Rebates, don’t you just love them?

Did you ever get so annoyed with getting the rebate on something you purchased that you just gave up? I found a really nice article about this kind of pricing strategy that companies use:
http://money.cnn.com/magazines/fortune/fortune_archive/1994/12/12/80037/index.htm
The cynicism in this story is hilarious, but the author also brings up a good point. Why don’t sellers just keep it simple and cut prices instead? Yes it’s true that people are initially attracted by the lower price, only not to collect the rebate because it is too much of a hassle. I must say that I have figured out a long time ago not to be persuaded by such offers. Experience has taught me that companies always make things too difficult for me. I would rather search for a place where I actually get the discount right away. But there still are a lot of people that can be tricked with this pricing strategy. This article explains that such pricing strategies are partly driven by what is called the ‘prospect theory’. This theory is based on the idea that: ‘People judge the loss of any given amount as more painful than they judge the gain of an equal amount as pleasurable’. The rebate is viewed as a reduction in a loss, but after the deal is done the rebate all of a sudden starts looking like a gain, and therefore less important. That is why so many people don’t bother to collect. Furthermore rebate pricing is a form of price discrimination. The people that are more sensitive to money will put up with the hassle, whereas the less price sensitive consumers will not. In this way the seller can take away some of the consumer surplus. So apart from the vengeful types that become so annoyed that they will do anything to collect the rebate and might never do business with the seller again, in general this pricing strategy works. Or might the number of negative impacts outweigh the benefits?

Make way for John Deere!

Who would have thought that tractors would become in high demand again? I read a recent article that spoke of how agriculture equipment for the next couple of years will be hot items. This is because of the demand for ethanol. With gas prices rising and the scare of global warming, researchers are finding ways to substitute gasoline and/or create fuel that will result in cleaner air. One way to produce ethanol is through the use of corn crops. It is estimated that there will be an 11.5% increase in acres planted this year over last. This, along with farmers needing new tractors, results in a high demand for tractors and other equipment. It is interesting to me to think about how the economy would change if this trend keeps on going. Currently, Brazil uses ethanol-powered vehicles in its domestic market. If we follow suit, there might be a lot of changes in the economy. Many products may become obsolete while others back in high demand like tractors.

Yellow vs. Red

Yesterday I bought a pack of Starbursts and as I opened them up I was disapointed to find only two reds and one pink in the whole package of twelve. This means that the remaining nine were orange and yellow. Now I consider myself somewhat of a candy expert, because I love candy and I eat a lot of candy. Finding only three good flavors in the package isn't unusual but it still is depressing. I tried my hand at Mambas today hoping for luck to be on my side. One package strawberry, one lemon and one orange; only one-third good flavors. I have always wondered if red coloring and flavoring was more expensive than orange and yellow, or if there was some sort of economically efficient profit maximizing reason for these candy companies to put in less of the good flavors. Now I understand that everyone has different tastes and there are probably people out there who prefer lemon or orange over strawberry or rasberry, but shouldn't that mean at least equal amounts of each color? According to the National Confectioners Association, red is the most popular color of gummi candy. When you go buy penny candies, or candy in a specialty candy store where you pick out exactly which ones you want and scoop them out yourself, which colors do you pick more of? I know I always pick out the reds, pinks, purples, blues and whites. I always skip past the yellows, oranges and sometimes greens. I wondered if anyone else had this same concern as me, and upon searching I found one opinion from a few years back asking, "does anyone like the green Gummi Bears"? The author of this article tried to contact the "Gummi Bear people" to find out why there were always more greens. The president of the company manufacturing Gummi Bears said that kids love green and that there are on average, equal amounts of each color produced. Thinking in terms of profit maximization, wouldn't it make more sense to put more of the good flavors in a pack of Starbursts? Wouldn't this encourage more repeat purchases if consumers knew they weren't going to be stuck with over half yellows? Why are there less reds? I am still unsure on the answer. For now though, I'll stick with chocolate because I know it will always be good.

One product fits all?

