Raise price on a good when it stops being a complement

The WSJ (Dec. 2019) discusses the increase in concert tickets. "As piracy decimated recorded music sales starting in the early 2000s, artists began to rely on touring, ever more so in the past decade."

Using AI to Screen Job Applications

The WSJ (Dec. 2019) describes how employers are using AI to screen applicants and offers advice. Some money quotes follow.

• "Spice up your résumé with specific on-the-job results, use meaningful job titles and tailor your choice of words to match companies’ requirements.
• "Rock Brouwer has hired many candidates ZipRecruiter has brought to his attention. 'When I get one of those, it just makes my day,' says Mr. Brouwer
• "About 60% of employers admit such tools cause them to miss some qualified candidates,
• "Most vendors refuse to tell employers how their algorithms work. And most employers lack deep, accurate performance data.
  The systems risk magnifying managers’ prejudices if those biases are reflected in the makeup of the employer’s current workforce
  ... High performers may share traits that have nothing to do with job performance, skewing outcomes." 
• "Even if employers and vendors aren’t trying to reject female or minority applicants, they still risk doing so if they train algorithms on data gleaned from a current workforce that lacks diversity." 

A new strategy, an extension of current strategy, or no strategy?

IHOP is opening a chain of fast casual restaurants (CNN, Dec. 2019). Is the decision an extension of the activities on which they currently focus, a decision to alter the activities on which they focus, or a failure to say no? How about adding burgers to the menu?

"For IHOP, new restaurants like Flip'd are part of a three-pronged growth plan. The chain is also targeting off-premise dining and promoting its non-breakfast food items — like burgers — to draw more customers into stores."

Moral Hazard in Organ Transplants

This essay describes a moral hazard problem in organ transplants. 

"Transplant programs are not evaluated by regulatory agencies to determine how well they use the organ donors available to them. Instead, they are judged primarily on how many of the patients they transplant are alive one year after surgery—an important but limited metric. The emphasis on one-year survival makes transplant programs overly cautious, letting viable organs go unused instead of using organs that they fear might harm their report card."

The essay includes an example. A surgery team turned down lungs that were good but not great matches for Patient A because another Patient B who had received a transplant had recently died. Patient A subsequently died while waiting for a match.

The emphasis on survival rates also reduces the propensity of doctors to transplant organs into patients who are likely to die within a year; e.g., patients who are old and weak and patients who suffer from other life-threatening diseases. 

Words v. action

In a commentary published by the WSJ (Dec. 2019), two researchers present evidence that "Business Roundtable signatories aren’t leaders in socially conscious environmental, social or governance practices or stakeholder orientation." 

Their conclusion: 

"The charitable explanation is that signatories are signaling their intent to change their ways. But there is no obvious way to test those intentions. As of now, signatories don’t walk the walk. Keep a close eye on whether that changes."

The RAP and PG&E: The battle of initialisms

This commentary in the WSJ (Nov. 2019) describes how the incentives PG&E faces => rolling blackouts instead of investments designed to reduce the risk of fire. 

Kodak's failed attempt to decentralize

The post and link describe Kodak's struggle to increase innovation. Some of the blame falls on a decentralized decisions not coupled with strong incentives.

This article in the WSJ (Nov. 2019) illustrates the importance of focus. Trying to do everything => do nothing well. It also illustrates that entry => lower profits.

Will AI => Centralization?

This article in the WSJ (Nov. 2019) discusses the role that AI may have in increasing or decreasing centralization.

Is this Use of AI great or scary?

The WSJ reports that Google has teamed with Ascension to analyse personal health data for millions of people across 21 states without obtaining consent or even informing the patients. The (partial) goal is noble: "Google in this case is using the data, in part, to design new software, underpinned by advanced artificial intelligence and machine learning, that zeroes in on individual patients to suggest changes to their care." The report also states that "the Health Insurance Portability and Accountability Act of 1996, generally allows hospitals to share data with business partners without telling patients, as long as the information is used 'only to help the covered entity carry out its health care functions.'” 

How Google auctions ads

A link to a nice video.

Take a peek under Google's hood

This article in the WSJ describes how Google built its "ad machine". 

Buzz words or reality at McDonald's

The WSJ reports (Nov. 2019) that the new CEO at McDonald's is now responsible for implementing the strategy he helped craft. "[E]xecutives say [the strategy] will provide a competitive advantage over time."  The article mentions that CEOs usually have operational experience. Here are two questions.

