Monday, September 30, 2019

REPOST: Screening out the "social" entrepreneurs

Funding early stage ventures presents a HUGE adverse selection problem:  How do capitalists find the twenty-something entrepreneur committed to making money for his or her investors, and screen out those who want to be entrepreneurs because it supports their lifestyle?  Here are four different ways:
  •  Mr Hommels employs a subtle test of character. During a chat about funding, he deliberately changes the subject. “The cool entrepreneur will immediately get back to the topic and not be a social talker,” he reckons. “The good ones are more focused.”
  • Mr Lobato’s test is more direct. “I get edgy and unpleasant,” he says. “I want to see what their reaction is. For them, I’m a means to an end. It shouldn’t matter how unpleasant I get. I want to see that they behave rationally and understand they need to get what they need to succeed.”
  • Danny Rimer, a partner at Index Ventures, a global tech fund, says an obvious turn off is an entrepreneur keen to discuss a quick “exit”. He doesn’t want to hear how they plan to sell out to Google or Facebook within a couple of years. Instead, he wants to hear how their company will be around for another decade.
  • And sometimes, obnoxious overconfidence has the karmic effect it deserves. “I had a pitch from an entrepreneur once,” Mr Rimer recalls. “She said: ‘I am the American dream.’ That was a tell-tale sign.”

Thursday, September 26, 2019

REPOST: New Harmony and the results of socialism

Each year, I begin teaching capitalism to our executive MBA's at the conference center in historic New Harmony, site of a failed socialist experiment.  The irony is funny (other posts on the topic seem convincing), but it is important to remember our history, lest we repeat it.
The term “socialism” was coined by followers of Robert Owen (1771-1858), whom Karl Marx would label a “utopian socialist.” In 1825 Owen founded New Harmony, an Indiana commune, to demonstrate the superiority of what was first called the “social system.” The same year, Owen explained his experiment to a joint session of Congress attended by Supreme Court justices, President James Monroe and President-elect John Quincy Adams. Although Owen poured his fortune into it, New Harmony collapsed in disarray and recrimination within two years.

Owen’s son Robert Dale Owen salvaged the community by implementing what he called “a policy the very reverse” of socialism: “giving each respectable citizen every facility and encouragement to become (what every adult ought to be) a landed proprietor.”

Undeterred, others founded some 40 to 50 similar communes during the 19th century, and all collapsed quickly. New Harmony’s two years proved to be their median lifespan.

Most telling is that the one socialist experiment which succeeded was abandoned because its people realized, collectively, that they could be much better off on on their own.
Successful socialism has been created in only one place on earth, the kibbutzim of Israel. They were democratic and egalitarian; sharing possessions, meals, even child rearing. But once the Jewish state was securely on its feet, kibbutzniks chose to switch to private enterprise. Socialism, they learned to their surprise, was not a happy way to live.

REPOST: Adverse selection vs. Moral Hazard

President Trump has overhauled private health insurance, allowing businesses to offer cheaper plans that do not have as many benefits.  The Republicans applaud the change because they think it will lead to more coverage, and address the issue of moral hazard; Democrats criticize it because they think it will lead to adverse selection, raising costs for less healthy people who need more coverage.

Proponents of the new rule argue that AHPs will provide lower cost coverage for an estimated 4 million small business workers over the next 5 years including approximately 400,000 individuals who currently do not have coverage. Critics counter that without regulations requiring the inclusion of essential health benefits, such as maternity care, mental health, or prescription drugs, new AHPs will exclude important benefits and ultimately create significant and costly gaps in health coverage. They further argue that young, healthy individuals will flee the individual market for lower-cost AHPs, thereby leaving the sickest in the individual and small-group market to further drive up premiums.

Tuesday, September 24, 2019

Is the stock market over-valued?

Historically (link), Shiller's P/E ratio (CAPE) looks high (Sept 24, 2019) but if I really knew I wouldn't be teaching school...and I probably wouldn't tell you.

Investopedia reports what Shiller (bubble-ologist) says:

The developer of the CAPE ratio, Nobel Laureate in economics Robert Shiller of Yale University, has been warning that current market valuations are unsustainable for the long run, as discussed in another Investopedia report. He is particularly concerned about "the public's lack of healthy skepticism about corporate earnings, together with an absence of popular narratives that tie the increase in earnings to transient factors," as he has written in an essay republished by MarketWatch.

Monday, September 23, 2019

Saturday, September 21, 2019

Are house prices over valued?

Not as bad as in 2008, but historically high relative to renting.  In the long run the prices should be close (Chapter 9).

Housing prices differ by city, so check the affordability vs. the wages in your area, a measure of the "real price" of a house.

QUESTION:  based on the real prices below, do you think these wages and housing prices are in long run equilibrium?

HT:  Calculated Risk

1980-2018, US Dollar strengthens against Chinese Yuan

The strengthening dollar could represent Chinese buying dollars to invest in US, to either make sure that Chinese exports stay cheap, or make sure Chinese owned US assets are outside of the reach of the Chinese government. 

Thursday, September 19, 2019

Can Price Discrimination Against Students Survive Competition?

In an earlier post, Can Price Discrimination Survive Competition, we showed that airline price discrimination was dramatically reduced following entry by Southwest.

Twenty-five years ago, the Ivy League Schools were sued by the Justice Department (my old employer) for conspiring to fix out-of-pocket costs faced by students:

The suit claimed that the Overlap members compared family contributions for financial aid applicants admitted to more than one of their schools and eliminated sizable differences to make the family contributions comparable. 
``Students and their families are entitled to the full benefits of price competition when they choose a college,`` Thornburgh said at a Department of Justice news conference announcing the suit and consent decree. ``This collegiate cartel denied them the right to compare prices and discounts among schools, just as they would in shopping for any other service.`` 
``The defendants conspired to eliminate cost competition as a factor in choosing a college,`` Thornburgh said. ``The choice of whether to consider price when picking a school belongs to parents and students, not the college or university.``

The collusion was necessary to maintain the price discrimination scheme.  Without it, the scheme probably would have collapsed:

Schools had defended the sharing of scholarship information as a way to prevent bidding wars for top students. Peter Smith, a spokesman for the Association of American Universities, said on Wednesday: ``If that`s right, I suppose you`ll get some of that (bidding) now. But I don`t have a feel for how many kids that may involve.``
Daniel Steiner, vice present and general counsel of Harvard, said he was concerned that Wednesday`s action might lead to student financial awards in excess of need. ``We have already seen in other parts of the U.S. too much evidence of bidding contests for students,`` he said.
So the Ivy's said it was OK to fix prices as long as the proceeds of the conspiracy were used for good.  

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 discrimination 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? 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.


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


Luke M. Froeb

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


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:

Tuesday, September 3, 2019

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