Extracting Information from Supply Disruptions

On Sept. 16, 2025, a fire at Novelis's aluminum rolling mill in Oswego, New York disrupted roughly 40 percent of the automotive aluminum sheet used in North America. The importance of this supply disruption can be determined using standard stock market event study analyses. Ford was one of the firms most exposed to the disruption because it relied heavily on automotive aluminum sheet. As analysts began estimating the impact on vehicle production and profitability, Ford's stock price fell sharply. Similarly, investors also penalized Hindalco, Novelis's parent company. The interesting question is what happened to competitors. If one supplier exits temporarily, shouldn't rivals benefit?

Firm	Relationship to Event	Approximate Stock Market Reaction
Ford	Customer of automotive aluminum sheet	-7% abnormal return
Hindalco (owner of Novelis)	Directly affected supplier	-6% abnormal return
Kaiser Aluminum	Potential substitute supplier	+3% to +5% short-term gain
Constellium	Potential substitute supplier	Little measurable effect

Investors appeared to believe that Ford would suffer large costs from the disruption, but they did not assign equally large gains to Novelis's competitors. While aluminum itself is a commodity, automotive aluminum sheet is not. Suppliers must invest in specialized equipment, satisfy demanding quality standards, and undergo lengthy qualification processes with automakers. Even if competitors wanted to absorb Novelis's lost volume, they may not have had sufficient spare capacity or approved production lines to do so quickly. Ford's stock market loss was several times larger than analysts' estimates of immediate production costs because investors recognized that replacing a critical supplier is expensive and time-consuming. There are no doubt benefits to Ford and Novelis from contract exclusivity. This episode highlights the costs.

Rethinking Strategy at Cracker Barrel

Julie Felss Masino was recruited to become the new CEO of Cracker Barrel in 2023 to reinvigorate the brand. Should strategy focus on growing demand by increasing attractiveness to new customers or should it focus on keeping existing customers comfortable? As the WSJ reports, it opted for the former:

The goal was to modernize its stores, menu and design to help bring new customers to the vintage chain. The company had seen some promising results from food updates and marketing tie-ins when, as part of a fall marketing campaign in 2025, it unveiled a new, simplified logo.

And then Cracker Barrel became an unexpected flashpoint in the culture wars. The new logo was described as "going woke" and the changes alienated many of its more traditional patrons. Visits plummeted and the company lost $100 million in market capitalization in a week.

Well that didn't work. To her credit, Masino quickly reversed course.

She cut ties with the marketing firm behind the chain’s rebranding campaign and revamped the company’s leadership structure, bringing back a former vice president for menu strategy and elevating a veteran field operator to oversee store operations. 

They doubled-down on the traditional experience. Even the old logo has returned. The pivot seems to be working. Customers are beginning to return and the share price is rebounding, though not to the $60-$70 range prior to these events.

A strategic decision is a sunk cost. Abandon it when new information indicates a mistake.

Hidden Cost of Environmental Protection

 REASON:

Greenpeace and its activists allies have blocked for more than two decades the adoption of Golden Rice, which is genetically enhanced to produce the vitamin A precursor beta-carotene. The result, according to new calculations by DC Abundance founder and research director at the Golden Gate Institute for AI Abi Olvera, is that "delay has killed about 106,000 children and left another 210,000 to 425,000 blind."

What Set-Asides Cost: A Lesson from Timber Auctions.

California's Public Utilities Commission is pressuring utilities to steer about 1.5% of procurement toward state-certified "LGBT-owned" firms.  Setting aside the certification debate, what will this cost the state? 

In every auction, the winner has to outbid the second-best bidder, so the second-best bidder sets the price. Weaken the field and you weaken that price-setter. But which way the price moves depends on whether the government is buying or selling.

When the government buys, it runs a procurement auction: bidders compete to sell to the government, and the lowest-cost bidder wins, while second-lowest-cost bidder sets the price. Restrict who can bid and the price the government pays goes up.

When the government sells, bidders compete to buy, and the highest-value bidder wins, while the second-highest-value bidder sets the price. Restrict who can bid and the price the government receives goes down.

A set-aside moves price through two separate channels, and they push the same direction. 

