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2009-07-27T22:34:00.000-05:00

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Advertising Bias

2007-05-09T03:01:00.000-05:00

I just read this article about the pros and cons of individualistic advertising versus demographic/profile advertising on the internet. I thought it was going to be about the ways in which companies use data gathered, and how intrusive they are. It was, kind of, but it had a lot of economics (price discrimination, etc) and though someone might be interested. The article can be found here.

Sony’s Advertising Drive

2007-04-11T21:35:00.000-05:00

Sony has launched a new 20 million dollar advertising campaign. The campaign emphasizes the easy-to-use, high-tech features of Sony’s camcorders and digital cameras. Sony’s new campaign comes in the wake of a series of ad agency changes. They hope that their new campaign will “show the public that Sony is making the same kind of technological advances in high-definition as, say, Apple is making in music.”

Sony’s new devotion to advertising is a response to the competition they have experienced from companies such as Samsung. According to David Martin, United States president of Interbrand in New York, says Sony has dropped from 18th in 2000 to 26th in his company’s annual brand rankings. To remedy this recent drop, Sony plans to play up its new technology and use humorous ads to make the brand feel more accessible. Sony is confident about this new campaign will be successful because their consumer research showed that consumers had great passion for Sony but that the brand was not making an emotional connection. Mr. Martin, however, is less sure of its success. He contends that traditional advertising has become less effective in the consumer electronics sector because people are paying more attention to objective product reviews. It seems that Sony’s advertising will only be effective if their products meet the new expectations they are setting.

http://www.nytimes.com/2007/04/10/business/media/10adco.html?_r=1&ref=media&oref=slogin

Advertising gone too far?

2007-04-11T14:18:00.000-05:00

Corporations have long been searching out new places to post advertisements. It started with television, radio, billboards and publications but today ads are everywhere. The average consumer faces 5,000 ads per day! Many economists believe this competitive "pushing" of ads has led to huge advertising waste. The consumer has been desensitized to many forms of advertisements, forcing advertising execs to change their tactics.

This extreme competition for consumer attention may have forced corporations to go a bit too far with advertisements. CBS has begun stamping advertisements for it's TV shows on eggs sold in supermarkets. This is crazyness. Or maybe not. We'll have to see the effects of this new bold egg-stamping advertisement campaign.

One thing is for sure, getting the product name to the public is extremely important. With advertisements being placed everywhere for the sake of brand-name recognition maybe stamping eggs isn't such a bad idea. See video below.

There are several advertising experts that believe CBS's eggstamping will turn consumers against them, believing that consumers will view the advertisement as an invasion of personal privacy. The idea is to penetrate the monotonous buzz of advertisements competing to reach the consumer in a place when they may least expect it and in a place where they are not sifting through an onslaught of information. If consumers take liking to the idea I believe it will be very beneficial to CBS. We will just have to see.

Posted by Patrick Giesecke, Jonathan Sutton and Melissa Barry

Ridiculously long-lasting gum!

2007-04-11T13:12:00.000-05:00

Chocolate is the number one treat to give to trick-or-treaters. Gum is the third most popular Halloween treat according to National Confection Association. Sugarless gum sales grew 9.9%. NCA’s Susan Fussell proclaims “It’s a shining star right now”. On Halloween, the Cadbury Adams marketer handed out nearly 100 boxes of their new Stride gum, a sugarless gum Cadbury flaunts as having “ridiculously long-lasting flavor”.
Drew, executive Vice president in marketing explains that the number one complaint of gum chewers is that the flavor just doesn’t last long enough..”Stride was born out of that fact”. Stride is promoted with dry witty commercials by JWT, New York. Cleverly, the ads began on June 21 –the longest day of the year. The ads’ setting is basically in a workplace that looks like the set of the NBC comedy The Office. Drew admits “Rather than just saying our gum lasts longer, we almost created a sitcom!” We think that Stride producers used key elements to produce a successful advertising model; they aren’t too bold or too passive.
Younger consumers agree, according to results of Ad track, USA TODAY”s weekly poll. 22% of 18-24 year olds give the ads top ratings. Stride has built a 2.4% market share and helped increase Cadbury’s overall share to 31.6%, up three points. A contest on their website, www.stridegum.com, even invites everyone to come up with their own marketing to boost sales. They have the essential flavors like new sweet peppermint, winterblue, and spearmint. However, they do need to find more clever ways to promote their gum to fight competition like Orbit’s mint mojito flavored gum.

AIr Jordan: It's Gotta Be the Shoes!

2007-04-11T12:56:00.000-05:00

With a price tag nearing 200 dollars a pair, a Jordan to any teenage basketball fan is analogous to a Jimmy Choo or a Manolo Blahnik to a crazed woman. While there have been numerous shoes throughout the last 15-20 years that have been sponsored by particular athletes, Michael Jordan’s shoe is the only one that has stood the test of time.

Building value has been a critical factor in this peculiar phenomenon. The Air Jordan shoe line’s success and popularity were highly correlated with Michael Jordan’s personal on-court successes. Even years after Jordan’s retirement, NBA stars continue to wear Brand Jordan sneakers as they were so heavily influenced during their adolescence. Hoops fanatics are left thinking, “These shoes are worn by millionaire professional athletes, they must be the best out there!”

However, a factor more important that building value may be the advertising of Jordan commercials. From a recent article on the effectiveness of advertisements, it’s been shown that it is far more important to consider how people feel about a brand, than what ads can tell them about it. It’s critical to define a target audience, ensure people have empathy and emotional attachment, etc. Jordan commercials do just that. The commercials always feature inspiring quotes or basketball clips - tugging at the heartstrings of basketball fans, and generally promote how wearing a Jordan sneaker is not only about performance but also about status. The Jordan commercials have effectively transformed Brand Jordan into a status symbol amongst the urban hip hop community.

As people camp outside Foot Lockers the night before the release of a new Jordan sneaker, as parents shell out almost 200 dollars for a pair of shoes for their children, as Jordan sneakers have the Midas touch, the question of how a sneaker has become such a popular icon can only be answered by the statement: ITS GOTTA BE THE…advertising?

Posted by Chris Liu, Seon Hwang, Kristy Choi, Minsoo Park

Holla at yo Context, What?

2007-04-11T12:29:00.000-05:00

While advertising practices have changed in drastic ways in our modern history, no other market has experienced such rapid saturation and exposure than that of internet advertising. Since this “internet” thing became a big deal, the shear number of users world wide has had advertisers foaming at the mouth as they realized that low cost advertising was possible(as opposed to higher cost methods like newspaper ads, billboards or mailing solicitation) and that segmenting consumers into specific groups would be much easier to accomplish. While most traditional advertising is targeted at the general population, which is not desirable for advertisers, the ability to separate consumers into different preference groups allows for much more effective advertising. Take Nike shoes for example. While in the prehistoric days of the internet, an advertiser might put up a billboard in the side of road with the newest Nike basketball shoe. While some potential consumers may be affected by this ad, it is unlikely that my 90-year-old grandma will want to go buy the new kicks. Warping forward to the days of the internet, Nike could pay to have an ad of their new shoe appear whenever someone searched basketball equipment, sporting news or shoes on a search engine. It’s ah nice.

With internet advertising gaining momentum, one must look at the difference in advertising strategies. Pop-up ads serve as the scum of the industry as almost all users try to avoid them. Contextual advertising, however, serves as an efficient way to match consumers with producers based on the consumers’ interests. This strategy is currently being used by many internet companies as advertisements are selected and served by automated systems (i.e. within google or yahoo) based on the content displayed by the internet user. The future of internet advertising is unclear, but for now, contextual advertising seems to be a great fit for consumers and producers. I’m no economist, but I would have to say that this advertising increases social welfare as producers can be more appropriately matched with consumers, giving way to higher utility and less wasteful advertising. Thumbs up to you contextual advertising.

It's So Easy, Even ABC Could Do It

2007-04-11T06:41:00.000-05:00

In March, ABC confirmed suspicions that the characters from Geico’s popular Caveman Ads would be featured in a pilot for a prime time comedy spot on ABC. The move, which marks a modern blurring between advertising and entertainment, seems primarily a marketing response to technology that allows viewers to skip their TV ads, as well as a desperate attempt for ABC to produce a successful sitcom.

The history of ad to TV characters is mixed. CBS’ 2002 attempt to create a “Baby Bob” show after the successful ads for a successful Internet failed. But The California Raisins, who originated from ads for the California Raisin Advisory Board, became a 1980s pop-culture hit and had a cartoon series on CBS.

According to the Wall Street Journal, a major explanation for the widespread popularity of the ads is Geico’s large advertising budget – it evidently spent about $403m on ad time and space in 2005. The ads are clearly more in the “building value” than “extending reach” category – they mainly serve to increase name recognition of Geico through the “Geico: so easy a caveman could do it” slogan, as well as to associate the company with the somewhat cerebral comedy and irony of the caveman as urbane sophisticate.

Geico’s caveman characters and lexicon are now ingrained in popular culture. WSJ reports, “fans at college sporting events have been known to hold up signs that say ‘Beating (team name) is so easy, even a caveman can do it.’” A line from one of the original ads, where the cavemen are taken to dinner by ad executives to apologize for the offensive ad, is now widely recognizable - “I’ll have the roast duck, with the mango salsa.”

-Katie, Helen, JungIn, Pam

Chivas Regal Gets a Makeover:

2007-04-11T00:08:00.000-05:00

Chivas Regal, the high-end Scotch whisky had many years of success since its inception in 1801, but began declining during the 80’s and 90’s until a Frenchman by the name of Christian Porta acquired the brand in 2000 from Seagram for 2 billion (pounds).

During the 1960’s and 1970’s, Chivas Regal had such a powerful presence in the market that people would ask for a “Chivas on the rocks”, instead of a “Scotch on the rocks.” But after these decades, Chivas’ image started to falter and lost market share to its main competitor Johnnie Walker Black Label, owned by Diageo. In 2003, Mr. Porta made small, subtle changes to the packaging and went into an aggressive 45 million (Euro) advertising campaign in which Chivas used its new catch line, "This is the Chivas Life". These commercials featured scenarios such as: traveling without a destination in mind, sailing a yacht and ice-fishing in Alaska. The new commercials and catch line were obviously trying to target younger consumers with this more “extreme” kind of message to it, whilst trying to maintain its older customer base: "The objective of it is to attract younger people, rejuvenate the brand and increase Chivas's approachability” says Porta.

In 2003, Chivas Regal’s sales increased by 7%. Although this number isn’t significantly large, it is a great improvement over the 1% - 3% sales drop per year that began during the mid-1990s. “The early signs show that with the new campaign and the new packaging we have reversed its decline". The image decay and then subsequent sales slump, seemed to come from neglect by Seagram, probably due to the fact that they must focus on many products and not just Chivas. What this brand needed was exactly what it got, a single non-corporative owner, with new ideas that could meticulously buff-up Chivas’ image and give it new life.

Adam, Amy, Braden and Fabio

Battle of the Beer Brands

2007-04-10T19:44:00.000-05:00

Comparative advertising, where brands selling nearly homogenous products compare their product to that of another company, is increasingly used as a tool to gain market power within the industry. In 2005, Miller Lite, launched adverts attacking Bud Light, a brand produced by the Anheuser-Busch Brewing Company. Over the Memorial Day holiday the year before, Miller suffered as a result of price cuts undertaken by Anheuser Busch and Molson Coors.

In an attempt to revive itself, Miller executed an advertising campaign, titled “The Truth Hurts,” which directly attacked Bud Light, urging drinkers to switch to Miller Lite, claiming that it has more taste. Because beer is considered an “experience good,” quality is not perceived until one actually tries the beer. However, consumers are likely to be more responsive to advertising for these experience goods, because it provides an inexpensive way to learn about the good. Because the elasticity with the respect to advertising is likely to be high for beer, a large advertising expenditure undertaken by Miller is worthwhile. With the increased advertising effort, Miller gained 0.1 percent market share during the Memorial Day period compared with the year before, despite increased prices. It is likely that Miller gained market power, which concurred with its increase in advertising. Thus, in industries with a high responsiveness of sales to advertising will have high advertising intensity and inevitably high market power.

http://milwaukee.bizjournals.com/milwaukee/stories/2005/06/13/daily34.html

http://query.nytimes.com/gst/fullpage.html?res=940DE2DA153AF931A1575AC0A96E948260

Posted by Jessica Halper, Michael Ledwith, Jake Carter-Lovejoy and Drew Muir

XM + Sirius = Xirius?

2007-04-08T11:43:00.000-05:00

By HoosAdvantage: Kara Ivy Goldberg, Thomas K.M. Li, Wei (Grace) Song, , Cheung Fai Yeung

The potential future marriage of Sirius and XM would bring together the nation’s only two satellite radio services and this proposed horizontal merger has ignited heavy debate on either side of the issue. However, a union between the two competing firms must first gain approval from the Federal Communications Commission (FCC) as well as the Justice Department. Much attention will be devoted to whether or not the deal violates antitrust laws and the company’s pricing structure will be a big focus of the Justice Department’s review. Both companies currently compete in Cournot equilibrium, and charge their subscribers $12.95 a month. When discussing the future of their merger, neither party would comment directly on whether the combined company would seek to raise prices.

With approximately 6 million subscribers, Sirius is most well known for being the home of shock jock Howard Stern, Martha Stewart, and National Football League games. By the end of last year, the larger XM service closed their books with about 7.6 million subscribers and it airs the popular Opie and Anthony show, Oprah Winfrey, Bob Dylan, and Major League Baseball Games.

Sirius Satellite Radio CEO Mel Karmazin and the XM chairman, Gary Parsons, presented analysts with one of their main arguments to support the merger. They argued that along with satellite radio, all forms of mobile entertainment - including digital music players like Apple’s iPod and music-playing cell phones - will comprise the true market that the future merged company will face.

Given the strong antitrust concerns, many analysts are doubtful that the deal will be approved by the Justice Department. FCC chairman, Kevin Martin, has expressed his strong support of the current FCC rules that prohibit a union between the two companies. In an interview, one antitrust lawyer called the chances of regulatory approval a ‘long shot.’ Furthermore, numerous sources in Washington have hinted that the chances of gaining approval for the deal by the first quarter of 2008 are less than 50 %.

The future of satellite radio is becoming the focus of much concern and the stakes are high. A horizontal merger between Sirius and XM runs the risk of hurting consumers with the possibility of a significant price increase for future subscribers. However, the battle to merge will be tough insomuch as terrestrial radio will fight to block it, Kevin Martin will fight to block it, digital music players will fight to block it. And logic should block it.

Source: http://money.cnn.com/2007/02/20/news/companies/xmsirius_reaction/index.htm?postversion=2007022010

Consolidation or Liquidation?

2007-04-04T15:54:00.000-05:00

Since deregulation in the 1970's, the airline industry has seen a shift towards a more competitive structure. The rise of low cost airlines such as AirTran, JetBlue, and Southwest has exacerbated downward pressure on prices and expanded access to many primary and secondary routes. This process has continued unabated to this day; see, for instance, the recent entry of AirTran and JetBlue into the Richmond, VA market at Richmond International Airport (RIC), a fact heavily advertised as part of their "Fly 8" campaign.

When combined with rising costs due to, among other things, increased fuel prices and high labor costs as well as reduced demand after September 11, it is not difficult to see the problems facing the traditional airline powers. Indeed, these problems resulted in $42 billion in losses for the industry over the past 5 years. This has led several carriers, including United and Delta, to declare bankruptcy in a final attempt to restructure themselves in this new environment.

Besides bankruptcy, another strategy that many in the industry are attempting to utilize in order to reduce competitive pressures and increase market power (and, consequently, prices) is mergers and acquisitions. In recent months, US Airways has made a bid for Delta while United has done likewise for Continental. Consolidation has become the main avenue through which airlines are attempting to regain profitability, given that the large losses facing most major carriers suggests an industry with unneeded supply.

Of course, increased prices for air transportation would not be beneficial to travelers, leading to much public debate about the merits of the proposed mergers. Antitrust regulators will be concerned about an excessive consolidation among the largest airlines, fearing the shift towards a more inefficient oligopic market structure with less service to many routes and high prices for said routes. Labor unions, already reeling from prior concessions to their beleaguered employers, will be reluctant to grant even more bargaining power to these post-merger companies.

In the end, the major airlines seem to be trapped in a perpetual cycle of discontent, plagued by a market environment devoid of profits and by a political environment less than conducive to what maybe the most direct way of handling the crisis; as such, the outlook is certainly bleak with respect to the potential for profitability in the airline industry any time in the near future.

