Over the last semester we have studied a lot about supply and demand. I believe supply and demand work great but when it comes to the markets you have to watch out for the manipulation of supply and demand. Our Government is injecting millions into the markets, gold and oil continue to go up because the US dollar is so weak even after what we have went through these past two years the speculators just can't get enough. Based off what we have learned from Supply and Demand is there truly a demand for Gold? Is oil going up because of the limited supply or is it because OPEC wants to get more money? There are just so many factors to consider it today's markets and I would suggest that we stay close to the shore until real growth begins to take place.
In my opinion education is priceless. Furthering my knowledge for myself and future generations will not only benefit myself, but will also advance society as a whole. Looking into the future it is a smarter investment to continue your education at this time of economic distress because when the economy finally does recover there will be better job opportunities and better pay for the educated. Hyperlink
According to an article on yahoo finance the Federal Reserve is working on a strategy that will recoup some of the money that has been injected into the economy during the recession. I feel like this is a great idea and is necessary for markets in general. It is obvious that government intervention is a debatable subject. Liberals and conservatives debate government intervention all the time. Basic economics tell us that when the government intercedes they need to do so briefly so that the market does not become dependent on the government supplement. The Federal Reserve Bank’s actions are brought about by a need to fend off inflation. At some point the Federal Reserve will have to make a bold move to increase interest rates and remove other market supports that are currently in place. If these actions are foregone the Federal Reserve will have major problems trying to remain solvent while keeping up with inflation. The proposed actions include reverse purchase agreements where the Federal Reserve will sell securities with an agreement to buy them back at a later time. The yahoo article says, “The operations will be “extremely small” and won’t affect the Fed’s key interest rate…”. Apparently these “operations” are only test runs that will serve to prepare the Federal Reserve as well as the markets for when they will have to make bigger moves. The Federal Reserve has a significant challenge ahead because removing the market supports prematurely could derail the recovery entirely.
I feel like the market supports should be removed sooner than later. If the markets become reliant on these supports it will lead to more problems for the market as well as the government. I am not suggesting that the markets be left to fend for themselves at this point. I really like that the Federal Reserve is proposing to diminish intervention. It seems like that is the first step in the right direction and it will help markets in the long run.
Reference the article below as well as the textbook for additional information.
The internet retail market has grown and continues to do so each year. Many retailers now have black Friday deals on days other than Friday. Many shoppers look for deals throughout the week of thanksgiving and especially on the day after. I think that even with the struggles of the economy and the decrease in sales for retailers the discount method of selling products does get many consumers thinking about their products. This helps promote more sales even on product that are not marked down for the black Friday event.
So here we see a monopoly run by a country exercising power over another country to get them to repay debt and act in a way that they desire. While government run enterprises tend to be inefficient, in this case, it gives them greater power on an international level. For further information, click HERE to visit the article.
According to the article in Business Week titled, “Textbooks for Tightwads” the textbook publishing industry is an Oligopoly, with 5 major publishers running the show. There might not be outright collusion between the companies, but their objectives are no mystery. Because there is a defined market that requires a unique product, the publishers can introduce higher prices and have little or no consequences when it comes to market share or revenue.
I’m sure I’m not the only one who gets frustrated when I see brand new textbooks on the shelves wrapped in cellophane with a “CD-ROM” that I know I’ll never use. With a few publishers controlling the market, they also have the ability to offer “bundled” products at higher costs, even if consumers would prefer the products separately.
When an oligopoly controls an industry, the consumers receive less surplus, if any; and the producers are motivated by profit, not by quality. Competition equalizes the market and promotes a free-market economy where producers are motivated to make their products better and where consumers are driven to find the best deal.
I think that this is a good example to demonstrate externalities. Because anything change that a search engine employs will result in externalities for users and/or the people or business that have websites and information posted on the internet. The new filters that Yahoo is using will result in positive externalities for say, the hotels in Paris and those people who are looking to travel to Paris. It will also have negative externalities for the celebrity gossip sites featuring gossip on Paris Hilton and users that are actually looking for celebrity gossip.
