tag:blogger.com,1999:blog-86374290284222630432024-03-08T14:26:13.527-07:00Utah Economist<br><br><br><br>Trying to explain economics to regular Utahns since 2008.<br><br>
Occasionally succeeding.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.comBlogger138125tag:blogger.com,1999:blog-8637429028422263043.post-47086954977467383742013-09-03T08:41:00.000-06:002013-09-03T12:42:20.641-06:00Blog Moving!New posts on this site have been discontinued, although I'm going to leave it up on the net for a while... For new blog content, see my home page at <a href="http://www.scott-schaefer.net/utah-economist-blog/">www.scott-schaefer.net/utah-economist-blog/</a>.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-24897938379626529412013-08-28T21:39:00.003-06:002013-08-28T21:39:25.134-06:00Outdoor Retailer Summer Market: The Underlying EconomicsI just put out another blog post over on the Eccles Outdoor Industry Club site. <a href="http://infooi.business.utah.edu/?p=160" target="_blank">Have a look!</a>Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-28298060834707380882013-07-18T11:45:00.000-06:002013-07-18T11:45:00.780-06:00Eccles Outdoor Industry ClubI'm on sabbatical for the 13-14 academic year, so no formal "teaching" at the U for me this year. But I will be doing a couple of things on campus. For one, I've recently signed on as faculty advisor for the Eccles Outdoor Industry Club for the U of U's full-time MBA program. <br />
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I'm excited to give it the full Roadside MBA treatment; that is, we'll get a group of students together, go find companies to talk to, and then discuss how various MBA frameworks apply. My co-author at Stanford has been doing stuff like this will students there for a couple of years, and he tells me it's going well. We'll also do some other forms of outreach to the industry. <br />
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Here's a <a href="http://infooi.business.utah.edu/?p=86" target="_blank">link to a blog post</a> I wrote for the Outdoor Industry Club site. I'll try to post some impressions of club activity as we go along. Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-35198977502263996702013-06-26T10:53:00.001-06:002013-06-26T10:53:40.356-06:00MBA Alumni: Help Needed!I've been working on some new ideas about how to teach strategy case studies to MBA students.<br />
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And I could use your help!</div>
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I'm at a point where I really need to road test some of these ideas. And that's where you come in... I'm hoping to find 3-5 "volunteers" --- I have a few dollars to pay, but unfortunately nothing close to what your time is worth --- to come to the U for probably 2.5 hours, sometime over the next few weeks. </div>
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My general plan will be to show you some materials, ask you some strategy questions, and see how you respond. </div>
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Normally, I can road test new ideas in the course of teaching classes, but this one... well, it could be awesome but it could also fail spectacularly, and I'd prefer not to have a class implode on me.<br />
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You won't be graded, and this isn't an opportunity to retroactively earn extra credit for courses you took a long time ago. But, you'll be doing me (and my future students) a big favor!<br />
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Send me an e-mail if you're interested: scott.schaefer@utah.edu.<br />
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Thanks!</div>
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Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-23251426340820693992013-02-22T10:00:00.000-07:002013-02-22T10:00:35.910-07:00Debt and Young Adults<span style="font-family: inherit;">It's been quiet over here on Utah Economist recently... More activity over on the new <a href="http://www.roadside-mba.com/" target="_blank">Roadside MBA blog</a>, so do have a look over there. </span><br />
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<span style="font-family: inherit;">I got a call yesterday from Jennifer Napier-Pearce, who's now covering the personal finance beat at the SL Trib. (Raise your hand if you still miss her voice on KUER.) Anyway, there's a Pew study about how debt levels among the young have fallen (mostly) since 2007. Housing, auto, and credit card debt all down; student loan debt up. <a href="http://www.sltrib.com/sltrib/money/55875848-79/debt-households-percent-adults.html.csp" target="_blank">Here's a link to the story</a>, with ample economist commentary. </span><br />
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<span style="font-family: inherit;">Part of the reduction in debt is coming from changes in the mortgage market. But there are also some interesting things going on in markets for automobiles. Here's a quote from the Pew Study:</span><br />
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<span style="color: #333333; line-height: 24px;"><span style="font-family: inherit;">In 2007, 73% of households headed by an adult younger than 25 owned or leased at least one vehicle. By 2011, 66% of these young households had a vehicle. Among households younger than 35, outstanding vehicle debt declined from 2007 to 2010. In 2007, 44% of households younger than 35 had vehicle debt. By 2010, only 32% had vehicle debt. The typical outstanding amounts owed among young households with vehicle debt fell from $13,000 in 2007 to $10,000 in 2010.</span></span></blockquote>
<span style="font-family: inherit;">Part of this is coming from changing attitudes toward debt, but there are also simply fewer new cars out there. There was an <a href="http://topics.wsj.com/article/SB10001424127887323511804578300650170654978.html?mod=WSJ_hp_editorsPicks_4" target="_blank">article in the WSJ on Wednesday</a> about how the low auto-industry production levels between 2009 and 2011 are impacting the used car market: </span><br />
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<span style="background-color: white; line-height: 22.5px;"><span style="font-family: inherit;">The shortage of used cars stems from the deep plunge in new-car sales between 2008 and 2010, and the virtual disappearance of new-car leases during the financial crisis. As a result, three-year-old cars are now hard to find and even older models are holding their value.</span></span></blockquote>