Submitted by Caryl Huynh, Chris Coyle, Lance Wang, and Meghan Magennis

Xbox 360 Welcomes PS3 to the Next-Generation

2007-04-04T15:04:00.000-05:00

On March 23, the much talked-about Sony Playstation 3 hits shelves in Europe (and Australia). The well-publicized production delays caused Sony to initially limit the PS3 release to the US and Japan, forcing European gamers to wait until production scaled up to allow acceptable release unit availability. Already a year behind Microsoft's XBox 360 console in the US, the PS3 has an even greater gap to contend with in Europe now. Add that to the raised cost of the European PS3 (compared to its lower-priced US counterpart - apparently Sony is willing to subsidize European gamers quite as much), and Sony has quite an obstacle to overcome to catch up to Microsoft. Enter EU launch night, a hallowed event for gamers (and techies in general) everywhere, when prospective purchasers will camp outside of stores, waiting for the clock to strike midnight, to become one of the first to own the dazzling new system. Video game console companies use this as a way to drum up excitement, sometimes offering additional incentives to launch night buyers or throwing parties at select mega-stores. Following this vein (and possibly also in an effort to appease the jilted European gamers who were forced to wait extra long for their PS3), Sony threw such events at large stores in London, Paris, and other large cities. Some were given free 46" plasma HDTV's and a cab ride home (to prevent console-related violence), and others were treated to a retail "party" aboard a boat moored near the Eiffel tour (serving as a temporary electronics store). Obviously, Sony expected such perks and their resulting press coverage (read: free advertising) to help bolster PS3 sales, but what they didn't expect was a little competition at their own launch.

It might not surprise some that Microsoft, the Stalin of technology competitiveness, did not sit by idly and let Sony steal the spotlight. In a console launch season that has seen plenty of advertising controversy, from Sony's super creepy floating baby commercial to Nintendo's almost complete lack of advertising, it seems that nothing was off-limits, even sabotage. In an attempt to sway gamers and cash in on some free advertising of its own, Microsoft funded various pranks around some of Sony's higher profile events. In response to Sony's floating gala in Paris, Microsoft hired a boat and painted it with Xbox themes, including a large message in almost international wording: "XBOX 360 [HEART] YOU." This boat drove up and down the Seine River, circling Sony's boat to the accompaniment of overpowering whistles from the deck and nearby rooftops, drowning out Sony's own PR messaging. Microsoft also sent text messages to journalists across France, wishing them a good evening (of waiting around for nothing, presumably), courtesy of XBox 360.

In London, gamers waited as long as 36 hours in the notoriously miserable and cold London weather for their consoles, but Microsoft had something to say about this as well. Microsoft "good samaritans" wandered the crowd passing out free chairs with www.shkyw.org printed on them. While the ardent PS3 fans initially greeted these chairs with enthusiasm, mobile internet users in the crowd soon discovered their true meaning: Shouldn't Have Kept You Waiting, courtesy of Xbox 360. The URL sent users to a splash page sarcastically welcoming late-comer PS3 to the next-generation.

More hijinks were held elsewhere, including Microsoft sending a premier English video game news site £146 worth of Foster's beer - the price difference between the Xbox and PS3 - with a note saying "What would you purchase for £146...? Signed, Xbox 360." Such guerilla marketing techniques, while humorous, are also interesting because of their nature of direct attacks on competitor's products. Citing higher costs and longer waits, Microsoft hoped to steal Sony's launch thunder and garner its own free publicity (a move that is highly-yet-understandably anticompetitive from Microsoft). Additionally, rarely does one see such targeted ads, reaching out directly to consumers who are in the process of buying a competitors product. Wouldn't it be strange if you reached for a tube of Crest toothpaste and representatives from Colgate suddenly showed up to try to get you to second guess your purchase (or if the adjacent Colgate tube itself somehow tried to communicate to you!)? This level of advertising prank is usually not pulled off by large corporations, rather being more commonly relegated to college fraternities or media conglomerates, but in the current age where companies pay dearly to get you to notice them, maybe this will become more common. Microsoft obviously thought it was worth the expense to pull off these pranks, just as Sony must have thought it was worthwhile to fund their launch events, spending an estimated £250,000 on the TV/cab ride promotion alone (or maybe they were stuck in a prisoner's dilemma, both spending vast sums of money* with no sway of sales levels either way). Given how large the multi-billion-dollar video game industry has become, and seeing how opulent all events gaming are becoming, it seems that such strongly competitive advertising is only going to become more commonplace.

*It should be noted that Sony is somewhat of a groundbreaker in the expensive and innovative advertising field, with such cool campaigns as paying graffiti artists to create large murals for its Playstation Portable device in public hot spots. It seems that the more money is at stake, the more companies are willing to spend to innovate and get their brand our there.

Source (one of many possible): http://www.inform.kz/showarticle.php?lang=eng&id=149589

--Risto, Cheryl, Joe

Possible Marriage of the Chocolate Giant & the Candy Man

2007-04-04T14:53:00.000-05:00

On March 31, 2007, The Wall Street Journal reported on Hershey’s willingness to discuss a possible merger with its U.K competitor, the candy business of Cadbury Schweppes. Speculation of a future tie-up began shortly after Cadbury’s announcement that it plans to separate its candy and drink units, holding on to the candy side and more than likely selling its drink business to a private-equity firm. When questioned on the matter, LeRoy Zimmerman, chairman of Hershey Trust Co., told the newspaper that since “the board of the trust holds the majority voting rights” for the chocolate giant, it has a responsibility to listen to all potentially profitable future options.
Talk of a “Hershey-Cadbury candy combo” should not come as a surprise, considering that today’s “food makers are under increasing pressure to consolidate in order to boost their negotiating power with retailers.” Other likely beneficial reasons for a horizontal merger between these two complementary businesses involve cost reduction, a search for synergies in operation, and a more efficient pricing and/or improved service to customers. However, even though a joining of powers could be advantageous, there is a trade-off. Such a move would consolidate the marketplace position of the largest U.S. chocolate maker, Hershey, and the world’s largest confectionary unit, belonging to Cadbury, potentially producing something that could act like a legal cartel. Along the same detrimental lines, a merger could lead to plant closures and job losses due to the combination or movement of the two parties’ operations. (Fear of such events were actually the driving force behind the opposition from the Pennsylvania officials and community groups who forced Hershey to pull itself off the market just five years ago.)
Even though Zimmerman turned around and downplayed talk of a deal with Cadbury the very next day, he did discuss Hershey’s goals to cut costs, regain market share lost to archrival Mars Inc., and expand its global reach. Funny, these sound very similar to the goals that could possibly be accomplished by entering a horizontal merger with another powerhouse. In the end, even if the chocolate giant decides not to merge into marriage, it is speculated that the candy man will still pursue her!

http://money.cnn.com/2007/03/31/news/companies/hershey_cadbury/index.htm
http://money.cnn.com/2007/04/01/news/companies/hershey_nodeal.reut/index.htm

Bidding Wars Beyond the Scope of eBay

2007-04-04T14:28:00.000-05:00

With news of a possible merger between British bank Barclays and Netherlands’ largest bank, ABN Amro Holding, a frantic and deeply expensive bidding war has started amongst some of the most prominent banks in Europe. In a statement made by ABN officials, there has been “exclusive preliminary discussion with Barclays concerning a potential combination of the two organizations.” This merger, which would make the combined bank worth more than $166 billion dollars, has resulted in analysts predicting that Citigroup, HSBC, and the Royal Bank of Scotland and Santander will be prepared to make counteroffers to ABN within the weeks to come.

The two banking companies, although operating in the same industry, have relatively limited overlap in terms of geographical location. ABN would give Barclays a retail credit card presence as well as their business of financing acquisitions; and more importantly, the company would spread its influence beyond that of Europe - expanding into the lesser invested Asian and African markets.

With the recent successes of similar bank mergers between Bank of America/Fleet/MBNA, rumors of a possible merge have resulted in significant increases in stock values for ABN. The merger would produce extensive cost savings in terms of competitive advertising and marketing, while at the same time promoting widespread familiarity with the company name throughout Europe and Asia and increased corporate profits. Analysts have stated that the acquisition of ABN would essentially be a plus for any large European bank, so it all boils down to who’s willing to dump out the big bucks. If only ABN had a Buy-It-Now option, all of this unnecessarily scrupulous “economic analysis” could be avoided!

-Seon Hwang, Kristy Choi, Minsoo Park, Chris Liu

Internet Advertising: Following Your Every Move

2007-04-04T13:49:00.000-05:00

The pop-up blocker. This seemingly simple invention speaks volumes about the internet. Basically, you need a tool to prevent your browser from being bombarded with advertisements. So it shouldn't be too hard to see how firms view the internet: as a way to convince you to buy something.

Internet advertising is fast becoming a huge source of revenue for website owners. A total of $15.7 billion was spent on online ads last year. Companies everywhere see it as an easy way to target consumers of every possible category. And as software technology becomes increasingly advanced, so do these seemingly annoying but innocent online ads. Using high tech data-collection, tracking, and analysis methods, internet ad designers are able to track individual web users, the sites they view, and the things they buy online. Using this wealth of information and running it through computer models, firms are able to target consumers based on their behavior and design ads that are specific to each internet user, down to the smallest detail. Firms like Ogilvy specialize in marketing and advertising techniques that fine-tune internet ads to maximize their effectiveness. Anything including the color of the ads, their placement on different sites, and the time of day they are run can be tweaked so that it is specific to an individual.

Needless to say, firms are catching on. Yahoo, MSN, and AOL, among others, are jumping on the bandwagon of using “behavioral targeting” to target ads to consumers. But this brings up a number of issues. While tracking consumers on the web may be legal, is it moral? The internet giant, Google, has refrained from such tracking techniques because it doesn’t want to “snoop” on its users. According to Gokul Rajaram the director of Google AdSense, Google’s advertising division, “it’s murky in terms of privacy.” Another issue that arises with internet advertising is the promotion of false information. If firms can track consumer’s online behavior, they can use this information to target ads that will be effective regardless of their credibility. This kind of false advertising can lead to huge inefficiencies in the market.

While internet advertising techniques are surely effective, firms must be able to use them responsibly. As our society becomes more and more dependent on the web, internet advertising will no doubt take over as the dominant method for advertising information to consumers. We need to be sure that firms are being responsible in their advertising techniques, as well as truthful in the information that they are advertising.

~Chuck Thomas, Brian Rock, Lian Ye, Zoey Wang

The Drug-Induced Gray Area

2007-04-04T11:20:00.000-05:00

Swiss pharmaceutical giant Roche Holding AG has been on a buying spree this week. On Monday, it announced the purchase of California biotech company Therapeutic Human Polyclonals. Today, Roche acquired BioVeris, a maker of biological and chemical diagnostic systems. Indeed, the pharmaceutical industry is no stranger to frequent merger activity, especially with growing healthcare trends.

But what about the merger paradox? These seem like typical horizontal mergers: Roche and BioVeris, for example, both compete in the immunochemistry business. Here, the challenge of merger profitability is mitigated by the product differentiation and enhancement promised by this acquisition. BioVeris will allow Roche to expand into new market segments beyond its human-diagnostics focus.

Moreover, pharmaceutical mergers (like much of the real world) don’t fall neatly into theoretical categories of horizontal or vertical mergers. With BioVeris, for example, Roche not only acquires new products but also intellectual property rights, vaccine research, and licensed technology. Many large pharmaceuticals will acquire small biotech companies to augment R&D – arguably the signs of a vertical merger.

The key issue for pharmaceuticals is the balance between organic growth and growth through acquisition, which is complicated by property rights governing the R&D that is uniquely critical to the industry. In its merger analysis, Roche undoubtedly sees shades of gray that are difficult to reconcile with clear-cut economic theory.

Holly, Pat, Daniel, Kevin

Smoking Gun

2007-04-04T09:08:00.000-05:00

Monday was the first day in nearly two decades that Kraft Foods traded as an independent company. In 1988, tobacco giant Philip Morris, which has since changed its name to Altria, acquired the packaged foods and beverages manufacturer in a conglomerate merger. One likely explanation for the merger is that Philip Morris wished to reduce the risk inherent in the cigarette industry by acquiring a stable and well-regarded company. Industry risk is large and rising as anti-tobacco groups gain clout, further litigation and federal regulation loom in the future, and hundreds of thousands of consumers die from product usage each year.

This past Friday, Altria completed a spin-off of Kraft Foods by distributing its 88.9% stake in the company to its shareholders. Why is the spinoff taking place? Some would conjecture that Kraft’s association with Philip Morris is dragging down sales, as consumers boycott Kraft’s products due to its ties to cigarette money. The stock market, however, supplies a different answer.

Typically, a spin-off increases the value of the shares of the spun-off company, but in our case the opposite is true. After the announcement of the spinoff this January, Kraft shares have dropped 11% as Altria shareholders have bet against Kraft Foods. By the end of the trading day on Monday, the first trading day after the completion of the spin-off, Kraft Food stocks (KFT) fell $0.81, or 2.6%, to $30.85 while the shares Altria (MO) rose $2.32, or 3.5%, to $68.22.

It seems investors favor Altria to Kraft. Even though it is plagued by charges of unethical behavior, deadly products, and threats of increased regulation and litigation, the cigarette industry’s strongly inelastic demand curve guarantees market stability and industry power.

It remains to be seen how Kraft and Altria’s share prices will respond to the merger in the long run. Perhaps the spin-off signals an end to the merger-happy 1990s. We will have to stay tuned to the situation to find out.

-Pam, Jung In, Helen, and Katie

Industry's First Integrated CPU/GPU Silicon Solutions

2007-04-04T01:24:00.000-05:00

What is a good strategy when you are in a two-firm oligopoly market and your share is much smaller than that of the competitor’s? Being that it would be very difficult (legally) to merge with the only other competitor (as we see with XM and Sirius), you can merge with a similar firm to increase economies of scale, innovation, and profits. This is exactly what AMD did on October 24^th 2006. The transaction involved a $5.4 billion purchase of ATI in what can be considered a Horizontal Merger. ATI basically shares the high-end GPU (graphics processing unit) market with NVIDIA, its main competitor. Even though ATI and AMD produce different products, they will benefit from decreasing costs in R&D, materials, and overall PPE (property, plant and equipment).

The main reason this merger was accepted is because Intel holds a much larger share of the CPU (central processing unit) market than AMD; they had sales in 2006 of $31.5 billion and $7.5 billion respectively. AMD wants to create a physical integration called “Fusion” between its CPU and newly acquired GPU unit’s. This is a large technological step in the computing world, because it will be the first integrated CPU/GPU system in the market. The merger is healthy for competition because it will create an incentive for Intel to come up with a similar technology and then a subsequent price war between the two which benefits consumers, “AMD believes that these integrated platform innovations will bring customers improved system stability, better time-to-market, increased performance and energy-efficiency and overall, an enhanced user experience.”

In sum, this merger will help advance computing technology which leads to more R&D, and thus, more competitiveness in the market; not to mention (probable) higher profits for the AMD/ATI combo.

Adam, Amy, Braden and Fabio.

How ‘Bout Dem Apples

2007-04-03T22:55:00.002-05:00

While traditional advertising expenditures continue to increase every year to extremely high levels, innovators are taking advertising in a whole different direction with the use of product placement. With the increase in technology and the growth of television in the past thirty years, more and more people are being exposed to vast amounts of media coverage every day. The television industry, in particular, has emerged as a top means for advertising. Through media avenues such as TV shows and movies, companies are modifying their image, by means of persuasive view advertising, in an effort to increase the consumers’ utility in purchasing the product. Sounds complicated, but in essence, all the company is doing is developing a cool factor for their products that consumers pick up on whether they like it or not.

While instances where companies pay high prices and set up contracts with TV and production companies to have their products placed in media(i.e. Norelco 8894XL in the James Bond film, Pepsi in Austin Powers Goldmember), some companies are getting loads of exposure at no cost. Apple computers products were mentioned over 250 times on television in one studied four month period. On the hit TV show “The Office”, Apple racked up more than four minutes of free exposure to audiences. Other shows such as CBS's "CSI: NY," Fox's "24" and NBC's "Las Vegas," also prominently displayed products throughout their showing times. In older episodes of 24, it can be noticed the high occurrence of bad guys using PC and Windows and the good guys using apple products…go get ‘em Bauer.

With this advertising market gaining popularity, one would think that Apple and other companies would devote more resources to obtaining more product placement at low or no costs. We imagine that this free advertising won’t last long and that a structured market will result in the future. But for now, it seems the Apple is the victor of the free advertising game.

Tsk Tsk, Sony

2007-04-03T21:38:00.000-05:00

This article discusses how the European Union has charged and accused several companies of running a cartel to fix the price on professional video tapes. These companies include Sony Corporation, Panasonic, Hitachi Maxell, and TDK Corporation, which are well known for their VHS production and sales in the United States. The video tapes involved in the cartel are made specifically for special video equipment and are used almost exclusively by TV stations, independent TV producers, and advertising film producers.