• First, it shrinks the number of bidders, so the second-lowest cost is higher (or the second-highest value is lower). 
• Second, the set-aside bidders themselves may be higher-cost or lower-value than the bidders they replace. 

Both channels move price against the government.  An article by a pair of middling economists shows by how much.  Prices in Forest Service small-business set-aside auctions—where only small businesses may bid—run about 15% lower than in open auctions. 

The lesson applies to California. Fewer, weaker bidders mean a worse deal for the government. 

AI and the Shrinking Firm

The way that Artificial intelligence (AI) is changing worker productivity may also be changing the optimal scale of the firm itself. According to a recent Axios report, AI-powered tools are enabling entrepreneurs to launch and operate businesses with little or no staff. Tasks that once required specialists in coding, graphic design, marketing, customer support, and bookkeeping can increasingly be performed by a single entrepreneur assisted by AI. The result is a growing number of "one-person firms" capable of generating revenue levels that previously required a small team. This contrasts with the trend since the industrial revolution in which ever more mechanization generated ever greater economies of scale and ever larger enterprises.

Some aspects of AI fit nicely into theories of the firm.

•          Transactions costs can be reduced by engaging with AI rather than an employee.
• AIs eliminate employee principal/agent issues.
• However, a more personalized AI may represent a relationship-specific sunk cost that can lead to holdup.

Has the risk premium for owning stocks disappeared?

Axios reported that the equity risk premium (ERP) — the extra return investors expect for holding risky stocks instead of safe Treasuries — has shrunk to almost nothing. A safe 10-year Treasury bond pays about 4.5%. Stocks, measured against the companies' current earnings, return only about 3.7%. So right now the safe bond actually pays more than risky stocks, even though stocks have historically paid 3–5% extra. It looks as if you'd be taking on the risk without the usual reward.

HOWEVER: That 3.7% is based on what companies earn today. Stock prices are high because investors expect much bigger earnings in the future, driven by AI. If those bigger earnings actually arrive, then the price you pay today is reasonable, and stocks aren't really overpriced after all.

BOTTOM LINE: The risk premium you calculate depends on which earnings you use — today's or the future's. The historical rule assumes today's earnings are a good guide to the future. If AI changes how much companies earn, that assumption breaks, and the real risk premium is unknowable until we see whether the growth shows up.

Did incapacitation, deterrence, or rehabilitation reduce crime in Baltimore?

The Free Press:

Bates, ``a new tough-on-crime prosecutor, ... replaced a scandal-plagued `progressive.'” '' 

Incapacitation (selection): sometimes referred to as ``specific deterrence.''

Bates said that his office has identified about about 6,000 frequent, violent offenders and put between 3,000 and 3,500 of them in prison. The cooperation of federal law enforcement has helped take a number of these offenders off the streets.

Deterrence (incentives):

...more willingness to process felons in possession of a gun, and a more credible threat of punishment.

Rehabilitation:

“If you’re seeing your friends all going to prison, you’re going to go: ‘What? I don’t want to go to prison,’ ” Bates said. “Now all of a sudden, that job or that program someone’s offered you before that you didn’t want to talk about—now it looks pretty appealing.”

Wheelchair Fraud

WSJ: They Get Wheeled on Flights and Miraculously Walk Off. Praise ‘Jetway Jesus.’ 

One viral account had 30 travelers needing wheelchairs to board a Southwest flight — and all but two walking off on their own at arrival.  Another traveler, Carlos Gomez, described a flight delayed by 25 wheelchair passengers and said he sees more "wheelchair fraud" every trip. A flight attendant reportedly told him many able-bodied passengers request wheelchairs for "the VIP experience" — skipping lines, first crack at overhead bins — and that the "healing begins" once they learn they'd have to wait for assistance to get off.

More Test-Taking Accommodations in Wealthy Areas

WSJ: 

The share of SAT takers getting extra time has increased from 2% to 6.7% in the last decade; on the ACT, it rose from 4.1% to 7%. Qualifying students typically receive 50% more time — and on longer accommodations, up to double the standard limit. The surge is concentrated in wealthy areas, where federal data show that students at affluent schools receive accommodations at more than twice the rate of those at high-poverty schools. 

Why? The payoff is huge (a few points can swing an admission), colleges aren't told who got extra time, and the qualifying bar is easy to clear — a diagnosis you can pay a neuropsychologist thousands to obtain. Same incentive for everyone; different ability to act on it.