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<span style="font-family: inherit;">These effects will probably continue to ripple through auto-related markets; how do you think, for example, that the relative lack of 2009-2011 autos will impact revenues for auto repair shops (who probably prefer customers with older rather than newer cars...)?</span>Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com1tag:blogger.com,1999:blog-8637429028422263043.post-5287476833722193232012-06-01T12:00:00.000-06:002012-06-04T14:33:34.595-06:00And Speaking of Crowdfunding.....Here's an interesting juxtaposition from today's Salt Lake Tribune. On the front page, we have an article <a href="http://www.sltrib.com/sltrib/money/54219645-79/catledge-investors-fraud-million.html.csp" target="_blank">about an alleged Ponzi scheme</a> that lifted $170 million from investors. On the front of the Money section, we have an article <a href="http://www.sltrib.com/sltrib/money/54218198-79/crowdfunding-conference-entrepreneurs-act.html.csp" target="_blank">about today's crowdfunding conference at the University of Utah</a>, which unfortunately I'm not able to attend. (You miss out on so much by having a job...)<br />Here's a quote in the crowdfunding article by Berkeley Geddes, head of a professional association:<br /><blockquote class="tr_bq"><br /><span style="color: #333333; font-family: Georgia, 'Times New Roman', Times, serif; font-size: 14px; line-height: 20px; text-align: left;">"The crowd has a powerful ability and can say, ‘I know this person’s past and I can vouch for him, or I know his past and I have some concerns,’ Geddes said. "The crowd has a unique ability to help make sure that the entrepreneurs asking for the money" are legitimate.</span></blockquote><br />I presume there were people vouching for alleged Ponzi schemers, too. Potential crowdfunders should probably worry about the incentives of the people doing the vouching, which raises the question of who's going to vouch for the people doing the vouching. And then who's going to vouch for the people vouching for the people doing the vouching. And so on.<br /><br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-74226613945084676892012-05-30T23:12:00.000-06:002012-05-31T16:42:45.561-06:00Crowdfunding and Financial IntermediationCity Weekly called a couple days ago with a few questions about the recently passed JOBS Act, and specifically about the new provisions for "crowdfunding" of small startups. <a href="http://www.cityweekly.net/utah/article-77-15975-i-would-love-to-know-more-about-this-or-how-i-c.html" target="_blank">The article is here.</a><br />
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"Financial intermediaries" are institutions --- banks, venture capitalists, private equity, angel investors --- that make money by connecting investors with good investments. If you have a deposit account at a bank, the bank is essentially borrowing money from you (paying you a low interest rate) and then lending it to someone else (and charging them a higher rate). The bank makes a buck on the spread. <br />
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One question to ask with any sort of intermediary is why the parties on either side of the transaction can't simply go around the intermediary. That is, if the bank is paying you one percent but charging a borrower three percent, then why can't you just call up the borrower and offer to lend at 2%? You earn a higher interest rate on your money, and the borrower pays a lower rate. This would cut out the middleman, and the banks would quickly go out of business. <br />
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This observation suggests that intermediaries can survive only if they're doing something better than you could do it yourself. In the case of financial intermediation, one of the big possibilities is that banks/VCs/angels are better at distinguishing good investments from bad. If borrowers know better than potential lenders whether their investment opportunities are likely to pay off, then you can easily get a market for lemons, which is a subject I <a href="http://utah-economist.blogspot.com/2009/04/economics-for-accountants-part-1.html" target="_blank">blogged about in long-winded, four-part fashion back in 2009</a>.<br />
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So I think the whole crowdfunding thing is a bit more complicated than just saying "Hey, let's use the <b><i>internet</i></b> to allow investors to connect directly with promising startups." Banks and VCs do things that us regular people just aren't good at --- like reading financial statements and assessing future market growth --- and the internet isn't by itself going to make us a lot better at these tricky tasks.<br />
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Financial intermediaries are really interesting to economists, probably because the very fact that intermediaries exist tells us something about when markets work well and when they don't. I'm attending the Financial Intermediation Research Society annual meeting next week, and you probably don't need me to tell you what a good time that is....<br />
<br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-70954946150110804842012-05-29T09:11:00.003-06:002012-05-29T13:05:04.514-06:00Hollywood EconomicsI'm a big fan of the television show <a href="http://www.imdb.com/title/tt0306414/" target="_blank"><i>The Wire</i></a>, which aired on HBO between 2002 and 2008. It's a gritty police drama, by which I mean that every fourth word is profane. If you watch it, wait til after your kids are asleep.<br />
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Stringer Bell (played by <a href="http://www.imdb.com/name/nm0252961/" target="_blank">Idris Elba</a>) is a terrific character who's the #2 man in a big Baltimore drug gang. He's unusual for a druglord in that he wants nothing more than to be a legit businessman, and he's hoping to use his drug profits to invest in legal businesses that he can run after he retires from selling dope. There's a great scene in Season 1 where the cops are tailing Bell as he drives to the local community college. He heads into class where the professor delivers a lecture on demand elasticity. Later, Bell walks into a copy shop that's he's purchased as part of his plan to go legit, and notices that his employees --- who appear to have been hired from the neighborhood based on criteria other than experience or skill at managing a copy shop --- seem not to be pushing very hard in the direction of superior customer service. <br />
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Bell expresses his displeasure, as follows:<br />
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Yo, you know what we got here? We got an elastic product. You know what that means? That means when people can go elsewhere to get their printing and copying done, they goin' do it. You acting like we got an inelastic product and we don't. Now, I want this to run like a true (gosh-darn) <adjective omitted="">business. Not no front. Not no (other stuff)<other stuff="">. </other></adjective></blockquote>
Gritty, as I indicated. <br />
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As with all Hollywood Economics, however, they don't get it quite exactly right. (It's not nearly as bad as the economics disaster that is <a href="http://www.imdb.com/title/tt0268978/" target="_blank"><i>A Beautiful Mind</i></a>....) On the outside of the classroom door that Bell enters at the CC, a sign reads "Introduction to Macroeconomics." Demand elasticity is a *micro* topic, but close enough I guess.<br />
<br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com1tag:blogger.com,1999:blog-8637429028422263043.post-44874489744410396342012-05-23T10:09:00.000-06:002012-05-29T09:24:05.296-06:00Google & Motorola MobilityGoogle completed its purchase of Motorola Mobility, which is what's left of Motorola's wireless phone business and was spun off by Motorola in January of 2011. Motorola Mobility makes the Droid RAZR --- a pretty successful Android smartphone --- so the merger raises the question of whether Google is trying to get into the handset business with this purchase. <br />
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I think this would be a terrible idea. <br />
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Here's why: A big part of the Android platform's appeal is price. You can get a reasonable Android setup for a lot less than any iPhone, and there are at least five or six major players --- Samsung, HTC, LG, Motorola Mobility, etc --- producing Android handsets. And these firms are competing fiercely on price, which drives the overall cost of an Android system down.<br />
