More recent posts

Follow these links for more recent posts on 

1. 5 Forces
2. Aligning Interests
3. All or Nothing
4. Big Data 
5. Costs
6. Org Design
7. Rational Actor Paradigm
8. Simple Pricing
9. Social Responsibility
10. Strategy
11. Vertical Integration
12. WFH
13. Writing Well

Use A/B testing to learn about your consumers

A review of two books touts the benefits of A/B testing (WSJ, March 2020). The focus of the books is on the best way to design the consumer's online experience. A/B testing can also be used to test product features and pricing.

The Demand for E-Cigarettes is Elastic

"We then calculate an e-cigarette own-price elasticity of -2.6 and a positive cross-price elasticity of demand between e-cigarettes and traditional cigarettes of 1.1, suggesting that e-cigarettes and traditional cigarettes are economic substitutes" (Cotti, Chad D. and Courtemanche, Charles and Maclean, Catherine and Nesson, Erik and Pesko, Michael and Tefft, Nathan, The Effects of E-Cigarette Taxes on E-Cigarette Prices and Tobacco Product Sales: Evidence from Retail Panel Data (January 2020). NBER Working Paper No. w26724. Available at SSRN: https://ssrn.com/abstract=3535316). 

Two questions.

1. If the government increases the tax on e-cigarettes by $1, what happens to the optimal price and unit sales?
2. Given your answer to (1) and presuming that the price of traditional cigarettes remains constant, what happens to unit sales of traditional cigarettes?
3. What is the quick estimate of the price elasticity facing an individual seller if the market contains 4 sellers? "We calculate a Herfindahl–Hirschman Index of 0.251 for e-cigarette retail purchases".

Mattel Commits the Fixed-Cost Fallacy

Mattel increased price for products produced at a plant when transferring one product at the plant increased the average fixed cost for the products that remained (WSJ, Jan. 2020).