1. Does the article describe the activities on which McDonald's will focus to create a competitive advantage?
2. Could lack of operational experience increase the ability to craft a strategy?

Will economies of scope drive more mergers in the automobile industry?

The WSJ reports that the goal of the proposed merger of Fiat Chrysler and Peugeot is to increase profit. My question is, why would the merger => more profit. I see two alternatives. One way that a merger might increase profit is the merger's impact on the 5-forces. The combined market share of the two firms might gives them more bargaining power over buyers and sellers; it could reduce rivalry within the industry and it could make entry more difficult. The second way that a merger might increase profit is because the larger firm is able to take advantage of economies of scope. The article reports some evidence that economies of scope may be important.

"But Sergio Marchionne, the legendary Fiat Chrysler chief who died last year, was a persistent advocate for deeper consolidation. He drafted a 25-page manifesto in 2015 imploring the industry to share the costs of developing parts most customers never notice, such as engines in small cars.

“'It’s duplicative, does not deliver real value to consumers and is pure economic waste," the report said."

The previous mega-merger that was supposed to herald major changes in the structure of the industry was between Daimler and Chrysler two decades ago. That merger did not end well. 

Hart and Holmstrom on aligning interests (and employment decisions)

1. This (re)post contains an excellent summary of what two Nobel laureates say about the best way to align interests of owners and employees. It contains a link to a more detailed summary in MRUniversity that is also excellent. The Nobel laureates are Oliver Hart and Bengt Holmstrom. Here are the basic elements.
2. The premise is that supervisors want to hire employees who work hard and reward them for doing so.
3. Output of an employee depends on how hard the employee works and luck. For example, a salesperson may have a great year when she works hard or when she is lazy and lucky. She can have a bad year even when she works hard because she is unlucky. 
4. Supervisors can observe signals of how hard the employee works. A signal contains information and noise. For example, output may be a signal. When output is a signal the supervisor knows that, on average, salespeople with high output work hard. The supervisor also knows that an individual salesperson may be lazy and have high output because she is lucky.  
5. The best compensation scheme uses all of the signals available to the supervisor to determine the reward to a worker.
6. The best compensation scheme places more weight on the signals that have the least noise. As noise decreases, the signal becomes more reliable. For example, suppose that output depends only on how hard someone works and that luck plays no role. In this case, the supervisor should measure output and use it and it alone to determine the reward. 
7. The best compensation scheme compensates risk averse employees with a higher base salary.
8. The best compensation scheme uses relative performance metrics ("tournaments", rankings) when employees have similar abilities.
9. The best compensation scheme uses absolute performance metrics when employees do not have similar abilities.

The post critiques compensation schemes that reward CEOs when the firm's stock does well because much variation is noise. Changes in the stock market affect the price of all stocks. Therefore, rewarding the CEO for appreciation often is a reward for being lucky, that is, being the CEO during a bull market. 

A better signal is the difference in return on the stock market between the firm and its competitors. This difference is more closely tied to what the CEO does and less affected by noise created by bulls and bears. In other words, a tournament may be best for CEOs.

Here is a key takeaway. When designing a compensation scheme, think about what you want to reward and what you can measure that is a signal. Identify the strongest, least noisy signal and put more weight on it in the compensation scheme. Daryl Morey spend years refining how to measure expected productivity of basketball players. He discovered that points per minute is a better signal than points per game and that points per possession is even better. Even then, noise beset him. He passed on drafting one player because a photo of the player without a shirt revealed man boobs and another player whose statistics were low because the player hated his college coach. 

Here is my final thought. Much of the analysis applies to measuring qualities of employees to hire. Think about the qualities you seek in the applicant and what you can measure that is a signal. Identify the strongest, least noisy signal and put more weight on it in the selection process.

Are strategic plans worthless?

Think about the strategic plan at your organization.

1. Does the organization publish the plan in a document?
2. Do most of the "workers respond to the plan by nodding and smiling in public while sighing and rolling their eyes in private"?
3. Does it begin "with an anodyne statement of principles, lists several general goals, and finally recounts a series of initiatives that the institution will undertake to realize these objectives"?
4. Does it state "that the company 'seeks to be a leader'”?
5. Does it set “stretch” targets?
6. Does it clearly identify where the activities on which the firm will focus and which it will avoid?
7. Does the plan align with the organization's budget?
8. If the plan and the budget diverge, which is a better guide to the firm's priorities?

This opinion in the WSJ (Oct. 2019) criticizes what many organizations call a strategic plan. The critique resonates with me. Many strategic plans are not plans and even fewer are strategies, imo.