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This hardware-side competition benefits the Android platform, and therefore Google, quite a bit. It's the same logic that helped Microsoft dominate the desktop twenty years ago; DOS and Windows ran on commodity machines, so the total cost of a Windows setup was much lower than that of a comparable Mac. <br />
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So the last thing Google wants to do is give Samsung and HTC any reasons to stop pushing handset prices down. And if Google were in the handset business itself, it'd be hard to resist the temptation to help its in-house handset business at the expense of Samsung and HTC. <br />
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There is talk of some other reasons for this deal, so I wouldn't be surprised if Google shuttered the Motorola Mobility handset operation.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-20291530014448122052012-05-21T08:00:00.000-06:002012-05-29T09:24:23.242-06:00RIM = DOA?I've written about <a href="http://utah-economist.blogspot.com/2009/06/iphone-pricing.html" target="_blank">iPhone economics before</a>, and it remains a really interesting market. One of the great stories is that of RIM, the maker of the Blackberry. Here's a firm that had a commanding market share not too many years ago, but has been completely hammered by the rise of the iPhone and Android smartphone platforms. <br />
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RIM is trying to catch up, so have a look at this recent article in <i>The New York Times</i> <a href="http://www.nytimes.com/2012/05/02/technology/research-in-motions-blackberry-10-is-unveiled.html" target="_blank">about release of the Blackberry 10 prototype</a>. <br />
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The good news is that RIM understands the importance of getting a large group of software developers to work on applications that run on their OS. The bad news is that developers will make their decisions based largely on whether they believe the product will be a hit with consumers. RIM wants developers to make significant investments, but these investments will pay off only if the product sells well. It's a tough sell for RIM, and I thought it was interesting to listen to the voice of skeptical developers such as Phill Ryu at Impending.<br />
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Even the pro-Blackberry-10 people quoted in the article didn't say much that would convince me the firm has settled on a good strategy. The CEO of Refresh Mobile says the platform integrates well with social media... but is "connect with Facebook" really much of a differentiator at this point? And a Gartner analyst cites the phone's ability to capture extra frames when shooting photos. I agree that this sounds like a nice idea, and is very much something I'd like to have on my phone. But <a href="http://utah-economist.blogspot.com/2012/05/moneyball.html" target="_blank">good ideas are different from good strategy</a>, and it's hard to imagine that "extra frames when you snap" is something that iOS or Android couldn't replicate in a day or two of development-team time. <br />
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<br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com1tag:blogger.com,1999:blog-8637429028422263043.post-35959444586534050062012-05-17T15:45:00.000-06:002012-05-29T13:00:52.940-06:00Gold StorageI talked to City Weekly earlier this week about an interesting company that offers gold storage right here in Salt Lake. <a href="http://www.cityweekly.net/utah/article-77-15913-golden-opportunity.html" target="_blank">Here's the story.</a><br />
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Gold prices are up sharply since 2002, but the metal really hasn't been a great investment over the past 40 years. Here's a link for <a href="http://stockcharts.com/freecharts/historical/djiagold1980.html" target="_blank">a chart comparing gold to the Dow since 1980</a>, and you can see that while gold has about doubled over the period, the Dow is up by something like a factor of 14.<br />
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Gold might well be a sensible hedge against economic catastrophe, but buyers should be keep in mind they're probably giving up returns in order to buy safety.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-73479649586144886332012-05-16T21:33:00.002-06:002012-05-29T12:58:46.319-06:00Delta: Computer Glitch or Price Discrimination?A current Executive MBA student sends a link to this article: <a href="http://www.ajc.com/business/delta-says-frequent-fliers-1438850.html" target="_blank">Delta Says Frequent Fliers Saw Different Fares</a><br />
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Nice find! <br />
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So maybe this is an unfortunate computer glitch on Delta's part, and maybe it's true that Delta Frequent Fliers were sometimes offered higher prices and sometimes lower. Maybe. <br />
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But this is also perfectly consistent with a third-degree price discrimination strategy. The rationale would go like this: Delta knows that anonymous searchers are probably searching lots of airlines and comparing prices. These travelers respond to low prices, which means their demand is elastic. And as I <a href="http://utah-economist.blogspot.com/2012/05/economics-of-driving-around.html" target="_blank">discussed earlier today</a>, it pays to offer lower prices when demand is more elastic. Frequent flier club members are probably less likely to search widely and compare prices, and this means their demand is less elastic. So Delta can increase profits by charging higher prices to this segment.<br />
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This is called "price discrimination" because the firm is charging different prices to different customers for the same product. It's entirely legal --- although you can tell from Delta's response that it's often not a popular thing with customers --- and firms do it all the time.<br />
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(I do fly Delta a lot, and I hope they won't put me in the middle seat because of this blog post.)<br />
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<br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-52697134177092409182012-05-16T10:29:00.000-06:002012-05-29T13:01:19.257-06:00The Economics of Driving AroundIt's time for a new feature here on Utah Economist Blog: The Economics of Driving Around. <br />
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I like driving around, and one of the best things about it is the real-world economics you can see as you go from place to place. Even if you don't like driving around, you probably have to do it --- and it's a great opportunity to look for economics. <br />
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I had some errands last Tuesday, and managed to catch a few snapshots. I was also messing around with Instagram (a billion? with a b?), and uploaded shots there. The Economics of Driving Around really benefits from the geo-tagging feature of your typical smartphone, and I've linked so as to show you both a photo and a map.<br />
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<a href="http://ink361.com/#/photos/map/186920433453973141_53369686" target="_blank">So, here's a picture of some Powerbars.</a> This was taken at the Common Cents convenience store at Bangerter and about 200W. And here's <a href="http://ink361.com/#/photos/map/186890311615200740_53369686" target="_blank">some more Powerbars</a> --- the same kind, in fact --- taken as the Fresh Market grocery store on 900 East and about 17th South.<br />