I read an article in Red Herring about how Cingular Wireless (AT&T) made an agreement with several banks to allow bank customers "to manage their accounts and pay bills electronically by using an application on their cell phone." The article states that this new feature is taking "a step toward the long-promised notion of phones replacing credit cards, checks, and cash." As I read this, I couldn't help but think about what the future will hold. It seems that many products we use today are already a combination of older products. In many instances, the key to innovation is not to create a new idea, but to simplify or combine other tasks into one simple step. We have seen how cell phones have already begun to take on more uses as they are now used for phones, music, videos, internet, email, cameras, games, and many other features. By adding these extra features, do you think that it is taking away from other products? For example, I can play the game Monopoly on my cell phone. Because of this, I currently have no desire to go out and buy the board game. In conclusion, it seems to me that products today are enabling consumers to accomplish many tasks with a simple device. Again, we could consider video game systems and DVD players. If this trend keeps on going, we will have no need for many of the products we use today. They will be combined with other products. However, there may always be competition to see who can come out with the best or the fastest device. It will be interesting to see what the future has in store for us.

Kobe Bryant Is Good For The Economy

In the article "Kobe Bryant Is Good For The Economy" it talks of how because of Kobe's recent success the economy is going to do better. I hate to say this, but I think it is right. Kobe has 4 nights where he has scored over 50 points in a basketball game. This is making history and because of that people are going to want to spend more. Nothing stimulates the economy better than a little consumer spending. Businesses are starting to ask more money for Kobe products. From jerseys to pictures it is getting pricey. People who want to be a part of the excitement and a part of the action are dishing out the money. Will this trend continue or is it a short term expansion in the economy? I believe that it will be a short term expansion and will shortly return to normal. Although the NBA records will always remember it, the effect on the overall economy will only be short lived.

World Economy

I recently read the news article "IMF chief continues to be bullish on world economy" and found it quite interesting how they treated the United States role in the global economy. The author looked at the world as a whole and believed that as a whole it was doing well. It praised countries such as China and India for its growth. It looked at the US with a little hesitancy because of some turbulence in the financial markets. It suggested that there would be a slowdown in the US. This was interesting because no longer are people looking only at one country. The US may be slowing, but China and India are booming. I think this is good for everyone. No longer are people restricted to the confines of one country. It they are looking to invest or improve, they can look to other places besides their own country. I see the economy of the world as almost always increasing. No matter what there will always be one country that is doing well. The only hope is that it is not at the expense of another country. I think the Global economy will continue to grow. The only thing that would slow it down is if multiple big countries experienced a slow down. I just don't see that happening any time soon.

How high will gas prices rise?

A recent article in CNNMoney discussed the impact that the capture of fifteen British Marines had on crude oil prices. This caused me to consider the volatility of gas prices. We have seen how many different factors affect the price of crude oil, including supply, demand, war, government, and others. With spring coming upon us, consumers have begun to watch gas prices very closely. We all seem to wonder if and when gas prices will rise above three dollars per gallon. Some analysts predict that prices will not get as high as last year. They say that consumers are more price conscious and are finding ways to reduce gasoline consumption. However, it seems to me that gas prices are already creeping up pretty fast. Demand in China is growing and the war in the Middle East is far from being over. With growing economies, rumors of wars, and corrupt governments throughout the world, the price of crude oil seems to be unpredictable. We could be in for a roller coaster.

Default or fixed rate mortgages

From consumer loans to installment loans to credit cards and now to interest-only adjustable rate mortgages. The old adage, “If it sounds (looks) to good to be true, it probably isn’t,” is still as true today as it was in 1959 when newspaper headlines read “Never have So Many Owed So Much.” Every week since September, the Business Week magazine has run an article on the housing market. Newspapers run stories each week either focused on families that are losing their housing due to inability to meet changing rates based on the adjustable rate mortgages or focused on the ever increasing mortgage defaults on the side of lending institutions. Alan Greenspan has already warned that the housing fallout will impact other areas of the economy and he “puts the odds of a recession by the end of the year at one in three.” (according to a New York Times article.) Wouldn’t it just be smarter for banks to leave the interest rates alone, or rewrite the loans at a fixed rate. This way families can continue to make their mortgage payments and banks don’t have to worry about default loans. This seems like a win-win situation to me that would help the overall economy and prevent a further recession.