(Lack of) Economies of Scale in Home Building

Brian Potter at Construction Physics takes a deep dive into economies of scale in construction. There are enough homes being built to observe economies of scale ... if they existed. But even manufactured homes don't seem to exhibit economies of scale. He marshals a lot of evidence to document where costs are incurred and how these compare to other industries. The lack of scale economies imply that the industry is rather unconcentrated. There are thousands of home builders with the five largest nationally having less than 25% of the market.

He concludes by trying to answer why there appears to be almost no economies of scale. One answer seems to be that that materials and labor home building costs represent 97% of costs with equipment costs being only 3%. Auto manufacturing, in contrast, is extremely capital intensive and hence firms are large. Home construction Fixed Costs (FC) are just not big enough for declining Average Fixed Costs (AFC) with scale to be too important. In contrast, high rise construction might require high cost excavators, cranes, pavers, pile drivers, etc. driving up the equipment cost share. Consequently, the five largest contractors for these projects have closer to 45% market share. The cost structure determines the market structure.

Hat tip: Marginal Revolution 

Is Business More Charitable than Charity?

“If I do my job right, the value to society and civilization from my for-profit companies will be much, much larger than the good that I do with my charitable giving.” - Jeff Bezos

A new opinion piece in the WSJ by Marian L. Tupy tries to calculate the value of the time saved by Amazon customers. I may quibble with some of his assumptions, but his point is that the cumulative value of the amount of time saved by Amazon customers likely exceeds the size of Bezos's fortune. This is on top of savings from lower prices and better product matching from a greater selection. Nordhaus famously estimated that entrepreneurs appropriate only 2.2% of the value of technological advances. Or Bezos likely got just a sliver of the pie that was created. Nordhaus's estimate could be off by a factor of forty and value appropriation by entrepreneurs would still be less than 100%. The amount of consumer surplus enjoyed typically rises when profit is earned. No one needs to get poorer just because someone else got richer.

I am reminded by a video clip of John Stossel interviewing Ted Turner from 1998 (I am that old). Ted Turner made his fortune creating a media conglomerate but had recently announced he would be giving away $1 billion in charity. Stossel's video makes the point that Turner could "do more good" by investing the $1 billion than giving it away. Charity divides the pie, investment grows the pie.

Selling Mattresses on Memorial Day

A nagging thought kept creeping into my more somber thoughts this Memorial Day. Why did retailers turn a day of remembrance into an opportunity to sell large consumer goods?

Wikipedia provide a nice history of the holiday but a short piece by McNutt & Partners explains some retailing aspects. For generations after the Civil War, it was called "Decoration Day" during which acknowledgement for the sacrifices of the dead were paired with commemorations meant to instill pride for country. It was renamed "Memorial Day" after WWII but a more significant change occurred in 1971 when it was moved from May 30 to create a three-day weekend. This made possible quick vacations and more time to consider large irregular purchases. 

In economic terms, it concentrated demand for mattresses, and similar big-ticket items, into a single weekend (and then two weeks around the date). This is efficient if there are economies of scale so that retail costs fall with sales volume. This may also permit some price discrimination as those who are more demand elastic seek out these deals and schmucks like me pay higher prices the rest of the year.

Biggas Savings

A funny commercial from a while back uses puns aimed at my adolescent sense of humor. Kmart wants to entice potential customers into its store, so it discounts the complementary product. I always enjoyed playing this video to classes.

Fabulous post on central planning from MarginalRevolution

If our textbook gets to an eight edition, this will make it into Chapter 1.

MarginalRevolution on Central Planning:

The dilemma is this. There is a problem of information. Supercomputers will in fact help process information better. But if the information coming in is junk, and if that junk is built into the system because of the incentives that operators have in workplaces to lie, you will not have a planning system that can be put on its feet through the advent of computers or artificial intelligence or anything like that. I don’t see any reason to think that that strategic misalignment of incentives is simply there because of Russian backwardness or poverty.

