Thievery

Thieves are a great problem now a days. people who steal things from others and sell them for all intents and purposes, at marginal cost. but is it all that bad for society. it has its good sides as well as its bad ones. they take items that rightfully belong to others, and sell them off for money. then the old owners either have to live without it, or purchase a new one. this forces the consumer to replace old things that could have been outdated and outlived its useful lives. but it also creates a excess outflow of money. people lose money when items are stolen from them. this is no different than when they go out and buy a replacement without the original being stolen. but it does create some lost utility, but you cant really measure lost utility. so you can say that the original owners lose some money or utility, but you cant really measure it. so all in all, there is no lost value in the stolen product. this also poses a another problem, though. if an item was stolen, you have lost something of value. so all you really lose is sentimental value. you don't really lose any monetary value, as long as you have insurance on your belongings.

Bold Prediction - Lenovo Becomes the New Leader in the Global PC Market

The global PC market finds new standings--No. 1 HP, No. 2 Acer, No. 3 Dell, and No. 4 Lenovo--based on global PC shipments. Consumers do not go to stores to look at Hp, Dell, and Apple computers any more but instead are looking at other brands. In the past, the concern for which laptops to buy was obvious--buy an HP, Apple, or Dell--today, it is Lenovo or Acer. Asian-based companies like Acer and Lenovo are emerging as contenders in the global PC market while companies like Dell are passing away. This may be due to management changes, streamlining, and refocusing. Lenovo is using aggressive pricing and product differentiation to command a greater percent of the market.

While Dell management is shutting down plants, Lenovo is pursuing aggressive pricing, bundling, and new technology. The new developments in the ThinkPad division, such as the notebook PC is only the beginning. Lenovo laptops have drainage holes to prevent drink spills from damaging interior components and the LCD screen has an antenna as big as the screen to provide for better wireless reception. Moreover, the hardware is engineered for reliability and as a result boasts lower failure rates. Furthermore, AT&T has teamed up with Lenovo to offer tech support designed to help small and medium sized businesses. A 24-by-7 tech support from AT&T bundled with a laptop or desktop may just be the ticket an entrepreneur needs to get his business up and running.

So, if I were a betting man I would bet on Lenovo. My only question is do they merge? As we know from Industrial Organization, fewer firms in an oligopoly generate greater profits. In the end, it is all about price competition and brand loyalty and it seems HP has that market cornered.

College Football Playoff?

There is a lot of talk of having a college football playoff and economic arguments have been used. The argument is that the NCAA and in particular the six BCS conferences have formed a cartel in the market for end of season games and the money that comes with them. They are able to do this by limiting the number of games played at the end of the season thus increasing demand and profits for the teams in those games. The BCS conferences are able to keep the cartel together by sharing bowl game revenue within the conference and guaranteeing bowl games for each conference by having bowl games sign long term conference commitments and having an automatic conference bid to a BCS game.

The losers in the deal are all the small schools that do not share profits or have guaranteed bowl games. Also it is also very difficult for a non-BCS conference team to make it to a BCS game where the payouts are 18 mill compared to all other bowl games which all pay under 5 million. This makes it hard for a small team to raise the money necessary to invest in their program, attract players, and become a major program.

It does appear that the NCAA and the BCS may be a cartel but I do not think the cartel should be broken up by creating a playoff and neither should any good Buckeye (or Gamecock) because we are a charter member and benefit immensely. The Big Ten and the Buckeyes (also the SEC and Gamecocks) were instrumental in setting up the BCS, the cartel, and did so in a way that benefits their program’s and their university’s. I am not saying that nothing should change, I would just like to see the cartel get stronger not weaker.

In case one is unsure of how the cartel benefits all us buckeyes go enjoy the new Library or try out for one of the 30+ varsity sports.

Verizon

Verizon has been expanding enormously, Verizon used to just be a plain old telephone service before it hit wireless, internet, and television provider. Over time it has moved into all of these markets. Since they were able to do so they have been able to utilize bundling in their pricing structures. At this time Verizon has already launched Verizon Fios which is fiber optic telephone, internet and cable television service. Since they have all of these services available they can add telephone service with the internet and cable tv and they can price these services more cheaply because they do not have to provide 3 lines to the house for all three services they only need one. so they are able to pass the savings on to the consumer and undercut the competition using bertrand pricing. Therefore in the markets that they are in they are dominating and acquiring the largest portion of the market.

Japan Airlines Seeking Antitrust Immunity for Open Skies Implementation

In an effort to increase competition and lower prices in the airline
industry for Japanese and American consumers, U.S. and Japanese
representatives began talks this past Monday to develop an "open
skies" agreement that will lower government regulation and increase
convenience for international travelers.

Discussions are well underway however strong competition between two
U.S. carriers Delta and American Airlines are threatening to
overshadow the true aim of the agreement due to their fighting over
who would partner with Japan Airlines.

Currently American has a partnership with JAL and if an open sky
policy were implemented it would be a considerably lucrative deal that
would yield much higher profit margins for both JAL and whichever
domestic U.S. airline they choose to partner with. As Delta and
American battle it out, a few more issues are also preventing the
talks from moving forward at a swift pace.

While U.S. carriers bicker and bargain, Japan has their own interests
in mind, and are using antitrust immunity as a dealbreaker with U.S.
negotiators. The antitrust immunity would not only apply to JAL but to
their partner airline as well, and would prevent any sort of
regulation regardless of the amount of market share the air
partnership gains. Another Japanese airline, All Nippon, is seeking
this immunity in addition to JAL, for their own partnership with U.S.
carrier Continental.

Deputy assistant Secretary of State John Byerly stated that the U.S.
can not technically grant antitrust immunity in exchange for a trade
treaty, but apparently an application for said exception exists. The
State Department has stepped out of the picture, allowing the Trade
Department final word on both JAL's and All Nippon's immunity
applications.

American Airlines has maintained a fifteen year relationship with JAL
and are pouring an incredible amount of money into lobbying with the
Trade Department in addition to bribing Japan Airline in order to
influence the outcome of their decision on the immunity applications.
In an effort to prevent JAL from switching partners to Delta, AA has
taken both a positive and negative approach. They're highest offer so
far is 1.8 billion dollars in investments for JAL and meanwhile they
are essentially threatening denied immunity if a switch of partners is
made as they dote lobbying funds onto government officials. Delta has
likewise offered upward of a billion dollars to JAL to maintain
competitiveness and will likely increase their offer as the talks
continue.

Delta Airlines, following their acquisition of Northwest, operates
more flights between the U.S. and Japan and if partnered in an
antitrust-immune agreement would possess a 62% market-share in the
U.S.-Japan air industry. American argues that this violates the very
point of the agreement, which is to create more competition, not strip
it away. Ironically, American Airlines spokespersons have not
acknowledged the anti competitiveness of an antitrust immunity.

Needless to say, an agreement won't be reached anytime soon, and
policy will not be implemented for quite a while. Three issues are
preventing quick and easy "open skies" agreements including mad
lobbying, government regulation and monopoly controversy. Ideally, it
is best for society if Japan and U.S. come to an agreement to increase
air transportation and lower prices, this can go without saying. If it
weren't for insane bureaucracies and regulation, the process of
implementing such desirable policy would be much easier. Talks between
the U.S. and Japan will likely continue as Delta and American work to woo

the near bankrupt Japan Airlines. The inefficiency of the high transaction

costs these negotiations are creating could potentially offset increased efficiency

in the market, and potentially could eliminate an agreement being reached at all.

In the last 10 years Apple has transformed itself from Apple Computer company into one the most well know and profitable companies. Apple was unprofitable till 1999, because its products were could not capture a market share big enough to cover their marginal cost. That all changed when Apple developed new products that used new technology and concepts. This allowed Apple to set monopoly pricing on most of their products, like the iphone and ipod. When their competitors started to enter into their market share, they lowered their price, which still was almost double their competitors price. Apple has been able to become profitable again by assentually creating a monopoly through the use of technology. While their competitors played catch up on technology, Apple racked in record profits. This class has made me realize that almost All of the fortune 500 companies have played the games we learned about in class.