The EU stated that the evidence of the cartel was based on information received under a leniency program. This is obviously the best way for a cartel to be detected, by providing immunity to anyone who comes forward and reveals the collusion.

The video tape corporations have two months to prepare their response and then argue their case. In order for the EU to prove that the cartel exists, they will need statistical accounting data that demonstrates the monopoly profits and the corporations’ lower costs by working together. This industry makes sense for a possible cartel since the companies probably have similar production costs, with a specialized product that is standard for professional video equipment. There is a lack of significant product differentiation, which simplifies negotiation and makes it easier for firms to agree on prices.

Posted by Marie Copoulos, Tiffany Luong, and Vicky Ukritnukun

The "Googling" of Satellite TV

2007-04-03T21:05:00.000-05:00

Today, Google announced that it will start using its advertising technology on EchoStar's Dish Network. The deal with the Dish Network will enable Google to take a piece of the $70 billion television advertising market. Google's revolutionary advertising technology enables the advertiser to either choose a network and time of day to advertise or allow the Google system to target specific demographic and geographic categories through its advanced software. Google's system is especially useful to advertisers because it is able to relay information about the number of ad viewers, time spent watching the ad, and other parameters. Thus, Google's entrance into the traditional television market is certainly noteworthy.

Google is an internet advertising behemoth, with a 65% revenue growth rate from 2005 to 2006 and profits in the billions. Its unique moneymaker is the auction system it uses to price its ads. The bidding process, coupled with Google's majority share of the search engine market, drive ad prices up to high levels on a constantly adjusted basis. As mentioned, its advanced software and targeting makes these prices worthwhile for advertisers.

Google's entrance in the television market foreshadows its ambitions to move into other more traditional media than the internet. Its entrance could change the face of advertising and TV marketing. The Nielsen ratings could languish as advertisers are able to get much more detailed, real information that could be crucial for a company's ad campaign. The improved targeting that is provided with Google's system has the potential to increase demand and marginal revenue curves, while keeping average total cost somewhere similar to previous levels. The targeting likely also reduces consumer search costs. If Google's TV service is effective and successful, it is possible, and perhaps likely, that it will find dominance in the TV market just as it has on the internet.

posted by Josh Bennett, Jeff Kerestes, and Charlotte Pool

Toyota has Camry, Honda has Accord, Ford has Focus… What does General Motors have again???

2007-04-03T20:38:00.000-05:00

General Motors itself is not a brand name for a car and yet, it is one of the largest auto manufacturers in the world. How did this come to pass? The Deal Maker expands how William C. Durant built GM in the early 1900s through both horizontal and vertical mergers, often associated with individuals whose names remain as their legacy, such as Ransom Olds (Oldsmobile), David Dunbar Buick, Louie Chevrolet, and Albert Champion (Champion spark plugs). Thus, Durant kept the different models of the merged companies to appeal to different markets. Such product differentiation became the key to GM’s success, especially in the mid 1920s.

The irony is that Durant never successfully integrated the firm to achieve cost savings. He bought up competitors simply to gain a dominant market share and thus realize high profits through pricing closer to monopoly price than competitive price. This lack of efficiency allowed their main competitor, Ford, to move ahead.

Ford Motor Company, under Henry Ford, emerged and stayed independent at this time, dominating the market from around 1917-1926. Ford’s Model T, basically its only model, was sold at a much lower price than any of GMs’ cars due to low costs yet relatively high quality.

Thus, Ford’s price competition initially dominated the market but its complacency with a single successful model ultimately hurt it as the automobile market grew at such a rapid pace and consumer tastes shifted towards more varied models such as GM offered. This was eventually remedied as Ford is now the home to several brand names such as Lincoln, Mercury, and Jaguar, some of which were acquired through horizontal mergers. As most know, both GM and Ford have been surpassed by Toyota in the recent past, partially due to another change in consumer preferences towards high fuel efficiency. Who knows what kind of product differentiation will next take the lead in this dynamic industry… Found this post interesting? Then take HIUS 341 US Business History! By Jim Baltz, Wooi Yang Chang, and Brian Gavron

Connected to Everyone... For FREE!

2007-04-03T18:08:00.000-05:00

For the past few years there have been tons of telecommunications mergers.U.S. antitrust authorities let AT&T and BellSouth to move forward with their $67 billion merger. For the past few years Thomas Barnett, assistant attorney general in charge of the antitrust division claims that the “proposed transaction is not likely to reduce competition substantially” and states that the “merger would likely result in cost savings and other efficiencies that should benefit consumers”.
AT&T Chairman and CEO Edward Whitacre explains the merger will “benefit customers through new services and expanded service capabilities”. Their focus is providing great service and innovative, competitively priced products for consumers and businesses throughout the nation and world. They also claim that the merger gives military and national security agencies a reliable U.S. based provider of secure, high-quality services.
Critics obviously opposed the merger saying it will reduce competition, limit customer choice and eventually lead to price increases. AT&T will have way to much power that the company might abuse by disregarding customer privacy barriers and limiting the type of traffic that crosses its networks. These risks are there because the merger would create the largest phone company in the US. Andrew Schwartzman, CEO of nonprofit law firm Media Access Project, says “AT&T, with the help of a complicit government, is poised to control nearly half of the nation’s phone lines and will also be the largest wireless and broadband Internet company in the country. If consumers thought gas prices were out of control, wait until they get their next phone bill!”

Stop! Turner Time!*

2007-04-02T20:45:00.000-05:00

Can't touch this! Unless you know about the effects of vertical mergers. Ring the bell, school's back in, and Team Awesome is here to break it down.*

Time Warner, not to be confused with the fictitious Rowling-ian Time Turner,** is no stranger to the merging scene. Before it got together with AOL, Time Warner was involved in a merger with Turner Broadcasting. The 1996 merger of Time Warner and Turner Broadcasting System falls into the category of vertical mergers since Time Warner creates the shows that Turner broadcasts.

As with all vertical mergers, both the positive and negative impacts must be weighed. In the case of the Time Warner-Turner Corporation merger, the combining of these two companies had the potential to restrict competition in cable television programming and distribution (as with all vertical mergers). However, the FTC ultimately decided - and Team Awesome agrees - that with a number of structural changes and restrictions "designed to break down the entry barriers created by the deal", the positives of this merger outweighed the negatives. Specifically, the FTC pinpointed the major benefit of this merger: access. The FTC Chairman Robert Pitofsky said that "this settlement would preserve competition and protect consumers from higher cable service prices and reduced programming choices by ensuring that competing cable operators, new technologies and future programmers can gain access to Time Warner/Turner's customers and programming."

Team Awesome agrees with the FTC's decision - while vertical mergers often result in negative consequences, it is crucial to take other factors - such as access in this particular example - into account. This is one case where an analysis of welfare effects led to the conclusion that this vertical merger was too legit to quit.*

- Jon Carrier, Joyce Chang, Dexter Galazo, Vinu Ilakkuvan

*pop culture reference 1
**pop culture reference 2

XM Looks to the Future, for Serious

2007-04-01T17:54:00.000-05:00

XM Satellite Radio and Sirius Satellite Radio announced on February 19th of this year that they would be merging in an effort to combat recent losses within both firms. The National Association of Broadcasters (or the NAB) has urged policymakers to reject the proposed merger based on the grounds it is an "anti-consumer" proposal. Furthermore, they look to a past merger attempt in the satellite TV industry between DirecTV and DISH Network that was rejected by the FCC. The NAB claims the industry structure of the satellite TV and satellite radio industries to be similar enough to reject the XM-Sirius proposal based solely on the failed merger in the satellite TV industry. They will tell the FCC that the combined debt of the companies (at 1.6 billion) and the increased prices for consumers are the two major reasons why the merger should be denied.

Sirius CEO Mel Karmazin disagrees with the NAB's outlook. He believes the satellite radio market has changed drastically since the DirecTV and DISH Network proposed merger, siting iPods, mp3-playing phones and high definition radio to be in competition with satellite radio in today's market.

The NAB's position on this merger may require a closer look. On one hand, the NAB which lobbies for traditional radio and TV stations says that satellite radio is in a separate market which does not compete with these entities, and thus the need for anti-trust legislation negating the merger. On the other hand, the NAB argues that they do compete and the current limitation on the maximum number of stations traditional radio companies can own should be dropped. This doesn't make much sense.

The FCC and other regulators should conduct a market study independently to determine the true market structure and if iPods, mp3-playing phones and other accessories really compete against satellite Radio. If this is the case, the merger should not be denied.

Posted by Patrick Giesecke, Melissa Barry, and Jonathan Sutton

A Solution Searching for a Problem

2007-03-26T14:41:00.000-05:00

Recently in the news consumers have been complaining of price-gouging at the pumps, some even claiming that big oil has increased it's profit margins to a whopping 40% . Dina Titus, a state senator from Las Vegas, has proposed a bill to Congress to regulate companies and keep them from taking advantage of consumers through price-gouging.

The bill classifies as illegal price gouging that is labeled as a "deceptive trade practice" in which the sale of a consumer good or service is set at "an unconscionable price before or during a state of emergency." The bill is intended to target businesses like those after Hurricane Katrina that were, apparently, "price gouging." But what exactly is "unconscionable"? The bill lays this definition out as "the selling at a price 25 percent higher than average price of said good or service over the past 30 days unless approved by an appropriate government or governmental entity. However, if you continue to read you'll find that such an increase can be justified in the exception that the producer has incurred an increase in costs. Wow.
The entire point of a "free market" is to allocate scarce goods and services in such a way that those who need them get them. Those who are willing to pay a higher price should receive the goods and services. Adam Smith would be decidedly unhappy with our lady Dina over this. In a time of shortage, not unlike those times for which the bill is intended, a restrictive price will mean those people who do not receive the highest utility from a good or service will consume at an unequal proportion to those in real need. You feel me? Probably not. Ok, for example, during Katrina there was certainly a shortage of gasoline. The consumers are not unaware of this shortage and restricting price will cause a flood of consumers who have no immediate need for the gas but will horde it because they fear the rise of gas prices in the near future. Soon the gas will run out and will be sitting in tanks, unused, when it could be going to - for example - trucks, caterpillars, and clean-up equipment that rely on this gas to fix homes and repair damages. If the price was allowed to rise naturally, these problems would be avoided.
Patrick Giesecke, Melissa Barry, Jonathan Sutton

Breaking the Silence: the Corporate Leniency Program

2007-03-21T15:13:00.000-05:00

The Corporate Leniency Program (revised in August 1993), states that corporations would be granted leniency for blowing the whistle on their cartel.*

The aim of this program, really, is to overcome the greatest difficulty that the Antitrust Division has. That is, to find out about the cartel in the first place and there after obtain sufficient evidence to make a case against the cartel for cartels are necessarily shrouded in secrecy. When looked at in the form of a game, the government is introducing a new element with this program.

Initially, the game is what we have seen in class, where two firms choose either to collude or deviate and collusion results in higher profits for both firms, but each firm has an individual incentive to deviate, thus resulting in the Nash equilibrium of both firms deviating and relatively lower profits for both.

However, the game changes subtly with the introduction of the Corporate Leniency Program. Look at it as an iterated game where in each round, each firm simultaneously chooses either to (a) keep the faith or (b) break the silence. Payoffs increase every time both firms choose (a), but so does the chance of detection. If one of the firms chooses (b), the game ends with the final payoff of that firm being the accumulated profits, but the other firm loses all prior profits and pays a hefty fine besides. If both firms choose (b), the outcome is the same as in the prisoners’ dilemma, where both firms lose.

As such, the aim of each firm would be to keep the faith as long as possible and break it one round before the other firm does so. But since each firm would then be trying to preempt its opponent, the Nash equilibrium becomes much like the result of a Bertrand game, where P=MC and neither firm colludes.

This result is undoubtedly what the Department of Justice hopes for by introducing the Corporate Leniency Program and empirical evidence does grant it some success as many firms have since blown the whistle on their own cartels. Still, this game assumes that the deviating firm is protected by the government from any ‘punishments’ that the cartel might have implemented.

If the punishment/threat is credible (ie. the whistle-blowing firm cannot be protected by the government from the wrath of its fellow players), then its payoff in the game outlined above maybe negative if it breaks the silence, which would then result in a different equilibrium that allows for collusion.

This counter-strategy to the Corporate Leniency Program is, perhaps, why illegal cartels still exist outside of public knowledge.

*terms & conditions apply

-Risto Keravuori, Joseph Saunders, Cheryl Kong

Formula[ting] Excuses

2007-03-21T15:03:00.000-05:00

Businesses can be quite creative when forced to defend themselves against anti-trust violations. The infant formula cases of the early 1990s provide an illustrative example.

In the early 1990s, the Federal Trade Commission and several states, including Minnesota and Florida, filed suit against the top producers of baby formula (Abbott Laboratories, Mead Johnson and American Home Products Corp.) for cartelization in violation of the Sherman Act.

With the formula giants caught cold price-fixing, the case should have been a cake-walk for prosecutors. However, the creative defense put forward by the formula producers complicated the situation. With the backing of the American Association of Pediatrics, the producers argued they were keeping the price of formula high for altruistic ends - to encourage mothers to breastfeed their babies. Breastfeeding has been shown to improve infant health.

This presented a quandary for the anti-trust litigators at the FTC and DOJ. These bodies are designed to advocate the people’s interests. What if breaking up the activities of these producers would actually harm societal welfare?

The case becomes clearer when the true nature of the relationship between the producers and the AAP is exposed. The AAP didn’t freely give its blessing to the arrangement – it turns out the formula producers donated heavily to the association. Although this could arguably be a further sign of the benevolence of the formula producers, the seasoned realist would see this mutually beneficial relationship as a buy-off strategy.

If you would like more information about this case, Mr. Elzinga was an expert witness in the case against the formula producers.

Predatory Bidding = Predatory Pricing

2007-03-21T14:50:00.000-05:00

http://www.mondaq.com/i_article.asp_Q_articleid_E_46578

Predatory bidding is a pricing strategy of bidding up the price of inputs to prevent other competitors from acquiring enough supplies. Predatory bidding is very similar to predatory pricing. Like predatory pricing, predatory bidding involves the use of market power (power of monopsony) to make other rivals unable to survive in the market. Once a predatory bidder succeeds in clearing the market, it will lower the input prices to earn extra profit that would at least cover the damage caused by predatory bidding (Supracompetitive profit).

On Feb 28, 2007, the Supreme Court finally set a legal model concerned about matters of predatory bidding in Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co. (No. 05-381). The court explained that the same legal standards that test the legality of predatory pricing apply to predatory pricing as pointing out the similarities between them. The Court implemented the test used in Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209 (1993) to judge the lawfulness of the price bidding claim. The main three points that made the Court believe the similarities were these (taken directly from link):

A rational business will rarely make the financial sacrifice necessary to engage in either predatory bidding or predatory pricing;

The actions taken in allegedly predatory bidding and predatory pricing schemes are often "the very essence of competition," and legal rules should not deter such conduct; and

Failed predatory bidding or predatory pricing schemes may often result in lower consumer prices.

The Court unanimously decided that the plaintiff must prove two points to allege the defendant’s predatory bidding. First, the plaintiff should provide evidence that the defendant paid too high price for inputs that at which price level doesn’t even cover the cost of outputs. Secondly, they also have to prove that the defendant has believable possibility of increasing its inputs’ price in order to regain its losses caused by predatory bidding in future. Just like we learned in predatory pricing, measuring marginal cost of a firm and judging these antitrust matters are very hard and controversial for court.

- Minsoo Park, Chris Liu, Kristy Choi, Seon Hwang

You Speakin’ Greek? – Entry Deterrents using long-term contracts

2007-03-21T13:35:00.000-05:00

Vantine Imaging is a photography company that holds a large portion of the market share here at UVa for sorority and fraternity composite production. There are over 30 fraternities and 15 sororities and I personally know of at least 25 of these that are customers of Vantine. The composite market is one that is easily defined, with a clear number of customers; there being a limited number of fraternities and sororities at UVa. Furthermore, the product in question, composite photographs, is almost perfectly homogeneous leading one to believe that entry should be quite easy into the market and competition levels should be high.

When speaking of entry deterrent methods we discussed the use of long-term contracts as a way for companies in the cell phone or housing industry to prevent new entrants into the market. Due to a long-term contract scheme, Vantine is successful in deterring entry into the market, and thus paving the way for the company to charge higher prices. The contracts they issue are for a three year period, and are renewed each year by a new house representative (as I know from personal experience). The contract can be broken, but large penalties are incurred if this is done. With fraternities and sororities operating on tight budgets (college students are not the wealthiest bunch) paying such a fine is out of the question. In addition, with such a quick turnover rate for undergraduate students, this process continues on and on without attracting much attention.

