Training Crows

I love this screenshot I recently came across. Even crows respond to incentives.

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. 

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.  

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.

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.

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.

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