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What's the difference? Well, same product. Similar display. Difference price. At the C-store, the bars go for $1.69 while at the grocery they are $1.59. So here's where you can put your brain to work as you're out running errands. Same product, so why not the same price?<br />
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Typically, people jump to thinking about cost differences, and very often to differences in the fixed costs associated with running each business. But fixed costs don't (directly) affect optimal pricing decisions. As we learn in a basic managerial econ class, the profit-maximizing price depends on two things: marginal cost and demand elasticity.<br />
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So one possibility is that the convenience store pays a higher wholesale price for Powerbars, and selects a retail price accordingly. <br />
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But another possibility is that demand is more elastic at the grocery store than at the c-store. Demand elasticity is a measure of how sensitive quantities are to prices. If demand is elastic then small price changes lead to big quantity changes, while if demand is inelastic small price changes lead to small quantity changes. <br />
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It works out that if your demand is elastic (rather than inelastic), then it makes sense to charge lower prices and accept lower margins? Why? Well, the benefit from reducing prices is that you're going to sell higher volumes. And if your demand is elastic, then a price reduction gives you a big increase in volume, and this big increase in volume can make it worthwhile to accept lower margins. If, on the other hand, your demand is inelastic, then a price reduction gives you a small increase in volume, in which case it probably isn't worth it to accept lower margins to sell more.<br />
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All this can be made horribly precise --- the inverse elasticity pricing rule is the governing equation --- but the key point is to think about potential differences in elasticity <i>in addition to</i> potential differences in cost when thinking about price variation. <br />
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So the question then becomes: Is there any reason to think that Powerbar demand would be more elastic at a grocery store compared to a convenience store? Is there any reason to think that a c-store price reduction would have a smaller impact on quantities sold than a grocery store price reduction? And that's a good question to ponder, as you're thinking about the why behind the price variation we observe every day. <br />
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Here's some more food-for-driving-around thought:<br />
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<li><a href="http://ink361.com/#/photos/map/186918046156799619_53369686" target="_blank">3.59 for regular unleaded</a></li>
<li><a href="http://ink361.com/#/photos/map/186910867915882093_53369686" target="_blank">3.64 for regular unleaded</a></li>
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<br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com1tag:blogger.com,1999:blog-8637429028422263043.post-59707731664420315902012-05-10T09:08:00.000-06:002012-05-29T13:04:22.878-06:00Moneyball and ManagementDid I mention that you should go see Moneyball? <a href="http://utah-economist.blogspot.com/2012/05/moneyball.html" target="_blank">Oh, that's right, I did</a>.<br />
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In an earlier post, I discussed why this movie is useful as an example of a failed strategy --- despite the fact that the team had a few great seasons. The important idea is simply that a great strategy is one that insulates a firm from margin-destroying competition, and this means strategy must deliver ways of creating value that rivals cannot emulate. Rivals had a pretty easy time of emulating the A's, and this is why their advantage dissipated over time.<br />
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I'd guess, in fact, that the rivals had an easier time <i>emulating</i> the A's than the A's had in <i>implementing</i> the strategy in the first place. And the movie --- with its made-up dialogue, fictionalized situations, and, yes, the dreamy Brad Pitt --- illustrates the issues far better than any Harvard case study could.<br />
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There's a wonderful, wonderful scene where the A's General Manager lays out his reasoning: We can't compete with the high-payroll teams if we keep doing things the way we've always done them. We need to find ways to identify the opportunities that others are missing. And we're going to do it by out-analyzing them. <br />
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This is, as I wrote last week, an amazingly good idea. And it was completely dismissed by the team's old guard.<br />
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The "old guard" had made large investments in skills that were specific to the "way we've always done it." The scouts had spent their entire careers honing their abilities to determine, by watching, whether a young ballplayer had the potential to grow into a productive major leaguer. The scouts hadn't spent a minute figuring out how to organize data, how to run regressions, or how to devise good quantitative measures of future ballplayer productivity. Given this, it's no surprise that the old guard tried to paint these new ideas as crazy, nonsensical, and radical. Success of these new ideas would reduce the old guard's value to the organization, and threaten both their earnings potential and job security.<br />
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In the film, the A's GM explains his reasoning... over, and over, and over. And he completely fails to rally the troops; he utterly bombs at building consensus in support of the new ideas. <br />
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It's a tough situation. What do you do, as a leader, when you come across untested ideas that you think will be good for the organization, but will require employees with markedly different skills than what your team currently possesses? Do you keep trying to build consensus before making changes? Do you push ahead with radical change without internal agreement? Or do you simply make do with the status quo? <br />
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If you're a manager, you'll probably have to make really difficult decisions like this sometime. So when you watch Moneyball, don't think about the baseball. Think about the human resource management, and how you'd try to implement change in an organization that you are or will be running.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-88261040953264077422012-05-09T08:46:00.000-06:002012-05-29T13:06:37.673-06:00Local Business --- Radio InterviewIt seems to be Radio Week here at the Utah Economist Blog. <br />
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I <span style="background-color: white; color: #333333; font-family: Georgia, serif; line-height: 20px; text-align: left;">was on KCPW's <i>City Views</i> </span><span style="background-color: white; color: #333333; font-family: Georgia, serif; line-height: 20px; text-align: left;">yesterday, talking a bit about local business. Of course, you always learn more from listening than talking, and I learned about the upcoming (tomorrow!) <a href="http://www.slcgov.com/nbc" target="_blank">Salt Lake City Neighborhood Business Conference</a>. Embarrassingly, the conference is being held in the Spencer Fox Eccles Business Building here at the U of Utah, but I must not be paying attention because I had no idea! Registration seems to be free, and maybe I'll see you there. </span><br />