Doctors, Drugs, and Money

For close to ten years now there has been discussion regarding doctors and the drugs they prescribe. Topics range from investing in certain pharmaceutical companies to receiving payment from drug companies to promote their product. These issues have become more heated in recent years with publicized research that indicates doctors are prescribing new and pricier drugs for their patients according to an article in the New York Post . The same drugs that the doctors have a vested interest in through some sort of financial benefit from the drug companies to the doctors. Drug companies state “In the end, patients are well-served when technically trained pharmaceutical research company representatives work with health care professional to make sure medicines are used properly.” This sounds like a fancy way to skirt around the issue of conflict of interest. Where is the doctor’s responsibility, legally or morally, to prescribe for patients a cheaper but just as effective drug that reaps no financial benefit to the doctor. I believe the drug companies should have a responsibility to NOT increase the costs of prescription medication (which effects the patients) in order to cover the ‘side’ payments to the doctors to prescribe those same pills.

Pay to sing Happy Birthday

Could you ever imagine that the popular childhood song titled “Happy Birthday” was worth a cool $5 million dollars? How many times have you sung the popular song “Happy Birthday” without paying the royalty dues that are required as part of the copyright regulations. The popular version that we all know the words to by heart was actually copyrighted in 1935 by the Summy Company as an arrangement by Preston Ware Orem, and according to Wikipedia
is scheduled to expire in 2030. Actually royalties are not required for private renditions of the song, however public performances of the song are technically illegal unless royalties are paid to the owner of the copyright. Who knew when Marilyn Monroe sung her lustily rendition to then President Kennedy that she was actually in violation of a federally protected intellectual piece of property. The company holding the copyright was purchased by Warner Chappell in 1990 for $15 million dollars. (It is merely a rumor that Michael Jackson or Paul McCartney own the copyright.)Restaurants such as Applebee’s must pay royalties when they sing the Happy Birthday song to their customers. Perhaps that is why they have come up with their own rendition:
Happy Happy Birthday
From Applebee’s to you
We wish it was our birthday
So we could party to, HEY!
I just hope I don't have to pay royalties for typing "Happy Birthday" in the title of this blog.

Will XM & Sirius radio create a monopoly?

There have been several articles lately about the possible merger between XM and Sirius radio. A current article in Forbes discusses the situation and the possible outcomes. The argument is if XM and Sirius merge, will a monopoly be created? I think that the answer to this question is no. However, it may depend upon what time horizon is looked at. Currently, satellite radio, in my eyes, is considered to be a competitor to land-based radio, I-Pods and other hand held devices, and internet radio. It seems that if a business takes customers away from another business, they are competitors. So, if XM and Sirius merge, they are still left with competition. Thus, they would not become a monopoly. However, this may change depending upon the future. If satellite radio is the future of radio and other music devices, then this possible merger may be the beginning of a monopoly. On the other hand, many people do not like the idea of paying for radio. Because of this market segment, it might not be possible for XM and Sirius to create a monopoly. Free radio and other music devices may always be in demand. In the end, it must be determined who satellite radio competes with.

Pet Food Recall

I was reading an article this morning in the New York Times about a recall on over 60 million cans of pet food by Menu Foods, a pet food manufacturer for companies including Proctor & Gamble, Nestle and Colgate-Palmolive. Gravy-style pet food that was made between December 3 and March 6 is being recalled due to ten pet deaths so far. Kidney disease is the cause of death among these animals and has been linked to the pets eating Menu Foods manufactured pet food. The cause? They do not know for sure but the timing coincides with a change in supplier of wheat gluten; however, Menu Foods will not name the supplier. Menu Foods is taking responsibility for this incident, whether it is the suppliers fault or because of something that happened inside their own plant. The recall and compensation effort is estimated to cost Menu Foods $30 to $40 million. When they announced these figures, stock prices dropped 26%. While this is surely going to hurt Menu Foods right away, I think it will help them in the long run. People who love their pets enough to buy them gravy-style pet food are going to appreciate Menu Foods for taking responsibility and trying to reconcile the mistake (whether ultimately theirs or not). It reminds me of the major Tylenol recall by Johnson and Johnson in the 1980's. This time we are obviously dealing with pets rather than human lives, but isn't dog man's best friend? I think this is a good move on Menu Foods part. It will help them to keep big names like Proctor & Gamble as customers. I think Menu Foods needs to be generous to the grieving pet owners, which will keep them out of court and better their image for the future. Consumers trust responsible companies.