The Unintended Consequences of Netflix

I recently purchased Netflix, which is an online service which provides access to movies and television shows by streaming on your home computer, through a blu-ray player, or through an xbox-360, as well as DVDs sent directly to your house. I chose Netflix for two reason. The first reason was the I already owned an xbox-360 and pay the monthly subscription rates for connection to the internet through the xbox. This means that I can select and view movies at my leisure using Netflix through my xbox, and the additional cost of Netflix is relatively low. Also, Netflix offers its service at a price of only about $9 a month, which is much less than the costs related to renting or going to the movie theater to view movies. Even if I wanted to upgrade my cable and add a movie channel the price would be about equivalent. The difference is that Netflix provides almost 13,000 movies and tv shows instantly, and has over 100,000 titles which are available through the mail. Almost any movie you can think of. Netflix seems almost too good to be true, and in some respects, it is.
So I sat down, turned on my xbox, and started my first movie. It was called, "Ink," and was a horror movie about a demon trying to abduct a child or something. I got through about a third of it, decided it was terrible, and switched to a new movie. The second movie I chose was "The Road Warrior." This movie wasn't quite as bad, but basically just proved Mel Gibson is crazy. As I continued through my binge of movie-watching, I began to realize something. Regardless of what movie I selected, I always had the option of simply ending the movie at any point, selecting another movie, and re-starting. Also, no matter how many poor movies I had to go through before I found a good movie, the cost for Netflix remained constant. This posed somewhat of a problem for me. Much of the pleasure I derive as a consumer of movies is as a result of choosing a movie which turns out to be enjoyable and entertaining. The cost of selecting a bad movie, whether at the movie theater or at blockbuster, is relatively high. As a result of the higher costs, I experience increased payoffs in terms of pleasure when I do actually select a good movie. By keeping the cost of selecting a poor movie fixed at zero (I can easily stop a movie whenever I get bored and select a new one), Netflix has indirectly removed a lot of the pleasure I experienced by selecting a good movie. In essence, Netflix has flattened my demand curve for movies, making it much more elastic, and extremely reducing the consumer surplus I can achieve through its use.
I have yet to realize the long term consequences of owning Netflix, but to be honest, I am somewhat fearful of what they may turn out to be. I have always been a fan of movies and movie watching, but with the ease at which I can access almost any movie, the incentives for watching are just not what they used to be.

Netflix

Monsanto: the Parable of the Sower, The Economist - Nov 19,2009

Monsanto is an agriculture research and development conglomerate, famous for Agent Orange and recently featured in the expose Food, Inc. The firm has been very active in acquisition of other firms producing genetically modified agricultural products, especially those it did not initially produce. It had to appeal to antitrust agencies in 1998 and 2007 for major purchases but has recently come under scrutiny by a watch dog group. The group claims the following: The vertical and horizontal integration Monsanto has secured by acquisition is harming the competitiveness of the genetically modified agriculture industry - their words, “impaired state of competition in transgenic seed.” It also claims that the degree to which Monsanto pursues copyright protection in court is grounds for investigation.

Predatory conduct is when the firm takes action that is profitable only if they drive existing firms out of the market or deter potential rivals from entering. At the very least it does not seem that Monsanto is engaging in predatory conduct because, as the article points out, it has been licensing it's products to hundreds of firms including some of it's biggest rivals. This would seem to be an act to keep the firms in the market. In the long run however it may be difficult for a firm to to license the Monsanto and pay for their own development, in that instance it seems the inability of the firm to secure financing rather than an deliberate attempt on the part of Monsanto give the firm the boot. The watchdog group's second argument was that the degree to which Monsanto pursues copyright protection gives some indication that it is violating antitrust. That kind of behavior is not a part of the definition of predation. It does not make the market more competitive for farmers to violate the terms of copyright, and in what way would that help keep other firms in or potential firms coming if farmers stole seed technology.

Interestingly, Mosanto's largest competitor Dupont is also under scrutiny by the Department of Justice for antitrust.

Are US Wages Too High ?

Are wages in the Unites States too high and need to be lowered in order to compete globally? Right now, in the grip of one of the worst depressions that America has seen in a long time, that is not what frustrated jobless American workers want to hear. But that is exactly what the article “American Wages out of Balance” says about wages in our country. Right now the New York Times article says that in order of America to compete with our more productive global partners (like China, India, and the rest of the Asian nations) we need to lower of wages. As much as I would not like to see wages on average come down in the future, (because I will be entering the job market soon and ever penny will help out in the real world), I do believe it is going to be necessary because of the huge global populations that will be competing for the same job. People in China can make almost the exact same products in factories as American workers, yet we get paid a larger amount. In order for America to be able to contend then we need to bring wages of unskilled factory workers closer to their foreign counterparts. Once wages are equal then companies would be on an even playing field in the Global Economy. Wages are low in developing countries with huge populations but we American do take advantage of higher productivity. In the United States it is increasingly important to get a college education and earn a professional living because in the future unskilled wages and wages of people that can be outsourced is only going to shrink in this ever flattening world.

http://www.nytimes.com/2009/11/11/business/11views.html

eBay's Big Business

There was an interesting article I found online discussing the business of eBay. Designed to cut out the middlemen (big businesses), its original goal was to create a place for people to buy and sell unused or unwanted items, with price determined by the consumers' willingness to pay. The idea of the auction allowed sellers to set their price and wait for desperate consumers to engage in a bidding war. While there has always been a buyitnow price, most sales were done through auction as profits tended to be higher. However, new statistics show that the outright sale of items is now more prevalent than auctions. While the website is still has the auction feature, this new wave of fixed-price sales represents the companies move toward any other online retailer. According to the article, more and more companies are using the site as a means of advertisement. I use eBay to purchase all of my school books and most of the time, the books are shipped new from an out-of-state company. Some suggest the this trend is a result of consumer's "buy it now" attitude. While auctions were new and popular years ago, consumers are less patient now. Auctions tend to drive up price and with an auction time of five days, it is impossible to know if you will even win the item you bid on. Furthermore, the site is becoming more and more risky as sellers motives and the actual condition of the product are unknown. And with the economic instability of today, the potential high cost of auctions is not optimal.
eBay protects the buyer but it also protects the seller. While a seller can hope that consumer demand drives the price up, they take a huge risk in selling an item below the cost. For example, if I sell a motorcycle on eBay and no one bids on the bike until the last minute, I run a huge risk of loss as the bike is probably sold way below cost. But, I can set a reserve price to hedge the risk. This reserve price is different than the minimum bid. I don't use eBay that often, so I was curious as to why a seller wouldn't just set the minimum bid equal to the reserve price. I would assume that the low auction price attracts more bidders (possibly some that may not have been extremely interested in the product but the low price attracted them), starting a bidding war, with hope that this bidding war will drive prices way up. Two people bidding on an item that was originally a low price, the auction drives price up, and the bidders have lost interest in the product and focus on the win. Although this might have a little to do with testosterone. Either way, if the auction price does not rise above the reserve price, the seller is not obligated to sell the item.

The College Football Cartel

I had the idea for this post when listening to “The Fan” 97.1 FM yesterday…at work…where I am currently. Common Man and the Torg were discussing the BCS Bowl system. Now regardless of whether you prefer a playoff, plus-one system, reversion to the traditional system, the status quo, or some weird sadistic combination, the conversation led to some valid arguments.
The Torg began, “The BCS is a cartel, and the rich are getting richer.” Sounds like a queue for some economics. For starters, of the ten teams selected for the five BCS bowl games, six are guaranteed conference champions from the major conferences. Of course, this system gives an immediate disadvantage to all teams outside of these conferences. One loss to TCU or Boise State’s unblemished record this year would have certainly barred them as a BCS bowl contender, but a win by a then 8-4 Clemson team over Georgia Tech this past weekend would have given the tigers an Orange Bowl berth. Despite five teams remaining undefeated after regular season play, the BCS “formula” pitted Alabama against Texas. The “formula” is quite possibly the most unfair part of the entire process—one which two thirds relies on human opinion. No one can argue against the fact that the BCS was created for the benefit of the “BCS conferences.” Furthermore, through the use of the BCS “formula” and bowl selection by committee, the BCS is in collusion to keep downward pressure on the non-powerhouse conferences from gaining ground on the major ones.

How is the BCS a cartel?

1. Maximizes revenue for the benefit of the six major conferences, leaving the rest of college football with little. Payouts are fixed by the cartel.
Below is the breakdown of last year’s payouts from the BCS:
$19.3 million — non-AQ conferences
$17.8 million — each AQ conference
$4.5 million — each conference with a second team in the BCS (in addition to the $17.8 million above)
$1.8 million — Football Championship Subdivision conferences
$1.3 million — Notre Dame
$0.2 million — Army and Navy
(2009-10 is expected to be similar)

2. Extreme social inefficiencies. “Of the 156 college football teams, 100 of them start with no chance”…at a national championship. Even in the other BCS bowls, teams are picked on the basis of potential revenue generation. Penn State could have been selected over Iowa to play in the Sugar Bowl had the committee believed such a move would prove more profitable.

3. Maximize revenue for the BCS committee. Preventing a playoff, keeps the entire post-season on neutral fields. The revenue generated from these games are then at the disposal and control of the BCS. The schools get less of a say in the allocation of funds.

In any other industry, these acts would be considered anti-competitive and unlawful. The BCS system continues to pump money into the powerhouse conferences while maintaining the glass ceiling for their non-major counterparts. No matter how great a year TCU or Boise State had or could have had this season, these teams had no chance at playing for a national championship from day 1. Greater substantiation of BCS conspiring is evident in this year’s Fiesta Bowl. Instead of matching TCU and Boise State against formidable major conference foes, the system chose to play the teams against each other. If these teams had the opportunity to play powerhouse conference opponents—and won—it would have only strengthened the arguments against the BCS system.

In the end, as is with most things, it’s all about the benjamin’s—and the BCS is rolling in them.

