Monday, May 25, 2020

Bad ideas from Nashville politicians

Potential exam question:
  • QUESTION:  Nashville currently has had a ban on evictions for about two months.   In about two weeks this ban will expire. Question:  What would happen if we followed Councilman Sean Parker's call for banning "Evictions ... until Davidson County's unemployment rate returns to 2.8%..."
  • ANSWER: In the short run, it would reduce incentives for renters to pay rent in a timely manner.  This would reduce the value of owning and building housing, which would reduce the supply of housing in Nashville, which would increase price of housing and rents.  The policy would end up hurting would-be home buyers and renters, the very people that it is designed to help. 

Saturday, May 23, 2020

Marriott's changed strategy when it realized it was competing on the wrong dimension

New paper identifies a strategy mistake by Marriott:
Early in the 1980s, Marriott operated a chain of large, higher-end full-service hotels that typically had 300-500 rooms.

While attractive to higher-income tourists, these hotels were not attractive to business travelers who wanted lower-prices and larger rooms.  Marriott surveyed its business customers and learned exactly what these customers valued, and what they didn't:
...many business travelers did not value out-of-room amenities such as full service restaurants, lobbies, or meeting space as much as firms believed, and valued in-room amenities such as larger and better-appointed rooms more than they thought.
The results of this analysis were a surprise to Marriott executives ... The results indicated that some out-of-room amenities that many hotels offered were not valued by business travelers and as a result certain features, which were “often provided based on traditional hotel management beliefs were not retained [in the new chain], for example, an ‘action’ lounge, a more upscale restaurant and room service, and more meeting space.”

So they launched a new brand aimed at business travelers. 
Based on this survey, Marriott also decided that the new chain would not offer several typical out-of-room services such as bellmen or concierges.  Instead, hotels in the new chain (Courtyard by Marriott) emphasized features of the room itself. The rooms were somewhat larger than standard rooms, with room for a large desk and sofa, and had nicer d├ęcor and larger bathtubs than mid-range competitors’ rooms had. These hotels did have pools and restaurants, but the pools were mainly functional and did not have slides or diving boards, and the restaurants were small and offered only a limited menu – in part because Marriott’s customer survey indicated that the business travelers they were targeting valued having a good restaurant nearby, but not necessarily in the hotel itself.

And, of course, you can guess the rest of the story.  Competitors copied Marriott's innovation:
... “limited service” chains such as Holiday Inn Express, Hampton Inn, and Fairfield Inn, among others. 

This story illustrates several themes from the book:
  • Chapter 17 (Uncertainty): gather information to make better decisions; 
  • Chapter 10 (Strategy): do something with the information to develop a "sustainable competitive advantage;"
  • Chapter 14 (Indirect Price Discrimination):  they introduced a lower-priced brand that appeals to business travelers but does not cannibalize vacation demand for their other brand; and
  • Chapter 9 (Long-run Competition): keep innovating because imitation erodes competitive advantage.  
UPDATE FROM ONE OF THE AUTHORS:

Not sure this gives Marriott enough credit, though.  After all, all of Marriott's competitors were competing inefficiently as well, and Marriott was the first to figure it out.

There is a fun backstory to the series of events that your students might like.  It turns out that this series of events was catalyzed by an executive, Lee Pillsbury, who was a student in one of Kellogg's executive degree programs.  He took some marketing classes and saw what academics were doing in terms of conjoint analyses and surveys -- stuff that was innovative at the time.  He went back to Marriott and got others to agree to studies that utilized these methods, and what they found surprised them and changed the direction of the company.  So what you see in the paper has its roots in the MBA classroom -- what you learn there can end up changing an industry.

Jerry Wind --- one of the Wharton guys that was involved in the study -- told us that at the time, the design and attributes of hotels were largely determined by engineers and property development people -- individuals who had little contact with hotels' customers.  These individuals had very strong believes on what hotels "had to have," but did not realize that tastes were changing as how business travelers used hotels (more as a workplace, less as a place to entertain or be entertained) were changing.  Marriott's study was probably the first application of advanced marketing techniques to the industry, and Marriott's success with Courtyard ended up being proof in concept.

