Advertising Bias

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

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?

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!

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!

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?

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

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:

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

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?

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?

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

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

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

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

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

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

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

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

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

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

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???

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!

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!*

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

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

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

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

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

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

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

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

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

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?

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

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

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.

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