No Smoking...In Casinos?

An article in USA Today talks about the ban on smoking in Atlantic City, the second biggest gambling city in the United States which brought in $5.2 billion in revenue in 2006. New Jersey has previously outlawed smoking in all bars, restaurants and other working places. Beginning in April, smoking will only be allowed in a designated 25% of the gambling floors and proposals are currently underway to outlaw smoking altogether in New Jersey casinos. Colorado, Rhode Island, Pennsylvania, Illinois and Lake Tahoe are not far behind New Jersey in putting bans on smoking. Many are arguing that this ban on smoking will hurt these casinos profitability and make them unable to compete against casinos in other areas that permit smoking. I personally don't think that it will hurt business that much, in fact from other information I've looked at banning smoking has actually increased business. Maybe some avid smoking activists will travel to other destinations that allow smoking, but how many new non-smokers will come out to the gambling floor because they won't have to worry about that constant overhead cloud of smoke and go home smelling like a bar? As long as there are designated smoking areas, even if outside, I think the casinos will be economically better off and a much better environment.

Bill Gates' Visa Petition

For years there has been an argument about the border system. Many people feel that the U.S.A. should close its borders to all immigrants, whereas others believe that we should allow everybody to enter. It seems that the Chairman of Microsoft Corporation, Bill Gates agrees with the latter group. In a recent petition to congress, Gates pleads that the high-tech industry in the U.S.A. needs all the brilliant, and educated minds. He felt that many of the bright scientists of the world are being sent away from the U.S.A, because of the strict visa policy in our country. Gates feels that there should be an "infinite" number of H-1B visas, which allow well-educated foreigners to work in the United States for several years. Recently, people have spoken out against Gates for his opinion. People with a knowledge of economics feel that an increase in the wages for the domestic workers would help bring supply and demand of high-tech jobs back into equilibrium. This argument seems to be a double edged sword. If the U.S. companies were to employ more immigrants, then the domestic market will suffer the loss through increased unemployment. However, if the U.S. companies increase the pay for the workers, then the U.S. consumers would probably pay a higher price for the domestic goods. It is an issue of economics, and I think that Bill Gates is right. We need to bring all the brilliant minds in to keep the U.S.A. competitive, it is the best business decision for America. It may lead to higher rates of unemployment, but it might also force people back to school and then once again into the high-tech industry. I think that the U.S.A. needs to stay ahead in this industry.

J.C. Penney, Back in Fashion?

I recently read an article in Business Week about a strategy that the CEO of J.C. Penney hopes will bring life to the slowly declining image of the department store. According to the article, J.C. Penney has had the image of being, “your parents store.” The CEO has introduced a trendier line of clothing in an effort to attract younger crowds that are more fashionable. The new line of clothing has already caused a slight increase in the companies’ profits. I think that CEO has made a good move in introducing a new line of clothing. I do not know that the increase in profits will be sustainable however. According to the article, Kohl’s is J.C. Penney largest competitor. In reaction to J.C. Penney’s new product line, Kohl’s has introduced its own trendy product line that is back by celebrity endorsement. Do you think J.C. Penney has a chance at reviving its image? Do you think they have made a good move? If not, what would you suggest that a company do to change its image?