One relevant comment to the post follows.

"It is axiomatic: an organization's "strategy" is where it spends its money. The corollary is: since every organization spends money, every organization has a strategy. Not every organization has a PLAN on how to spend money. A company that has no plan for spending invites (and usually gets) chaos, dissension, and sub-optimal returns on spending and investment. Some run out of cash. Others run out of customers.

"I've been involved in strategic planning for 40 years. Like all management pursuits, its been wasteful, enormously helpful and everything in between. It is vastly under-rated, and under-used, as a communication tool in large complex organizations. Good planning works when it helps focus choices and resource use. When you shoot at every leaf that moves, you run out of ammo. Fast.

"That people have been subjected to lousy processes isn't an indictment of planning; it's an indictment of, well, lousy process."

Versioning, bundling both of the same good and with complementary goods, and two-part pricing

This story reports that the SF 49ers have bundled season tickets (a bundle of single-game tickets) and unlimited food and beverages. This package combines versioning, bundling both of the same good and with complementary goods, and two-part pricing.

Can you trust what a job applicant reports?

A recent study reports that a substantial number of CVs embellish the accomplishments of the candidate. Verifying information is costly and many employers probably accept what is written without question.

FYI: CV = Curriculum Vitae, sort of a résumé for people seeking teaching or research jobs.

Facebook could increase profit by using price discrimination

This paper explores how Facebook could profitably employ price discrimination. "We find that a profit maximizing platform should decrease fees or advertising for users who elastically demand the platform (the direct effect) and who create high amounts of network value for other profitable users who themselves demand the platform elastically(the network effect). ... Facebook could increase profits by decreasing the amount of advertising on some market segments and increasing it for others.|

In this opinion in the WSJ (Oct. 2019), Andy Kessler discusses the role of technology in creating a competitive advantage and strategy.

Writing Well is Difficult

This article in the WSJ (Oct. 2019) describes the problems the SEC is having getting financial advisers to write well.

My reaction: Gut Instinct is Information

I stress the importance of gathering information to improve the information flow to deciders. This article in the WSJ (Oct. 2019) cautions against relying solely on data analytics when making decisions. 

An example of using the power of the government to raise barriers to entry

Why would Kentucky have a law that lets incumbent firms stifle entry into the ambulance industry? One answer: to help the incumbents earn profit in the long run.

Can the five forces model help you in the stock market?

Andy Kessler's advice sounds like an argument for using industry analysis to find where the grass is probably greener.

Why are prices for prescription drugs so high?

ReadClear Policy (Oct. 2019) describes the role of and incentives facing pharmacy benefit managers, or PBMs. Spoiler alert: the incentives encourage the managers to negotiate for higher prices.

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Does Goldman have a strategy?

The WSJ (Sept. 2019) reports the trouble Goldman Sachs is having adding consumer banking to its previous core businesses of trading and deal making. Questions arise.

1. To what did GS say"NO" previously?
2. To what does GS say "NO" now?
3. Are the activities on which to focus for trading and deal making the same activities on which to focus for consumer banking?

The Secret Life of Regional Airlines

The Secret Life of Regional Airlines By Jon Sindreu | September 12, 2019

Summary: Although the airline industry is dominated by a relatively small number of large firms, such as Delta Air Lines and American Airlines, 65 little-known regional carriers account for 40 percent of all passengers. Recently, some of the smaller airlines have been acquired by larger airlines, which have increasingly taken over small-jet fleets that they lease to their regional partners. One result of this is that more passengers are being shifted to the preferred hubs of the large airlines and away from smaller airports. Classroom Application: The airline industry has an oligopoly market structure in which a relatively small number of firms account for a relatively large share of passenger ticket sales. Unlike a competitive market in which many firms have little or no power to set the prices of the products they sell, each oligopolist has enough power to increase or decrease its own prices. But other firms in the industry are likely to react to such price changes. As a result, there may be price competition in some oligopoly markets, but little in others where firms fear the impact a price war would have on their revenue and profits. Questions: Oligopoly markets have entry barriers that make it difficult, but not impossible, for new firms to enter the market to compete with existing firms. Name an entry barrier that would make it difficult for a new firm to enter the airline industry. The article mentions that the airline industry was subject to government regulation prior to 1978. This regulation limited the prices airlines charged for passenger tickets. How can airlines compete with each other when price competition is limited by regulation? Since 1978, an airline has been able to charge different prices than another airline that flies the same route. On what type of route would price competition be most likely? On what type of route would price competition be less likely? A typical airline flight has relatively high fixed costs and very low marginal costs. Explain why the fixed cost of a flight from New York City to San Francisco is high. Explain why the marginal cost of this flight is low. The article mentioned that a regional carrier, Mesa Airlines, “…returned to the stock market last year following a 2010 bankruptcy.” How would declaring bankruptcy assist Mesa Airlines’ return to the stock market? From the article: “Mesa [Airlines] stock trades at 4.3 times earnings, less than half the average of the industry.” What does trading “at 4.3 times earnings” mean? Would investors be more or less likely to purchase shares of Mesa stock because it trades at “less than half of the average of the industry”? Explain briefly. “Economists have long found that market power tends to reside in the party that controls capital expenditure…” To what type of capital expenditure does this refer? The article mentions that many planes that have 50 seats are becoming older and suggests that United and other major airlines would like to replace these with larger planes that have as many as 90 seats. Why would the airlines prefer to fly planes with more seats? Why would airline workers’ unions be reluctant to agree with this proposal? “Both SkyWest’s and Mesa’s operating profit margins now surpass those of all major U.S. airlines…” How were two small, regional airlines able to have profit margins greater than the operating margins of each of the larger airlines?