Price Discrimination w/ Cleveland Indians Season Tickets

I recently encountered an example of price discrimination a few weeks ago when my friend told me that his parent’s Cleveland Indians season tickets were decreased in price for next season by 40 percent. This discount, however, only happened because of their complaints about my parents being offered season tickets for half off right before the beginning of the season last year. Essentially, while it angers the people that pay the higher price, the Indians use price discrimination techniques to sell more season ticket packages and capture more consumer surplus than they otherwise would. My parents were season ticket holders during the late 90s and early 2000s (when the Indians were good), but got rid of them once the team went into “rebuilding” mode around 5 or so years ago. Last season, about a week or so before the season began, the Indians realized they still had many unsold season ticket packages, and since the marginal cost of an extra person coming to a baseball game is essentially zero, while the marginal revenue is very high, they tried to lower the prices of season tickets to people who were willing to pay something for season tickets but not as much as current season ticket holders. So, the Indians contacted my parents figuring they would be interested in discounted season tickets since they had them before but were no longer willing to pay for them at regular price. The Indians unsurprisingly keep deals like this quiet, as I could not find any information on offers like this on the Internet. The reason they do this is because if everyone knew they could get half price season tickets by pretending that they were not willing to pay the full price, as my friend’s parents did, then the price discrimination would no longer work because price discrimination requires that the willingness to pay of various groups of consumers can be identified.

Coca- Cola or Pepsi?

Coca- cola and Pepsi have been major competitors in the soft drink market. About $66 billion make up the annual sales of soft drinks in the U.S. (http://www.researchwikis.com/Soft_Drink_Market). The two companies that take over a majority of these sales are coca cola and pepsi. The two companies try to gain a market share by creating new products and through a lot of marketing. Pepsi has always been the one to develop new products, but Coke has always responded to them fairly well. Coke has began to learn to put their ideas out into the market even if it is a failed attempt. They have begun to develp new products before Pepsi such as Vanilla Coke. Though Pepsi's response to this product was Pepsi with vanilla, the product did not do as well as Coke. The two companies are continuously creating ideas one after the other to keep the consumers interested. Another way they are marketing is by expanding their products internationally. Although, Coke is winning in this department, Pepsi has also been quite successful.

This is not the only strategy these companies have, however. Their competition has even been in thier advertising techniques (http://10steps.sg/articles/advertising-wars-pepsi-vs-coca-cola/). This website shows us some advertisements that Pepsi and Coke have used. The two companies compete by putting the other down. Some show both companies in the adverstisements fighting: equally strong and others are beaten down. While I was looking at these ads, I had a question come up in my mind; which company is exactly being advertised. Though they are major competitors, the two companies have this strategy that makes the companies grow more. The major strategy, I believe, could be the competition between the two itself. Showing both products in their commercials is assisting in the growth of the soft drink market as well as telling the consumer to try both and that is when the consumer will know which drink is preferred by them. It is a great marketing strategy.

This market is like the stackleburg that we discussed in class. The two companies respond to each others outputs as well as their advertisement schemes. If one produces a product called Cherry Coke, then the other come back with their new product Pepsi with Cherry. The two companies have always been huge competitors.

sources: http://10steps.sg/articles/advertising-wars-pepsi-vs-coca-cola/
http://en.wikipedia.org/wiki/Coca-Cola
http://www.msnbc.msn.com/id/3718141/

Public Transportation Monopoly

Public transportation is not all that great here in the United States, but it plays a much greater role in many European countries. Cities have a great network of bus lines, suburbs, and streetcars, different cities are connected with railroads and buses that run frequently.
Often times, this public transportation system is run by the government, at least on the local level. The particular case I am discussing here is the one of my hometown somewhere in Switzerland. It is a small city with about 36'000 people. But even a small place like that has its public transportation system, in this case there are several bus routes connecting the various neighborhoods and the city center. The bus system is run by the governemnt and there is no competition, meaning the government has a monopoly on the public transportation in the city. That means they should be able to set prices in a way that maximized profits. Now you may think that the government's goal shouldn't be to maximize profits with the public transportation system, since it is supposed to serve the citizens. You're right, so maybe they should just set prices so that they can cover the costs.
The surprising thing is that they fail to do so. Instead, they run a deficit every year that has to be filled with tax money. That doesn't make much sense. Either way the public transportation system has to be paid for. That could either happen through smart pricing strategies, or with with tax money. But only the first option implies that the organization is run efficiently and that the ones who actually benefit fro it are the ones who pay for it. Is the government not capable of running a monopoly?

AT&T vs Verizon

For the past couple of weeks, AT&T and Verizon have been going at each other with their new advertisement. It started when Verizon advertised that AT&T had spotty 3G signal. AT&T took it to court and lost so they decided to come back with their own advertisements bashing Verizon. It has turned into a dynamic game with Verizon making the first move and then AT&T following them. AT&T retaliated with the fact that their services covered more of the United States including Hawaii and Alaska than Verizon. Then Verizon came out with another one for how they have the fastest 3G internet and AT&T responded with how you can talk on the phone and surf the internet simultaneously with their network.
This dynamic game they are playing is a Stackelberg (except that they are not choosing outputs) because the first move isn't really an advantage. Although Verizon makes the first move, AT&T are able to address Verizon's claims and even make further claims of their own with their response. They are able to consider Verizon's decision and return with a better response which then makes the first move not as powerful as it was meant to be. I am biased towards AT&T because of the iPhone but I wonder how long they will continue beating each other up or if T-Mobile or Sprint might join in on the action.

The National Football League: A Government Sanctioned Cartel?

Robert Bork, of the Chicago School, once said, “The inconsistency both of [antitrust] doctrine and of application is well known to antitrust lawyers. It makes their practices lucrative and their clients’ lives wretched.” One would be hard pressed to find a better example of what Bork referred to as the subjectivity in the creation, application, and enforcement of antitrust laws than the National Football League (NFL). Most assuredly throughout history, so long as businesses have participated in capitalism, there have been firms who adopt and participate in anticompetitive, collusive strategies that violate U.S. antitrust doctrine, all in the search for monopoly profits. What is so unusual about the NFL is that: 1). It flaunts antitrust laws so overtly in plain sight and in full public view and 2). Government not only ignores antitrust violations by the NFL, it expressly protects the NFL from antitrust enforcement.

The NFL is an $8 billion plus government blessed cartel of 32 independently owned teams, who collude through a collective governing body to control: market entry by restricting the number of teams; what markets teams are located; who is eligible to play in the league (including age discrimination); who is eligible to own teams; ticket prices; revenue sharing (from higher revenue teams to low revenue teams); and broadcasting rights for all teams to name a few.

Arguably, the most profitable antitrust protection afforded to the NFL was granted by Congress via the 1961 Sports Broadcasting Act (SBA). The NFL’s impetus in getting SBA enacted was to restrict broadcasting rights competition between the different teams and allow all the teams to legally collude to restrict the output of broadcasting rights. That is, the NFL wanted to avoid price competition between its different teams and gain monopoly profits. As a trade-off, games were to air on the broadcast networks (ABC, NCB, and CBS) widely available over-the-air for free to the public. This was, of course, in addition to the NFL agreeing to put a team in New Orleans in order to get to powerful lawmakers from Louisiana to vote yes on the bill (and that is how the Saints came to be).

In what is viewed as an additional effort to extract more monopoly profits (at the expense of consumer surplus), the NFL has been taking more and more games off the free broadcast channels and putting more games on the NFL Network, the Sunday Ticket only available to DirecTV customers, and other channels like ESPN. The SBA did not contemplate this action and was predicated on it being in the public’s interest for these games to be offered on free broadcast networks. The NFL has also monopolized all the modes of production and distribution of NFL games. Should the NFL continue to enjoy this antitrust exemption and act against the public interest in limiting the public’s ability to widely see these games (note: most NFL stadiums are also publicly financed)?

It is worth mentioning that none of the preceeding has addressed government not enforcing antitrust laws by allowing the NFL and AFL to merge in 1966 (based on both league’s claims that competition between leagues was becoming cost prohibitive and hurting profits), the USFL’s antitrust victory against the NFL where the court awarded damages of $3 ($1 trebled) even though a court ruled that the NFL’s predatory tactics led to the USFL’s demise, NFL’s protection against antitrust complaints filed by unionized employees (granted in a 1996 Supreme Court case), or the NFL colluding to engage in age discrimination in eligibility requirements for players.

Game Theory and the NFL Draft

Each year the NFL holds it Annual Player Selection Meeting (or NFL Draft) where the 32 NFL teams select players from college. In total there are 256 players drafted in the 7 rounds of the draft. I am a huge football fan and the NFL Draft is one of the things that fascinate me about the league. You can look at the NFL Draft as a game and apply the concepts we have learned in game theory to the draft.

The NFL Draft is in essence a very large extensive form game. It is obvious that the game is sequential since teams pick one player at a time and in a particular predetermined order. Solving this game using the tools of game theory is nearly impossible on the other hand.