To access the article click here
I find the idea of taxing negative externalities intriguing. Governments already do this through taxing the creation and disposal of pollution and other destructive elements. Almost all taxes create a degree of deadweight loss, so the benefits may not be worth the costs. I'm not sure if the same concept of taxing these externalities could be applied to financial speculation the way Mr. Krugman is suggesting; nevertheless, it is an interesting thought.
Temporary sales are a method of price discrimination to collect sales and profits from buyers that normally wouldn't purchase certain items at higher prices. Black Friday is the most important day of the year for these temporary sales. As with almost everything, there are those people that are willing to buy certain products at a price that most would consider high. There is also at least one group of buyers that will only buy those same products at a bargain price.
Sellers must make trade-offs regarding temporary sales. A temporary sale is great because it allows a seller to collect profits from the group of buyers that are "price-sensitive" and only buy at bargain prices. These sales can also sacrifice profits because the "price-insensitive" group that would have paid more can now purchase products for less, reducing profits from this particular group. Kling points out in his article that the great part of Black Friday is that the crowds generally discourage buyers that are "price-insensitive" from taking advantage of bargain prices. The negative externalities from large crowds maximizes profits from both groups, price-sensitive and price-insensitive buyers, to a greater extent than during other temporary sales. It is a big win for retailers that take advantage of this simple form of price discrimination.
To access the article, click here.
Nason notes in this article that the competitive landscape is changing primarily due to "scale economies". Airlines have very high fixed costs and low marginal costs in terms of the number of passengers. In such an environment, economies of scale are critical. Nason's six C's--competition, coopetition, codesharing, coordination, cooperation, and colusion--reveal how airlines are attempting to survive.
This article discusses an interesting concept of working with competitors to achieve a mutual benefit. These various relationships can be evaluated using game theory. A simple example is the following situation: American and a competing airline can either competitively coordinate, or co-opete, by sharing ground services with each other or completely compete by not sharing any auxiliary services. Cost savings will be the highest if they share auxiliary services and most likely the lowest if they compete on their own (such as zero). A decision to share by one and not the other with result in cost savings for the one not sharing with little or no benefits to the other that is sharing. We can imagine that the strategy of not sharing will easily be dominated by the strategy to share. Thus, our Nash equilibrium tells us that if both rationally choose their decisions, the airlines will share auxiliary services in order to increase cost savings.
This is a real-world example in which a corporation would likely use the principles that are taught in Chapter 10 regarding game theory. For additional reading, please access the cited article by clicking here.
There are many new technologies in the cell phone industry. Within the last couple of years, cell phone devices have switched from basic use to full on transportable mini computers. The major cell phone companies struggle to keep up with demand and their products are constantly changing to meet that demand. Just as computers are outdated in almost 6 months, cell phones can become outdated even quicker than that.
Smart-phones are now part of the biggest market trend in the cell phone industry. These phones allow users to check email, update their Facebook status, check out stock prices and even plug into laptop computers to receive internet wherever there is cell phone reception. Although T-Mobile products have struggled to win a portion of the market share because of difficulty in creating a high quality smart phone, it recently came out with the myTouch 3G.
Although this new product is expected to shine in the already crowded market, its greatest competitors are Apple’s iPhone and the many high tech smart-phones made by Blackberry. The myTouch 3G was introduced into the industry in June of 2009 and is a predecessor to the G1 smart phone. T-Mobile’s marketing strategy evolves around this new product for the remainder of the year. The myTouch 3G is targeted toward a much broader audience in anticipation of a much wider use in smart-phones.
I recently switched my cell coverage from Verizon to T-Mobile. In pricing the differences between wireless companies I found that it was almost impossible to escape the temptation of purchasing a smart phone cell plan. T-Mobile now offers a cell phone plan that does not require a contract and is $10-$20 less than any equal plan with a contract that the company offers. This just does not make sense economically! I also discovered that just for the convenience of a smart-phone and an internet data cell phone plan, a customer would be paying a minimum of $40 a month just to receive emails on their phone!
Although the mini-laptop lacks the storage and software capabilities of the larger laptops and PCs, the dramatically lower price is convincing the consumer they can manage. The article quotes one consumer who, being concerned about the rough economy purchased the mini because it was less than half the price of a traditional laptop.
