Exclusive deals are a part of business, and can be pro-competitive. For small firms, having an exclusive deal with a supplier or a vendor can reduce the uncertainty of doing business and give each party a greater incentive to invest more in pre-sales and post-sales services. This can lead to more innovation, better products or services and a greater degree of healthy competition.
Exclusive deals can also be anti-competitive. For firms (typically) with a great degree of market power, exclusive deals can lock out new competitors, reduce the choice to customers, and reduce competition.
In testimony to lawmakers earlier this year, some wireless carriers suggested that the degree of exclusive deals in wireless communications is the later, not the former. From the article, there seems to at least be the possibility that the amount of exclusive deals among wireless carriers and smartphone manufacturers is reducing consumer welfare.
Monday, November 16, 2009
Saturday, November 14, 2009
Airline Merger & the Horizontal Merger Paradox?
British Airways and Iberia recently announced they were merging. According to the article, the main benefits of the merger were costs synergies - specifically overhead or fixed costs synergies. One of the counter-intuitive results from the Cournot model revolves around something called the horizontal merger paradox. The horizontal merger paradox states that if firms in the same industry merge, and the merger is not a merger to monopoly - in other words after the merger there are still firms competing in the market - that the post-merged profits of the combined firms are less than the pre-merged firms profits.
One of the resolutions to the horizontal merger paradox is that the merged firm can be more profitable if it can lower its fixed costs by merging. This is what BA and Iberia are claiming they are going to do. The problem is that firms seem to over-estimate the fixed cost synergies, and thus we see some evidence that the post-merger profits are less than anticipated.
I wish to be clear, I am not saying that this is a profit-reducing merger. All I am saying is that this merger seems like a good example of the horizontal merger paradox.
One of the resolutions to the horizontal merger paradox is that the merged firm can be more profitable if it can lower its fixed costs by merging. This is what BA and Iberia are claiming they are going to do. The problem is that firms seem to over-estimate the fixed cost synergies, and thus we see some evidence that the post-merger profits are less than anticipated.
I wish to be clear, I am not saying that this is a profit-reducing merger. All I am saying is that this merger seems like a good example of the horizontal merger paradox.
Friday, November 13, 2009
Booksellers Association Accuses Retailers of Predatory Pricing
Toward the end of last month, the Booksellers Association accused Wal-mart, Target and Amazon of predatory pricing. To be clear, I am not a legal scholar or expert but rather a legal novice, so none of the following should be in any way considered legal advice. Rather, I am looking at this issue from an economic perspective. With that out of the way, let's look into the economic merits of the Booksellers Association's accusation.
Specifically, Wal-mart, Target and Amazon are selling new, hardback books for around $9 each, which is below the estimated per unit cost to these retailers of acquiring the hardback books. Thus the first component of predatory pricing is that the firms are selling below their costs, and for simplicity I am thinking about this in terms of unit variable costs. But firms can set prices below their costs and not be engaged in predation. What is needed is for the alleged predatory behavior to lead to the exit of their rival, and here is where it gets very difficult, since Wal-mart, Target and Amazon - whom I will refer to as the "three amigos" - are not competing in the same product market as book publishers. Thus it seems difficult that the book publishers are actually driven out of the market, when they are not in the same product market and since none - that I am aware of - have exited the market due to the "three amigos" new pricing strategy.
This could be a profit maximizing strategy if the "three amigos" are doing this to cross-subsidize in other areas of their business. I am unable to show this for lack of data on the firms business practices, but I did want to point out that it is theoretically possible for a firm to set prices below its unit variable costs and still behave as a profit-maximizing firm.
As for the claim that this is "is damaging to the book industry and harmful to consumers", this I am having a hard time figuring out. The book publishers set their price to the retailers, and the retailers then (usually) mark up the price to the final consumer. As I understand it - and I could be wrong - book publishers are still selling books to retailers and earning revenue from the sales of these books. So the retailer changing the price of the final product should have no effect on the sales revenue of the book publishers in the short-run.
As for the last part of the claim, that retailers selling books at lower prices is harmful to consumers, that is laughable, which even my 7th grader immediately found the fallacy of that statement. Then again, he really is a smart boy.
Finally, at least one book producer (David Young, chief executive of Hachette Book Group) hoped for a law outlawing the discounting promotions and emulate France’s prohibition against book publishers pricing books below cost. I think that regulating the lower bound on book prices would be a grave mistake. Given the industry typically over-produces many books - walk into a book store like Barnes and Nobles - and you can easily find the bargain book piles, regulating the lower bound for the prices of books would be a step in the wrong direction. Given our time with reduced reading by young people - typically due to a plethora of substitutes - increasing the quantity demanded for books (and thus reading) should be something that book publishers should seriously consider.
Specifically, Wal-mart, Target and Amazon are selling new, hardback books for around $9 each, which is below the estimated per unit cost to these retailers of acquiring the hardback books. Thus the first component of predatory pricing is that the firms are selling below their costs, and for simplicity I am thinking about this in terms of unit variable costs. But firms can set prices below their costs and not be engaged in predation. What is needed is for the alleged predatory behavior to lead to the exit of their rival, and here is where it gets very difficult, since Wal-mart, Target and Amazon - whom I will refer to as the "three amigos" - are not competing in the same product market as book publishers. Thus it seems difficult that the book publishers are actually driven out of the market, when they are not in the same product market and since none - that I am aware of - have exited the market due to the "three amigos" new pricing strategy.
This could be a profit maximizing strategy if the "three amigos" are doing this to cross-subsidize in other areas of their business. I am unable to show this for lack of data on the firms business practices, but I did want to point out that it is theoretically possible for a firm to set prices below its unit variable costs and still behave as a profit-maximizing firm.