Before the draft each team has spent a large amount of money on scouting the college players that are being selected. The teams assign a certain value to each player with the best players having the greatest value of course. The teams then rank the players according to their value and in the end they have their value board. The value of each player is not an indicator of how good he was in college but how good the scouts predict he will be in the NFL. Now when it comes to selecting players there are two main strategies that teams use:
1. Picking the best player available (BPA) according to your value board
or
2. Picking a player that plays a position of need.

I think it clear that playing the BPA strategy is better because if you don't follow it then you are letting your competitors have a player that you think is better than the player you got. This might end up being really bad since the player(s) you passed on could end up becoming great and your team has to play against them for the next decade. Therefore it should be best to pick the player that gives you the greatest expected value each time.

Now if you would have the value board for each team, assume that each team plays the BPA strategy and would eliminate trades of draft picks, then you could predict how the draft would play out. But would this result in solving the game?

At first you might think the answer is no because you are not using backward induction. Backward induction would result in maximizing the expected value of the whole draft class of the team selecting first given what the other teams would select. What the BPA strategy does on the other hand is maximize the expected value of each draft choice. So there is the possibility of deviating from the BPA strategy at some time might lead to a greater expected value of the whole draft class.

To test if this was correct I set up a small example where I had three teams choosing two players each. The results of that experiment resulted in the same result whether the BPA strategy or backward induction was used. This worked in my small example and I would think the same would hold for the NFL Draft. However testing the theory on the NFL Draft would be nearly impossible. As I said before there are 256 players drafted. Also I found that after the 2009 NFL Draft the teams signed a total of 378 undrafted rookie free agents. Then there are some players that did neither get drafted nor signed and lets just say there were 66 such players giving us a total of 700 players that could possibly be drafted. So we have 700!/(700-256)! possible outcomes of the draft. This number is so large that trying to use backward induction would take days to solve the game. Of course there are thousands of possibilities that can be thrown out since they are not logical. They are not logical since there are only a few players worthy of the number one overall pick but the number of possible outcomes is still very high after throwing out these illogical possibilities.

Based on my small experiment I would conclude that it is in each teams best interest to pick the best player on their value board and if each team follows this strategy the game should solve the same way as if backward induction was used. Also there is no incentive for teams from deviating from the BPA strategy since that lowers the expected value of your draft class while it increases the expected value of your competitors draft class. In the end it would all come down to how good your scouts performed in predicting the talent of college players and how the players performed in the NFL.

I-phone Monopoly?

I recently needed to purchase a new cell phone as my three year old Blackberry was about to die. I really wanted a new I-phone because of all of the very cool features that were available. I also liked the fact that I would no longer have to carry both my phone and I-pod around with me as they would be combined into one handy device. There was just one problem, I have Verizon and so do 99.9% of my friends and family. Apple has an exclusive deal with AT&T that makes you have to switch to AT&T in order to use an I-phone.

This exclusive deal between AT&T and Apple made me wonder if this was a monopolistic move or just smart negotiation between two large and powerful corporations to better both companies and innovation for the consumers. I found an article that I thought was interesting as it relates this specific case and how the Obama administration is looking at if it is in violation of the Sherman Anti-Trust Act: http://online.wsj.com/article/SB124689740762401297.html. So, is this deal between Apple and AT&T a violation of the Sherman Anti-Trust Act. The Act was originally enacted to prevent the collusion between firms or “trusts” to lower supply and artificially raise the prices. Such collusion is a violation of the Sherman Anti-Trust Act, and prevents market competition and negatively affects the consumer in which the law was brought about to protect.

So the question remains, is this agreement illegal according to Sherman Anti-Trust or Clayton Acts. I would have to say no. There is no proof that there is lowering of supply or price-fixing taking place. They would have to prove that the the agreement was anti-competitive and negatively impacting consumers and society. I don’t believe this is the case. One reason is because there are substitutes to the I-phone. There is Palm and numerous other Smartphone’s on the market that could be substituted for the I-phone through the other major mobile phone carriers. As much as I wish someone were to step in and say that the agreement wasn’t allow and Verizon could carry the I-phone (because I still really want one), I don’t think that should be the case. This agreement is in no way illegal and I think is promoting competition and bettering society. It is making the other companies work harder on future technologies and innovations that can compete with the I-phone.

Another point that was brought up is that the reason behind the agreement with AT&T and Apple was that AT&T had the network capable of supporting the I-phone and the other companies were lagging behind in this regard. I don’t know too much about how this technology works and what is required to run the I-phone so I can’t comment in this regard, however if AT&T is the only one capable of running the I-phone, then it was the other carriers such as Verizon and T-mobiles fault for lagging behind.

In conclusion, I do not believe this agreement is in violation of the Sherman Anti-trust Act. There is no proof of artificial price-fixing or that this agreement is a detriment to society. There is also no proof that this collusion is anti-competitive and preventing other firms from competing or joining the market. If the companies are just creating great products that have a high demand because they are innovative, that in no way entitles the government to step in and prohibit it. According to the Sherman Act legal monopolies or those brought about by merit are perfectly legal and allowable. I believe this is the case with the exclusive agreement between AT&T and Apple.

What is the Future of Alerantave Fuels?

While I was growing up I was always told that there would never be anything other than gas powered cars on the road because of the power that the oil companies hold. While I realize that the idea of some inventor disappearing off the face of the planet because he will not sell his alternate fuel technology to the oil companies is a little out there, progress in this area has been impossibly slow. Does it not make economic sense for a big oil company to invest in their future, oil is a finite resource there for it will run out some day. At the rate that the US and the World is consuming the stuff that day is coming in short order. But still Exxon, the worlds largest oil refiner, contributes about 1% of its annual 40billion in profit to research and development of new technologies.

Looking at the situation from the outside it would appear that there might be some covert collusion going on between these oil companies. It is the only way to explain slowly evolving technology of batteries, full electric, and hydrogen automobiles. The money that Exxon or another company stands to make in the long run by having the first full network of hydrogen stations, or the first full network of super-fast charging stations for full electric cars is incredible. Demand is growing all the time for these cars especially since everyone wants to appear that they car about the environment.

Creating a partnership with a manufacturer like Toyota or Honda would be beneficial also. Helping to further the technologies and increase demand can only create long term benefits. I do not want to believe that the future lies with some tech toy that makes none of the glorious sounds of an internal combustion engine, but it is the truth. It will be interesting to see how the future of the oil companies evolves, if i were the CEO or in charge of making any decisions at all I would be spending the money on infrastructure now and reap the benefits in the long run. It has reached the point where one of the firms in this market will have to deviate from the collusive group, the incentive is too great!

How effective is advertising?

Imagine this scenario: A 25 year old man is in his bedroom beginning to pack for a trip that he is about to take. His young wife walks into the bedroom holding a laundry basket full of clothes. She stops in front of him shaking her head and says, "it is just so weird, why would the president of the company WANT YOU to go for the weekend?" The husband replies, "They are having a lot of problems with the new compute system that they just put in place last week. I just do what they tell me." The wife looks at him with a very puzzled look and responds, "but you are just the night shift janitor." The husband firmly says, "Now how many times have I told you that I am a custodial engineer?.................What's your excuse? Visit LasVegas.com.

With the Super Bowl just around the corner, one of the most watched sporting events in the world, many corporations might be coming up with some crazy advertising commercials similar to the one above. In the 2009 Super Bowl, there was an estimated 95.6 million viewers, which was the second most watched in history. For a 30 second commercial in 2009, the approximate cost was $3 million up from the previous year of $2.7 million. This rate of $3 million does not even include the total cost of making the commercial itself. Is this strategy actually profitable for the company? The reason is quite simple: supply and demand. Companies are willing to incur this cost in order to persuade consumers to purchase their product. Before they jump off the bridge regarding the cost of the commercial many of these companies are doing market research. If the company has done their market research accurately, the company knows its quantity demanded depends on two things: its price and its advertising expenditures in dollars. The company believes that in paying for this huge sunk cost by advertising, it will create more sales and therefore more revenue. Advertising is a sunk cost in the short run, however if the company actually persuades these consumers to buy their product the cost in the long run isn't a sunk cost.

If the speculation of Tiger Woods is true about him sleeping with several women and if I were the CEO of Trojan condoms, I would have already made him an offer to persuade consumers to buy this brand.


This is a good one if you have never seen it:
http://www.youtube.com/watch?v=ifjMgEWDoWQ&NR=1

I CAME, I SAW, I CONQUERED PRICE DISCRIMINATION...SORT OF!!!

I have a very diversed group of friends and one of our favorite places to eat at is No. 1 Chinese on Woodruff and High St. The quality of the food is okay but the quantity (which really does a spectacular job in putting you to sleep afterwards) is what draws us to this place over and over again. We've gone there so many times and we never change our orders so as soon as we get in there, the girl behind the register just tells us our respective prices and we pay for it and wait. With our numerous visits, we noticed my Asian friend Nate always ended up paying a buck or two less than the rest of us. Initially, we didn't think anything of it since his order was always different from everybody else's, but as time went on we started getting suspicious because his food always came with soup or an egg roll which were not on the menu and yet he was still paying considerably less (our suspicions would've been proven right faster if we looked at the freaking menu for his order).