..the burden of proof is on us, on the Left, if we want to continue with this slogan of replacing the market with the plan. The burden of proof is on us to show that it can work. You might say that along with this ought to come a kind of humility about facts and about the world. ... it would be criminally negligent to ignore the experience of decades upon decades of planning and say to yourself, “Well, that wasn’t what my vision of socialism is, so I’m going to ignore it.” Because if you do that, I can guarantee 100 percent you will end up repeating many of the mistakes and falling into the same dilemmas that the planners did. 

Lessons from Sweden's Capitalist Makeover

WSJ:

• By 1990, center-left raised taxes/spending to 70% of GDP

THEN:

• cuts to unemployment, housing subsidies, pensions
• privatization of public services
• cuts to taxes
• Limit govt. debt to 36% of GDP (vs 129% U.S.)
• govt. spending drops to 24% of GDP (vs. 30% for France, Italy)
• Businesses invent new technologies.
• GDP, house prices, and inequality soar

LESSONS:  

• Incentives drive innovation and inequality
• Innovation drives 2% growth: income doubles in 36 years

HT:  Justin

FDA screens out studies with selection bias

The Free Press:

• ..one of the studies looked at a group of people for six weeks—three weeks after they were vaccinated, and then another three weeks after that. If they were healthy after the second three-week period, the researchers concluded that it meant the vaccine was safe. In addition to the absurdly short length of time—six weeks to conclude the vaccine is safe?—it has an obvious and inherent bias toward healthy people, who are the most likely to get vaccinated. 

•  Another study used an approach called “test negative”: It looked at people who came to the hospital with flu-like symptoms, some of whom had Covid and some of whom didn’t. If the group who were vaccinated had fewer people with Covid, it was supposed to mean that the vaccine worked. But in reality, it could simply mean that people who are vaccinated are more likely to show up at the hospital.

Waning Credit Card Market Power?

 

Historically, Visa and Mastercard earned substantial interchange fees because merchants had few practical alternatives. But FedNow, RTP, “pay-by-bank” systems, and blockchain-based settlement reduce switching costs and create new competitive options for merchants and fintech firms. Recent reporting from American Banker noted that RTP and FedNow transaction volumes are growing rapidly while firms simultaneously experiment with stablecoin-based international transfers that bypass traditional correspondent banking systems. Meanwhile, regulators are increasingly scrutinizing the market power of incumbent payment firms, including a new UK competition probe involving Visa, Mastercard, and PayPal. Network effects can create durable market power, but interoperability, regulatory pressure, and technological innovation can gradually transform even seemingly entrenched monopolies into far more competitive markets.

For decades, Visa and Mastercard benefited from one of the strongest forms of market power: network effects. Consumers tend to apply for cards that are accepted by more retailers and retailers accept cards that are held by more consumers. The resulting feedback loop favored first-mover credit cards and made subsequent entry difficult. But now new payment “rails” are beginning to erode that dominance. Real-time payment systems like FedNow and RTP now allow money to move directly between bank accounts in seconds, bypassing traditional credit card networks entirely. At the same time, stablecoins and open-banking systems are creating alternative methods for transferring funds with lower fees and faster settlement. Reuters recently reported that Visa’s annualized stablecoin settlement volume has already reached roughly $7 billion, while Mastercard is spending up to $1.8 billion to acquire stablecoin infrastructure firm BVNK. These investments reveal that incumbents increasingly view new payment rails as potential substitutes for traditional card networks.

A Hiccup in a Price War

Many antitrust economists are wary of the efficacy of predatory pricing, the strategy of pricing below costs to drive a competitor out of a market. The usual counter-argument is that, for it to work, the inevitable losses this will entail must be recouped after the rival has exited. Recoupment requires higher prices ... that can attract rivals again. Additionally, there are many tactics the prey can implement during the predation phase to try to thwart the predator.

A new one to me is giving away booze. As described in an article for Southwest Airlines 50th anniversary, Southwest pioneered frequent, cheap flights within Texas in the 1970s. In 1973, Braniff and Texas International started a price war offering $13 tickets. This was below Southwest's costs and was intended to drive Southwest out. Southwest countered with two-tiered prices. They would match the $13 price but also offer a $26 price that included a fifth of liquor. Most of its customers were business travelers who would expense the $26 ticket and keep the liquor. Since the liquor cost Southwest less the the the difference in the prices, it made more on the $26 tickets. Few of its customers opted for the money losing $13 tier. And, of course, the publicity of "free booze" was priceless.