Friday, May 22, 2020

Causality

Many business problems are questions of causality:
  • How much will sales increase if I increase my advertising budget?
  • Will employee productivity increase, if I raise the wages to new employees?
  • Will productivity be hurt if I allow employees to work from home?
Anyone who has read this blog knows that I am huge fan of randomized control trials ("experiments") as they get rid of the "selection bias," or "reverse causality."  For example, each of the following factors would bias simple correlations so they do not reflect the implied causality:
  • When sales increase, advertising budgets typically increase
  • New employees are younger and less experienced than older ones
  • Low productivity employees may be more inclined to work from home.  
In this interview, Josh Angrist details some of experiments he ran to figure out that:
  • Allowing laptops and iPads in the classroom has a big negative effect of learning.
  • No-excuses charter schools have a positive effect.
  • Peer effects and giving laptops to kids does not improve learning.

    For businesses trying out new advertising campaigns, employment practices, or pricing strategies, design their rollout so you can learn something:  Advertise or change prices in randomly selected areas; adopt employment practices in certain plants but not others.  

    If not, you will end up making changes without ever knowing whether they made a difference. 

    BOTTOM LINE:  identifying causality is really hard, but profitable.  

    Related web app to teach regression (and causality) by showing how Type I (mistakenly inferring causality) and Type II errors (mistakenly inferring no causality) occur.  Do the learning exercises!

    Monday, May 18, 2020

    Moral Hazard: over-reporting of COVID-19 deaths

    For a variety of reasons (many asymptomatic cases, lack of random testing), it is difficult to measure the infection rate or the death rate of COVID-19.  Deaths due to COVID-19 is probably the best data we have, but there is good reason to doubt these data as well:

    ...The CARES Act adds a 20 percent premium for COVID-19 Medicare patients.  
     Incentives matter. When the government increased the disability compensation for air traffic controllers, a lot more controllers suddenly started claiming to be disabled. When unemployment insurance payments increase, more people become unemployed and stay unemployed for longer periods. When the government offers flood insurance that charges everyone the same insurance premium regardless of the risk level in their area, more people build homes in frequently flooded areas.

    Wednesday, May 6, 2020

    Density used to be green, now it kills

    Anyone who has followed this blog, knows that I was a big fan of urban density: it reduces commuting costs, pollution, urban sprawl but, most importantly, it increases the supply of housing.  I vilified NIMBY's in places like SF and NY for erecting barriers to new housing that would have increased density, and supply.  I even blamed them for homelessness, inequality, and segregation.

    One of the things I love about myself is that I can admit it when I am wrong.  Although I still believe in what I wrote, now we have a bigger problem.
    Density Kills,The coronavirus has been much more deadly in places like New York City or Boston than in rural settings. As demographer Joel Kotkin notes, Los Angeles has done much better than other big cities, because it’s less dense. “L.A.’s sprawling, multi-polar urban form, by its nature, results in far less 'exposure density' to the contagion than more densely packed urban areas, particularly those where large, crowded workplaces are common and workers are mass-transit-dependent...
    Mass Transit kills. Kotkin mentions mass transit, and an MIT study found that NYC subways were a ”major disseminator” of the coronavirus in New York. This is unsurprising: New York City subways are crowded, poorly ventilated and filthy. The city is only just now starting to clean them every night. (A bit late.) Cars come with built-in social-distancing: With a car, you’re riding in a metal and glass bubble with filtered air. Subways and buses, not so much. Whether this virus sounds the ”death knell” for mass transit or not, people will be far more reluctant to ride packed vehicles in the future. and Bureaucracy kills. 
    Bureaucracy kills. Much of the fight against the coronavirus has also involved a fight against bureaucrats dead set on making things worse. Early on, the Centers for Disease Control and Prevention declared COVID-19 a public health emergency, which raised the bar for testing requirements. As a result, hospitals and universities faced significant barriers to getting alternative tests approved by the Food and Drug Administration. Worse yet, the CDC tests turned out to be defective.
    To be fair to myself, I always knew that Bureaucracy kills, but thank goodness I don't follow my own advice. 

    Saturday, May 2, 2020

    Is it ethical to buy antibody rich blood at inflated prices?

    Alex Taborrak tells it like it is:

    The huge demand for antibody rich blood (to develop a vaccine) has driven up the price:

    From March 31 to April 22, prices asked by Cantor BioConnect for its cheapest samples — always sold by the milliliter, the equivalent of less than a quarter of a teaspoon — rose more than 40 percent, to $500 from $350.
    QUESTION:  Is this ethical?
    ANSWER:  Only if you want to save lives.  
    “I’ve never seen these prices before,” said Dr. Joe Fitchett, the medical director of Mologic, one of the British test manufacturers that was offered the blood samples. “It’s money being made from people’s suffering.”
    READ THE WHOLE POST!