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<span style="background-color: white; color: #333333; font-family: Georgia, serif; line-height: 20px;">You can </span><a href="http://kcpw.org/blog/cityviews/2012-05-07/cityviews-5812-mercury-rising-in-gsllocal-business-and-the-local-economy/" style="background-color: white; color: #3d81ee; font-family: Georgia, serif; line-height: 20px; text-decoration: none;" target="_blank">listen to my conversation with hosts Jennifer Napier-Pearce and guest Nan Seymour from Local First Utah here</a><span style="background-color: white; color: #333333; font-family: Georgia, serif; line-height: 20px;">. </span></div>
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<span style="color: #333333; font-family: Georgia, serif;"><span style="line-height: 20px;"><br /></span></span></div>Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-74445420168302918602012-05-08T07:11:00.000-06:002012-05-29T13:06:15.203-06:00Hiring: Radio InterviewI was on KPCW's Monday business show <i>Mountain Money </i>yesterday, talking mostly about hiring and why it's so hard. I think hiring well is a big key to success in many businesses, but unfortunately it's an area that economists and other management professors don't have enough to say about. We're working on understanding it better. <br />
<br />
You can <a href="http://kpcw.org/posts/mountain-money/" target="_blank">listen to my conversation with hosts Pam Wylie and Doug Wells here</a>, and I'll try to write more about this important topic in the future.<br />
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<br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-53019149823596038852012-05-03T08:00:00.000-06:002012-05-29T13:02:28.259-06:00Delta Buys A... Refinery???According to <a href="http://www.nytimes.com/2012/05/01/business/delta-air-lines-to-buy-refinery.html" target="_blank">Tuesday's New York Times</a>, Delta Airlines will purchase a refinery outside of Philadelphia. The idea, at least according to the article, is that Delta will somehow use this refinery to "get control of fuel costs." <br />
<br />
This is a clear example of a make-or-buy decision. Delta can easily buy jet fuel on the open market. This has been an expensive option, for sure, in recent years, but this market seems to be working just fine (in the sense that anyone who's willing to pay the market price can get any amount of jet fuel that they like).<br />
<br />
Obviously I wasn't in the room for the deliberations by Delta management, and so maybe something else is going on... But it sure seems to me like Delta is falling for one (or more) of the big "Make-or-Buy" fallacies. While there are many good reasons why a firm might want to buy one of its suppliers, this is one of the areas of management where you hear a lot of really dubious arguments. <br />
<br />
In our <i>Economics of Strategy </i>textbook, my co-authors and I describe five make-or-buy fallacies (page 123 of the fifth edition), and I'd guess that Delta is falling for number 4. We describe this one as follows:<br />
<blockquote class="tr_bq">
Firms should make, rather than buy, because a vertically integrated producer will be able to avoid paying high market prices for the input during periods of peak demand or scarce supply. (This fallacy is often expressed this way: "By vertically integrating, we obtain the input 'at cost,' thereby insuring ourselves against the risk of high input prices.)</blockquote>
Why is this a fallacy? Well, there's a long numerical example in the text illustrating why this won't increase expected profits, but here are some quick thoughts: First, Delta still has to buy crude to feed its refinery, and it's fluctuations in the price of crude --- not the margin earned by refiners --- that has been causing the ups-and-downs in the price of jet fuel. Second, if Delta wants to hedge jet fuel prices, it can do so in the futures market pretty easily. Finally --- and this I think is the big one --- what is Delta management going to do if/when its refiner falls behind other refineries in terms of cost-reducing process innovation? Note that if Delta has an independent supplier (that is, one that's not owned by Delta) and this supplier falls behind rivals on costs, then Delta can easily switch to a lower-cost supplier. Will Delta management idle its own refining capacity if the managers it hires cannot stay competitive? I bet not, and this will sharply reduce competitive pressures on the in-house supplier relative to the market. <br />
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My view: I think this plan will lead to higher medium- and long-run jet fuel costs for Delta. Not a good move...Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com2tag:blogger.com,1999:blog-8637429028422263043.post-57614805532709746302012-05-01T07:22:00.000-06:002012-05-29T13:05:32.171-06:00MoneyballBest.<br />
<br />
Movie.<br />
<br />
Ever!<br />
<br />
And no, it's not because Brad Pitt is so dreamy. <br />
<br />
I like baseball, and people would maybe say this is a movie about baseball. I like statistics too, and people would maybe say this is a movie about that. <br />
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But it ain't about that; this is a movie about management and strategy, and that's why it's so great. I'll get to the management part in a later post; let's talk about strategy.<br />
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(And I'm going to assume you've seen it; if not, stop reading and go watch!)<br />
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I was giving a talk about strategy at the Governor's Utah Economic Summit a few weeks ago, and started by asking whether people had seen the movie, and if so, whether they thought the Oakland A's strategy --- essentially using innovative analysis to identify players whose contributions to on-field success were undervalued by the labor market --- was a success. The movie shows that the A's did, indeed, have a couple of very good seasons in the early 2000s, and so the audience mostly concluded that this was a successful strategy.<br />
<br />
But the great thing about this movie is that this is a strategy that failed. And I think understanding why can help businesspeople understand what strategy is, and what a good one looks like. <br />
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In my view, the Big Question of Strategy is this: How can a firm deliver long-run superior performance? How can we do what General Electric did in the 1980s and 1990s? Or what Apple has done over the past 10 years? <br />
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This is a hard problem because markets work against you. Turning short-run success into long-run advantage is difficult because rivals can so often just copy you. Or worse, take your ideas and improve upon them. <br />
<br />
This is exactly what happened to the Oakland A's. The team's ideas were amazingly good. The A's achieved their goals and topped their rivals. For about two years. But then... The rivals took note. They saw that the source of the A's success was in their front office and the people who analyzed the players. Rivals started to copy their methods, poach their talent, and generally compete for the same players that the A's had been after. And there was really nothing the A's could do about this. Their advantage quickly dissipated, and the team has been mostly medium-ish over the last few years. <br />