One day, while he was not with the crew as we went there to eat, I decided to order the same thing he orders and guess what, I paid $2 more and it came with neither an egg roll nor soup. I have to say I was extremely disappointed (not really) and to add insult to injury Nate didn't believe us when we told him about it, till I proved it to him the next time we went there. As usual, he got the soup and the -$2 price while I got neither. I figured his value for the food was less than us since he probably gets some of the same things at home, and also he had another edge on us, he could speak Mandarin.

I had decided to boycott the place till one of our friends came up with a better idea. We never eat in there, Nate orders all our food by phone and we give him the money (I might need to learn Mandarin so i can get discounts over the phone since Nate leaves after this quarter) or we all order the same thing but he orders first and hopefully they feel bad and charge us all the same price. The 2nd plan had a few loopholes in it (let's say it didn't work out when we tried it) so we stuck with the first and I have saved $12 (might not be a lot but it could build up if I learned Mandarin) on the five or six times we've ordered there. I was going to thank Econ for this great enlightenment but it's just common sense that you let whoever has the discount make your purchases for you. I'd still like to thank Econ for making my life miserable and making me overthink every purchase I make...

The New Globalized World

In 1980, Supreme Court case Diamond v. Shakrabarty made way for the patenting of life forms based on their genetics. This led to a race in the monoculture hybrid seed industry, with the leaders being whoever had the highest yields compared to input costs. Farmers gladly signed purchase agreements requiring them to buy new seed every year because they were more profitable and the process of growing corn, wheat, and soybeans was greatly simplified.

The advent of genetic engineering also rocked the seed industry. By the close of the century, most conventional seed companies had been bought up by chemical companies, the top two being Monsanto and DuPont. Monsanto held the patent on the popular herbicide Roundup, as well as the Roundup resistant gene they inserted in their seeds. This enabled Monsanto to become the top genetically engineered seed producer in the world, as well as one of the top chemical companies. Today 90% of soybeans raised in the U.S. are Roundup Ready.

In June 2007, Monsanto bought out Delta & Pine Land Company. The Mississippi firm, along with the USDA, owned patent rights to the terminator gene. This gene renders crops sterile so seeds cannot be saved for planting the following season. The fact that there is no benefit to this technology other than maximizing profit is debated by no one.

In this country, multinational firms being closely intertwined with the government is nothing new and is not necessarily cause for concern. Both Monsanto and the government have verbally distanced themselves from talk of terminator gene implementation, while at the same time maintaining patent rights to it.

When the concept of cross-pollination is considered, these facts start commanding more attention. Monsanto's extensively documented litigation history offers a glimpse into their corporate culture. Monsanto and DuPont protect their market shares by using predatory contracts to prevent new firms from entering the market. This strategy is in fact, predatory and deleterious as first proven by Rasmussen, Ramseyer and Willey (1991) model. Still the US courts struggle with enforcing anti-trust laws, because of the difficulty of proving predatory and behavior.

I love my country, but that does not mean I agree with everything she does or could do. I am not trying to incite a moral backlash over something that has not even happened. The fate of billions who live in subsistence cultures rests on the benevolence of the powerful. My goal is to shed light on some possibilities that exist in this new globalized world, where leader firms are.

Textbook Economics

A common gripe among college students is the overwhelmingly high price of textbooks. At the start of each quarter, most students will dole several hundred dollars on textbooks. Complaints of being gouged on price run rampant. In addition to meter maids and tow trucks, one common enemy all students share is the daunted student bookstore.

Unless you happen to be me of course. The bookstore was my best friend.

In my case, the Columbus State Community College bookstore has helped make my college experience a more pleasurable one. Aside from funding numerous vacations - it has allowed me to enjoy a standard of living that is unknown to most college students.

How does economics make this possible? What market forces are empowering me to capture such an outlandish surplus?

It started when I was purchasing textbooks for a class of my own. The required textbook, "Who Built America?" (circa year 2000...more on that soon) was a startling $3.00 through an online outlet. Being both curious and enterprizing, I purchased 6 copies - with the intent of selling them at textbook buyback.

When I recieved back $27.00 for each book, a 9x ROI - I knew I was onto something much larger. With much success, I soon invested thousands of dollars into the depreciating asset that is a used textbook. I had just recognized an enormous inefficiency produced by this highly fragmented market.

Almost a scenario out of the textbooks themselves.

The first observation I soon made was that all profitable textbooks were at least 3 years old.

When a textbook is discontinued at a given school, demand decreases significantly - if not eliminated altogether. When that same textbook is still current at another school, demand remains stable - along with prices. The more schools with lowered demand on a book means a greater amount of cheap textbooks that will abound. If CSCC keeps that title instead of updating to a newer edition - it will usually translate into a profitable book.

A book that is outdated at 99/100 schools means there will be an enormous opportunity to capture a major surplus at the 1 school where the book is still current.

The rest is academic arbitrage.

The surplus I was capturing was the variation between fragmented textbook markets. The market for textbooks at the University of Arizona or Boston University is far different than the one at CSCC - or even Ohio State for that matter.

Simply put, I profited from buying textbooks from schools with low demand and selling to schools with high demand.

Now that we have determined that the market bears opportunity - lets examine the factors behind it:

1) Centrally Planned Markets - Each university is a submarket that is directed by central planning (the university) as opposed to consumer preferences. Customers are forced to buy required textbooks rather than the textbooks of their choice. Once a textbook decision has been made - all consumer behavior is predictable. Anything that is economically ineffecient - such as this - produces a potential for profiting.

2) Highly Fragmented Markets - This is an offshoot of #1. Since each university is both a controlled and unique sub-market, textbook demand differs considerably. In most markets, there are similar demands which promotes efficiency. The opposite is true here, which is why arbitrage is possible by buying from markets with low demand for book A and selling it to a market with high demand for it.

In the past year, I have sold hundreds of books to the Columbus State bookstore - all repositioned from other markets where demand for the same commodity was dismal. In some cases, books could be purchased for $20 from low-demand markets and sold for $70 in high demand markets.

Since CSCC is not as aggressive as Ohio State and other major schools in updating book editions, it set the stage for the incredible opportunity. There is one instance where I noticed that Ohio State used a newer edition for the same book that had provided much profit at Columbus State.

What I did was beneficial to the CSCC bookstore too. When I purchased books in large quantities from online outlets, the price for that title would increase - giving students more reason to buy from them. The reason they could not do this themselves was due to contractual obligations to their wholesaler.

Next week college will end along with the incredible memories of my CSCC bookstore days. I will move onto more challenging enterprises. However, I will never forget the most valuable lessons I learned in college - through Textbook Economics.

This Class in a Nutshell

Earlier today General Electric and Comcast announced a deal for the sale of NBC Universal that makes Comcast the majority owner and lessens the ownership share of GE. The central issue with this deal is whether or not this will create an unfair advantage for Comcast and violate anti trust law since they will be in control of NBC and all the other networks they own. The problem that most people see is Comcast is the largest cable provider in the United States and will be gaining control of one of the largest media comglomerates.
The opponents of this deal believe Comcast will have an unfair advantage over all other cable and satellite providers since they will control how much is charged to air the NBC stations such as USA, Bravo and SyFy. While Comcast and GE state this will not happen and is just a readjustment of their businesses since GE is mainly involved in manufacturing and industrial creation as opposed to media groups. With one industry experting putting it best, 'How can they screw their competitors?'" said Briggs. "That's their job, after all." speaking the truth about true capitalism that the goal of every company is to screw those they are competing against so they will come out on top. Most consumer groups agree with this statement that this sale will end up being a bad deal for the public while most industry experts and legal experts believe the deal will pass with no major problems.
The experts believe the process may be a long process taking probably more than a year to pass through all the regulatory processes. The FCC, Department of Justice, and the FTC all will get a say as to whether or not it will be approved. I do not see a reason for this deal to not be passed, especially since this new company will not even reach the size of Disney Corp. who has their hands in a lot of different areas, the only difference is Comcast actually has the way to distribute it. This story will be very interesting to see whether or not the government will follow the ideals and beliefs of the current adminstration and their wish to be more stringent with anti-trust enforcement or if they will follow the presedence already set with the creation and size of Disney Corp.