Vantine has slowly increased their prices over the years and will be able to continue doing so as long as they maintain their long-term contract agreement. From Vantine’s perspective, this is great; slowly but surely Vantine is achieving monopoly power by successfully deterring entry. However, as we know, this is not best for the consumers, students at UVa. Understanding that this strategy is being utilized shouldn’t we be taking action to combat the rise in prices and market predation? Ideas and counterattacks are welcomed. Game on Vantine!

The Economics of Gaming

2007-03-21T12:08:00.000-05:00

Most people don’t think of video games as anything more than a great way to spend time that you could be using to study or do something productive (which brings up an entirely unrelated question: is playing video games a productive use of time?). But, in reality, the market for video game consoles and the games that accompany them can provide great insight into firm behavior under imperfect competition.

The three major game systems that are currently on the market are produced by three different firms: Microsoft (Xbox 360), Sony (PlayStation 3), and Nintendo (Wii ). Each firm faces similar issues, namely, how to distinguish its product from the others, how many systems to produce and release in a given time frame, and setting prices for their products. In addition, the video game market has some unique aspects. The cost involved with developing the game consoles is huge. There is a high up-front cost for the games themselves, but a minimal marginal cost for their production. So, the stage is set for Cournot-type competition in the game console market, with a Bertrand-type market for the games to go with the consoles, with tie-sales between the two! Needless to say, this creates a very complex market and equally complex firm behavior.

The firm that could be called the “veteran” of the video game market, Nintendo, is taking a slightly different approach with their new Wii than they have in the past. Leading up to product’s release in November 2006, Nintendo worked hard to differentiate the Wii from Microsoft’s and Sony’s products – a very smart move when dealing with the type of imperfect competition that Nintendo is encountering. Rather than focus on computing power or new advanced hardware, the cliché for this industry, Nintendo focused on revolutionizing it’s product through new and different game play, and by introducing a motion-sensor controller. The firm set a quantity to produce (typical for Cournot competition) for the first few months after its release and followed through. Everything Nintendo has done seems to be working – the Wii has outsold Sony’s PlayStation 3 (released the same week) by a substantial margin.

Another way Nintendo is beating its competition is by focusing on making profits on both the Wii console and games. This is in contrast to Microsoft and Sony. All three firms are able to mark up the games to make a significant profit, despite their low marginal cost, because consumers distinguish between the three consoles. The Bertrand model with differentiated products fits the game market very well. Both Microsoft and Sony are banking on the profits of their games to overcome the loss they take on the consoles - $240 per unit for the PlayStation 3 and $126 per unit for the Xbox 360. Nintendo takes no loss on the Wii console and still sells games for a substantial profit.

Will the success of the Wii continue in the coming months? Will the superior hardware of its competitor’s products begin to outweigh the Wii’s innovative game play? Only time will tell. But so far, Nintendo has proven itself in an imperfectly competitive market through its successful product differentiation.

~Chuck Thomas, Brian Rock, Lian Ye, Zoey Wang

Antitrust in Telephony Market

2007-03-21T12:06:00.000-05:00

January 6, 2006 Verizon and MCI merged. The merger had been under scrutiny for over a year. Many outside groups, specifically The American Antitrust Institute took an interest in the impact the merger would have on market power for Verizon, one of the larger firms of the market. Prior to the merger the wireline market had an HHI of 1759.10. The merger increased the market concentration by 736 points on the Herfindahl-Herschman Index.

Advocates of antitrust argued that a merger between MCI and Qwest would have been the best for the market. Even though market concentration would have increased more under this merger (1047 point increase), it would have kept market power roughly the same. Verizon and MCI have their main focus in the same geographic region, while Qwest’s is different.

Another major concern is for special access service – provides dedicated, high-capacity lines that circumvent the publicly switched network; they are essential for government, communication providers, and large institutional users. Verizon is the major supplier and MCI has the largest client base. Their merger would be a vertical integration that would create a duopoly in this market with Verizon as the dominant firm.

It is interest to look at all the different factors that affect market power and see how different mergers affect these factors differently. The FCC decided that the merger did not increase market power beyond an acceptable limit because the merger did go through, see C|net news (http://news.com.com/Verizon+closes+book+on+MCI+merger/2100-1037_3-6003498.html ).

Microsoft may be jeopardizing your security

2007-03-21T10:37:00.000-05:00

Bill Brenner, a columnist for searchsecurity.com posted an article which suggests that as of recently, it seems that Microsoft has been using predatory pricing on its security software called OneCare.

Although this is difficult to prove, evidence suggests that this is indeed the case: OneCare costs $49.95 for three PCs, while McAfee and Symantec’s antiviruses for three PCs sell for $69.99 and $89.99 respectively. Microsoft’s price is almost 50% below Symantec’s and more than 60% below McAfee’s.

Without further analysis, this may seem healthy for the consumer; but it’s not. In the words of Alex Eckelberry from Sunbelt Software, “They are going to kill their competition through predatory pricing.”

This will then lead to two probable outcomes: First off, Microsoft will become a monopolist when McAfee and Symantec exit, which will allow them to charge higher prices because they will be the only internet security provider on the market. The other consequence is that this creates a large barrier to entry, which reduces the incentive for Microsoft to innovate its OneCare for future security threats. This would lead to hackers invading our privacy and threatening our security on the web.

Hopefully, antitrust laws can soon come into play in order to stop Microsoft from monopolizing the market in yet another sector.

Posted by: Adam, Amy, Braden and Fabio.

Leegin v. Doctor Miles Medical: How much longer will vertical price fixing be per se illegal?

2007-03-21T09:42:00.001-05:00

On Monday, March 26th, the Supreme Court will hear the case Leegin Creative Leather Products, Inc. v. PSKS, Inc. You may already be familiar with Brighton Handbags, a division of Leegin. Their website claims that they are the only major accessories line that coordinates from, “head to toe.” PSKS is a Texas- based retailer of Brighton products who deviated from the Leegin’s suggested minimum retail pricing policy; in turn, Leegin suspended all shipments to this retailer. PSKS has sued Leegin for price-fixing.

Price fixing is illegal, per se, as decided under the case Dr. Miles Medical in 1911; however, in US v. Colgate (1919) the court made a concession to manufacturers, stating, "[manufacturer] may announce in advance the circumstances under which he will refuse to sell." Therefore, hypothetically, if I am manufacturer interesting in fixing prices, it would be per se illegal (no evidence of reasonableness would be admitted to the court in determining guilt) for me to agree with my retailers as to the prices they would set for my product and the punishment they would incur for deviating. However, under the Colgate doctrine, it would be legal for me, the manufacturer, inform retailers that it was their responsibility to make an independent decision concerning the prices they set for my product, but that I would refuse to supply them with anymore should they not following the suggested retail price. The line is, therefore, a bit blurry. Should Leegin do anything to enforce their minimum suggested prices, they find themselves dangerously close to vertical price fixing. However, it is well within their legal right to refuse to deal with certain retailers under certain circumstance that they’ve stated in advance.

The Leegin case coming before the Supreme Court is an important one because Leegin is asking the Court to overrule Dr. Miles Medical and its per se rule on price-fixing in favor of a rule of reason. Should Dr. Miles be overruled, future price fixing cases coming before the court would now be able to argue that their price-fixing strategy had other, perhaps, pro-competitive effects. In this case, Leegin argues that, "This pricing policy allows Leegin and others to build a strong brand name. All retailers are selling the same product at the same price, [Leegin] competes by providing additional services that would help Leegin stand out from consumers," Leegin's counsel said. "It provides a consumer-additional choice." (1) Economically, this means that consumers are gaining something from the high-prices that may be lost if you were able to buy a Brighton Bag at Wal-Mart - a brand name, an assurance that you could not have found the bag at a lower price, and certain standard product services.

This case is an important one and will be watched by the world of antitrust very closely.

(1) http://docket.medill.northwestern.edu/archives/004185.php

Posted by Tiffany Luong and Vicky Ukritnukun

De Beers' Diamonds May Not Be Forever

2007-03-21T07:42:00.000-05:00

De Beers, a significant producer of diamonds on the world market, has recently changed its strategy to stay competitive and profitable in a dynamic industry. De Beers has been historically known as a diamond cartel, having fairly exclusive rights to mining in Africa and selling diamond through the London market. Because De Beers possessed 80% market share in the world diamond market, the company was able to effectively act as a cartel. It did so by fixing the quantity, or output, of diamonds released for sale on the world market, and was able to maximize its profits by setting the quantity released as monopoly output. More recently, the article Changing facets; Diamonds argued that De Beers has been forced to change its strategy as a result of a changing industry. The cartel has loosening its grip, as governments in Africa have promoted change. One of the most significant changes currently observed in the industry is the emergence of synthetic diamonds, which have now captured a 90% market share in the industrial market. De Beers, under new management, has recognized the implications of synthetic diamonds as undermining the cartel. So in order to remain a competitive player in the diamond market, it has switched its strategy to focus more on product differentiation. By investing significantly in marketing, the fading cartel hopes to distinguish its African-mined diamonds from synthetic diamonds. In doing so, De Beers is hoping to maintain significant profits through a product differentiation strategy for goods that could be viewed, without any marketing initiative, as perfect substitutes.

By Brian Gavron, Wooi Yang Chang, and Jim Baltz

Three for All, All for Three

2007-03-21T00:45:00.000-05:00

Coke and Pepsi have a third major rival on the bottled soft drink shelves, namely Cadbury-Schweppes. The big three carbonated beverage makers now exist in a stable oligopoly that change only by small increments and which controls over 90% of the market. Over the years, Cadbury-Schweppes (the result of a merger between a British candy company and a British beverage company) has improved its position by acquiring key brands in the US, namely Dr. Pepper and SevenUp, along with A & W and Canada Dry.

In past decades, the carbonated beverage section had been the beneficiary of an amazing record of growth, where consumption has more than doubled over the past 25 years. Americans consume twice as much soda as they did 25 years ago, up from 22 gallons per person per year to over 56.
While individual flavors go up and down, the relative market share of the big three changes at a glacial rate. The next biggest North American soda company, the Canadian-based Cott Beverage Company, had only a little over 3% of the market and that company specialize in supplying private label soda to supermarkets and other chains.

As with many mature retail industries, the beverage giants have a problem – growth in the sales of their flagship carbonated products are at a near standstill in the key U.S. market, with 1% growth or less. After years of rapid growth, it seems that the average American can’t drink any more flavored, fizzy soda water. To remedy that, these three companies are rapidly expanding both globally as they enter and promote new markets for existing products and locally, as they add products from adjacent beverage categories in the supermarket, in categories that are still expanding.

Selling costly sugared water and building an increasing demand for it, even in Third World countries, involves marketing in its purest form, unsullied by any preexisting need or local tradition. Markets in Eastern Europe, China, India, and Mexico, among others, are expanding fast, and both Coke and Pepsi are finding local partners (bottlers) in these countries to keep extending their reach. And while the American market may be mature, there’s still an opportunity worldwide to replace hot beverages like coffee and tea that require some preparation with these cold, iconic, Ready-to-drink brands.

Fool me once, shame on you. Fool me twice, still shame on you.

2007-03-20T18:02:00.000-05:00

Last month European antitrust authorities fined Otis Elevator Co. and ThyssenKrupp AG, the world's two largest elevator makers, and three competitors a record 992.3 million euros ($1.3 billion) for price-fixing.

The European Commission penalized ThyssenKrupp 479.7 million euros, the biggest fine against a company for a cartel, and levied 224.9 million euros on Otis, a unit of United Technologies Corp. It also fined Schindler Holding AG 143.7 million euros, Kone Oyj 142.1 million euros and Mitsubishi Elevator Europe BV 1.8 million euros for fixing prices of elevators and escalators. The penalty is the highest imposed by the Brussels-based commission for a cartel, surpassing a 790.5 million-euro fine imposed on eight companies for fixing vitamin prices in 2001. Otis, Schindler, ThyssenKrupp and Kone control about 75 percent of the global elevator and escalator market, which has annual sales of 30 billion euros. ThyssenKrupp's fine was raised by 50 percent because it was a repeat offender, the regulator said.

The commission, the EU's antitrust regulator, said the companies set prices in Belgium, Germany, Luxembourg and the Netherlands between at least 1995 and 2004. The cartel rigged contract bids, allocated projects to each other and shared confidential information. Moreover they dominated the market illegally and consumers, public authorities and property developers were “ripped off” in result.

``It is outrageous that the construction and maintenance costs of buildings, including hospitals, have been artificially bloated by these cartels,'' Competition Commissioner Neelie Kroes said in a statement. Kroes has made fighting cartels a priority for her five- year term. On Jan. 24, she fined Siemens AG, Areva SA and eight other companies that make electricity network gear 750 million euros. The commission fined seven cartels a total of 1.84 billion euros last year, an annual record.

With authorities striving to fight against price-fixing cartels, hopefully those companies that might be tempted to get involved would think twice before they do anything wrong.

On behalf of Kara Ivy Goldberg, Wei (Grace) Song, Cheung Fai Yeung, Thomas Li

Crazy College Collusion Cover-Up

2007-03-20T12:13:00.000-05:00

Attorney General of New York Andrew Cuomo is accusing U.S. colleges and student loan lenders of collusion in the market for student loans. Cuomo alleges that schools are giving anticompetitive traits to the market through the questionable although not illegal arrangements that are developing between the two entities. This issue is one of great importance because approximately two-thirds of college students receive some type of student loan. The major issue raised is about the practicality and legality of having "preferred lender" arrangements between schools and lenders. In this situation, a student, having already selected a school of their choice, is then forced into a student loan market that is essentially a monopoly given the the preferred lender. In this case, the lender is able to price at virtually any price he wishes (above marginal cost) because there is essentially no option for the consumer to purchase another good in the form of a different college after their initial college choice has taken place. Although the legality of this preferred lender status has not yet been determined, Cuomo is alleging other activities involved in the collusive arrangements that could be considered illegal. This include kickbacks to colleges based on a percentage of the student loan agreement, expenses paid vacations to exotic locations for the lenders by the colleges, and funds/credit lines to schools who drop out of the direct federal loan program. This situation can also be seen as representing collusion inside the loan market between lenders. If all lenders are satisfied with a majority of their business coming from preferred lender status institutions at which they are allowed to price about the market price, there is then a great incentive to maintain this price on the market that does not include the preferred lender relationships. If the prices in both instances are the same, it would be hard to prove collusion between lenders in the "free" market for student loans when they are simply pricing the same in both markets. This instance is also a great example of how collusion of producers BETWEEN primary and secondary markets and not WITHIN markets can lead to situations that are anticompetitive.

Vitamins Gone Bad

2007-03-19T19:42:00.000-05:00

Hoffman-LaRoche, a Swiss global health care company, was involved in an illegal price-fixing cartel for vitamins along with seven other companies, including BASF and Rhone Poulenc SA in the 1990s. Hoffman-LaRoche, the world’s largest vitamin producer with a 40 % market share, instigated the cartel. The eight firms were colluding to reduce competition, increase prices and earn inflated profits. In addition to fixing the prices of the pills, the conspirators agreed to allocate the sales volumes and market shares of the vitamins as well as divide contracts to supply premixes to consumers. In 1999, Hoffman-LaRoche pleaded guilty in the US and faced a $500 million fine, the largest fine at the time a firm had ever faced in the US. Subsequently, in 2001, the EU prosecuted LaRoche because it was in violation of EU law, which forbids price fixing. LaRoche faced a €462 million fine from the EU.

This is a clear example of a cartel. Because Hoffman-LaRoche controlled 40 % of the market and was the producer of all 12 vitamins under investigation, it was able to collude with the other firms and use its market power to fix prices above competitive levels. By coordinating their actions, the firms were able to raise their prices and consequently their profits. As a group of suppliers behaving collusively, they eliminated competition. Although the firms were successful as a cartel, they faced enormous fines, and in 2002 LaRoche sold its vitamin business as a result of the anti-trust violations.

Posted by: Jessica Halper, Michael Ledwith, Jake Carter-Lovejoy, and Drew Muir

Anti-Antitrust

2007-03-19T16:14:00.000-05:00

The Los Angeles Times ran a story this past Monday suggesting that the Supreme Court, under the influence of the Bush Administration and big business lobbies, is relaxing its enforcement of antitrust law. Over the course of the past year, the Court has relaxed or repealed rules designed to guard against anti-competitive strategies, like price-fixing and collusion. This reveals a trend in the political economy toward the realization of laissez-faire in its purest sense. According to Albert Foer, president of the American Antitrust Institute, "The court is on a path to reshape the law to conform to the Chicago school of law and economics," which is most famous for its advocacy of free market theories.