Practice What You Preach

Ever since I started studying in the U.S.A the same topic has been coming up a couple of times now: Developing a mindset that will make you financially successful in life. Next to individuals trying to live the American dream there is a growing interest in what factors influence employee attitudes, especially the kind that stimulates financial success. In a book excerpt of ‘Practice What You Preach’, by David H. Maister, it is explained how important it is to be able to create a culture that supports the drive for success. His research has shown that as companies get bigger a lot of the key profit drivers such as valuing input, listening, trust, practicing what you preach, etc suffer and loose ground in the companies culture.
Even though this research did not include any financial performance data it seems obvious that the bigger the organization the harder it is to achieve the employee attitudes that drive success.

http://www.businessweek.com/smallbiz/content/nov2001/sb20011109_069.htm

Best Buy

I read an article recently about Best Buy called, "Smashing the Clock". The article states that Best Buy has totally rearranged how they work. The company used to be run by hard-nose executives that thought success only came about by hard work and long hours. Now they have reenergized the company with a so-called new experiment. They call this experiment, "ROWE". It stands for, "result-only work environment". They are not the first to come up with this idea, but they are the first to be successful at it. The whole idea is to give employees the freedom they deserve. They are not evaluated on how many hours they put in a day, but on their performance only. Some employees are able to work at home, or come in the office only for a few hours a day. The only thing that matters is that the job is done efficiently and effectively. Once the job is complete, the rest of the day is theirs to do what ever. How would it be?
Best Buy did not want to hit a plateau like most companies. The article stated that most large companies fail to grow with inflation because their employees fail to work as hard as before. They see their success and basically stop performing. This experiment has really worked for Best Buy. Since starting the experiment, the employees have become more productive and happier with their jobs. In return, Best Buy is not hitting a plateau, but are finding themselves more effecient. This is why they are the nation's leading electronic retailer. However, the question I find myself asking is "Will Best Buy's employees be able to continue to self motivate and how can Best Buy help them stay motivated?". Other companies have tried this before and failed.

Minimum Wage Increase May Not Cause Inefficiency

CNN (http://www.cnn.com/2007/POLITICS/02/16/minimum.wage.ap/index.html) and other news sources have reported on the House and Senate passing a bill that would increase the minimum wage from $5.15 to $7.25 over the next two years. Minimum wage is clearly a price floor, which can cause an inefficiency in the market if it is set above the free-market equilibrium. I do not think the minimum wage increase will affect the market equilibrium. Most people in the lowest income bracket are already being paid above minimum wage. Even companies in Cedar City -- like Smead, Convergys, etc -- who primarily hire unskilled individuals without a college education, are paying above minimum wage. Also, many states have higher minimum wages -- also called living wages. I don't think the increase to $7.25 exceeds the free-market equilibrium and should not cause excess supply of labor. I think that the only companies that may see an excess supply of labor and a higher labor cost is fast-food restaurants, which primarily hire high school students at the minimum wage.

Starbucks vs. Ethiopia

In a recent article entitled “Starbucks vs. Ethiopia” Stephan Faris explains that for a $26 bag of premium coffee sold in the United States, Starbucks only pays the growers in Ethiopia $1.43. The debate lies in the words Starbucks uses to ensure the coffee’s premium status. The words Starbucks uses are the names of the places where the beans are grown in Ethiopia. This means Starbucks can charge a premium and not pay a premium on a name they don’t own. This does not sound fair and according to the article Ethiopia is taking the issue to the United States Patent and Trademark Office in order to trademark the names of the regions where the beans are grown. Starbucks argues that this is unconventional for a region to use a trademarked and is pushing for Ethiopia to protect its products by using geographic certification instead. I support Ethiopia in its decision to go after the trademark and if it fails, they should push for a geographic certification because in my opinion something should be done.

Airline Food

If you have flown on a commercial airline recently, you may have noticed that there are no free airline meals on most airlines. The Capital Freedom Blog discusses this point and concludes that airlines must have found that passengers are very price sensitive about the cost of their seats – much more so than about the amenities on flights. Many airlines are charging $1 to $5 for snacks and meals aboard flights. Personally, I think this is a great change. Even when airline meals were free, I almost always preferred not to eat them. Now, I know that I am not paying for an amenity that I am not consuming. The article also cites Continental Airlines as being one of the last holdouts to offer meal service on domestic flights. Their research (very limited) indicates that while there may be a slight cost difference between airlines with and without meal service, the flight options (timing and number of connections) are still the #2 factor in deciding between airlines, with price being the #1 factor. For me, that is about right, although #1 and #2 are pretty close. I suspect when it really comes down to it, most consumers care very little about meal service, and the airlines were very wise to cut it as a cost-cutting measure. This will allow them to build their business with very price-sensitive consumers.