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The business world has dozens and dozens of examples of innovators, like the A's, who were unable to convert short-term success into long-run advantage. (Do you remember Myspace? Yahoo?) The moral of the story is this: A plan for long-run competitive advantage has to be built around things that rivals can't easily copy. The A's were likely doomed from the start, and that's why the Moneyball story fails as a strategy. <br />
<br />
To be clear, I'm not saying the A's made a mistake by pursuing this innovation; the team was clearly better off having a couple of great seasons than not having that success. But when you're presented with options about what direction to take your firm and your career, it's important to keep in mind the impact of future competition on your ability to sustain performance. And if you can get to places where competitors will have trouble following... those are the great strategies. (It's a bit easier said than done.)<br />
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More on the "management" side of things, upcoming...<br />
<br />Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-22238238749625583632012-04-24T14:24:00.000-06:002012-05-29T13:07:22.995-06:00Those Darn Socialists<div>
<span style="font-family: Georgia, 'Times New Roman', serif;">One of the basic insights of a typical microeconomics class is why price ceilings (and floors, for that matter) can be such a bad idea. I'm ramping up to teach our Executive MBA students this summer, so <a href="http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html" target="_blank">this article from Saturday's New York Times</a> caught my eye. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">Venezuela's populist leader Hugo Chavez --- concerned about keeping the poor happy in a country with severe income inequality and an upcoming election --- has pushed through mandatory price cuts on certain basic food staples. The idea is that if milk and juice costs less, then the poor will be better off. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">But of course the problem is that suppliers make decisions based on the price they will receive when selling goods and services in markets. And if that price falls, then suppliers react by making fewer investments, reallocating resources to more profitable markets, producing less, etc. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">To tie this back to a lines-on-a-chart supply and demand analysis, the mandatory price cut will move us down and to the left on the industry supply curve. And at the same time, lower prices will cause consumers to shift their demand toward these staple goods, moving down and to the right on the demand curve. At the government-mandated-low-price, the quantity of milk demanded by consumers will exceed the quantity of milk supplied by the market. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">"Excess demand" can seem like an abstract concept when presented in a lines-on-a-chart fashion to students, but it's not at all abstract for the people of Venezuela: According to the article, in March 42% of stores had no powdered milk. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">Imagine this: You have two young kids and you're going through milk like crazy. And... where you gonna get it? You have to visit probably two and sometimes three stores, just to feed your kids. This constant, time-wasting search for daily products is just not something we (usually) deal with here in the US... And you can thank the fact that prices are free to move to equate supply and demand. Think about that next time you hear a call for government regulation to stop "price-gouging" in the market for gasoline. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">And let's not even think about the ramifications of the Venezuelan toilet paper shortages. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">Yes, it's <b><i>socialism</i></b>, right here in the western hemisphere... Where is the Monroe Doctrine when you need it?</span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;"><br /></span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">But before we get on our high horse and lecture the rest of the world about the virtues of free markets and how competitive the US economy is, let's recall that we do the exact same thing here in the good ol' USA. <a href="http://www.nytimes.com/2012/04/24/us/supreme-court-declines-to-hear-rent-control-challenge.html" target="_blank">In today's New York Times,</a> there's a nice article about how the Supreme Court has refused to hear a challenge to New York's long-standing "rent stabilization" law. That's right, New York State is doing to rent what Chavez is doing to powdered milk, by restricting how quickly landlords can raise rents. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;"><br /></span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">So let's compare New York to Hugo Chavez, and hand out some Econ 101 grades: </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">New York State: We need to "prevent rent profiteering."</span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">Hugo Chavez: We need companies to "<span style="background-color: white; line-height: 22px; text-align: left;">make money in a rational way, that they don’t rob the people".</span></span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">Econ 101 Grades: F for both! The way to prevent "profiteering" and "robbing" is to make sure markets are competitive in the first place. </span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;">New York State: Regulations are "<span style="background-color: white; line-height: 22px; text-align: left;">a necessary response to a housing shortage".</span></span></div>
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<span style="font-family: Georgia, 'Times New Roman', serif;"><span style="background-color: white; line-height: 22px; text-align: left;">Hugo Chavez: "Companies </span><span style="background-color: white; line-height: 22px; text-align: left;">cause shortages on purpose, holding products off the market to push up prices." So again the price ceiling is a response to the shortage. </span></span></div>
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<span style="background-color: white; line-height: 22px; text-align: left;"><span style="font-family: Georgia, 'Times New Roman', serif;"><br /></span></span></div>
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<span style="background-color: white; line-height: 22px; text-align: left;"><span style="font-family: Georgia, 'Times New Roman', serif;">Econ 101 Grades: Double F again! Price ceilings aren't the remedy for shortages, they're the cause.</span></span></div>
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<span style="line-height: 22px;"><span style="font-family: Georgia, 'Times New Roman', serif;">Total GPA 0.00, for both. I'm concerned that neither Hugo Chavez or the New York State Legislature will be allowed to graduate....</span></span></div>
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<span style="font-family: georgia, 'times new roman', times, serif;"><span style="font-size: 15px; line-height: 22px;"><br /></span></span></div>Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-57146880572638252732012-04-19T20:05:00.000-06:002012-05-29T13:03:35.959-06:00Roadside MBAI've gotten a few e-mailed questions this week about the "Roadside MBA" project, so I thought I'd explain a bit more about what we're doing, and why.
