Scott Schaefer

Economist. Business Professor.

MBA Alumni: Help Needed!

Filed Under: Utah Economist Blog

I’ve been working on some new ideas about how to teach strategy case studies to MBA students.

And I could use your help!
I’m at a point where I really need to road test some of these ideas.  And that’s where you come in…  I’m hoping to find 3-5 “volunteers” — I have a few dollars to pay, but unfortunately nothing close to what your time is worth — to come to the U for probably 2.5 hours, sometime over the next few weeks.  
My general plan will be to show you some materials, ask you some strategy questions, and see how you respond.  

Normally, I can road test new ideas in the course of teaching classes, but this one…  well, it could be awesome but it could also fail spectacularly, and I’d prefer not to have a class implode on me.

You won’t be graded, and this isn’t an opportunity to retroactively earn extra credit for courses you took a long time ago.   But, you’ll be doing me (and my future students) a big favor!

Send me an e-mail if you’re interested:  scott.schaefer@utah.edu.

Thanks!

Debt and Young Adults

Filed Under: Utah Economist Blog

It’s been quiet over here on Utah Economist recently…  More activity over on the new Roadside MBA blog, so do have a look over there.  


I got a call yesterday from Jennifer Napier-Pearce, who’s now covering the personal finance beat at the SL Trib.  (Raise your hand if you still miss her voice on KUER.)  Anyway, there’s a Pew study about how debt levels among the young have fallen (mostly) since 2007.  Housing, auto, and credit card debt all down; student loan debt up.  Here’s a link to the story, with ample economist commentary. 


Part of the reduction in debt is coming from changes in the mortgage market.  But there are also some interesting things going on in markets for automobiles.  Here’s a quote from the Pew Study:

In 2007, 73% of households headed by an adult younger than 25 owned or leased at least one vehicle. By 2011, 66% of these young households had a vehicle. Among households younger than 35, outstanding vehicle debt declined from 2007 to 2010. In 2007, 44% of households younger than 35 had vehicle debt. By 2010, only 32% had vehicle debt. The typical outstanding amounts owed among young households with vehicle debt fell from $13,000 in 2007 to $10,000 in 2010.

Part of this is coming from changing attitudes toward debt, but there are also simply fewer new cars out there.  There was an article in the WSJ on Wednesday about how the low auto-industry production levels between 2009 and 2011 are impacting the used car market:  

The shortage of used cars stems from the deep plunge in new-car sales between 2008 and 2010, and the virtual disappearance of new-car leases during the financial crisis. As a result, three-year-old cars are now hard to find and even older models are holding their value.



These effects will probably continue to ripple through auto-related markets;  how do you think, for example, that the relative lack of 2009-2011 autos will impact revenues for auto repair shops (who probably prefer customers with older rather than newer cars…)?

And Speaking of Crowdfunding…..

Filed Under: Utah Economist Blog

Here’s an interesting juxtaposition from today’s Salt Lake Tribune.  On the front page, we have an article about an alleged Ponzi scheme that lifted $170 million from investors.  On the front of the Money section, we have an article about today’s crowdfunding conference at the University of Utah, which unfortunately I’m not able to attend.  (You miss out on so much by having a job…)
Here’s a quote in the crowdfunding article by Berkeley Geddes, head of a professional association:

“The crowd has a powerful ability and can say, ‘I know this person’s past and I can vouch for him, or I know his past and I have some concerns,’  Geddes said. “The crowd has a unique ability to help make sure that the entrepreneurs asking for the money” are legitimate.

I presume there were people vouching for alleged Ponzi schemers, too.   Potential crowdfunders should probably worry about the incentives of the people doing the vouching, which raises the question of who’s going to vouch for the people doing the vouching.   And then who’s going to vouch for the people vouching for the people doing the vouching.  And so on.

Crowdfunding and Financial Intermediation

Filed Under: Utah Economist Blog

City Weekly called a couple days ago with a few questions about the recently passed JOBS Act, and specifically about the new provisions for “crowdfunding” of small startups.  The article is here.

“Financial intermediaries” are institutions — banks, venture capitalists, private equity, angel investors — that make money by connecting investors with good investments.  If you have a deposit account at a bank, the bank is essentially borrowing money from you (paying you a low interest rate) and then lending it to someone else (and charging them a higher rate).  The bank makes a buck on the spread.

One question to ask with any sort of intermediary is why the parties on either side of the transaction can’t simply go around the intermediary.  That is, if the bank is paying you one percent but charging a borrower three percent, then why can’t you just call up the borrower and offer to lend at 2%?  You earn a higher interest rate on your money, and the borrower pays a lower rate.  This would cut out the middleman, and the banks would quickly go out of business.