Black Friday fight for the consumer surplus with big pay offs


I’m a foreign student who has been living in the US for about 5 years and the one thing that never ceases to amaze me is how firms in the US fights for the demand markets-dropping costs a little above their marginal cost, bundling products for even better deals, and most importantly the amount spent on marketing to create the sense of absolute necessity for consumption.
Firms use the holidays to try to capture the majority of consumer surplus as best they can. Consumers in the US have the power to consume because the wages in US are relatively higher than those of other countries, and as a result firms try to use marketing to create a necessity of their product to the consumers. For example, take the PS3- it is common knowledge that when Sony released their new gaming system they sold it at less than their marginal cost, or in another words they took a loss, in order to gain market share. Sony knew that if enough people owned the PS3 to begin, word of mouth about the superior of the system would be their greatest marketing tool.
From what I heard, read and saw from marketing on and for Black Friday, consumers responded positively to the very aggressive promotions and discounts being offered in big retail stores. On Black Friday, people radically switch from very calculated to very compulsive consumers. I’ll explain why-first, people camp outside of stores in order to ensure they will either get a voucher for the hot item or just to be one of the first in. Once they enter the store, competition is on! Consumers don’t even think twice about trampling someone to get their target item, because quantities are extremely limited. However, remember, I said people switch from calculated consumers to compulsive. This is because, say for example the crazy consumer who waited for 5 hours doesn’t get the item they waited for because the store only has 4…the consumer figures they may as well buy something, although it may not be such a great deal, only because they have waited for so long to get into the store so they have to try and compensate for their time by buying something.


Thursday night I was checking my email and I logged in yahoo and I saw the advertisement about how Wal-Mart was basically having a price war with Amazon.com on PS3 bundles. They were bundling PS3 fighting + 2 video game +I DVD for the same price as the PS3 costs normally. Later, I saw that Best Buy had entered the PS3 market war.
Black Friday has a huge impact in US economy as firms capture huge amount of consumer surplus selling with good deal and bundles. Black Friday is such a big day for retailers that stock investor gain a huge profit just the single day and the firms who have the most impact in sale were the ones who expose their sales using big campaign of marketing. Just to mention one, Wal-Mart brought in returns of 0.64% and -1.46% respectively.

Rugby Observation

I attempted to write something based on my interests...

I am a member of the Ohio State Women’s Rugby Team. We recently made a trip to Iowa for the Midwest Tournament.
The location for this tournament is supposed to be centralized in the Midwest, so teams can have comparable travel costs and significant home advantages will be eliminated. The coach of the Iowa Women’s Rugby Team, and subsequently an influential power in Women’s Rugby, finagled his way into making the tournament location in Iowa.
Obviously, this greatly decreased his team’s fixed costs of travel and increased the Ohio State Team’s costs considerably. I took a Sports Economics class and this seemingly strategic location contradicted some of the principals I learned in the class. Although out of state teams suffered considerably more fixed costs, they escaped having to pay higher costs of field rentals, ref salaries, and hosting fees they would have incurred had the tournament been hosted in their home areas.
Although the Iowa Team suffered these costs that other travel teams did not, the coaches decision to host the tournament possibly contributed to Iowa success (they placed 2ns in the Midwest, while OSU placed 3rd). Evidence given in “Distance matters in away games: Evidence from the German Football League” supports this idea. The paper provides supporting evidence that as game location distance increases, traveling teams score less points.
Understandably, a home team advantage exists. However the costs incurred by the Iowa team (refs, fields, insurance, ect) would most probably be equal to or greater than traveling team fixed costs. Winning the tournament generates no revenue, leaving the Iowa team with little more than bragging rights and even more costs when they travel to the West Coast to compete for the National Title.
Overall, one could ascertain that the strategic “cost effective” decision of hosting the Midwest Tournament would incur far greater costs than fixed costs incurred by traveling teams. In effect, although the Iowa coach desired home team advantage, he ended up creating more costs for his team.

Is the ETS really a nonprofit?

The ETS (Educational Testing Service) is the world's largest private testing and assessment nonprofit organization. Some of the tests they administer (out of the 20 million they administer annually) include the TOEFL (Test of English as a Foreign Language), GRE (Graduate Record Examination), Praxis, which is a teacher certification test, and various standardized tests administered to K-12.

However, through for profit subsidiaries, it has grown to a multinational operation and retained a revenue in 1996 of $411 million. In 2007, according to IRS forms, they grossed a profit of $94 million. Since they're technically classified as a nonprofit organization, they avoid paying millions in corporate taxes every year. The standard testing industry is entirely unregulated, except for boards of Trustees. The ETS has a board of sixteen Trustees, each of whom earn upwards of $32,000 annually, even though the IRS asks that the trustees of a nonprofit not be compensated.

"E.T.S. is standing on the cusp of deciding whether it is an education institution or a commercial institution," said Winston H. Manning, a former E.T.S. senior vice president. "I'm disappointed in the direction they have taken away from the education and public service."

The worse offense of this conglomerate was breaking the norm by competing with the private sector for selling test preparation materials. They add to the offense by using slogans aimed at stealing market share by differentiating their product with slogans like, "We prepare the tests, let us help prepare you." Their distinct advantage (the fact that they make all of the test content) in the test preparation market seems extremely anticompetitive. Numerous attempts have been made to bring this to the attention of the government, but none have been successful, as most of their anticompetitive behavior is stemmed out from their supplementary organizations.

So I suppose us undergraduate students seeking higher education have no option for now except to succumb to the monopolistic tendencies of this corporation, as there is no optlet for gaining entry into most graduate programs except for the tests administered by this giant corporation.

(Thanks to Stefan S. for your blog post about application fees and other grad school charges that spurred my research about the ETS.)

http://www.nytimes.com/1997/09/30/us/testing-giant-exceeds-roots-drawing-business-rivals-ire.html

Internet Market Competition- Microsoft vs. Google

There is a huge issues in regards to Microsoft and big media companies trying different techniques to run other firms search services out the business. On November 23rd of this year, it was said that Microsoft and News Corp are discussing that the world's largest software firm should pay other firms, such has Time Warner, to block Google from messing with their content and have Bing, Microsoft's new search engine be the main deal to search the web. How far does Microsoft planning to take this? How much are they willing to spend to make it happen?

Questions are being asked and not much answers have been given. The main concern for Microsoft is to have their new search service rival to Google, in any means possible and involving the network externalities as well. As it was such a surprise that News Corp brought upon the idea of doing so, Microsoft went on board. Google has a negotiation with News Corp that gave Google the full right to place contextual advertisements on Myspace, a social network owned by News Corp in 2006. News Corp is not too happy by that discussion. The agreement was for Google to pay $900 million over the next three years from 2006 for them to have the ability and right to advertise.

As of today, Google has one of the fasting growing traffic from other wedsites to newspaper sites. The firm is leading so much higher than Microsoft's Bing. How does Microsoft think they can bet Google and Google News? Also currently, more than a quarter of visitors to the Wall Street Journal's site are those who currently use Google as their number 1 search service. So as far, Microsoft has a huge competition in their hands. The firm can not afford to let Google get in their way of ruling the entire search service business. Now with Bing, Microsoft believes they can rival to Google by comparing prices of consumer technology software and devices or by looking for cheap flights to outperform Google. To make sure they increase the market share of Bing, Microsoft merged with Yahoo!'s search activites to compete with Google in a fast past. Yahoo! Mail and Yahoo! currently are little below in percentage of traffic from Google but much more ahead of the game of Bing. So now the question is are these firms perfectly competitive markets? If so, will they have a better change in ruling the search service bussiness.

As Microsoft is willing to spend whatever they need to bet their rival Google, i believe its a tough competition. They will need to do more advertising deals with other firms and by doing that cost money and compromsing. Also Microsoft is in a good stand in the market as far as their software. This compeition may cause sunk cost and DWL in this process, but lets see how far they plan on taking it. As Apple dictates which applications are allowed to run on iPhone, Facebook tries to get their consumers away from surfing other sites on the web. Google on the other hand, has free software only for those users of their operating system smart-phones. Even for myself, I've been using Yahoo! search service for the past couple of years, basically since I knew how to function a computer and surf the web. Today I see many advertising and consumers moving towards Google and Google Mail. As that being said, I till consume to Yahoo! because I'm more adopted to using it and check my email through Yahoo! Mail thats been set up since 2000. Just last week I recently opened a Google email account for Blogger.com. If it wasn't for this class, I would have not. Overall, the rival between Microsoft and Google is causing a web war in the seach service industry and many people are concern if its better for them or not.

Resource and more Information on Economist.com/businessfinance

The Satellite Radio Horror Story

In 1992 the FCC made available at auction the rights to specific radio frequencies for satellite broadcast on radio. The auction resulted in two companies paying about $90 million each to obtain licenses to use these frequencies. The winning companies were to become Sirius Satellite Radio, and XM Satellite Radio. The business model was simple: Charge an annual fee, provide the customer with countless programming options all of which would be commercial free. This would be the end of terrestrial radio. Both companies went public in the late ‘90s and generated a tremendous amount of capital. They would need it… it is estimated that each company had start up costs of between $1 and $2 billion. The companies knew it would take time to recover these costs, but they and their investors were confident. Satellite radio became a reality in 2001 when XM launched two satellites and began to broadcast nationwide. Sirius followed a few months later.