Gaming System Skirmish

I don't own a gaming system but was fascinated by an article that I read from a magazine in my boss's office. It focused on the power struggle between the three major companies; Sony, Nintendo, and Microsoft. First, Microsoft launched the XBox 360 for the Christmas of 2005 in order to beat Sony and Nintendo in the release of their most current gaming systems, and hopefully steal some of their market. They focused on building a strong on-line connection between gamers. The PS3 and the Nintendo Wii both came out this past Christmas. The PS3 incorporated Sony's new Blue Ray technology and felt that graphics were the key to gaming systems sales. Nintendo, on the other hand, forewent graphics and focused their research and development on a more interactive game controller.
Sony Playstation has held market dominance since they introduced their first playstation. When they launched the PS3, it seemed as if they didn't account for what the XBox had done with on-line interaction or what the struggling Nintendo was doing with their new interactive controller. They seemed to think that just because they always have had market dominance by having better graphics that they would continue to hold their market strength.
Nintendo was considered dead in the water after the Nintendo Game Cube failed. They responded by NOT trying to keep pace with Sony's graphics. It could have been the perfect response. The Nintendo spokesman may have stated it best when he said, "people want fun not graphics" (Electronic Gaming Monthly, March 08).
The Nintendo Wii has made twice as much as the PS3 in the past few months. Has Nintendo taken the right approach with their new game controller or is it just a novelty? Will we start seeing Nintendo Wiis resold on ebay in a year? Is Sony's focus on technology more profitable in the long run?

Illegal Immigration & Capital Spending

A column in the Washington Times recently cited the many negative effects that illegal immigration has on U.S. citizens. Lower wages for all workers due to illegal immigration makes sense from an economics standpoint. When the quantity supplied increases, the price will decrease. Businesses can also be hurt. For example, in the construction industry, companies that do not hire illegal workers are expected to compete with companies who do hire workers for whom they do not face such costs as workers compensation. The most interesting effect cited was one I had never considered. The author claimed that a supply of cheap labor served as a disincentive for companies to invest in technology. Why should a company invest in capital, if they have a large supply of cheap labor? In the long run, this can hurt the entire U.S. economy. This has become a very hot issue lately and the reemergence of white power groups (yes, even in southern Utah) is alarming. However, I think these points would allow a productive discourse to begin.

Hualapai Antics at the Grand Canyon.

I read this article about the Skywalk created at the Grand Canyon by the Hualapai Tribe. This Skywalk was created to allow visitors to have something new and exciting to see at the Southern Rim of the Grand Canyon. The main reason the Hualapai Tribe decided to do this was to help boost their struggling economy. The Hualapai hope that this new attraction will cause more people to want to come and take part in the Grand Canyon experience on the Southern Rim. Though this seems beneficial for the Hualapai, environmentalists have expressed their dislike for the Skywalk. They say that it tarnishes the beauty and natural look of the Grand Canyon.

I think that the Skywalk is a great idea. It does change the look of the Canyon where it stands, but allows many people to see a part of the Grand Canyon that was almost impossible to see before. I think that this is a wonderful thing! It should, in my opinion, increase the demand of that tourist site. I think that providing something like this increase the demand by providing better sight-seeing possibilities is a very smart economic move. Also, I think that no matter what venture one chooses to take, there will always be people who will want to take issue with what is being done. Often times environmentalists are more concerned about providing negative externalities than with trying to see the benefits of what is being done. I feel that this is the case with the Skywalk. It will only enhance peoples experience at the Grand Canyon--and that is a great thing.

Click HERE to learn more about the Hualapai and the Skywalk.

Technology Today!

I read an article about "anywhere marketing".
The article talks about how new technology is giving companies more of a competitive advantage. Technology today allows us to run a business from home, or on the road. It allows companies to hire across the country and their employees will never have to go into the office. Laptops, mobile internet, and cell phones make all the difference. Technology is changing the business world, and for the most part it is doing alot of good. Companies are catching on and are drastically increasing their profits by becoming more efficient. This is a good thing, but I see that there can be alot of disadvantages too. Does new technology make running a business easier or harder and in what ways?