This observation suggests that intermediaries can survive only if they’re doing something better than you could do it yourself.  In the case of financial intermediation, one of the big possibilities is that banks/VCs/angels are better at distinguishing good investments from bad.  If borrowers know better than potential lenders whether their investment opportunities are likely to pay off, then you can easily get a market for lemons, which is a subject I blogged about in long-winded, four-part fashion back in 2009.

So I think the whole crowdfunding thing is a bit more complicated than just saying “Hey, let’s use the internet to allow investors to connect directly with promising startups.”  Banks and VCs do things that us regular people just aren’t good at — like reading financial statements and assessing future market growth — and the internet isn’t by itself going to make us a lot better at these tricky tasks.

Financial intermediaries are really interesting to economists, probably because the very fact that intermediaries exist tells us something about when markets work well and when they don’t.  I’m attending the Financial Intermediation Research Society annual meeting next week, and you probably don’t need me to tell you what a good time that is….

Hollywood Economics

Filed Under: Utah Economist Blog

I’m a big fan of the television show The Wire, which aired on HBO between 2002 and 2008.  It’s a gritty police drama, by which I mean that every fourth word is profane.  If you watch it, wait til after your kids are asleep.

Stringer Bell (played by Idris Elba) is a terrific character who’s the #2 man in a big Baltimore drug gang.  He’s unusual for a druglord in that he wants nothing more than to be a legit businessman, and he’s hoping to use his drug profits to invest in legal businesses that he can run after he retires from selling dope.  There’s a great scene in Season 1 where the cops are tailing Bell as he drives to the local community college.  He heads into class where the professor delivers a lecture on demand elasticity.   Later, Bell walks into a copy shop that’s he’s purchased as part of his plan to go legit, and notices that his employees — who appear to have been hired from the neighborhood based on criteria other than experience or skill at managing a copy shop — seem not to be pushing very hard in the direction of superior customer service.

Bell expresses his displeasure, as follows:

Yo, you know what we got here?  We got an elastic product.  You know what that means?  That means when people can go elsewhere to get their printing and copying done, they goin’ do it.  You acting like we got an inelastic product and we don’t.  Now, I want this to run like a true (gosh-darn) business.  Not no front.  Not no (other stuff).  

Gritty, as I indicated.

As with all Hollywood Economics, however, they don’t get it quite exactly right.  (It’s not nearly as bad as the economics disaster that is A Beautiful Mind….)  On the outside of the classroom door that Bell enters at the CC, a sign reads “Introduction to Macroeconomics.”  Demand elasticity is a *micro* topic, but close enough I guess.

Google & Motorola Mobility

Filed Under: Utah Economist Blog

Google completed its purchase of Motorola Mobility, which is what’s left of Motorola’s wireless phone business and was spun off by Motorola in January of 2011.  Motorola Mobility makes the Droid RAZR — a pretty successful Android smartphone — so the merger raises the question of whether Google is trying to get into the handset business with this purchase.

I think this would be a terrible idea.

Here’s why:  A big part of the Android platform’s appeal is price.  You can get a reasonable Android setup for a lot less than any iPhone, and there are at least five or six major players — Samsung, HTC, LG, Motorola Mobility, etc — producing Android handsets.  And these firms are competing fiercely on price, which drives the overall cost of an Android system down.

This hardware-side competition benefits the Android platform, and therefore Google, quite a bit.  It’s the same logic that helped Microsoft dominate the desktop twenty years ago; DOS and Windows ran on commodity machines, so the total cost of a Windows setup was much lower than that of a comparable Mac.

So the last thing Google wants to do is give Samsung and HTC any reasons to stop pushing handset prices down.  And if Google were in the handset business itself, it’d be hard to resist the temptation to help its in-house handset business at the expense of Samsung and HTC.

There is talk of some other reasons for this deal, so I wouldn’t be surprised if Google shuttered the Motorola Mobility handset operation.

RIM = DOA?

Filed Under: Utah Economist Blog

I’ve written about iPhone economics before, and it remains a really interesting market.   One of the great stories is that of RIM, the maker of the Blackberry.  Here’s a firm that had a commanding market share not too many years ago, but has been completely hammered by the rise of the iPhone and Android smartphone platforms.

RIM is trying to catch up, so have a look at this recent article in The New York Times about release of the Blackberry 10 prototype.

The good news is that RIM understands the importance of getting a large group of software developers to work on applications that run on their OS.  The bad news is that developers will make their decisions based largely on whether they believe the product will be a hit with consumers.  RIM wants developers to make significant investments, but these investments will pay off only if the product sells well.  It’s a tough sell for RIM, and I thought it was interesting to listen to the voice of skeptical developers such as Phill Ryu at Impending.