Just last year, the Court overturned a barring of the joint venture between oil giants, Texaco and Shell. It ruled that the joint venture would not qualify as price-fixing because the two companies had not been competitors in the market for selling gasoline in the West. In another case, it repealed a long-standing rule that had made product “tying” illegal as an anti-competitive strategy. And most recently, the Court overruled a huge verdict against Weyerhaeuser, the lumber corporation that had been found guilty by the State of Washington of entry deterrence behavior.

This trend of reducing the strength of antitrust law shows that globalization and exponential technological progress are changing the nature of business competition. The Court seems to believe that what was traditionally considered to be illegal anti-competitive behavior—price-fixing, collusion, and entry deterrence—may now have become the forces that drive competitive free trade. Either that, or it is has bought into the pro-big business conservatism that the Bush Administration has demonstrated through its tax policies and partnership with private defense contractors. A reaction to this anti-antitrust trend from the now Democrat-controlled Congress remains to be seen but is certainly not unexpected.

Posted by: Josh Bennett, Charlotte Pool, Jeff Kerestes

Whatcha gonna do now, Wanadoo?

2007-03-18T20:10:00.000-05:00

In a world of rising technology, predators come in all shapes and sizes. Physical predators, like grizzly bears and ax-murderers, are easy to identify. But- BEWARE! - the type of predator that you are most likely to confront may be lurking in the shadows of a cubicle near you.

Price predators, like the high-speed internet company Wanadoo, bare their teeth by charging prices that are so low that they scare away potential entrants. In July 2003, the European Commission fought this antitrust violation with a harmful weapon- a 10.35-million-euro (13.4-million-dollar) fine.

The European Commission accused Wanadoo, an internet affiliate of France Telecom, of abusing its market power by discouraging entrants. At the early stages of high-speed internet development, Wanadoo’s market share was very high (with eight times more subscribers than its next competitor.) Since the internet industry requires enormous sunk costs, Wanadoo recognized that its pricing behavior during the development phase was critical to long-term market structure. Under these circumstances, it is clear that when Wanadoo initially charged extremely low prices, it was willing to forgo current profits so that it could drive potential competitors out. If they were successful, they would earn monopolistic profit in the second period. By actually charging these low prices, Wanadoo confirmed its credibility.

Luckily (for consumers), the corporate Crocodile-hunter came to the rescue in this predator tale. The Commission proved that Wanadoo’s prices didn’t even cover its marginal costs and slapped the company with a 13.4-million-dollar fine. Whatcha gonna do now, Wanadoo?

Posted by: Caryl Huynh, Meghan Magennis, Chris Coyle, Lance Wang

A Stink About Subsidies

2007-03-16T16:35:00.000-05:00

In “Imports Spurring Push to Subsidize Produce”, NY Times reporter Alexei Barrionuevo discusses the increasing pressure on garlic farmers in the United States as cheaper imports from China come pouring into the market. In the face of such pressure, garlic farmers are in turn pressuring the government to set up entry deterrents in the form of subsidies for garlic producers in the United States. These requested subsidies are not exactly like those currently provided to U.S. producers of various other agricultural products. Instead, garlic farmers, along with other specialty crop producers, have formed a coalition that submitted a bill asking for about $1 billion for programs that would help them better compete in the global market. Specifically, they are asking for money to go towards marketing, research, and conservation.

One of the garlic farmers mentioned in the article spoke of this type of subsidy being better than the direct farm subsidies of more than $15 billion a year provided primarily to growers of corn, cotton, rice, wheat, and soybeans. This farmer said, “nobody learns from [direct] subsidies. But you want to give them opportunities and resources and tools to make their industry better.” However, a comment on this article points out that most economists are in favor of abolishing all farm subsidies, as we might expect.

If the proposed subsidy is approved, it could turn out to be an extremely successful entry deterrent. By hindering competition, this could make consumers worse off, and thus Team Awesome, while in agreement that this type of grant from the government is better than a direct subsidy, still feels that this is not an economically optimal option*.

- Jon Carrier, Joyce Chang, Dexter Galozo, Vinu Ilakkuvan

*Team Awesome, very respectful of the "fiercely independent vegetable and fruit growers" and their desire to avoid direct subsidies, would not go so far as to say this option stinks.

"A Beautifully Misleading Mind"

2007-02-18T16:52:00.000-05:00

The Technology of Price Discrimination

2007-02-14T20:15:00.000-05:00

Price Discrimination has been a practice of business owners for a long time. Jane Black in “Sharper Tools for Discriminatory Pricing” talks about the use of price discrimination as early as the late 19th century, particularly in the railroad industry. She explains that railroads used a type of price discrimination known as “versioning” in which they would offer lower prices for carriages that were less nice, sometimes so bad that someone would feel it was worthwhile to pay more. Price discrimination is a very appealing strategy for firms who look to be able to attract customers depending on their willingness to pay. Capturing consumer surplus, Jane Black points out, makes trade more efficient.

Today, technology is making it easier to use differential pricing. Black notes that in the past, first-degree price discrimination had always been regarded as the ideal because it induces maximum production. This ideal, however, has always been unattainable. Now, technology is making it seem like more of a possibility, by making it easier for firms to track information about their customers. Technology has also increased the sophistication of price discrimination when selling products. Coca-cola for example, tested a vending machine that would raise prices on a hot day, and lower them when it was cooler. Amazon has also experimented with using the data it collects on customers to create “personalized bundles…to induce people to buy more.”

While price discrimination is a technique firms will continue to use in the future, consumers have long been bothered by the idea of differential pricing. Black states that people are concentrated on the issue of fairness, and paying more for a product than others makes people feel cheated. Despite these concerns, Andre Odlyzko, the director of the University of Minnesota’s Digital Technology center, explains that price discrimination will continue to grow over the next decade “due to continued ability to find out just how much people are willing to pay and the desire to control how products and services are used.”

by Christopher Hildner, Bradley Fromm, and Carter Mann
http://www.businessweek.com/technology/content/jul2003/tc20030731_6139_tc073.htm

Oh~ The Choices!

2007-02-14T16:22:00.000-05:00

http://www.washingtonpost.com/wp-dyn/content/article/2007/01/29/AR2007012900085.html

A couple of weeks ago, Microsoft, the leading desktop operating system software provider released its newest OS, the Windows Vista. And just like its predecessor Windows XP, Vista comes in a range of functionality levels. There's the Home Basic edition, which basically offers nothing significant but just a few twinks here and there for $100. You'll have to dish out another $60 on top of what you have to pay for Home Basic to get Home Premium if you actually want to see the new User Interface called the Aero. Then there's the Business version, which offers better network and hardware stability. And at last, for a hefty $250 you can get Ultimate! Woohoo~. Quite the spread in prices considering the fact that from the producer's point of view, all they had to do was turn off certain features otherwise known as 'crimping'. But what can you do? Microsoft knows there are distinct markets out there for their operating systems. Third Degree Price Discrimination at its best. When was the last time you saw a computer not running Windows (except those who actually bought a mac..HAH)? For the average consumer, no Windows means no computing. There aren't many softwares out there programmed for operating systems other than Windows and Mac, if any. If a consumer decides to buy Vista, he is placing himself in one of the four markets: 1) low-budget consumer 2) average 3) small business 4) the big show and the humongous corporates. My advice? Stick to XP unless you're dying to see the new visuals.

Posted by Minsoo Park, Seon Hwang, Kristy Choi

Sour BlackBerries

2007-02-14T15:01:00.000-05:00

A few days ago Research In Motion Ltd. introduced their new BlackBerry 8800, a product targeted towards business users, only a few months after releasing a BlackBerry for consumers called the Pearl. The new BlackBerry 8800 has a full-keyboard handset, allows users to send email, talk on the phone, listen to music and includes global-positioning-technology system for a cost of $300 after rebate.
After the Pearl had the most successful launch in company history in September, Research In Motion Ltd. took its stylish and multi-media features and simply added GPS technology to create the BlackBerry 8800. The catch - the initial price for a Pearl was $200, meaning that there was a whopping 50% increase to add the mapping and navigation system! This is a clear example of 3rd degree price discrimination as the company is offering almost the same product to two clearly different user groups for different prices: normal consumers for $200 and business users for $300.
Additionally, the new BlackBerry 8800 is only available through AT&T’s wireless unit and includes a two-year service contract with AT&T. This smells like a tie-in sale to me.

Superbowl Aftermath

2007-02-14T14:19:00.000-05:00

So we've heard some interesting news after the Superbowl; a Bears fan lost a bet to a friend and he is filing a request to change his name to Peyton Manning... and Circuit City announced that they are going to close down 69 of their stores.

After a series of price wars over flat-panel TVs in the few months leading up to the Super Bowl, Circuit City Stores Inc., the nation's No. 2 consumer electronics retailer, stated on Thursday that it plans to close seven domestic Superstores, a Kentucky distribution center and 62 company-owned stores in Canada to cut costs, switch resources to online sales, and improve its financial performance.

The price war led to a minimum of a 15% price drop for flat-panel TVs, which, despite keeping the price of the TVs much higher than a lot of people's budgets, led to a definitive increase in the number of flat panel TVs sold. This was an example of network externalties at play since the consumer's willingness to pay for a good increased as the number of other consumers buying the product rose. On one hand, this price drop benefited the customers who have been consuming more and more flat panel TVs, but on the other hand, hurt the store itself since the gain in sales could not recoup the loss in profits. Thus, some sort of change was inevitably necessary. This bold move indicated a market re-structure decision based on both cost and non cost determining factors. Tough competition with low gross margins, the need to improve efficiency, and the market size of the industry were the main noncost detereminants of the industry structure.

This decision will further increase the market share of dominant competitors such as Best Buy and Walmart; undoubtedly limiting customers' choices and further exploiting consumer surplus. On the other hand, since online sale service is further expanded, more customers might switch to online shopping due to high efficiency.

on behalf of Pamela Tsang, Thomas Li, and Chi Liu

Unfair Fares?

2007-02-14T14:05:00.000-05:00

Commuters in the Washington DC area have been closely following a recent proposal to increase Metro subway fares that has been debated throughout the city in the past few months. While the driving force behind the proposed fare increases is due to budgetary concerns, the pricing scheme that is being proposed clearly has its roots in price discrimination.

Metro has proposed an increase in fares during “high use hours” when many people are traveling. These blocks of hours are during commuting times when people are traveling to and from work. Metro is attempting to generate more revenue by targeting and charging higher fares to commuters who have a much greater willingness to pay for subway service during rush hours than a more casual subway rider that is not under pressure to get to work on time.

Metro is also proposing to generate more revenue by targeting subway riders based on their boarding-station. The proposed fare increases would require riders boarding from high-volume downtown stations to pay an additional surcharge. This would extract the consumer surplus of those that need to travel from the downtown stations.

Not only do these proposed fare schedule changes promise more revenue and a balanced budget for Metro, but they work to reduce problems in the subway system caused by high volume usage. By setting a price system such as the one proposed, Metro allows consumers to self-select into the different price groups based on riding time and station. Presumably, those riders that have the greatest willingness to pay for subway service in high volume situations will pay the higher fare. By distinguishing these consumer groups, Metro hopes to decrease subway usage in areas where volume is a problem.

While this pricing scheme is sound, the overwhelming majority of Metro riders would fall in the “high use” price block. So it’s not surprising that the proposed Metro fare increases were met with outrage from consumers. For now, the proposed fare increases were tabled, for the most part because of the heated consumer protests. Metro is currently looking at other ways to balance their budget. However, many officials believe that a fare increase is inevitable. At least they have a solid pricing scheme to implement when that time comes.

~Chuck Thomas, Brian Rock, Lian Ye, and Zoey Wang

Price Discrimination: Bad or Good?

2007-02-14T13:26:00.000-05:00

By Sujin, Priya, Ziad

Many assume hospitals initially charge all patients a price and do not engage in price discrimination like airlines and colleges. As we discussed in class, a firm with monopoly power in more than one product line may have additional opportunities to price discriminate. These industries have high annual fixed costs relative to the cost of producing additional services. Hence the sellers try to maximize total revenue that can be taken from the society. Some sellers in the medical industry wouldn’t sell output below the production costs, unless government regulated like under the Emergency Medical Treatment and Active Labor Act of 1986.

Alternatively, not-for-profit sellers may price discriminate just to cover their allocated total costs while obeying established social ethics. Physicians defend their fees on these ethics; however, economists believe the norm. Authors, Richard Steinberg and Burton Weisbrod presented a model showing that because of truly severe competition nonprofit organizations and U.S. hospitals behave more like profit-maximizing enterprises just to survive in the long run.

For-profit and non-profit hospitals basically have minimum options and little choice to price their services to private payers essentially as profit-maximizing endeavors. How can charging and harassing uninsured patients to pay the highest prices for hospital care be ethical? Or the hospital allowing more discounts on bills for large insurance carriers than smaller insurance carriers with less bargaining power? Some industries wouldn’t survive without price discrimination.

Valentine's Economics!!!

2007-02-14T12:46:00.000-05:00

Sometimes a relationship could really equal money when it comes to giving the right gifts at the right moment. With the Valentine’s Day being just around the corner, the $1.13-billion rose market can be of interest to some economists. A recent article by the Forbes magazine explores the complexities of this market including the distribution process, costs incurred, and pricing strategies.

Initially, one might believe that rose sellers practice price discrimination during this peak season. Indeed, the price of roses increases during Valentine’s week, hopping from $12 to $100 a dozen!!! As the main source for roses sold in U.S., Columbian labor costs only $1.59 per hour. When the Columbians are exporting their roses at less than 50 cents per stem, how are the retailers justified in selling roses at such a high price?

There are several factors that must be considered before accusing the rose sellers of intertemporal price discrimination. First, one should carefully analyze the costs in the rose market including maintenance and shipping. As the author mentioned, the rose industry has a complex supply chain. When moving from one stage to the next, the roses need to be watered, refrigerated and delivered. These variable costs can be significant. Having to squeeze their profit margin 90 percent of the year, the rose retailers are forced to price higher during this season.

In ECON 101, we learned that when demand increases, price increases as well. It is estimated that Americans will buy 189 million roses on Valentine’s Day. Any rational seller will definitely raise the price. So where is the catch? If the price increase is way out of proportion with the increase in demand, we might suspect that sellers have ulterior motives in mind. Without crunching the numbers, however, we can not say anything for sure.

Okay, let’s assume the sellers’ price according to their costs, future losses, and the increase in demand. How would they extract extra from consumers? Well, one way is by bundling roses with teddy bears or some sort of low-cost add-ons and charging it at an appealing price level. Perhaps they could also have some premium packages in their selection to distinguish the rich brats from regular customers.

So if you think roses are too expensive for you, I would suggest picking up some DIY skills. After all, loving someone incurs a price! Ačiū.

By Jim Baltz, Wooi Yang Chang, and Brian Gavron

Rebates: Up for Debate

2007-02-14T11:58:00.001-05:00

Rebates, in their myriad forms, are a form of price discrimination. We have probably all received them. They allow retailers to keep the price on a good high, but advertise it for a much lower one. They allow retailers obtain more money from the consumer on purchase, with the promise of return a few months later. Some consumers won't even send in their rebate forms and the company will keep the money the consumer paid - over and beyond the advertised price.

Consumers who demand a lower price are separated from other consumers by their willingness to complete several additional steps past purchasing a product and to wait weeks to receive their 'discount' in the mail. While consumers certainly self-select their price by complying or not-complying with the terms of the rebate, and even before this by searching for items that have rebates offered in the first place, the complexity of the situation becomes immediately apparent when companies advertise prices that not all consumers receive (by not completing the rebate process or doing so incorrectly) or when companies simply do not fulfill their promises.

Highlighting their interest in the topic, the FTC will be holding a day of Rebate Debates to garner information concerning best practices and common problems that according to consumers, retailers, and academics. There are companies that do not, as the existence of Rebate Report Card verifies, comply to customer standards. During 2005 the FTC brought a case and won against well-known CompUSA for extending the time in which they delivered on rebate returns without their consumers' knowledge. Similarly, a high level of complaints against the process has prompted some companies, such as Best Buy, to curtail their rebate programs.

What the FTC will conclude concerning rebates remains unknown, though it is likely that the issues presented here will be some of those that they discuss.

Posted by: Tiffany Luong and Vicky Ukritnukun

Amazon.com with New Tricks

2007-02-14T11:16:00.000-05:00

If you have ventured on to Amazon.com lately you may have seen one of their latest ploys to get consumers to buy more of their goods. Now each product page has a bundled good for purchase with the good. Before one can scroll down to read the reviews of the product one sees the “Better Together” section. Below is a screen shot from the site with Talladega Nights: The Ballad of Ricky Bobby priced with Pirates of the Caribbean.