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<br />
Mike Mazzeo and Paul Oyer are economists and strategy professors at Kellogg (Northwestern) and Stanford, respectively, and I helped hire both of them at Kellogg in the '90s. (Yes, they *do* owe all their successes to me. Paul especially.) Paul and I have written many articles together, and I've known Mike since we were both undergraduates at Stanford in the '80s.
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About two years ago, we were on the phone discussing economics-based strategy courses for MBA students, and were lamenting the fact that the typical Harvard Business School case study focuses on Procter and Gamble, or Ford Motor Company, or Microsoft, or Pepsi, or ... somebody big with billions or hundreds of millions in annual sales.
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<br />
One of us --- probably me, but I don't actually recall --- pointed out that owners and managers of small and medium-sized businesses might benefit from thinking through their problems using an "Economics-of-Strategy", principles-based approach... but that our profession doesn't always do a great job of encouraging this given that we produce a lot of "big-business" case studies. We all agreed that small business needs attention from economists interested in strategy.
<br />
<br />
So we decided to hit the road in search of stories that we could use to help translate MBA strategy frameworks for owners of small and medium-sized businesses.
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<br />
Our first trip was from Memphis to Omaha in August of 2010. We went from Denver to Oklahoma City in Winter 2011, Charlotte to Atlanta in Spring 2011, Missoula to Portland in Summer 2011, and as I type this I'm on a plane headed back to Salt Lake after a weeklong tour from Chicago to Cincinnati. We typically meet in City A, rent a car, stop in Cities B, C, D and E on consecutive days, visit 3-4 businesses per day, and fly to our respective homes out of City F. We have grown to like Holiday Inn Express quite a bit, although to date they have not offered us a sponsorship deal.
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<br />
(I'm sure by now you're trying to imagine what it's like to drive across America in a rental car with economists for the better part of a week. Really, it's not that bad. I mostly drive. Paul mostly navigates, and, yes, we get lost a lot. Mike sits in the back and interjects with humorous commentary on whatever argument Paul and I happen to be having. By far the worst part is Mike's continuing affection for the New York Yankees, and his constant updates on how many hits Derek Jeter has --- like I care. The winter trip was my favorite, for obvious reasons.)
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<br />
To date, we've visited 100+ small and medium-size businesses. We try to set a meeting with the owner or a general manager with significant operational and strategic oversight responsibility, and we usually start by just asking for the story of the business. From there, our visits usually turn in to a conversation in which the three of us ask questions about pricing, positioning, strategy, organization, succession, or other topics, depending on what strikes us as interesting. The people we've met are, without fail, creative and energetic, passionate and thoughtful, interesting and driven. It's been really fun, and we have learned so much.
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<br />
What exactly have we learned? And how can our catalog of examples, stories and mini-cases help other owners of small and medium-sized businesses? We're not telling the stories quite yet, because it's important to for us to get signoff from business owners before putting anything out there publicly. But we're in the process of cataloging, analyzing, and writing; we're hoping to get something interesting down on paper --- er, pdf --- soon.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com6tag:blogger.com,1999:blog-8637429028422263043.post-32602497692307486812012-04-15T16:46:00.001-06:002012-05-29T13:02:54.861-06:00Hitting the RoadGive me some room to warm up, so I don't strain a blogging muscle.<br />
<br />
I will be ending my term as Associate Dean shortly (77 more days!), and I am looking forward to doing more of the things I became a professor to do... Teach, write, think, etc. Part of the "write" plan is to restart this long-dormant blog. So, hopefully people are still interested in economics out there.<br />
<br />
I'm writing from Chicago, where I'm meeting some economist friends for another installment of the Roadside MBA. We're making a circuit from Chicago to Cincinnati this week, talking to small and medium sized businesses all along the way. There will probably be a book written sometime, but first I need to get back to the whole "write" thing. (See above). I'll post some notes as we go along this week to try to slowly ease my way back into actual thinking as opposed to being an administrator!Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com2tag:blogger.com,1999:blog-8637429028422263043.post-14605347395163340842010-03-31T21:10:00.000-06:002010-03-31T21:46:39.872-06:00Insurance and Redistribution of WealthI don't usually read the comments of the SLTrib when I write something for them or when I'm quoted there. I did see one comment on my article from a few months ago that I wanted to touch upon. The comment had something to do with how the current health reform plan was all about redistribution of wealth, and questioned whether that was a good idea.
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Before I get into this, let me say first that economists don't have a lot to say about income redistribution generally. Economics doesn't offer much guidance on whether taxing the rich to help the poor is a good idea or a bad idea. Different societies make different decisions on how much redistribution to do, and that's usually accomplished through the ballot box.
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But there is one important sense in which any sort of insurance is a wealth-redistribution plan. And it's a form of weath redistribution that, for the most part, people engage in willingly.
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Insurance redistributes wealth from the lucky to the unlucky.
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How does this work? Think about your homeowner's insurance. If your house burns down, that's unlucky. But if you have homeowners' insurance, the insurance company is going to pay a big part of the replacement cost. Wealth has been redistributed (from somewhere) to you. And where does that wealth come from? People usually figure it's coming from an insurance company. And this is right, sort of, except for the fact that corporations are just legal shells that allow people to transact. The corporation's wealth has to come from somewhere. So where does the wealth come from?