Very shortly after the companies began broadcasting, they realized they had a problem: they had vastly overestimated demand. The customer did not view satellite radio as a necessity, but rather as a novelty. Over 90% of revenue in the satellite radio business is from subscriptions, and only a small fraction of the subscriptions they had anticipated had become a reality. The companies recognized that their only chance for survival was to find niche programming which would create value for specific listeners and generate revenue through additional subscribers. Celebrity hosted talk and comedy shows began to appear. However, the only way to secure celebrities they felt would be a draw, such as Oprah Winfrey and Martha Stewart, was to offer them absurd amounts of money (Oprah got $50 million for a show she rarely appears on). Market research has shown that most of these shows have failed to increase subscription rates by a significant amount. In 2005 XM had 3.3 million subscribers, and Sirius had 1.2 Million subscribers. Both companies hemorrhaged money, though XM was in a much stronger financial position.

The industry began to change in late 2005. Sirius, recognizing that they were withering on the vine, took an “all in” approach and gave Howard Stern a 5 year $500 million contract beginning in January of 2006. The gamble was a success as Sirius ended 2006 with over 6 million subscribers. XM continued to grow as well, primarily due to their deal that put XM receivers in every GM car. However losses for both companies were still colossal (several hundred million per quarter), though Sirius now seemed to be gaining the stronger position in the industry. In February 2007 it was announced that, in an effort to reduce costs and become profitable, the companies would merge and Sirius would acquire XM for 4.6 shares of Sirius common stock per XM share. The primary point of contention regarding the merger (which was heavily lobbied by Clear Channel, Viacom, and other organizations with interests in terrestrial radio) was that the new company, SiriusXM, would have a monopoly on satellite radio. Sirius XM argued that it had no monopoly, and that it was in competition with terrestrial radio. It should be noted that the terrestrial radio contingent most likely agreed with this, but was opposed to the merger because without a merger both companies would be certain to fail and all competition to the terrestrial medium would be eliminated. Seventeen months later, after what is believed to be the longest deliberation in FTC history (the notoriously long Exxon/Mobil merger only took 11 months), the merger was approved in July of 2008.

Since the merger, things have actually started to improve for the satellite radio industry, which is now solely SiriusXM. The company has a positive cash flow, though it still loses about $100 million per quarter as it struggles with its satellite capital expenditures. 2009 adjusted EBITDA is over $300 million. And most importantly, they have roughly 20 million subscribers. However, the future does not look very bright for SiriusXM. In their current model, they are still several years away from turning a profit, if ever. And most importantly, Howard Stern’s contract expires 13 months from today. The latest metric shows that anywhere from 5 to 7 million of SiriusXM subscribers buy the service solely for the Howard Stern show. If Howard Stern were to leave SiriusXM the company would most likely lose all of those subscribers and the $700 million in yearly subscription revenue that comes with them. Ultimately, if you’re a SiriusXM shareholder, you may as well ride it out. The stock price has been steadily declining since it reached its high of about $70 in 2000. Today its $0.63.

The Wedding Packages

My fiancee and I decided to take a little trip to St. Augustine, Florida and determined after our first night there we would have a destination wedding. The ceremony would take place on September 9, 2009. Our first appointment was at The Wedding Authority in the Lightner Museum, where we were faced with the first experience of price discrimination. The owner of The Wedding Authority was explaining the six different courtyard ceremonies to us. Each package would include one hour in the courtyard, minister, wedding director, bridge decorations, and traditional wedding music (CD). Everything included in the packages were serviced solely by The Wedding Authority staff, which included two people; Carla and Bill Young. Most ceremonies were conducted on the bridge of the courtyard, although as we were standing on the bridge we noticed one big downfall and that was the fountains which limited the hearing of attendees. We opted against the bridge, and chose one of the corners in the courtyard. The bridge decorations included in all of the packages was only a white streamer wrapped along the bridge railing. After looking at the streamer, we decided it would be too tacky to use. The minister was the wedding director's husband, Bill, although we had already planned to have a family friend marry us instead. The package included one hour, although it didn't seem like that much time for a wedding ceremony and pictures. She explained that we would have to apply for a city permit for any of the packages costing $100, although for an extra fee of $150 we would be able to stay for an additional two hours. There were two different types of chairs offered that were an extra cost in addition to the package. With the chairs not being included she produced a tie-in sale, since we would obviously need to provide seating for our guests. The first set looked like they were loners from the bingo hall and they cost $1.50 a chair. The second set consisted of a more appealing chair costing $2.50 a chair. She knew some of our buying characteristics; we were from out of town, our willingness to pay a higher price, and our limited amount of time to make decisions. She explained that normal brides buy their own decorations in order to use the cheaper chairs, although with being from Ohio she knew we would not be able to do what the "normal" brides do. She created a "damaged good" item to practice versioning to make a higher profit.

After reviewing all the features included in the packages, we began to question our decision to choose The Wedding Authority as our ceremony site. The only appealing quality was the actual courtyard, with the flowers, stream, and unique structure. We learned the money we would be paying would only be for the courtyard. When purchasing bundled items consumers want the most for their money, but a happy wife equals a happy life.

The Economics of Torrents
Torrents are a big problem in our society. They are managed by peers and online websites promoting peers. They are supposed to be entirely for web development of software by everyone that wants to help make something. In other words, it is supposed to be for freeware developments such as Linux, android, and other things of the sort. But software pirates have infiltrated the market. They post every type of software, games, movies, TV shows and anything else they can.
They may not earn anything monetary wise, but one would think that they get something out of it. Otherwise why would anyone waste their precious time and energy after such endeavors? When people share software online they can either get utility from being able to crack the so called un-crack-able software and post it so that others can enjoy the stuff without having to pay for any of it. I am not complaining about this. If I use these sites, then I don’t have to pay rental fees to watch movies, play games, or buy different software’s.
You can place any kind of software after cracking it online for anyone’s use. I’ve seen packages that usually cost people around 5000 dollars on there for free. The only people who lose in this arrangement is the producers of the goods that are being stolen. One might think that they have enough money. It I think it really depends on how long the software had been out. Since research and development costs are sunk costs, and they tend to be really large, it might take years to recoup all the money spent.
The marginal cost of producing each individual CD, DVD, etc. is probably around 0, but it doesn’t take the sunk costs into effect. I know that I get satisfaction from putting my programs that I’ve written for simple things such as a sleep timer, online so that everyone can try it out. It makes me feel proud that people are using my programs, but I just do it for fun.

Some Basic Thoughts on the Economics of the Car Impounding Industry

Most people have dealt with or will deal with the annoyance of having one’s car impounded. Not only must you track down the impound lot, lose work hours potentially, and secure a ride, but you must also pay a ridiculous price to get your car out. Where does this price come from? What is the towing and impound market anyway?

            One way of looking at the impounding market is by making the consumers the people whose cars were just towed and by making their cars the goods being sold. In this kind of market, the demand curve is defined by the consumers’ values for their cars. A price higher than a consumer’s value for his or her car will cause the person to buy a new car, use public transportation, ect. Because two firms cannot both have impounded the same car, there becomes an effective monopoly for each towing firm. In fact, each “good” is so specialized that one could even define the market as having one good for one consumer (the car and the owner of the car), assuming that the firm can only sell the car to its owner and not to anyone else (this tends to be the case for at least a few days). Now, instead of setting a general price, the monopolistic towing firm can charge each person their value for their own car minus the costs in getting to the impound lot (Unless, of course, this value minus cost is less than the firm’s marginal cost. Then there would be no sale.). In this way the firm can get as much consumer surplus out of each consumer as possible.

            The problem with this model is that towing firms tend to not price discriminate in the real world, as is implied by the model. Arbitrage would be difficult as the firm can only sell the car to the owner, making it impossible for another person to buy the car cheap and sell it to the real owner at a cheaper price. There is no identification problem as each car is so unique in the eyes of the consumer that each consumer is matched with his or her car only. In order to figure out why these firms do not price discriminate, the market must be redefined.

            By changing the products from the owners’ cars to parking spaces, we may be able to figure out why towing firms don’t price discriminate. The number of firms in the market would now be equal to the number of towing firms patrolling lots in the area as well as firms that sold each spot to a person. If a firm were to price discriminate in the same way as was shown earlier, many consumers, with somewhat decent values for their cars, would switch to another lot with a more reasonable price, even if that lot was farther from their destination.

            In this new model, we seem to find that the price would not only not be a discriminatory one, but it would also be below the monopolistic price (since there are more than one firms). Because some of our firms are not even towing firms at all but are simply land owners renting their land out to others, the price could be brought down to a point below the towing firms marginal cost. The price that the firms actually charge, though, is probably not below marginal cost. The reason for this is that towing firms count on not making much (if any) money on average days, but on certain days, where parking spaces become scarce and the demand for them is very high/ inelastic (creating monopoly power), towing firms make large “windfall” profits. The new price is now determined by the price that will both reduce losses on bad days and maximize profits on good days best. 

What is the American Auto Industry?