Even though it may appear that buying these DVDs together one will save about $21, the price given is actually the price of both movies combined. So is this actually a creative pricing strategy? Buying the two goods together will reduce the average cost of the goods as shipping them together will be cheaper, but the marginal cost is unaffected. Also Amazon.com is known worldwide for having some of the cheapest prices for books and other goods. So by buying both products here one is achieving more consumer surplus and Amazon.com is earning more revenues.

The “trick” here though is that Amazon.com is only providing the appearance of a bundled good as the goods can be separated at no charge on the checkout page. Which brings us back to the question, is this a pricing strategy or marketing ploy?

Posted by Michael Ledwith, Jessica Halper, Drew Muir, and Jake Carter-Lovejoy

Amazon (Price) Warriors

2007-02-14T10:12:00.000-05:00

Amazon. com, pioneer and leader in online sales, has some innovative tactics in bundling and tie-in sales. Firstly, Amazon offers free “super-saver” shipping for purchases over $25. Most items the company sells are books, DVDs, and CDs, which are typically priced between $10 and $20, and with standard shipping costs at approximately $5, there is a strong incentive for the consumer to “save” the $5 in shipping costs by spending an extra $5 to $15 on extra merchandise. On a website with such an extensive collection of products, the average consumer has little trouble finding another item she “needs,” and the shipping discount works as an effective personalized bundling discount – a bundle selected by the consumer.

Amazon also uses a second pricing strategy which is slightly less welfare optimizing. When viewing the product information of an item on the website, Amazon lists an option to “buy this item along with …” and lists another, similar or complementary item and the total price for buying both items. This is classic, textbook bundling. The catch here is that the bundled price is usually the same as the price of the sum of the individual items – there’s no discount for buying the bundle. The unwary or harried shopper may be essentially tricked into buying additional items because he thinks himself bundle-savvy. On the other hand, this feature may be effective, even with wary customers, as an advertising tool.

Is Wal-Mart helping itself ? – The Launch of Digital Movie Store

2007-02-14T00:57:00.000-05:00

By HoosAdvantage: Kara Ivy Goldberg, Wei (Grace) Song, Cheung Fai Yeung

Topics covered: Price Discrimination, Bundling, Product Cannibalization

Wal-Mart Stores Inc. just announced its entry to the digital download business last week. The launch of this long-awaited online movie store is bringing several impacts to the market and itself.

The biggest impact of this launch may be that it now frees studios to cut deals with other online services. Most studios have resisted signing deals with iTunes in part because of Apple's desire to sell movies at one price. Studios prefer variable pricing such as Wal-Mart is offering, and therefore practice price discrimination in the digital market.

Wal-Mart also said it will bundle some titles, allowing consumers to buy the "Superman Returns" DVD and the digital download for a "small additional price." This bundling act increases Wal-Mart’s market power in both the traditional and digital video businesses. It smoothes the entry to the digital download market and will help extract more consumer surplus.

However, has Wal-Mart considered carefully before this launch? Will this new digital store cannibalize its retail DVD business? "Customers have a growing interest in downloading video content, but complementary and supplemental to buying content on DVD," Kevin Swint, Wal-Mart's divisional manager for digital media, claimed. Wal-Mart reportedly objected when iTunes began selling movie downloads. It was worried that iTunes cut into its DVD business, and now it’s launching its own movie download store? The new online store will sell older titles starting at $7.50, compared with the $9.99 charged by iTunes. Will the cheaper pricing strategy save Wal-Mart from the product cannibalization besides undercutting iTunes’ market share?

"With the health of the DVD business and coming high-definition formats, retail DVD business will remain strong for quite a long time," industry expert predicted. The business of delivering popular video content on-demand over the internet is small and growing, but becoming increasingly competitive and complicated. Whether Wal-Mart can translate its success on the ground to the digital domain remains to be seen.

Source: The Washington Post

Wal-Mart launches video download service

Wal-Mart to launch Digital Movie Store

Toyota - Oh, What A Feeling! Lexus - Oh, What A Stealing?

2007-02-13T23:45:00.000-05:00

Why cruise along in a $61 000 Lexus LS400 and not a $25 000 Toyota Camry? Are the cores of Lexuses "every bit a Toyota" as The Car Man claims onThe Auto Channel Discussion Board ? Why would Toyota/Lexus compete against themselves? Does this count as product cannibalism? Have we asked too many questions?

The claim is made that "the core of the vehicles of Lexus are every bit a Toyota". They have the same manufacturers, the same dealership locations, and (at least in 1999) the same 'TOYOTA' text imprinted on the window glass. There are no crossover products. Toyotas and Lexuses may not even be considered the same market. Lexus owners may be trying to buy something more than the car itself.

It is our view that they are not competing against themselves.

While opponents of The Car Man had previously argued that the fact that Toyota and Lexus do not have any crossover models illustrates that the two brands are indeed different, this author argues that the lack of crossover models indicates that the two are really just one brand.

This argument illustrates an interesting aspect of product cannibalism. "Product cannibalism occurs when one product category steals potential customers from another product category" according to an editorial from Penn State's Distance Education website.

In this light, the author's argument about crossover models makes sense – if Toyota/Lexus made crossover models, the company would be competing between their own models – they would be stealing potential customers from another product, but since this product would also be part of their company, it would be of no use to the company.

As The Car Man says (and Team Awesome begins to think of him as "Our Car Man"), "Why would [the company] want to spend double the money in resources and advertisement to try and attract buyers to compete amongst themselves?"

What Lexus is doing to Toyota may also be defined as competitive displacement by Soren Kaplan. While it may not be the radical product cannibalism of infinitely updating browsers, it seems slightly tinged with competitive displacement and market invention.

The situation illustrates competitive displacement in that luxury cars (Lexus) and more economical cars (Toyota) do not belong in the same market if you look at cross-price elasticities (as we did in class for the demand for cars) and market invention.

Lexus and Toyota are certainly price discriminators, if not product cannibals.

- Jon Carrier, Joyce Chang, Dexter Galozo, Vinu Ilakkuvan

Metro Contemplates New Pricing Scheme

2007-02-13T23:29:00.000-05:00

The Washington Area Metro Transit Authority struggles to balance its budget year in and year out. Metro periodically rolls out new pricing schemes in an attempt to balance its budget, and there is a new proposal on the table. Metro is considering increasing fares for rush-hour riders who exit Metro in the heavy trafficked business district in downtown Washington. Metro is trying to divide the market into two groups: business riders and non-business riders. With this new proposal up for consideration, Washingtonians have been speculating about the wisdom of metro's current fare rates. Recently, Dr. Gridlock addressed a reader's opinion in his column in the Washington Post. The reader suggested that Metro should eliminate its peak-load pricing scheme with higher rush-hour prices, and charge the rush-hour price all the time to try to increase profit. Dr. Gridlock makes a valid point in saying that the rush-hour customers are paying for a more-frequent service. While this is a true statement that Metro has higher costs during rush-hour because of a more frequent service, Metro's main justification for using peak-load pricing is more likely because the demand curve is more inelastic during rush-hour. Metro can make more profit by increasing fares during rush-hour, and offering lower fares during non-peak hours when demand is more elastic. The new proposal to use a pricing scheme with higher price for business riders will likely increase Metro's profit, or more accurately reduce its loss. The use of trip exit station for market division is a smart way for Metro to move towards a balanced budget. However, some people are concerned about this plan, including Dr. Gridlock. Dr. Gridlock suggests this new plan is unfair price gauging, that Metro rider's don't have a choice, "unlike the form of congestion pricing in which drivers get to pick between a free lane or a less crowded toll lane." But Metro riders do have a choice, they can drive or carpool among other options, and for many riders even with fare increases Metro is a better deal than the alternatives, and therefore riders will continue to ride Metro.

Posted by Adam, Amy, Braden, and Fabio

Minimum Credit Card Purchases -- This is Discrimination!

2007-02-13T22:26:00.000-05:00

Recently, more and more businesses, such as restaurants, bars, and movie theaters, are requiring a minimum credit card purchase which can force consumers to pay more than what their purchase is worth. This practice is said to be driven by the cost of running the transaction, but often the minimum credit card purchase can range up to $20, which seems to suggest that these minimums more than cover the associated transaction costs. This practice can be seen as a form of price discrimination as it allows firms to classify consumers into groups based on those that are more willing to use credit for small purchases and those that are more willing to use cash for small purchases. One of the main differences between these groups is how the consumers value the relative ease of tracking transactions. Consumers who use cash are more able to easily track transactions, while those who use credit seem to be less concerned with tracking small purchases. Credit card users can be classified as more price inelastic for the given good, and therefore firms implement minimum charge requirements to make them pay a higher effective price. This practice of price discrimination allows firms to transfer more consumer surplus to profits, but it may actually violate credit card company regulations! Visa and Mastercard both prohibit minimum charge amounts, and “American Express’s regulations do not explicitly prohibit minimum charges, but its policy is to discourage any merchant practices that create a ‘barrier to acceptance.’” One of the main advantages of credit cards is convenience, and these minimum charges may punish consumers for using credit cards. Also, the fact that minimum charges vary from business to business suggest that is up to each individual firm to specify their minimum charges. It remains to be seen if businesses will change their policies according to the consumer’s credit cards, but this form of price discrimination may be less than fair.

Posted by Charlotte Pool, Josh Bennett, and Jeff Kerestes

Stop Whining Europe: Gazprom Flexes Muscles

2007-02-13T21:10:00.000-05:00

Russian natural gas giant Gazprom has been criticized by western nations for abusing its market power. Russia's largest company controls 93% of the Russian market and holds 16% of the world's natural gas reserves. The company owns more pipelines than any other in the world and caused a stir internationally when they threatened to shut down a pipeline that ran through Belarus towards Europe if the Belarusians did not accept a two-fold price increase.
Gazprom is the sole supplier to many of the countries of the former Soviet bloc. It also supplies the European Union with 40% of its natural gas. The company has been accused of using its monopoly like power in Europe to blackmail other governments.
The Russians announced at 10 am on January 1 they would shut down the pipeline through Belarus if the country did not agree to new terms. Gazprom not only raised the price, but also demanded sale of 50% of the pipeline, which had previously been owned by the government of Belarus.
Is this really Gazprom abusing its market power or are they just executing price discrimination. Belarus has one of the weakest economies in Europe and its economy is dwarfed in particular by Western Europe. The price that Belarus is paying is still below the market price. Belarus pays the lowest price while other countries like Ukraine and Georgia do too.
So why is Gazprom providing subsidized gas to Belarus and other former Soviet states? The obvious answer is the political motives that have continued to exist since the Cold War. However, with this case and a similar instance in Ukraine last year one could see things differently. Gazprom is soliciting only financial benefits, not political ones. The reason Belarus pays less are based on its weak economy (weaker demand) and its important position as a transit point that makes it valuable to Gazprom. Western Europe can complain, but Gazprom is acting like any monopoly would.

Posted by Joe Saunders, Risto Keravuori, Cheryl Kong

Hey Mac! Get out of my Vista...

2007-02-13T17:26:00.000-05:00

Though after watching the above commercial (and those like it) an ignorant observer would never believe that a Mac user would ever want to purchase a Windows based computer (or even interact with the Windows OS in any way, shape or form, since they are much to “cool”) there are Mac users which currently use Windows XP on their Macs. As many of you know, Microsoft has recently released Windows Vista, the newest version of Windows, for which there are 4 distinct (and distinctly priced) versions: Home Basic ($199), Home Premium ($239), Business ($299), and Ultimate ($399), from which users are able to choose based on their needs. According to this article published on MacWorld.com though, Microsoft is furthering its use of price discrimination by forcing Mac users which want to run Vista on their computers to purchase either the Business or Ultimate versions (the two highest priced!) by including a clause in the EULA (End User License Agreement) for Vista which forbids the installation of either Home version on a non-Windows based PC. While Microsoft’s decision to publish four distinct versions of its own product for the Windows based PC could be the subject of research on price discrimination product cannibalism, taking a quick look at price discrimination for Mac users is very interesting.

How does this price discrimination affect Macintosh users though? They surely don’t NEED to install Windows, and if their reservation prices are below those of either Business or Ultimate edition then they are effectively priced out of the market, right? Not so fast. In his blog, Tom Bozzo, an economist by trade, states that he will not be installing Vista on his home computer (a Mac) due to the price, since it is nonessential to anything he does at home. He does mention though that “I work in an otherwise all-PC shop, and we have Windows-only licenses for some job-critical third-party software,” and that he therefore must install either the Business or Ultimate edition in his office.

This scenario is what Microsoft had hoped for; considering that their company statement on the issue reads “Home users have rarely requested virtualization and so it will not be supported in Microsoft Windows Vista Home Basic and Home Premium SKUs.” Microsoft believes they can extract much of the consumer surplus from businesses who would normally buy the Home Basic version, just so that they could run their third party programs which run only on a Windows OS, but have much higher reservation prices than $199, since there are no substitutes to Windows in this case. By forcing businesses to purchase the higher priced versions, Microsoft is extracting much of the consumer surplus that would exist if these businesses were able to purchase the cheaper versions. They believe that this increase in producer surplus will outweigh the loss of producer surplus from people who use Macs in their home who are priced out of the market due to price discrimination. While this may be good in theory, it will be a while before we find out of Microsoft has effectively priced an entire portion of the population out of the market, or if they have designed a price discrimination strategy which will extract a significant portion of the consumer surplus.

USPS Goes Postal on Shipping Rates

2007-02-12T19:14:00.000-05:00

The United States Postal Service beginning in May will undergo a dramatic change in the way it prices for packages. The current system charges postal customers based on the weights of the packages they are sending. The new system will introduce a system of rates based not on weight but rather on shape. The logic behind the idea is that charging based on shape will give a more accurate payment relative to the cost of mailing packages. The economic side of all this is that the post office will be essentially sorting its consumers, mainly in the form of businesses, and charging them prices based on the elasticities of their demand curves. For example, the company that needs (or doesn’t care/want to change) 9X12 envelopes instead of the cheaper standard #10 envelopes will be charged more than the more flexible/elastic company who shifts its mailing to adopt to the now relatively cheaper #10 envelopes. Another example in which sorting will occur is that under the new plan the second ounce of a first class letter will be cheaper than the first. Those companies that are more flexible and combine mailings will benefit in that they will receive a cheaper per ounce rate. At the same time the post office will identify the consumers with inelastic demand for strictly one ounce first class letters and charge them more per ounce than those willing to adapt to the new pricing. In these ways the new pricing scheme can be seen as second degree group pricing discrimination.

HW 2 Elite Economists (Melissa Berry, Pat Di Gregory, Patrick Giesecke, Jonathan Sutton)

Students Feel Pain of Textbook Price Discrimination

2007-02-11T22:33:00.000-05:00

Every semesters, college students flock to the campus bookstore for textbooks while bitterly complaining about the price. According the GAO, a college student spends roughly $900 a year for textbooks alone. To make matters worse, prices of textbooks grow twice as fast as the rate of inflation. The textbook publishers set their prices so high because of price discrimination. In the United States, publishing companies charge a high price while a lower price is charged for the same book in other countries

Publishers own a monopoly because students must adhere to class syllabi; thus the first condition for price discrimination is met. Students often try to maneuver around paying full price such as buying the book used or buying a cheaper international version. The publisher utilizes certain practices in order to allow for price discrimination remains. By constantly introducing newer editions, used books become obsolete, and, therefore, the publisher eliminates arbitrage, the second condition for price discrimination. Publishers also bundle textbooks with extraneous features such as CD-ROMs and Internet companion sites in order to justify such a high price. Since foreign countries are relatively less wealthy than the United States, publishers will often produce lower-priced, international versions. This satisfies the last two conditions, namely two identifiable sub markets and different price elasticities of demand. The international editions come with a token warning on the cover that forbids them from being re-sold in the U.S. even though it is perfectly legal. Additionally, the shipping costs and required waiting time further compels students to avoid international editions.

Because the four conditions required for price discrimination are met, it’s no surprise that publishing companies price discriminate. Unfortunately, the students feel the pain. There is the last resort, however, of just not buying a textbook at all! Just hope to pass the class.