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Now think what happens if your house doesn't burn down. That's lucky, right?. But you still had to pay your insurance premium. And it's the premiums from the lucky that are transferred to the unlucky.
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It's wealth redistribution, pure and simple.
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So why do the lucky put up with it? Wouldn't they be better off refusing to subsidize the unlucky? Well, yes, and that's why we don't allow people to decide whether to buy insurance after they know whether they're lucky or unlucky. You can't go to Allstate and say "Hey, my house burned down last night. So how about a buy a policy that covered me starting yesterday?"Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com8tag:blogger.com,1999:blog-8637429028422263043.post-73238221228758596732010-03-24T11:58:00.002-06:002010-03-24T12:15:38.148-06:00Lawyers: Who Got Laid Off?I don't usually publicize my working papers. Prefer to wait until they're published so I'm (reasonably) certain that all the kinks are worked out.
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But if others are going to publicize for me, I guess I should at least link to it. Paul Oyer and I have a new working paper on which lawyers lost their jobs at the top 300 law firms during the recent recession. Here are three blog links to it:
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<a href="http://legaltimes.typepad.com/blt/2010/03/patterns-emerge-from-lawyer-layoffs.html">Blog of the Legal Times</a>
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<a href="http://abovethelaw.com/2010/03/layoff-patterns-was-there-a-method-to-the-madness/">Above the Law</a>
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<a href="http://www.businessinsider.com/when-it-comes-to-lay-offs-youth-and-a-fancy-law-degree-wont-save-you-2010-3">Business Insider</a>
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I'm happy people found the study interesting, but the authors of these posts didn't summarize entirely right. A couple of quibbles/clarifications: First, it's not at all the case that people at fancy law schools are worse off than those who went to lower-ranked schools. You're much more likely to end up working for a big, fancy law firm making a lot of money if you go to a top school. (And Paul and I have another working paper that showing that.) It's just that conditional on making it to a big, fancy firm, it seems you were a bit more likely to get laid off (at least early in your career).
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Second, it's not the case that hiring networks are associated with the likelihood of being laid off, just the likelihood of turnover.
That is, an associate is less likely to leave a job voluntarily if there are partners from the same school at the firm. But an associate is no less likely to be laid off when there are partners from the same school.
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We don't exactly know why the patterns in lawyer firings look like they do, but we're working on some models that might explain it.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com0tag:blogger.com,1999:blog-8637429028422263043.post-13250785786494548142010-03-07T18:21:00.000-07:002010-03-07T18:58:55.715-07:00Another Reason to be Bullish on Utah<a href="http://www.thedailybeast.com/blogs-and-stories/2010-03-05/state-employment-rankings/full/">Check the map about halfway down the page....</a>
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Utah's projected employment growth through 2018 is 27.8%, second in the nation to Nevada. The <a href="http://www.nps.gov/grba/planyourvisit/images/GB-Definition-Map.jpg">Great Basin</a> is the place to be for sure.
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As an aside, I have no idea how The Daily Beast is coming up with these "rankings." Utah is 12th, but if you compare to #11 New Mexico, you'll see we had stronger 2006-09 job growth, lower current unemployment, stronger projected employment growth and higher median salaries. Since we top NM on all four of the reported dimensions of the ranking, it's hard to see how we're ranked lower overall.
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Are they giving extra points based on a state's overall level of "Enchantment"?
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(And if so, I would put two feet of Alta powder up against a chile ristra on the enchant-o-meter any day.)Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com4tag:blogger.com,1999:blog-8637429028422263043.post-36328567093883604022010-03-06T20:05:00.001-07:002010-03-06T20:17:43.030-07:00Does Capital Punishment Work?Does capital punishment deter potential murderers? Or are people simply not thinking about the consequences when they commit homicide?
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New evidence came to my mailbox last week in the form of the lead article (by Franklin Zimring (Berkeley), Jeffrey Fagan (Columbia) and David Johnson (Hawaii)) in this month's Journal of Empirical Legal Studies.
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(You can <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1436993">download a working-paper version of the article here.</a> )
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The paper looks at differences in the homicide rates in Hong Kong and Singapore between 1973 and 2008. Notably, Hong Kong had very few executions over this period (and made capital punishment illegal in 1993). Singapore, on the other hand, went from 2-3 executions per year in the 1980s to 21 in 1992 and 76 in 1994, before dropping back down to 17 in 2003 and just 2 in 2007.
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This setting is a good one (but of course not perfect) for testing the deterrence effect of capital punishment. Hong Kong and Singapore are similar (though not identical) in terms of demographics and ethnicity. Both are small, urban enclaves with a British colonial history. Both had rapidly growing capitalist economies over this period.
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If capital punishment deters homicide, then we might expect rates of homicide in Singapore to fall (relative to those in Hong Kong) around the time that Singapore became so execution-happy.
So what do the data say? Homicide rates were slowly falling in both Hong Kong and Singapore throughout the entire sample period. But there's no noticeable reduction in Singapore homicide rates (relative to Hong Kong) at the time that Singapore starting executing a lot of people in the early 90s. Nor is there an increase in the Singapore homicide rate (again relative to Hong Kong) around when Singapore stopped executing folks so much around 2005.
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So what does it all mean? It's pretty hard (though not impossible) to reconcile this evidence with the view that capital punishment deters homicide. Proponents of the deterrent effect will need a story for why the Singapore murder rate didn't follow a very different pattern from the Hong Kong rate, given the very different patterns in capital punishment rates.Scott Schaeferhttp://www.blogger.com/profile/01287867499714637779noreply@blogger.com1