Planet Money talks about "doing good"

This excerpt from a Planet Money newsletter (Sept. 2019) describes two studies that examine the impact of and reasons for corporations acting in socially responsibly ways.  
Two key findings are:

1. "[W]hen a company says it's dedicated to helping disadvantaged children, they can pay much less and get much more."
2. "[C]orporations use their charitable giving in politically strategic ways, giving more money to influential congressional districts when it suits their purposes. [The authors] call it 'tax-exempt lobbying.'"

John List, a coauther of one of the papers, offers three conclusions.

1. "[R]easons [exist] to be cynical about corporate social responsibility." 
2. "[Y]es, [the] research shows that 'people generally want to do good.' 
3. [T]his includes those corporate executives who signed that statement saying their companies are about more than just profits." 
4. "[T]he real reason for their recent statement, like other efforts to paint themselves as a force for social good, comes down to dollars and cents."

What Changed?

This WSJ article (Sept. 2019) reports that Boeing has changed its organizational chart in response to the crashes of its 737 MAX. Here are my questions.

1. Did the change move decision rights?
2. Did the change affect information flows?
3. Did the change affect incentives?
4. Did the change affect the extent to which the company is centralized?
5. Did the change alter the extent to which the firm is organized around functions or products?

Students offer $100 to other students to drop classes

This article in the Daily Californian reports that students on a wait list for a course have offered $100 to registered students to withdraw. Question: would accepting the offer move resources from low-value uses to high-value uses?

LSE swats away $37 billion

Market watch reports (Sept, 2019) that the London Stock Exchange swats away $37 billion Hong Kong offer. I have several questions.

1. Who decided to sway away the offer?
2. Do the deciders benefit when they swat away the offer?
3. Do the shareholders benefit when the deciders swat away the offer valued at $37 billion when the company's current value is $31.4 billion?
1. Does your answer depend on the costs the firm incurs to accept the offer and the probability regulatory agencies stop it?
2. Does your answer depend on probability that the offer spurs additional offers for other suitors?
4. What is the best way to measure the value of the HKEX stock that makes up 3/4 of the offer: the price buyers and sellers strike in open competition or the opinion of the deciders.  

Expensive popcorn in movie theaters = indirect price discrimination.

This article from the Hustle (Sept. 2019) describes pricing in movie theaters. Some key points.

1. The commission theaters must pay on revenues from ticket sales reduces the incentive to increase the price of a ticket.
2. "This strategy of selling a primary good at cost (or at a loss) and making the bulk of profit on a complementary good (like popcorn) is a form of the widely employed razor and blades business model. Microsoft, for instance, will sell its Xbox consoles at a steep loss to get people to buy them, then make healthy returns on games and accessories."
3. "Gil, along with a colleague from Stanford, analyzed 5 years’ worth of revenue data from a major movie chain and found a different motivation for expensive popcorn: Theaters use it as a way to price discriminate, or charge customers varying prices for the same experience (in this case, seeing a movie)."

Why do people who graduate from college earn more than people who do not?

Real Clear Books interviews an economist who thinks that college serves as a signal but does little to increase productivity

When Netflix sharpened its strategy

This account in the WSJ (Sept. 2019) describes when Amazon almost acquired Netflix. The result is that Netflix said no to selling DVDs.

Hints on how to a good proposal

Writing Proposals Well