Monday, September 16, 2019

Is competition among colleges becoming fiercer?

The NY Times Magazine outlines the tradeoffs that make it difficult for college admissions departments to admit deserving students and pay the bills:  the high costs of college and the link between income and test scores.  Indeed when Trinity made standardized testing optional, it fell six places in the rankings.

But I think the article may have missed a bigger issue:  the intensifying competition among colleges for students driven individualized pricing, i.e., price discrimination.  If you set a single price, competition is limited to consumers whose reservation values are near the price.  But when you offer individualized pricing, which is a by-product of financial aid, you start competing for every single student.  In essence you turn relatively mild price competition into an auction--for every single consumer!

See Cooper et al. (2007), does price competition intensify competition?  Antitrust Law Journal,  (also available on SSRN).

If colleges could figure out how to quit offering individualized financial aid--without colluding to do so--I suspect it would soften competition to the point where they could stop losing money.

Tuesday, September 10, 2019

How do politicians promote policies with a straight face?

...by ignoring their costs.
On Thursday evening, The Washington Post reported that some members of Sanders' campaign have been lobbying to raise their wages. Field organizers say they make a salary of $36,000 annually but work 60 hours per week, which is an average of $13 per hour.

Instead of upping their pay, Senator Sanders reduced the number of hours he will pay for from 60 to 40.  As Greg Mankiw notes, "Demand curves slope downwards, even for socialists."

Is Verizon's strategy better than AT&T's?

One of its large shareholders thinks so (article):
Elliott Management Corp.’s detailed criticism Monday of decisions made by AT&T’s leaders effectively praises rival Verizon Communications Inc. ’s focus on upgrading its wireless network over becoming a media giant.

Verizon's strategy is cutting costs with a big voluntary severance program, and improving and finding new uses for its 5G network.  So far it looks to be better than AT&T's, vertically integrating into content:
“While revenue per employee was nearly identical at both companies just over a decade ago (~$400k), today Verizon’s revenue per employee (~$900k) is nearly 30% higher than AT&T’s (~$700k),” Elliot wrote.

Saturday, September 7, 2019

REPOST: 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

Why is Warren Buffet investing in airlines?

For years, the airline industry was Michael Porter's classic example of a zero-out-of-five star industry (it had none of Porter's five forces going for it).  But now, it is earning profit (see graph below),



and Warren Buffet is investing in it.  What has changed?The WSJ suggests that the increase in industry profitability is driven by an increase in concentration:

But this increase in concentration occurs at the industry, not the market level (see my earlier post on this mistaken inference), where market power is exercised.  Instead, it is likely that the industry has rationalized routes, taking advantage of "network economies" in the industry to reduce costs and increase demand.  This would drive the increase in profitability and the increase in industry concentration.

Thursday, September 5, 2019

I loved the concert, but did the money do any good?



The terrible truth about Live Aid:  it was a case study in why throwing money at problems is a terrible idea

The Ethiopian dictator, Mengistu, until then deadlocked in the war, was using the money the west gave him to buy sophisticated weapons from the Russians, and was now able to efficiently and viciously crush the opposition. ...

What makes it all such a tragedy is that it was perfectly foreseeable:

Geldof was warned, repeatedly, from the outset by several relief agencies in the field about Mengistu, who was dismantling tribes, mercilessly conducting resettlement marches on which 100,000 people died, and butchering helpless people. According to Medicins Sans Frontiers, who begged Geldof to not release the money until there was a reliable infrastructure to get it to victims, he simply ignored them.

HT:  Instapundit.com

TED Talk: How not to be ignorant about the world

10 Ways US and EU antitrust enforcement differs

The European system is:
• driven by competitor complaints.
• run by politicians rather than antitrust professionals.
• conceived of as regulation, not as law enforcement.
• grounded in a skepticism of markets.
• lacks the due process of US court proceedings.
• allows for appeal, but only after modifying conduct.
• lacks the burden of proof of an adversarial system.
• does not impeach unsound theories.
• has a low bar for anticompetitive effects.
• receptive to leveraging theories.
• does not recognize competition on the merits.

Antitrust and Tech: Europe and the United States Differ, and It Matters
8 Pages Posted: 4 Sep 2019

Gregory J. Werden

unaffiliated

Luke M. Froeb

Vanderbilt University - Owen Graduate School of Management
Date Written: August 26, 2019

Abstract

European enforcers have brought high-profile antitrust cases against the tech giants, and both activists and members of Congress are calling for action in the United States. This short note identifies ten hard-wired differences between the European and American enforcement regimes that make very it difficult for the US antitrust enforcement agencies to emulate their European counterparts. This note also identifies a few other points of contrast between Europe and the United States that affect antitrust enforcement against tech giants going forward.
Keywords: tech giants, antitrust
JEL Classification: K21, L41
Suggested Citation:

Werden, Gregory J. and Froeb, Luke M., Antitrust and Tech: Europe and the United States Differ, and It Matters (August 26, 2019). Available at SSRN: https://ssrn.com/abstract=3442798

Tuesday, September 3, 2019

"Do what you are good at" commits the hidden-benefit fallacy

MarginalRevolution.com has another great post using marginal analysis to explain why boys are more likely than girls to major in STEM subjects--because children are told "do what you are good at!"

Girls get As in History and English and B’s in Science and Math which implies that (MCMath > MCEnglish) so they study English and History
Boys get B’s in Science and Math and C’s in history and English (MCMath < MCEnglish) so they study Math.  

This advice is incomplete as it commits the hidden cost fallacy by ignoring the benefits of studying Math.  The correct advice is "do what profits you the most!"  If the marginal profitability of studying Math is bigger than the marginal profitability of studying English, study Math!

•If (MRMath-MCMath) > (MREnglish-MCEnglish), then a child should study Math, not English.  
...stop telling people to do what they are good at and instead tell them to do what pays! STEM fields pay more than the humanities so if people were to follow this advice, more women would enter STEM fields. 

Monday, September 2, 2019

Why is the press becoming more partisan?

Its the incentives:
“You can go after the media you don’t support with boycotts or pressure on advertisers, but increasingly you go after the media you do support. The New York Times has grown so much because of their digital subscriber base. News outlets today are much more sensitive to the people who are paying or clicking or commenting. They know exactly who is buttering their bread,” he added.   ...
...reacting to liberal outrage on Twitter, the Times changed a headline that some said soft-pedaled one of Trump’s racial controversies. This week, the paper added a sentence to a story about the Tea Party after liberals demanded it account for alleged racism among some Tea Party members.