I will forget for a minute that I am a car nut, I love the automobile and know way to much for my own good, let us look at the American auto companies;

Not long ago there were no choices for cars and trucks outside of the big 3 (Chrysler, Ford, and GM). The first Japanese cars started to come to the US in the late 1950s with popularity really growing through the 70s and 80s. While the first of the Honda and Toyota imports were of poor quality like all good businesses they learned from there mistakes and start to make a quality product that could no longer be ignored by the American Consumer. During this time what were the big 3 up to? Nothing. They believed deep down that they were always going to be better than the foreigners simply because they were the BIG 3.

Anyone that is not blind can visibly see the difference between a Japanese auto and an American one.

A while ago my dad decided that he wanted a pickup truck to drive during the winter months (why he decided this is a mystery). Logically we chose to go and drive all of the available options for a full size pickup. That meant the Ford 150, Chevy Silverado (same as the GMC Sierra), Dodge Ram and, the Toyota Tundra ( Nissan Titan was not driven because it is essentially a Dodge Ram with a different body). Let me point out that the big 3 have always owned the truck market, they have simply had no other serious competition. That is until Toyota came out with their most recent Tundra. Now having driven all the competition it became clear that Toyota had done their homework. Americans are known for their huge trucks with a huge amount of power, but that is where the similarities with the American trucks stop. The Tundra drives like any Toyota car and most notably the fit and finish is worlds ahead of Ford, Chevy and Dodge. When you sit in the cab of the Tundra it shows you what quality means. It does not look or feel cheap the way the other examples did. Ford may have been the worst, the truck honestly looked like it had been engineered by a 5 year old. The interior especially looked and felt like it was velcro'd together. If i was going to pay 30 or 40 thousand dollars for a truck I would at least want it to look like a quality piece.

I think that the reason that the big 3 got into trouble in the first place is that they just could not compete any more. The cars that they were building were literal pieces of shit while the Japanese where building cars that notoriously last longer than 200 thousand miles.

They best way to get these companies to wake up and smell the flowers is not to give them billions of dollars to support themselves and then go into bankruptcy, it would have been to let them go into bankruptcy at the beginning.

They need to downsize. Period.

When you look at Toyota you see 2 brands Toyota and Lexus (and scion), when you look at Honda you see 2 brands Honda and Acura, when you look at Ford you see 3 brands Ford, Lincoln, and Mercury, then there is GM with 4 brands (now after closing pontaic, olsmobile and saturn) Chevy, GMC, Buick, and Cadillac. (Chrysler gets left out because they just do not sell a product that anyone wants and they are owned by FIAT)

Not for the life of me can I figure out why you would produce the same cars with different bodies in segments that compete with each other. GM especially. Trucks that are labels as GMC and Chevy, there is just no point they are the same truck with a different badge. And Buick and Cadillac, they are both up market brands much like Lexus is to Toyota, but they have the same parent company GM could save billions in the long term by eliminating duplicates that compete with one another. Getting a clue would be best for everyone, in this case the market needs to be able to determine who lives and who dies, the strong survive for a reason.

Then there is the whole perception of "buying American". The perception that the American car companies are building American cars in America is not as true as it used to be. Many foreign cars are assembled right here on American soil. Not to mention that the two most popular cars in the US ( Honda Accord and Toyota Camry) are more than 60% parts sourced from the US. So now is buying American really buying Japanese? I think it works out that way.

Theory of the Firm and Scientology

In 1937, the economist Ronald Coase came up with a theory to explain why firms exist. His answer, in short, was that creating a centralized firm cut down on transaction costs between independent contractors. Let's say we have 5 architects working on a project, but none of them works for a firm. In order to have all of the architects contract with one another, we'd need 10 contracts:

But what if we had a centralized firm, and all the architects were employees? Then we'd only need 5 contracts--one employment contract between the firm and each architect:

Because firms cut down on transaction costs, Coase also reasoned that firms existed because they allowed an entrepreneur to specialize in producing only his goods to serve the market. This allowed the entrepreneur to focus on his specialty, and saved people a whole lot of hassle from having to round up an army of workers every time they wanted a loaf of bread produced. (Leonard Read's "I, Pencil" is a beautiful ode to the ability of the market to blindly coordinate production with demand.)

So Coase figured he had discovered the reason why we establish firms. But he didn't have the whole story. His theory underwent a lot of scrutiny in the '60s, but it was Alchian and Demsetz (1972) who best explained the behavioral component of why we make firms.

It has a lot to do with game theory. Suppose we have our 5 architects, and they're assigned to a project. It has some distant deadline, but it stands to reason that the more projects the architects take on, the more money they make, so they should try to get the project done as quickly as possible to maximize their profit.

If you've ever worked on a group project before, you know that one person usually ends up doing 95% of the work, while the rest sit on their thumbs. Here's where game theory comes in--each architect has an incentive to shirk. If one architect can successfully procrastinate on the project while the other four pick up his slack, he's pulled in his share of the cash for no work. But the other four architects are thinking the same thing, and as a result, the project never gets done. There's a carrot to motivate the group, but there needs to be a stick to motivate each member. They need to hire a monitor (this is where we get our everyday boss.)

A few rules apply to the monitor. First, the monitor has to be able to hire and fire people. Otherwise, workers would still shirk their duties, even if their coworkers complained. Second, and most important, the pay of the monitor must be tied to the performance of the workers. Otherwise, the monitor would shirk his duties, and they'd need a monitor for the monitor, etc. Remember the outrage directed at the executives of failed companies who wrote themselves fat bonus checks while their workers were getting laid off? This is where it comes from, and why the ability of workers (and not politicians) to hire their bosses is so important.

Now allow me to play Malcolm Gladwell here for a minute. After I learned about the stuff I just said, I discussed it with a deadbeat stoner friend of mine named Bob. If you want a visual on Bob, he looks a lot like the teacher from Beavis and Butthead Do America:

I drew the diagrams above for Bob when I explained it to him, and he pointed to the green dot (the "firm") in the second one and said, "And now, if we switch over to theology, this is just God." (There were probably a lot of "uh"s and "man"s and "like"s in there too.)

I was blown away, because he was totally right. Instead of the Theory of the Firm, Bob had hit upon the Theory of the Church--the reasons that organized religion was created.

There are two main aspects of organized religion that explain its creation:

1. Money/power

2. Getting everybody to live a moral life by establishing a moral code.

We'll deal with the first one later. By the way, I apologize in advance if any of what I'm about to say offends your moral/religious sensibilities--please be assured that this is meant to be an earnest discussion of these ideas. Although the paragraph on Scientology is a little harsh. Actually, if you're a Scientologist, just stop reading.

Back to bullet 2: Establishing a moral code and getting people to stick to it. The church/synagogue/mosque/etc. functions like the firm. The production goal is not goods, but good (kindness, charity, etc.)--often spelled out in the form of commandments or other religious doctrines. The members are now congregants rather than workers. The middle management that we hire to make sure that we don’t shirk on our moral duties to produce good are our priests/rabbis/imams/etc., but at the head of the church is our CEO, founder, and president, “God.” God has the ultimate say in whether or not we go to heaven or hell, and, depending on your degree of belief in free will, many other aspects of our lives—including our health, and our success in love/work/sports/etc. God is the boss we hire to prevent moral shirking.

Can the monitor (God) hire and fire people? You bet: that's where we get heaven and hell from. Is the performance of the monitor tied to the performance of the members? Sure. If members behave in a fashion that the majority considers to be immoral, their gods become pagan/heathen/etc. On the other hand, if members behave admirably, the righteousness of their God is increased.

Once we’ve established our firm of Good, Inc., we can see a number of applications of industrial organization. Now, we have to consider that our members are not only our producers, but our consumers as well. Specifically, they consume good feelings (joy, spiritual satisfaction, righteousness) for a price in the form of time or money donated, or an explicit monetary payment (see Scientology and/or Middle Ages Christianity “entitlements”).

-Network externalities: 60 years ago, there was not a single person who identified their religion as Scientology. Now, depending on how you count, there are more than 1 million. But there’s a sucker born every minute, and even completely ridiculous bullshit cooked up by a scam artist/opium addict/science fiction writer as a get-rich-quick scheme can eventually gain legitimacy as a real actual religion if enough suckers get their friends and their friends’ friends on board. Of course, Scientology does have some real value—in getting us to think critically about our own religious beliefs.

-Differentiated products and monopolies: One of the nice things about running a religious organization is that you can tell your consumers that your product is the only product that will perform the desired function (getting them to heaven or to feel good). The other products on the market are not just inferior, but evil and blasphemous! (Somewhere, a Coke brand manager just read this and got really jealous.) Scientology, for example, has a strict monopoly on the sale of Scientology products—everything from self-help books and junk instruments that measure your state of mind to actual religious secrets and materials, available only to platinum-level donors (or, as they call them, “OT levels above Clear,” pending a “review of the candidate's character and contribution to the aims of Scientology,” according to Wikipedia.). They have a militaristic copyright/intellectual property regimen to protect their ability to maintain a monopoly on their brand of spiritual salvation.

Any other links between organized religions and firms that relate to IO? Comments are welcome.

Sources: Wikipedia, lectures at Georgetown U., Beavis and Butthead Do America (1996).