Even the pro-Blackberry-10 people quoted in the article didn’t say much that would convince me the firm has settled on a good strategy.  The CEO of Refresh Mobile says the platform integrates well with social media…  but is “connect with Facebook” really much of a differentiator at this point?  And a Gartner analyst cites the phone’s ability to capture extra frames when shooting photos.  I agree that this sounds like a nice idea, and is very much something I’d like to have on my phone.   But good ideas are different from good strategy, and it’s hard to imagine that “extra frames when you snap” is something that iOS or Android couldn’t replicate in a day or two of development-team time.

Gold Storage

Filed Under: Utah Economist Blog

I talked to City Weekly earlier this week about an interesting company that offers gold storage right here in Salt Lake.  Here’s the story.

Gold prices are up sharply since 2002, but the metal really hasn’t been a great investment over the past 40 years.  Here’s a link for a chart comparing gold to the Dow since 1980, and you can see that while gold has about doubled over the period, the Dow is up by something like a factor of 14.

Gold might well be a sensible hedge against economic catastrophe, but buyers should be keep in mind they’re probably giving up returns in order to buy safety.

Delta: Computer Glitch or Price Discrimination?

Filed Under: Utah Economist Blog

A current Executive MBA student sends a link to this article:  Delta Says Frequent Fliers Saw Different Fares

Nice find!

So maybe this is an unfortunate computer glitch on Delta’s part, and maybe it’s true that Delta Frequent Fliers were sometimes offered higher prices and sometimes lower.  Maybe.

But this is also perfectly consistent with a third-degree price discrimination strategy.  The rationale would go like this:  Delta knows that anonymous searchers are probably searching lots of airlines and comparing prices.  These travelers respond to low prices, which means their demand is elastic.  And as I discussed earlier today, it pays to offer lower prices when demand is more elastic.  Frequent flier club members are probably less likely to search widely and compare prices, and this means their demand is less elastic.  So Delta can increase profits by charging higher prices to this segment.

This is called “price discrimination” because the firm is charging different prices to different customers for the same product.  It’s entirely legal — although you can tell from Delta’s response that it’s often not a popular thing with customers — and firms do it all the time.

(I do fly Delta a lot, and I hope they won’t put me in the middle seat because of this blog post.)

The Economics of Driving Around

Filed Under: Utah Economist Blog

It’s time for a new feature here on Utah Economist Blog: The Economics of Driving Around.

I like driving around, and one of the best things about it is the real-world economics you can see as you go from place to place. Even if you don’t like driving around, you probably have to do it — and it’s a great opportunity to look for economics.

I had some errands last Tuesday, and managed to catch a few snapshots.  I was also messing around with Instagram (a billion?  with a b?), and uploaded shots there.  The Economics of Driving Around really benefits from the geo-tagging feature of your typical smartphone, and I’ve linked so as to show you both a photo and a map.

So, here’s a picture of some Powerbars.  This was taken at the Common Cents convenience store at Bangerter and about 200W.   And here’s some more Powerbars — the same kind, in fact — taken as the Fresh Market grocery store on 900 East and about 17th South.

What’s the difference?  Well, same product.  Similar display.  Difference price.  At the C-store, the bars go for $1.69 while at the grocery they are $1.59.  So here’s where you can put your brain to work as you’re out running errands.  Same product, so why not the same price?

Typically, people jump to thinking about cost differences, and very often to differences in the fixed costs associated with running each business.  But fixed costs don’t (directly) affect optimal pricing decisions.  As we learn in a basic managerial econ class, the profit-maximizing price depends on two things:  marginal cost and demand elasticity.

So one possibility is that the convenience store pays a higher wholesale price for Powerbars, and selects a retail price accordingly.

But another possibility is that demand is more elastic at the grocery store than at the c-store.  Demand elasticity is a measure of how sensitive quantities are to prices.  If demand is elastic then small price changes lead to big quantity changes, while if demand is inelastic small price changes lead to small quantity changes.

It works out that if your demand is elastic (rather than inelastic), then it makes sense to charge lower prices and accept lower margins?  Why?  Well, the benefit from reducing prices is that you’re going to sell higher volumes.  And if your demand is elastic, then a price reduction gives you a big increase in volume, and this big increase in volume can make it worthwhile to accept lower margins.  If, on the other hand, your demand is inelastic, then a price reduction gives you a small increase in volume, in which case it probably isn’t worth it to accept lower margins to sell more.

All this can be made horribly precise — the inverse elasticity pricing rule is the governing equation — but the key point is to think about potential differences in elasticity in addition to potential differences in cost when thinking about price variation.

So the question then becomes:  Is there any reason to think that Powerbar demand would be more elastic at a grocery store compared to a convenience store?  Is there any reason to think that a c-store price reduction would have a smaller impact on quantities sold than a grocery store price reduction?  And that’s a good question to ponder, as you’re thinking about the why behind the price variation we observe every day.

Here’s some more food-for-driving-around thought: