault-Nissan sold the most cars worldwide.
Does it matter? Not according to Nissan’s chief of investor relations, Joji Tagawa. It may bring bragging rights, but he claims it is not an important performance indicator. 

What does matter? Chairman and CEO of Renault, Carlos Ghosn promised to:
“continue to leverage our significant economies of scale and global market presence to deliver valuable synergies for our member companies this year, while maintaining a strong technology lineup and offering customers breakthrough electric models.”

Or managing scale and scope economies.

Friday, July 28, 2017

The Injustice of Corporate Welfare

The Beacon Center has produced a nice video on cities using tax abatements to lure companies. The video focuses on the unfairness to competitors of them paying taxes that subsidize their competitors.

But it also causes an inefficiency in two ways. First, the taxes represent another wedge between consumer value and producer cost that could prevent moving an asset to a higher valued use (because producer cost + tax > consumer value > producer cost). Second, the subsidy could make profitable moving an asset to a lower valued use (if producer cost  > consumer value > producer cost - subsidy).


And so we continue our slow slide into becoming a banana republic.

Thursday, July 27, 2017

When is an Airport a Sunk Cost?

















Fred Cyrus Roeder writes in Handelsblatt that Berlin's yet to be completed new airport is "A Textbook Example of the Sunk-Cost Fallacy." It is already seven years past its original opening date and costs are currently 150% higher than originally planned. Both numbers will undoubtedly rise. Moreover, an expansion is already needed for it to fulfill its intended purpose.

How could this have happened?
The fatal flaw was the decision by Berlin’s mayor and the governor of Brandenburg, the state surrounding the city, to ignore conventional wisdom and attempt to supervise hundreds of contractors instead of hiring one good general contractor to oversee construction. This decision transferred any liability from the private-sector contractor directly to the taxpayer.

Herr Roeder advocates scrapping the whole project and starting over.

Wednesday, July 26, 2017

Consumers screen out based on poor brand image ... and so do prospective employees

One might expect that bad press about a company's brand will turn away some potential customers. But a recent survey by CareerBuilder indicates that job candidates also shy away from companies experiencing negative publicity.
"In today's 24/7 news cycle and social media world, earning and maintaining a good reputation can be a challenge," said Rosemary Haefner, chief human resources officer at CareerBuilder. "It's easier than ever before for job seekers to research potential employers. Employers that value transparency and take a proactive approach to issues or complaints will have a better chance of securing trust and loyalty and maintaining a positive reputation that can strengthen their recruitment and retention strategies."

It seems that job candidates use this as an effective screen for implicit job attributes. If you consistently treat your customers poorly, you probably treat your employees poorly too.

Friday, July 21, 2017

Incentive alignment: Lincoln Electric



I show this video on the first day of class as it is a stark illustration of how difficult it is to align the incentives of individuals with the goals of a company.  At Lincoln, they do it by devoting lots of effort to measuring individual productivity.  When you have a good performance metric, it is much easier to design incentive compensation schemes that (i) give employees enough information to make good decisions; and (ii) the incentive to do so.

Wednesday, July 19, 2017

Declining Barriers to Entry to 'World Music'

The BBC's story on the success of the song "Despacito" (4.6 Billion streams and counting) suggested that this was emblematic of the the growing internationalism of the popular music industry.
Sir Lucian Grainge, [head of Universal Music Group] said ... "The industry has predominantly been English-speaking artists for the last 50 years [but] streaming will continue to open up music from Latin America artists globally.

This reminded me that his observation has been confirmed recently by a more systematic investigation by Fernando Ferreira and Joel Waldfogel, "Pop Internationalism: Has Half a Century of World Music Trade Displaced Local Culture?" They show that the traditional bias in overseas markets toward English language songs has declined toward more home country produced songs in the last decade or more. This is likely due to improvements in information technology: the Internet allows consumers to find new music more easily and IT lowers the burdens for musicians to produce and distribute their music.

This has implications for the how talent scouts will search for the next Luis Fonsi.

Tuesday, July 18, 2017

Money markets and religion

Historical explanation for the religious acceptance of for-profit borrowing and lending:

...When the Catholic Church held a monopoly in Europe, the clergy could ‘sell’ salvation at high prices – including strict prohibitions and purchased ‘indulgences’, which usurious sinners could buy in order to be absolved. But in the 1500s, during the Reformation, theologians such as Martin Luther denounced these practices. They advocated a more direct relationship with God that did not rely on priests as intermediaries, and founded new Christian movements such as Protestantism. The effect was that of a new company undercutting a monopoly. As Christian factions competed for believers, it led to a faith-based ‘race to the bottom’. And to increase their appeal, sects made fewer demands on believers – which meant weakening their stance on usury.
HT: Marginal Revolution

Friday, July 14, 2017

What is the Appropriate Strategic Response to Entry?

Bloomberg has a nice article on how London cabbies have changed their stance to ridesharing. Many taxicabs and municipalities have responded to the entry of Uber with a hard stance including protectionist measures and sometimes violence. Now they seem to be accommodating and imitating this entry.

After resisting everything Uber, the cabbie told me that he and his colleagues are shifting to a more constructive response -- they are adapting. For example, he is part of a syndicate that now uses an app similar to Uber’s to provide riders with an expanded menu to hail and pay taxis, as well as offer them more control and transparency. The sector is a lot more willing and able to accept credit card payments. And it is all part of an effort to improve customer relations.
In a moment of frankness, he admitted that Uber has delivered a much-needed wake-up call. For him, it is no longer about stopping Uber; nor is it just about co-existence. A growing number of traditional taxis cabs are also embracing some of their rival's best practices.

Part of this change is the realization that ride-sharing represents both a competitive threat and a more efficient 'production' technology.
The initial phases of Uber’s technology-led “disruptive innovation” proved particularly powerful because they lowered in a remarkable way the barriers of entry to both the supply of urban transportation services and the demand. Few disruptions influence both sides in such a dramatic and lasting fashion. 
By allowing massively underused assets -- personal vehicles otherwise sitting idle -- to double as taxis, Uber significantly increased the provision of the service. And by measuring client satisfaction in a timely and high-frequency manner, it ensured that the bulk of this additional service would be clean, responsive, accountable, efficient, cost-effective and friendly. 
The revolution on the demand side came from Uber’s understanding -- and use -- of the power of mobility, big data, and artificial intelligence. In doing so, it met the growing digitalization desires of clients (initially, mostly millennials, but increasingly encompassing a larger part of the population) eager to gain greater direct control over activities that had become ill-served, increasingly distanced and, in some cases, alienating. By also making the payments and settlement process more efficient and transparent, Uber further improved the experience for riders -- leading many to substitute the service not just for other forms of public transportation, but also for private cars.

Wednesday, July 12, 2017

How many ways can you price discriminate?

Also in my travels, I got to got to Heidelberg and rode the funicular up to the schloss. Their pricing schedule demonstrates multiple ways in which they price discriminate.

  1. The additional charge for the return down the hill (3 Euro = 12 Euro - 9 Euro) is much less than the  single ride up the hill (9 Euro). Since the stroll down the hill is a closer substitute than the climb up, demand is more elastic coming down.
  2. The "concession" is a catch-all phrase for the elderly, students, and maybe a few others. These folks tend to be poorer and more elastic and so get a discount.
  3. They charge lower average prices for groups of preschool children. This is a form of bundling.
  4. They charge lower average prices for large groups and the rates fall as group size increases. This is more bundling with larger groups being more elastic.
  5. Finally, families get increasingly larger discounts on ever more children. That is, there are quantity discounts on kids.
  6. Did I miss any other dimensions?