As for the claim that this is "is damaging to the book industry and harmful to consumers", this I am having a hard time figuring out. The book publishers set their price to the retailers, and the retailers then (usually) mark up the price to the final consumer. As I understand it - and I could be wrong - book publishers are still selling books to retailers and earning revenue from the sales of these books. So the retailer changing the price of the final product should have no effect on the sales revenue of the book publishers in the short-run.
As for the last part of the claim, that retailers selling books at lower prices is harmful to consumers, that is laughable, which even my 7th grader immediately found the fallacy of that statement. Then again, he really is a smart boy.
Finally, at least one book producer (David Young, chief executive of Hachette Book Group) hoped for a law outlawing the discounting promotions and emulate France’s prohibition against book publishers pricing books below cost. I think that regulating the lower bound on book prices would be a grave mistake. Given the industry typically over-produces many books - walk into a book store like Barnes and Nobles - and you can easily find the bargain book piles, regulating the lower bound for the prices of books would be a step in the wrong direction. Given our time with reduced reading by young people - typically due to a plethora of substitutes - increasing the quantity demanded for books (and thus reading) should be something that book publishers should seriously consider.
Tuesday, November 10, 2009
NCAA Football Coaching Salaries
The USAToday has put forward an excellent database of NCAA football coaches salaries. For head coaches they have the base salary, other income, maximum bonus and total salary. For assistant head coaches, it provides the lowest and highest salaries, along with the total assistant coaches salaries. Coupled with the database on NCAA athletics and NCAA football productivity this is an excellent combination looking at how compensation is determined among NCAA Football Bowl Subdivision coaches.
If you click on the name of the head coach, for many schools you can get a .pdf file of the coaches contract.
If you are wondering about the details for Kirk Ferentz's contract, check out the Daily Iowan's article from this past Summer, and for those interested in the entire contract, here it is in .pdf.
If you click on the name of the head coach, for many schools you can get a .pdf file of the coaches contract.
If you are wondering about the details for Kirk Ferentz's contract, check out the Daily Iowan's article from this past Summer, and for those interested in the entire contract, here it is in .pdf.
Saturday, November 7, 2009
The Problem with Disequilibrium Prices
During the Fall, Wal-mart and Amazon (along with other retailers) have been engaged in a price war for toys, books and now DVD's (h/t - Jeremy A.). The problem with price wars is that prices tend to be below market equilibrium prices (which is great for purchasers) but not sustainable.
For example, in the book price war, Wal-mart, Amazon and Target are now rationing (yes, rationing) books so that other book sellers will not purchase them at lower unit costs and re-sell the books at more market oriented prices. This is a classic case of arbitrage, which should happen in a competitive marketplace, and something the three amigos should have foresaw before they engaged in the price war.
For example, in the book price war, Wal-mart, Amazon and Target are now rationing (yes, rationing) books so that other book sellers will not purchase them at lower unit costs and re-sell the books at more market oriented prices. This is a classic case of arbitrage, which should happen in a competitive marketplace, and something the three amigos should have foresaw before they engaged in the price war.
Friday, November 6, 2009
2009 World Series MVP?
Given the dust has settled and the New York Yankees are the World Series champions for 2009, I figured that it was time to determine the Most Valuable Player (Batter) for the series. I am determining the MVP for batter based on which player had the highest runs created during the series. My calculation is based on the Blass (1992) model over the 2000-2008 regular season, so some of the coefficients for the individual batter stats may be slightly off, but should not be off by much, and would not change the top 10 performers during the World Series.
Thus, my MVP for the 2009 World Series is: Hideki Matsui, who was also named the World Series MVP. Here the top 10 finishers (batters) for the 2009 World Series MVP in terms of runs created.
Thus, my MVP for the 2009 World Series is: Hideki Matsui, who was also named the World Series MVP. Here the top 10 finishers (batters) for the 2009 World Series MVP in terms of runs created.
| Player | TEAM | RC |
| H Matsui | NYY | 6.691 |
| C Utley | PHI | 5.611 |
| C Ruiz | PHI | 4.277 |
| D Jeter | NYY | 3.856 |
| A Rodriguez | NYY | 3.616 |
| J Damon | NYY | 3.462 |
| J Werth | PHI | 3.336 |
| R Ibanez | PHI | 2.855 |
| J Rollins | PHI | 1.696 |
| J Posada | NYY | 1.370 |
Thursday, November 5, 2009
Vertical Integration in Soft Drinks
Earlier this summer, Pepsi announced that they will be buying their two largest bottlers for around $7.8 billion. This is an example of the oligopolistic vertically integrated model that I talk about in Industrial Organization and the MBA Managerial Economics courses.
Here we have primarily two upstream firms (Coke and Pepsi) and two or more downsteam firms, Coke's bottlers and Pepsi's bottlers. Now the upstream firms have (simply) two options, to vertically integrate (buy their bottlers) or to not vertically integrate. Each has an incentive to vertically integrate and by doing so, will make lower profits than by not vertically integrating. It is a great example of the Prisoner's Dilemma.
See my brief discussion on the attempt to vertically integrate live concert events, which fits closer to the monopoly vertically integration model.
Here we have primarily two upstream firms (Coke and Pepsi) and two or more downsteam firms, Coke's bottlers and Pepsi's bottlers. Now the upstream firms have (simply) two options, to vertically integrate (buy their bottlers) or to not vertically integrate. Each has an incentive to vertically integrate and by doing so, will make lower profits than by not vertically integrating. It is a great example of the Prisoner's Dilemma.
See my brief discussion on the attempt to vertically integrate live concert events, which fits closer to the monopoly vertically integration model.
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