Normally the computer manufacturers would be thrilled to see a product’s sales to go from 182,000 to 11 million in one year, but not at the expense of more profitable products (i.e. Laptops and PCs). The mini has not only cannibalized laptop and PC sales, but has put pressure on the prices of these items. The article states that the estimated average selling price of portable computers will drop 8-12% in the next two years, partly because of the netbook.
The text outlines options for mitigating product cannibalization. The computer manufacturers could upgrade the high-profit products and/or degrade the mini-laptops to highlight the differences between them and help the consumer directly discriminate. This strategy might be a short-run solution to cannibalization, but comes with the obvious risk of damaging a product, that could be profitable in a different economy.
Searching the New York Times I found the following article that is intriguing. It is a professor that auctions a $20 bill (similar to what Joe Baker demonstrates in his economics class).
There are eight students that participate in the silent bid. The students all engage in “co-opetition” both competing and cooperating. The options before them would be to bid together or against each other. If they bid together they all come out winners. If they bid against each other, only one would win the money (and the amount pocketed depends on the bid). I find it interesting that instead of creating a large Nash Equilibrium matrix with eight people making separate decisions, they decided to bid the same price. The only exception was Ashley who chose to bid on her own. In essence, there became two parties, the seven with the same price and Ashley.
I like this article and example because it shows the various choices before people and how they react to situations.
I thought the article provided an excellent example of a few of the concepts presented in chapter 10 of our text.
Here’s a summary of Russia’s and Renault’s positions. Both parties hold a 25% stake in Avtovaz.
The Russian Government
Avtovaz has suffered during this recession and is currently partially shut down. Without support, Avtovaz “is not going to make it.” The poor position of the auto factory has led to industrial and social unrest as well as threats of employee strikes. Amid this difficulty, the Russian government has tried both a threat and a promise (of sorts) to pressure Renault into investing in a bailout. Russia has threatened to dilute Renault’s stake if it did not invest. Alternatively, Russia has stated that Renault is “welcome to increase [its] stake in Avtovaz. Russia’s conflicting statements show there may be little credibility in either.
Renault has offered to retool the Avtovaz factory at Russia’s expense and has also offered management and technical support, but Renault has stated it will contribute no cash for a rescue. Experts pronounce that Renault is losing interest in the Eastern European market. Just this week, Renault announced a new car to be sold in India in 2012. Meanwhile, Renault has faced problems of its own back in France and has accepted a large, restrictive loan from the French government. The loan’s restrictions force Renault to keep all of its French factories open. While a mere announcement of a new Indian car in 2012 might not convince Russia that Renault will not cough up the cash, the acceptance of a substantial, cumbersome loan probably will.
The two parties have plans to meet within the next week, but I have little doubt that Russia is going to be left with the financial burden of saving Avtovaz.
It is quite clear from these articles that Apple will continue its relentless dependence on First Mover's Advantage strategy. While such strategy is not without its risks, it is apparent that Steve Jobs, President & Founder of Apple, and Apple have mastered the art of disruptive technology and should capitalize on it. And it's not just Jobs' and Apple's egos either, others recognize this competitive advantage as well. A renowned analyst is quoted in article2 saying, "The thing that most people don't realize about Steve [Jobs] is that he is not only really good at taking technology and turning it into good-looking, easy-to-use products, he's also really good at doing it faster than anyone else." Thus while most companies are out identifying target markets and surveying consumers to discover what it is that they desire, Jobs and his people are back at Apple showing that "you can't ask people what they want if it's around the next corner" (article1).
The most intriguing and most indicative part about Apple's disruptive method of creating First Mover's Advantage is that it doesn't even restrict its own products from scrutiny and disruption. In fact, article3 shares that instead of sitting around and waiting for its newly released five-gig, monochrome screened, and very popular iPod Mini (the original iPod) to make its way through the product cycle and while competitors were busy just trying to piggyback and keep up with the Mini, Apple disrupted the Mini technology and released the 16-gig, color-screen, and sleek new iPod Nano for about the same price, while the Mini was still at the top of its game. Thus, competitors were caught off guard once again, cash was flying into company coffers, and Apple preserved its First Mover's Advantage. Hence, perhaps Apple's relentless disruptive method of creating and maintaining First Mover's Advantage is sustainable. With a history flush with innovation, creativity, and "building products that really turn us on," they have staved off the traditional risks of First Movers such as piggybacking, price undercutting, and 'borrowing' R&D without much investment. Consequently, with such a history, how can one question Apple's ability to continue to disrupt technology, even its own if necessary, to establish and maintain First Mover's Advantage for years to come? I would stick with Apple, that is, until Jobs and the crew create some kind of iFruit to replace it.