Link: Swelling Textbook Costs Have College Students Saying 'Pass'

Posted by: Caryl Huynh, Meghan Magennis, Chris Coyle, Lance Wang

In This Case, One May Be Better Than Two

2007-01-31T21:42:00.000-05:00

Earlier this January Citigroup held its annual entertainment, media and telecommunications conference in Las Vegas, NV. Among the massive plasma screen televisions, human sized talking robots and Cash Money Millionaire CEOs, there was talk of the Satellite radio market and where it was headed. The duopoly-throne is held by big-tymers Sirius Satellite Radio and XM Satellite Radio. While both companies have grown rapidly and generated strong revenues and subscriber growth, they continue to lose money (See link below for the article).
Looking at struggle between the rival of East Coast and West Coast Hip-Hop industry, obvious comparisons can be made to shed light on the satellite radio industry. Notorious BIG led the East coast and Snoop Dog and Tupac Shakur led the West coast. While both of these groups were widely successful with their music, the competition and rivalry led to the deaths of Tupac, Biggie and many others. Would it not have been better to set aside differences and work together to create music for fans without violence? We think so.
Rather than the two satellite companies fighting it out and losing money (symbolized by the rap artist’s violence), they should merge together and provide a better service to all subscribers. The key here is the high economies of scale associated with high sunk costs (satellites), and low marginal costs as more subscribers are added. The satellite radio industry could also be described as a network economy, as more people purchase this good individual demand will increase. Economies of scale and network economies are two sources of a natural monopoly.
Sirius CEO Mel Karmazin spoke out to investors saying that this merger could be in the best interest of everyone. Given the nature of the industry and satellite radio’s many competitors, it seems the merger makes sense. With a regulated monopoly of satellite radio, the two powerhouses can join forces giving way to an economically sound provision of entertainment. In the words of Snoop, it sounds like this merger, “Ain’t nuthin’ but a G-Thang baby”. And by g-thang, he means good thing.
http://money.cnn.com/2007/01/10/news/companies/sirius/index.htm
Sirius-XM merger makes sense

Posted by Ain't nuthin' but a G-thang baby (not Jura)

The Electric Price Shock

2007-01-31T16:42:00.000-05:00

The foundation of the Smithian economic model is that the market allows both allocative and productive efficiency. Such a market, now the standard for industries such as telephone companies, airlines and trucking, achieves this by forcing producers to compete to offer their good for the lowest price, thus saving consumers money. This, however, has not been the case for the business of generating electricity. After opening to competition over a decade ago, a truly competitive market for electricity production has yet to develop.

Advocates of the new system, such as Joseph T. Kelliher, the chairman of the Federal Energy Regulatory Commission, hold that eventually “market discipline will deliver the best prices.” Some argue that change can already be seen. Mark L. Fagan conducted a study that concluded that the new system often produces better results. Fagan argues that in 12 of 18 states that restructured, “prices were lower for industrial customers than they would they would have been under the old system.” Proponents of this system, however, seem to be quickly losing support to those who want to return to an updated version of the old system, in which states had rate-setting power.

Critics of introducing competition into the utility industry believe that the new system is not effective and, among other things, “can be manipulated to drive up prices, with the increases passed on to consumers.” Furthermore they argue that companies that produce electricity can withhold or limit it, further lifting prices. Many places, such as Baltimore, have already begun to experience heavy rate increases. Wary of these increases six states, including California, have suspended or delayed transition to the competitive system. Regardless of the debate, as of now, the market structure that led to “unambiguous drops in the prices of telephone calls, air travel and trucking” has yet to work its magic for electricity.

by Carter Mann, Christopher Hildner, and Bradley Fromm

Article: http://select.nytimes.com/gst/abstract.html?res=F30C11FE35540C768DDDA90994DE404482

Wall Street vs. the FCC: Sirius-XM Merger?

2007-01-31T16:20:00.000-05:00

Since the creation of the satellite radio industry, Sirius and XM Radio have dominated the market. So much so, that in analyzing and regulating the relatively new satellite radio market, the FCC classified the industry as a duopoly, with the two media giants as the only competitors in the business.

According to CNNMoney’s Paul La Monica, in the past few weeks, Wall Street analysts have been speculating about the possibility of a merge between Sirius and XM Radio. Sirius CEO Mel Karmazin, speaking at a Citigroup event in Las Vegas, said that a merger between the two companies could result in benefits across the board. Many analysts agree with this statement, speculating that if such a merge took place, the companies could redirect their huge marketing and advertising budgets into other areas and reduce the subscription cost to customers.

All of this speculation leaves out an important part of the merger equation. According to MediaWeek’s Jeffrey Yorke, the FCC already rejected a proposal for the two media companies to join forces in the summer of 2004. Since the duopoly that the two firms currently enjoy leaves them in a great position to make large profits, the FCC is not going to jump at the chance to allow them to consolidate into a single-firm monopoly. FCC Chairman, Kevin Martin, has said that the current regulations on the market are clear on the point that the industry must have two competing firms. The FCC is currently reviewing data on the ownership trends of 10 different media companies. This report, due sometime this spring, could influence the FCC’s ruling on a possible merger between Sirius and XM Radio.

This situation illustrates what can happen when the market and its regulating bodies are at odds. While the two companies may want merge, the FCC may decide that a merger is not in the best interest of consumers and the industry itself. It will be interesting to see what course of action Sirius and XM Radio decide to pursue and what regulatory action the FCC will take in response.

By Charles Thomas, Brian Rock, Zoey Wang, and Lian Ye

Works Cited:

CNNMoney - Sirius-XM Merger Makes Sense

MediaWeek - FCC Nixes Prospect of Sirius-XM Merger

Resurrecting Ma Bell?

2007-01-31T13:51:00.002-05:00

Some of you have probably seen Stephen Colbert's rant about the recent AT&T-BellSouth merger. This $67 billion acquisition of BellSouth by AT&T comes close on the heels of last year's $6.7 billion Verizon-MCI and $16 billion AT&T-SBC mergers, and it would seem that the telecommunication industry is indeed returning to the old days of Ma Bell's phone monopoly. There are now only 3 remaining competitors: AT&T, Verizon, and Qwest - all of which consist of at least one Baby Bell. A more realistic picture of what things look like:

A quick history lesson for those that aren't familiar with it: Beginning in 1972, and taking effect in 1984, the Department of Justice undertook antitrust proceedings that led to the breakup of telecom monopolist AT&T ("Ma Bell"), which owned both local and long-distance telephone service throughout the US. AT&T lost all local service rights, relegated to long-distance only, but was also allowed to diversify into the computer industry (a venture which failed quickly). AT&T's local service was split into seven Regional Bell Operating Companies ("Baby Bells"), though they continued to hold local monopolies. Competition in the long-distance market, however, grew strongly as Sprint, MCI, etc. quickly entered the market. The immediate effect was a dramatic raise in the cost of local calls as the long-distance revenues from the previously coupled service provider could no longer underwrite the more costly local networks. On the bright side, long-distance rates did fall, but only to be driven back up by government regulations that transferred profits from long-distance to local companies (since it was the local companies that owned and operated the infrastructure).

Now, of the original seven bells, one remains free-standing (Qwest), two have been incorporated into Verizon, and four are in the newly constructed AT&T, seemingly bringing the market ever-closer to one large entity once again. This has gotten many consumer rights and industry watchdog groups up in arms, as they view this as an end to the idea of a Bell vs. Bell competitive utopia of sorts. Yet many economists think that this is not a bad thing at all and claim that it will actually help the consumer. The most obvious advantage of such mergers is the return of the consolidation that had originally allowed AT&T to defray costs between sectors of their company. The Bell breakup separated service providers from infrastructure owners, a situation that encourages advantages to be taken. But this is not the only reason why this deal isn't bad, the main one being that the market is a different place now than it was 20 years ago, with vastly changed technology. Plain old telephone systems (or POTS, as they are known) are becoming outdated as they are replaced by cell phones and Voice-over-IP (VOIP) systems. This is especially true in population centers, where technology takes off fast, but also where telecom companies stand to make the most profit (as they have the lowest installed infrastructure to users ratio). Continuing to provide service to rural areas becomes increasingly expensive as companies are forced to maintain "legacy" systems, and it makes sense to incorporate their service into consolidated vertical ownership so that none of these consumers are forced to pay egregious amounts for their small portion of total service - a return to the old cost-underwriting-for-public-service that was present under the old AT&T.

Another large argument for the mergers stems from the emerges of these new technologies. As POTS are phased out (in favor of cell phones currently), consumers' expectations from telecom companies are also changing drastically. Internet users want increasingly faster broadband connections to the web, and many previously distinct industries are converging towards this demand. Cable companies offer internet over their high-speed coaxial lines, phone companies continuously upgrade DSL/ADSL services, satellite companies improve their technology towards "spot beams" and other high tech names, and cellular/wireless companies promise impending high-speed access whereever their is cellular reception. With the internet poised to eliminate POTS forever with VOIP, all of these newly-competing companies are greatly enlarging the market for telecom services. The biggest craze today is for the lying of fiber optic lines to every consumer's house, an ultra-high speed link that would could replace all other connections (delivering voice, video, internet, etc. all over one huge capacity line). With so many companies rushing to give this to the consumer, competition is not suffering.

One valid concern about this merger is that AT&T will now own 100% of Cingular Wireles, the nation's largest (by a good margin) cellular provider. Once again, though, there are still plenty options for consumers currently, and the cellular market is one that has low enough entry costs (see Helio mobile, for example, which sprung out of nowhere), especially with the emergence of mobile virtual network operators who can coexist with current infrastructure owners. This is still the one aspect of AT&T's that needs the most attention, but it is not a situation of impending doom. It should also be noted that the US is behind other parts of the world in cell phone technology, and overseas service providers have been looking for opportunities to gain a foothold here as well - and in today's world, such globalization is another great protective device against unfair monopolistic practices.

Economists Robert Crandall and Clifford Winston threw down the one of the first gauntlets in favor of this merger back when it was intially announced, but they also provide an interesting critique of government antitrust regulation in general.

--posted by Risto Keravuori, Joseph Saunders, and Cheryl Kong

Boeing Benefits from Market Concentration

2007-01-31T13:31:00.000-05:00

Boeing’s earnings release this morning recorded huge growth at the Chicago aerospace company. Net income more than doubled, and airplane manufacturing slots are filled for the next three years. In addition to the strength of its defense department, Boeing is riding on the growth of its commercial aircraft division and the introduction of the new Boeing 787 Dreamliner. It only helps that their only competitor, Airbus, has pushed back the introduction of their competing A380 due to production problems.

Wait… there’s been a huge boom in aerospace, but Boeing only has one competitor? What about zero economic profits? The commercial aircraft industry is one of the few examples where, because of a combination of sunk R&D costs and economies of scale, the market is structured with only two major players. If the lack of competition is alarming, throw in the role of government and you’ve got an industry that is at times highly controversial.

The two companies, both in their infancy and even now, receive hefty support from governments to finance their projects. Ideally, the subsidies and loans they receive should only balance out prohibitively costly barriers to ensure that the industry continues to exist. Rules policing the role of government support are outlined in a 1992 bilateral trade agreement and WTO regulations. In recent years, Boeing has accused Airbus (a European consortium) of receiving illegal subsidies from European governments. Airbus countered that US government contracts and tax breaks violate the previous trade agreements.

Although this conflict has yet to be resolved, both companies are benefiting from a huge boom in aircraft orders that will last through the end of the decade.

Post by: Holly Bui, Daniel Mendelson, Kevin Turner

Who Controls the Media?

2007-01-31T11:21:00.000-05:00

By HoosAdvantage: Kara Ivy Goldberg, Wei (Grace) Song, Cheung Fai Yeung

In the absence of practical organic growth prospects, media industry executives have the urge to merge. This wave started a dozen years ago and has been marked by such deals as “Time merging with Warner, buying Turner Broadcasting, and then selling itself to America Online; Disney buying ABC; Viacom buying CBS; and Vivendi buying Universal. Later months have seen such combinations as Comcast and AT&T Broadband, EchoStar and DirecTV, Vivendi Universal and USA Networks.” A tide of activity in this sector over the past decade has provoked wide-ranging comment from the press, investment analysts, and other commentators. Critiques are concerned that it might not take too long for very concentrated conglomerates to control every image, radio and TV channel, and even the emerging internet service.

There is a state of oligopoly or monopoly in a given media industry. For example, movie production is known to be dominated by major studios since the early 20th Century. The music and television industries recently witnessed cases of media consolidation, with Sony Music Enterntainment's parent company merging their music division with Bertelsmann AG's BMG to form Sony BMG and TimeWarner's The WB and CBS Corp.'s UPN merging to form The CW. There is also a state of large-scale owners. This market structure exists for television broadcasting, cable systems and newspaper industries, all of which are characterized by the existence of large-scale owners. Concentration of ownership is often found in these industries. As a result, a small number of large companies lead to a very concentrated media and entertainment industry. To see a graph of Family Tree of the current media conglomerates:

With this concentrated market structure, the industry Learner Index is relatively high, thus the market outcome lies farther from the competitive case and the market power is being exploited more. Concentration of media ownership is very frequently seen as a problem of contemporary media and society. When media ownership is concentrated in the ways mentioned above, a number of undesirable consequences follow, including the following:

For the general public, there are less diverse opinions and voices available in the media.
For minorities and others, fewer opportunities are available for voicing their concerns and reaching the public.
Healthy, market-based competition is absent, leading to slower innovation and increased prices.

Source: McKinseyQuarterly Media Merger: The wave rolls in

U.S. curbing deals with the enemy

2007-01-31T11:17:00.000-05:00

By: Elite Economists

Shell recently joined with Spain and Iran to develop a new gas field in Iran. The development is aimed to take place about a year from now and become a new and very important source of income for Iran. This development would give Iran even more leverage in the international realm of politics and economics. As of now Iran has the second largest natural gas reserves, following Russia. This movement creates many issues for the U.S.

As an adversary to the United States as well as many other democratized nations, a move like this threatens the U.S. The U.S. created a law, Iran-Libya Sanctions Act in 1995 in which the U.S. will create a sanction against businesses and nations that invest too much in Iran’s energy source. This deal is currently under review and can possibly cause the U.S. to act on this business move.

The U.S. government is greatly affecting various economies with their aggressive government regulations. The pressure is on businesses and nations to avoid profitable dealings with American enemies. This deal would’ve bought in about 15 billion to Iran’s income every year. Even with countries and businesses in need of a financial advancement, I’m sure this is hard for them to swallow, especially when the business opportunities are right in front of their faces. This is once again an example of how the U.S. succeeds in controlling the world economy.

Source: "Big Shell Iran deal could bring U.S. sanctions"

Market for...Love?

2007-01-31T02:15:00.000-05:00

With Valentine’s Day right around the corner, what better a time to talk about the ‘perfect substitute’ or the ‘perfect complement’ for all of us? Increasing demand for relationships from all the lonely singles out there has solicited tremendous growth in the on-line dating industry.

One particular dating service that had previously lost on-line subscriptions to racier social-networking sites has since become the largest online dating service in the United States. Here’s how Match.com did it. After a period of losing subscribers, Match.com revamped its focus audience such that it was geared towards people over 50 and divorcees. With older people getting “connected” more often, they’ve become an attractive target for a company that advocates “serious relationships.” By creating a new web-site designed towards usability, and by employing the psychological ‘talents’ of “Dr Phil” McGraw to create guides with advices on setting realistic relationship goals, Match.com has increased its online traffic to 4.3 million unique visitors per month; second only to Yahoo! Personals in terms of monthly visits to dating websites.

Match.com, owned by Barry Diller, incorporated the use of economies of scope to revamp the online dating market. Barry Diller also owns better known brands such as the loan exchange Lending Tree and the invitation service, eVite. As links and banners were cross-promoted on Diller’s broad range of media, more people were reached with each additional dollar spent.

Extremely high start-up costs in relation to advertising and technology restricted entry into the relatively small market for online dating (only eight major dating services), and thus the dating services that do exist have exhibited near monopolistic power in terms of the monthly fees and services that they charge. As the market structure and concentration remains the way it is, Match.com seems to be continually earning an increase in its quarterly revenue. Will other online services catch on to this market of old people?

http://coachingtip.blogs.com/so_baby_boomer/2007/01/boomers_and_onl.html

The Wall Stree Journal, How Match.com Found Love Among Boomers, January 27-28, 2006

Posted on behalf of Pamela Tsang, Thomas Li, and Chi Liu

Hostile Takeover in the Airline Industry?

2007-01-30T23:39:00.000-05:00

Charlotte, Jeff, and Josh

http://money.cnn.com/2007/01/30/news/companies/delta_merger/index.htm

http://www.usatoday.com/money/biztravel/2007-01-30-usairways-delta-merger_x.htm

US Airways is beginning to second guess its plans for a hostile takeover bid of Delta Airlines. The creditors' committee of Delta, whose support for consolidation is necessary for the deal to go through, has been vacillating on a decision after US Air increased its bid for the company by 20% three weeks ago. Delta's management has been fighting consolidation in the hope that reorganization and a departure from bankruptcy protection can be quickly accomplished. Delta has secured financing from six large investment banks to emerge from bankruptcy in the spring, and has additionally promised to emerge from protection as a company open to mergers (without a "poison pill" prohibiting takeovers).

