Can Blockchain Tech. Resolve this Principal-Agent Conflict?

PROBLEM FACED BY ADVERTISERS:  how to figure out whether their ads are viewed by real people, not computer-generated bots, and how much of their spending is siphoned off by middlemen.

SOLUTION PROVIDED BY BLOCKCHAIN:  Marketers sometimes can manually audit digital ad campaigns, but proponents of blockchain say the technology offers a faster, more reliable way to track spending and reconcile discrepancies with suppliers...  The technology can also help track whether ads are running on websites with real traffic and on portions of them visible to ordinary users. That type of campaign information can be included in stored “blocks” along with pricing information.

SOURCE:  Article from WSJ

Netflix vs. HBO: a tale of two strategies

From the Atlantic:

HBO’s current profit model is simple but effective. People pay a fee (something like $15 a month) to subscribe; HBO uses that money to license movies and produce TV for subscribers to watch. Because of the company’s longtime reputation for high-quality, Emmy-winning shows like Game of Thrones and Big Little Lies, plenty of people subscribe, and HBO makes a lot of money. 

Netflix’s business approach, again, is about scale and is underwritten by investors. The company has focused on getting more worldwide users and hiking its subscription fee to increase revenues. But producing more original shows means Netflix burns through more money—a March 2017 report found Netflix had a negative free cash flow of $2.1 billion. A few months later, the company said in a letter to shareholders that it would remain in the negative for years, but that the investment would crucially help the company spread across the globe.

Now that HBO has been acquired by ATT, it is being pushed to mimic the Netflix strategy:

In this age, as Stankey made clear, “hours of engagement” are what matter most. Executives have long factored viewing data extracted from subscribers into their programming decisions, but online services can mine our viewing preferences much more minutely. The more data, the easier it is to understand what people want—at least that’s been Netflix’s guiding principle as it makes hits like House of Cards and Stranger Things, which are calibrated to play on audience nostalgia. But the idea that numbers alone will drive good or popular art is ludicrous; Netflix has made plenty of shows that haven’t hit the mark with audiences, like any other network.

Bubble-ology: "A Crisis of Beliefs"

Beliefs caused the credit bubble and subsequent bust (slides on the 2008 Financial Crisis)

1. Excess optimism, excess lending and investment 
2. Correction of expectations (due to bad news or waning of optimism) 
3. Recession (impaired intermediation or excess pessimism) 

==>Crises are due to non-rational beliefs, which may be amplified by traditional mechanisms.

"Change is inevitable, if you try to stop it, you will kill the economy"

Nice articulation of the gains from trade. 

Prevalence bias

Here is the essence of the experiments that document it:

…When blue dots became rare, purple dots began to look blue; when threatening faces became rare, neutral faces began to appear threatening; and when unethical research proposals became rare, ambiguous research proposals began to seem unethical. This happened even when the change in the prevalence of instances was abrupt, even when participants were explicitly told that the prevalence of instances would change, and even when participants were instructed and paid to ignore these changes.

Here is a public policy implication:

… When strong sexism declines, for example, … what was once not considered sexism at all (e.g. “men and women have different preferences which might explain job choice“) now becomes violently sexist. 

I am thinking about how this kind of bias might appear in a business setting.   For example, as particular kinds of accidents become less prevalent (rarer), if consumers overestimate the probability of these accidents, then consumers will be willing to pay much more than the cost of the insurance [probability of an accident times the cost of an accident].

Greg Mankiw on the Poverty Trap

Mankiw's graph shows that as you earn more income (plotted on the horizontal axis), the amount of money you receive (income - taxes + subsidies) is does not increase, at least for lower-income earners.  Until your earned income hits about $40,000, the extra money you receive from earning more is near zero.

Longer Trains

The WSJ reports that freight trains keep getting longer.

The freight train is now on track to stretch up to 3 miles long, with 200 cars or more.

CSX Corp., for instance, in April said its average train length rose 5% in the first quarter from a year earlier, a signal to investors and analysts that the railroad is gaining efficiency.

The relative sizes of fixed costs and marginal costs seem to be behind this. Long trains mean fewer, more efficient trains which save on fuel and crews. This also means fewer but longer delays at crossings, perhaps better for residents to plan around but worse unplanned trips by, say, emergency vehicles.

There are challenges:

Operating trains that are double the length of standard size trains involves mastering the distribution of weight and pulling force. The longest, heaviest trains may have four locomotives in front, two in the middle and two at the end.

Online Sales Tax and Vertical Integration

Last week, the US Supreme Court reversed earlier decisions on the collection of sales tax by online retailers. Previously, states could not tax a company that had no physical presence in the state. Now, states can collect sales tax on retail items sent to residents of the state.

Large online retailers had a presence in almost all states and so collected state sales taxes from all customers. Mom & Pop venders may have sold across state lines but usually only collected from local residents. Mid-sized online retailers, however, had to weigh the option of expanding into a state with the 6-8% higher costs that their customers would have to pay. Avoiding those costs, likely affected some facilities purchase decisions. Now that this  tax can no longer be avoided, I expect more of the mid-sized firms to vertically integrate into states where they had been hiring third-party vendors.

What is the elasticity of demand for Whole Foods?

After Amazon bought Whole Foods, there was increase in foot traffic (a proxy for sales):

Whole Foods’ foot traffic has increased roughly 3% year over year in each of the quarters since Amazon bought the chain, ...  That came after two straight years of stagnating sales at the chain before the deal. 

Presumably caused by a decrease in price:

Amazon.com Inc. AMZN -0.61% on Monday put itself in the unusual position of being a first-mover on price cuts when it slashed the sticker price on more than 100 items at Whole Foods Market Inc.,many by more than 30%. 

To calculate the implied price elasticity of demand for Whole Foods, divide the quantity increase by the price decrease:

 elasticity = (%change in Q)/(%change in P)=(+3%)/(-30%) = -0.1

Demand seems very inelastic.  If Amazon were trying to maximize profit on its Whole Food sales, it should have raised price, because revenue would have gone up, and quantity, and costs would have gone down.  In fact, the stock price reactions seem to underscore the unprofitability of the move:

Investor concern that Amazon’s price cuts at Whole Foods will trigger a price war led to a stock selloff among traditional grocers Monday, continuing last week’s slide. Sprouts Farmers Market Inc.’s stock tumbled 10%, while Natural Grocers by Vitamin Cottage Inc. was down by more than 2%. Kroger, the largest U.S. grocery chain by stores and revenue, slipped 1.4% before largely recovering, while Wal-Mart Stores Inc.’s shares slid slightly.

What seems more plausible is that Amazon is applying its traditional pricing algorithms to the acquired Whole Foods stores.

Amazon typically relies on algorithms that scrape competitors’ prices before automatically matching or narrowly undercutting them on its website. It focuses on items that are most popular on the site and that drive traffic, according to former executives in Amazon’s retail divisions. That gives the retail giant a reputation for having the lowest prices, part of its strategy of driving more shopper traffic.

Shirking Level 100