The article goes on to discuss how some steel companies are considering starting anti-trust procedures against other steel companies because they were supposedly acting in cartels. The recession has encouraged the steel company to go on a witch hunt. They are desperate to decrease competition in an attempt to gain market share and rebound from economic strife.
Once the economy rebounds, the car and steel industry will rebound as well. As the article mentions, a rebound will take time. Until then auto and steel makers will have to be innovative to cut costs and gain market share.
The downside to uniform pricing is that it causes inefficiencies in sales and an item that is in more demand will be sold for the same price as something with the least demand. I think Apple decided to do this, and set its price at what it did, because it could. Apple did not need to do as much research for uniform pricing as it would have on complete price discrimination. The book mentions that complete price discrimination is the most profitable but also requires the most research and information. Uniform pricing is great for Apple because if they see that the demand is falling off, they can lower the price across the board and this is much easier than trying to guess which band, or show, will be the next and greatest hit.
Apple did do some research on which price point would be the most profitable and would demand the most from its consumers. This helped them set the price point at what it is set at. In Apple's case, I think they went with the best pricing program that they could have chosen. It was easy to implement and can be changed just as easily.
Bundling is a pricing strategy that many companies use to get their customers to buy more than they usually would. Bundling is taking more than one product and selling it as one with one price. The price of the bundle is usually set at a lower price than the products would individually sell. This gets the consumer that may have originally set out to buy only one product to consider buying two or three products to receive a discount on their original product and get more value by having the other products.
There are two types of bundling. The first is pure bundling the second is mixed bundling. Qwest uses mixed bundling which gives the consumer the option of purchasing their products either separate or bundling them. Pure bundling is selling the products in a bundle exclusively. Many products at the store seem to utilize this pure bundling.
Pure bundling and mixed bundling are profitable only when direct segment discrimination is not possible and the demands of the produces are negatively correlated. Mixed bundling is profitable when the marginal costs are low. Qwest is a perfect example of mixed bundling. Their costs for adding cable internet to a customer that is purchasing cable TV is very small.
I am of the opinion that many companies do not have the time or resources to research their own product's demand and supply to utilize bundling to its fullest extent. Many small business owners learn whether or not bundling is profitable through trial and error rather than market research. Larger companies like Qwest have done very well capitalizing on bundling pricing strategy.
The current $8,000 tax credit for first-time home buyers will lapse at the end of this month. As of today the senate and house have opted to extend the credit through the middle of next year. Many feel that this is a great idea. In fact, it has been suggested that the tax credit has taken real estate values out of a tailspin. The current tax credit has been beneficial. However, I feel that the government should allow the credit to expire and encourage the real estate cycle to prevail again. It is well known that home prices are cyclical. This cycle is what creates wealth and profits in the market. These profits are what drive the market and create interest.
The tax credit will quickly create a bubble that will lead to another down-turn. Recent months are evidence of the potential bubble. Home prices have ticked upward in many areas with the tax credit deadline looming. This has created an artificial spike in demand that can only continue as long as home buyers are supplemented by the government. Extending the credit will only exaggerate the bubble and delay the inevitable decline.
I know that the tax credit is small and wouldn't seem to drive the industry but I think that it does just that. People that were considering a home purchase in the next year or two are forced to do so now because it is financially responsible to take advantage of the government stimulus. Government stimulus packages are designed to spark a recovery and should not be continued to the point of market reliance.
The original tax credit was intended to help people get into homes that they otherwise would not be able to. Real estate agents are already arguing that the end of the tax credit will kill business. Therein lies the problem. If the President does sign the bill into law, as he is expected to, it will further exaggerate the real estate industry's reliance on the tax credit. This will create a bubble that will burst sending values downward again.
Please reference the book for more information on demand and government intervention.
Also reference the articles below for more information.