Delta has resisted a bid on the grounds that the two airlines have significant overlap in routes and that consolidation would merely lead to competitors doing the same to increase their own market share vis-a-vis the new US Air-Delta company. Delta had previously been rumored to be considering a merger with Northwest - a combination that to them could create a mutually beneficial relationship. US Air's chance at success in their takeover bid has been riddled with skepticism on the part of analysts. They seem to agree that it would be better to let Delta emerge from bankruptcy and see what the industry looks like after the company has a chance to reestablish itself. Talk by US Airways of further sweetening the deal has been met only with more skepticism.

Delta's belief in its ability to reaffirm its place in the airline industry and its distaste for the US Airways deal should be respected for the time being. If it is established that fares remain too low for the most efficient airlines to be profitable, then mergers and takeovers should be reconsidered. However, there seems to be better options for a merger (as with Northwest) in the marketplace, and at least for the consumer and airline quality, more competition and a less concentrated marketplace should at least be tested out. As airlines finally are becoming profitable five and a half years after September 11th, perhaps the market should simmer before being shaken up yet again.

Drug-dealer Drama: The hidden economics of pharmaceuticals

2007-01-30T23:14:00.000-05:00

Meghan Magennis, Seon Hwang, Kristy Choi, Minsoo Park

http://www.washingtonpost.com/wp-dyn/content/article/2006/04/24/AR2006042401508.html

It turns out that the drug-dealer in the back alley isn’t the only one who has spent some time in court. In 2006, the Federal Trade Commission challenged brand-name pharmaceutical companies in Supreme Court for cutting deals with generic companies to delay the sale of cheaper drugs. The Federal Trade Commission discovered at least seven cases where brand-name drug companies paid generic drug manufacturers not to challenge their patent after it expired. The Washington Post explains that “the agreements allow the branded companies to maintain their patent exclusivity for longer periods, while the generic company receives money, for, in effect, dropping its challenge.”

In one case, Cephalon, Inc. convinced four generic companies to drop challenges to the patent of the sleep-disorder drug Provigil. All four generics agreed to steer clear of the market until 2011, and together they will receive licensing payments of $136 million from Cephalon.

This case illustrates that market power carries a multi-million-dollar price tag. Cephalon, and many other brand-name companies, are willing to pay others not to enter the market. By restricting the number of firms in the market, pharmaceutical companies can implement monopoly-like pricing schemes- pricing way above marginal costs. In other words, Cephalon is aiming to keep its Lerner Index high.

As long as big pharmaceutical names continue to cut deals with generic makers, consumers will have to pay brand-name prices. The Federal Trade Commission recognizes that these big-name agreements are making prescription drugs unaffordable for many citizens. The future of prescription drug prices lies in the hands of the Supreme Court, who will decide if these types of arrangements are legal.

Government Regulation Affecting Youtube and MySpace Abroad

2007-01-30T22:49:00.000-05:00

The popularity of sites such as Youtube and MySpace has increased drastically over the last year. These sites allow users to make ‘video blogs,’ in which they can post media clips ranging from home videos to music videos to the most recent episode of popular television shows. In the arena of video-sharing, two of the most controversial debates center around piracy and censorship.
Last year, Google purchased Youtube for $1.65 billion, a price so high as a result of the mass volumes of copyrighted videos posted on the website. If it hadn’t been for those copyrighted materials such as episodes of 24 and The Simpsons that were floating on Youtube’s cyber-turf, the company’s value would have been much lower. Twentieth Century Fox has taken legal action and are requesting that these videos be removed from the site. Under US Federal regulations, copyrighted material is prohibited from being reproduced and distributed, thus creating a barrier to entry and limiting competition. However, in the UK, Youtube is not required to monitor its users’ posting. Therefore, barriers to entry are not as high abroad.
However, European users face a different kind of barrier to entry. In Europe, television services must be licensed, a regulation that helps to monitor advertising, hate speech and censorship for children. In general, television licensure is a barrier to entry and creates a monopolistic market. Until now, online video-sharing has not been affected by the regulations that apply to television licensure; however, the EU is pushing to extend broadcasting regulations to the internet. If this directive is adopted, it will create two barriers to entry – firstly, sites administering video-sharing will decline and secondly, users of these sites will be driven away. If these companies are forced to operate outside of the EU, the Member States will suffer high GDP losses.

Blog Post by Jake Carter-Lovejoy, Jessica Halper, Michael Ledwith, and Drew Muir

Articles:

http://business.timesonline.co.uk/article/0,,9071-2569108,00.html
http://www.timesonline.co.uk/article/0,,13509-2407359,00.html

Bankruptcies drastically fall down in 2006. So what’s the fuss about? You can get your money back!

2007-01-30T22:32:00.000-05:00

By Sujin, Priya, Ziad

Most people tend to see government regulation as a negative; however, we found the 2005’s bankruptcy reform legislation to be effective. The legislation makes it harder for someone to simply renounce their debts by declaring bankruptcy. For basic information check out http://mahalanobis.twoday.net/stories/3194683/.

Some people think the legislation is unfair to the poor because most rules are broken disproportionately by the poor. There are more poor and also the reasons that revolve around the poor are correlated. But the legislation helps companies and corporations while enforcing contracts. In our opinion, the government’s decision to enforce this legislation has more benefits than costs.

Craig Newmark, an associate professor of Econ at North Carolina State University, writes in his online blog that one of his sources strongly agrees with the 2005 bankruptcy reform legislation. He states “the bottom line is that most of those prevented from declaring bankruptcy by the new law weren’t sympathetic, they were simple scofflaws, and are better off for having to pay their debts like responsible adults”. To read more view http://newmarksdoor.typepad.com/mainblog/.

Similarly, the article states “you can’t have a prosperous society without having prosperous companies”. Encouraging bourgeois virtues like temperance, diligence, thrift, and keeping one’s word can only help our society. So what’s the problem with the government encouraging people to keep their word and to pay their debts!

Wal-Mart will own the world someday…

2007-01-30T22:03:00.000-05:00

Or maybe not, but they are taking serious steps to either purchase or become a bank. They currently have built alliances with financial service providers such as Money Gram International and Sun Trust Banks. The idea of Wal-Mart introducing itself fully into the banking industry sends shivers through retailers and other financial institutions alike. Wal-Mart has excellent economies of scope to expand a potential banking business to an enormous size due to the fact that it contains much of the physical capital it needs and has many stores all over the world which would facilitate money transfers. Besides this, it will eat up even more of the retail market by lowering prices and providing financial services and/or very attractive payment plans for purchases at its stores, thus capturing a new (very low) socio-economic market.

This seems like a great plan for Wal-Mart and for most of us, but it deters equitable and fair competition for other firms that suffer because of Wal-Mart’s huge economies of scope and its ability to have the lowest prices and maybe soon, the lowest loan rates. Banks and retailers who are in the market will lose a lot of customers and the barriers to entry into any of the two industries will be raised enormously if Wal-Mart reaches its objective.

The only force that can stop Wal-Mart right now is government regulation (specifically the FTC). The government may prohibit Wal-Mart from owning or operating a bank because this behavior may be perceived as anti-competitive. However, Wal-Mart is still exerting a lot of pressure in order to open up a bank. If and when they do, the government will make sure there are enough restrictions imposed upon Wal-Mart and its bank in order to foster healthy competition throughout the economy.

Always low prices and rates? We think not.

Sources: http://www.businessweek.com/magazine/content/05_06/b3919046_mz011.htm
http://www.epinet.org/content.cfm?id=2328
Authors: Adam Koussari-Amin, Amy Peckinpaugh, Braden Rotberg and Fabio Vanegas.

Office Depot? What's that?

2007-01-30T16:22:00.000-05:00

Had anyone else not heard of the proposed merger between Office Depot and Staples that Jura mentioned in class? What happens when the government wants to prevent a merger? What sorts of evidence do they use? We decided to investigate the case.

The attempted acquisition of Office Depot by Staples, one of the office supply chain’s two leading rivals (the other being OfficeMax), is a prime example of modern anti-trust regulation in the U.S. Staples began preparing for the merge in early 1997 and was promptly sued by the Federal Trade Commission. The FTC sought an injunction in federal court barring the merge.

The government’s burden was to prove that the merger would be anti-competitive by analyzing firm behavior. Using Econometric analysis, the FTC demonstrated that prices for office supplies in Staples and Office Depot were lower in cities where the two competed head-to-head as opposed to those where only one of the stores had set up shop. To put this into terms we can relate to, look at one of the examples the FTC cited – file folders. In Orlando, where Office Depot competes with both Staples and OfficeMax, file folders cost $1.95. In Leesburg, Florida, a city some fifty miles away in which Office Depot is the only superstore, the same file folders will run you $4.17. Any this is according to Office Depot’s own ads!

The FTC argued that if the merger was permitted to go through, some forty markets across the country would be in Leesburg’s situation, containing only one of the three superstores. Notice how the FTC’s definition of the geographical market is critical – if Leesburg is lumped into Orlando’s market, the merger might go through. But as it stands defined, the FTC can show that the merger would tend to raise prices for consumers, and hurt their ultimate welfare. And a note to those of you considering going into business – don’t do what Office Depot did, which was to label its stores as located in “price zones” if they faced entry by other superstores, and “non-competitive” if they did not. Talk about the “smoking gun memo” for the FTC! In the face of such evidence, Staples’s argument that the newly merged company would face increased competition from non-office supply stores selling similar products (think Wal-Mart, Target) seemed to break down.

And so the proposed merger between Staples and Office Depot was rejected by a 4-1 decision of the federal court, and became one for the record books.

The FTC’s website, www.ftc.gov, is a great resource for more information on this attempted merger, especially the log of press releases and the testimonies of government officials.

Posted by Jung-In Choi, Katie Meyer, and Helen Mayer

FCC says "Yes" to More Local Cable Service Providers

2007-01-30T15:57:00.000-05:00

On December 20, 2006, the FCC ruled that local governments should “speed up the approval process for new competitors [for providing cable services], cap the fees paid by new entrants, and ease requirements that competitors build systems that reach every home”¹according to the Associated Press. Is this FCC regulation of the cable service market fair?

Proponents of the FCC ruling state that the new regulation should allow more competitors into the cable service market through reducing demands of the local government to new entrants, which should lead to better consumer satisfaction with their cable service provider.

Opponents of the ruling argue that the new regulations will lead to “cherry picking”¹, where new cable providers will only better serve the rich neighborhoods, leading the rest of the consumers with their original cable service problems. In addition, opponents of the regulation believe that there will be loss of local oversight due to the “federalization” of the cable market and fewer funds available for public channels.

From an economic prospective, the answer to the question is no. The FCC regulation will get rid of the barriers to entry in the cable market that were set up by the local governments. If this is the case, then there should be an increase in consumer satisfaction of their cable service providers because there will now be more competitors in the market, which will allow consumers to have more options in choosing a good cable service provider.

There also should be no threat of “cherry picking” in the long run because all the firms will be more competitive, thus the old firms will offer incentives (e.g. lower prices) and the new firms will want to expand their services so that they have the largest consumer base possible from which to generate revenue.

The only unsolvable issue left in this case is the dispute between the powers of the local government and the federal government. Does the federal government have the right to impose these regulations on the local government? The answer must be a yes, since the federal government is a higher hierarchical bureaucracy than the local government. Furthermore, the federal government deals with issues that concern not only localities, but the U.S. economy on a much larger scale. Thus, it seems that this “unfair” FCC regulation is not so unfair after all.

Works Cited

¹“Local Governments: FCC Not Playing Fair” by John Dunbar

Posted By: Lance Wang, Chris Doyle, and Caryl Huynh

Economics of Scalping

2007-01-29T21:42:00.000-05:00

By Jim Baltz, Wooi Yang Chang, and Brian Gavron

What’s interesting and relevant to our coursework in this week’s current events? How about the Super Bowl?

This brief article from the New York Times describes how the internet has changed the market for scalpers, people who sell tickets to events like the Super Bowl on the secondary market. There are thousands of these tickets on the market, each priced at an average of about $5,000 per ticket, a huge mark up from their $600-700 initial price since demand far exceeds the very limited supply.

In the past, one needed a scalper contact or waited until game day to purchase tickets from a random guy near the venue, often wondering if the tickets could be fake. Today, there exists a large variety of search sites online (try googling “Super Bowl tickets”), through which one can buy their tickets from hundreds of different sellers before game day. Many sites also guarantee the authenticity of their tickets, which is very important for this market that tends to have many forgeries. Market concentration is low, with most sellers offering 2-3 tickets, so competition is high. Increased transparency and competition through these sites have revolutionized the market.

This market is interesting because every ticket is unique, so there are technically very close substitutes within the market but not perfect substitutes. For example two seats next to each other are almost perfect substitutes. There are fewer substitutes as one moves further away from any given seat. Yet, the rate of change in substitutability is relatively slow for most of the stadium as one is only willing to pay so much extra to get a slightly better view of the field. That means cross price elasticity, if you consider every ticket as unique, is extremely high for similar goods, resulting in low price dispersion between sellers of similar goods (similar sections of the stadium). This is an example of how an educated consumer benefits. Sellers must charge very close to the market price or they will likely sell nothing. Note that prices may not be accurately represented initially on websites due to fees charged later (obfuscation).

Overall, researching and buying tickets through these sites is quick and easy, and will remain so in the future. Since search engines generally make a commission per sale, it is in their best interest to keep competition and transparency high. Thus, prices remain low so consumers use their site, and websites suffer less from decreased profits than the sellers.

I’m not sure if I’ll be one of those consumers in the near future, but if I wanted to, I’d rather buy re-sold tickets online than from a sketchy guy on the side of the road.

Go Bears!

Wireless over Wires

2007-01-29T20:56:00.000-05:00

http://media.seekingalpha.com/article/7887

For our blog, we read an article about the telecommunications industry. The article stated that telecommunications companies put forth the initial investment to build a national infrastructure and should therefore be allowed to utilize it as they see fit, including the installation routers which violate the principle known as “net neutrality”.

We disagree with this position. While building the national infrastructure, telecommunications companies had the fixed cost of construction heavily subsidized by the federal government. Additionally, they were permitted to charge rates substantially above marginal cost without the threat of monopoly prosecution. Due to this economic assistance, we believe the infrastructure that supports the Internet is much more of a public good than it is portrayed as in the article. Thus, the government has a duty to regulate this contentious field.

We are not necessarily advocating for or against network neutrality legislation. However, we believe that the government has a duty to investigate the possible effects of network neutrality regulation. If it is found that such regulation would harm the research and development efforts of the telecommunications industry or hinder the creation/introduction of new generation of Internet products or services without providing substantial benefits to consumers, then government regulation should be avoided in this sensitive area. However, if the government investigation finds that the implementation of non-network neutral routers causes substantial harm to consumers, through decreased competition and increased prices, the government should impose net neutrality legislation to protect this valuable public asset.

FTC and DOJ probe anti-competitive practices in Private Equity

2007-01-29T20:26:00.000-05:00

A recent concern about anti-competitive practices among Private Equity (PE) firms has caused the Justice Department to launch an investigation into PE funds. Two recent articles in the Wall Street Journal highlight the growing concern over potentially anticompetitive activity with regards to PE firms and the mergers and acquisition (M&A) market: "Carlyle Agrees to FTC Limits to Secure Kinder Morgan Deal" and "GE Sets Private-Equity Limits" .

The first article concerns The Carlyle Group's intended Buyout of Kinder Morgan, which, after FTC review, may only proceed if Carlyle gives up "daily involvement in running" Magellan Midstream, a company that competes in the energy distribution market with Kinder Morgan . The FTC contends that Carlyle's stake in these two companies could have threatened competition in 11 metropolitan areas, including Richmond, VA.

The second article discusses the bids that GE has solicited for it's plastics business, valued at approximately $10 billion. Sources contend that GE will not entertain club offers. The concern, for the DOJ, is that there maybe a potential lack of competition among these bidders: “The "club" issue has taken on greater significance since October, when the Justice Department launched an antitrust probe of private-equity funds. While the ostensible goal of forming buyout clubs has been to spread the risk of larger investments among the members of the club, some takeover professionals have voiced concern that clubs may also limit the number of competing bidders and the value of potential bids." (WSJ - GE article).

These two articles highlight the growing concern in the Antitrust Community that consumers, the beneficiaries of antitrust regulations such as the Sherman and Clayton Act, may be harmed by lack of competition in the PE market. The recent investigation by the DOJ and the unusual restrictions enforced by the FTC are signals that other similar business transactions will be closely scrutinized.

** Posted on behalf of Marie Copoulos, Tiffany Luong, and Vicky Ukritnukun