As a class we have been studying the principle agent problem and concept of employee shirking. An article written by Esme Deprez in Bloomberg outlines the US minimum wage increase in 2009. It suggests that the proposed increase came at a poor time for the US economy due to the recession.

A primary concern of raising the minimum wage is job losses by small businesses that can no longer afford to hire as many workers. Is this type of unemployment similar to structural unemployment caused when employers pay efficiency or above market clearing wages? Have businesses compensated for wage increases by finding cost-effective substitutes such as machinery or technology to replace labor?

A secondary concern of raising the minimum wage is the increased likelihood of shirking by employees at the minimum wage? If an employee knows that any job they receive will pay them the same or possibly more than what they currently earn are they really incentivized to perform optimally?

Solar Power Bankruptcies Loom as Prices Collapse

This article found on CNN Money about the recent collapse of certain Solar Companies is interesting because of the political ramifications that they have.  We have started to see signs of this due to the Governments presence in financing many of these Solar Companies like Solyndra.  Because of the last few years and the desire to rid ourselves from foreign oil, demand for solar panels soared cause over speculation and excitement about this industry.  Similar to the housing market speculation in this industry looks to have lead to another bursting bubble; and like the housing market when the prices get low enough demand will pick up.  Another issue that this industry needs to take into consideration is all of the other competing energy industries.  If the US decides to drill for oil again someday or harvest more natural gas the desire for solar paneling which is expensive and for the most part have a short life span will be volatile.  These companies that make these huge investments into these speculative companies must maintain a safe level of supply even if the prices of the products are inflated a little.
Solar Energy will always be an important part of our countries energy policies but we should never put all of our efforts as a company in just one industry to try and fix our energy dependence.http://money.cnn.com/2011/11/30/technology/solar_power/index.htm

Occupy this: Affordable Data Revolution!

You could call it a data revolution. There is something amazing happening before our very eyes. Massive amounts of data are being created, processed, stored, analyzed and used for profit. Many successful companies rely on massive amounts of data to design their products. For example: Facebook, Groupon, and Human Genome Sciences use enormous data sets to capitalize on the rapid technological advances in data storage and the dramatic effect this technology is having on the cost (and even the possibility) of doing business in this arena. Although data-analytics is not new; the low cost is. The scale of what is possible has been altered to such an extent that any business can get in the game of data-analytics to their competitive advantage.

We can all relate on a smaller scale to something we use daily. About a year ago I purchased a 16GB flash-drive. It cost me about $40. The same flash-drive is on sale today at Target for $24.99. In 1980 just 1GB cost roughly $210,000.00. So 16GB in 1980 would have cost me about $3.1 million.

Approximate price per gigabyte over the last 31 years:

1980: $210,000

1990: $9,000

2000: $109

2011: $0.15 (yes, that’s just 15 cents for the same gigabyte)

NPR reports on the transformation this technology is having on data-analytics and the enormous potential offered by our current and anticipated advances in technology. Companies and individuals can now all afford the awesome power of data-analytics to make their judgments more sound, more objective and to hopefully lead to better decision-making. What are you doing to capture, analyze, and succeed with this affordable technology now literally at your fingertips?

After the Floods, a Sea of Disk Drive Shortages

According to Businessweek, Seagate Chief Executive Officer, Stephen J. Luczo, is forecasting difficult times for the disk drive industry. Each of the hundreds of thousands of drives Seagate’s Thai factories ship every day contains parts from 130 or more suppliers. Many of these suppliers are three feet under water. For the past six weeks the floodwaters have engulfed much of the industrial heartland north of Bangkok.

Some Wall Street analysts predict production will be back to “pre-flood” levels by summer, 2012. Luczo believes that this prediction is nonsense. “This is going to take a lot longer than people are assuming, until the end of 2012 at least,” he says. “And by then, demand will have gone up.”

Average drive prices have already jumped about 20 percent because of the flooding. Western Digital and Toshiba have major factories in the flood zone, and industry production is expected to be 50 million drives short of its “180 million” goal this quarter. Luczo says he could raise prices 40 percent but instead is offering 20 percent hikes to those who commit to one-year to three-year contracts. “People are going to appreciate the complexity of this business,” he says.

The Flooding, a natural disaster, in Thailand has created an upward shift in the supply curve in the disk drive industry. The flooding has crippled all three of the major disk drive suppliers; Seagate, Western Digital, and Toshiba. Since the flood has reduced production to all of the world’s suppliers of disk drives, there is no alternative product to replace the higher priced disk drives. Not only is there a shift in the supply curve, but according to Luczo demand will also increase by the end of 2012. This shift to the right in the demand curve will cause the price to increase even more. Therefore, consumers are going to be paying a much higher price for disk drives ‘till 2013.

Fast Food Making Fast Cash

A quick stop into a McDonald’s restaurant got me thinking. First, I don’t care for fast food. And lastly, they capitalize on the American market. Fast Food

Since the 1980’s, McDonald’s has been bringing in and out the McRib. When looking at the American prices for pork it is no wonder that the McRib enters and exits the market. The prices of pork are cyclical in nature and the introduction of the McRib follows this pattern too. When the price of pork falls, McDonald’s buys up meat and brings back the McRib capitalizing on the low pork prices and the seemingly insatiable American hunger for fast food.

Although a better diet may be more expensive and less convenient, a healthy lifestyle should be worth the extra costs.

Borders, Losing its Edge

The book store Borders and been closing its doors in many locations. Borders the once great bookstore thrived on the experience that it gave its customers, but the experience isn’t enough anymore. Besides the experience, Borders prided itself on its enormous inventory of books. Because of the collection of books, the bookstore needed large stores which incur huge overhead costs.

Borders has been making some bad investments in media and technology. It invested heavily in CDs, DVDs and stationary when the world was moving towards MP3s, Blurays, and electronic communication. Borders was also a late bloomer getting into the online book sales which has been hard to make up. In hindsight, the right choices are quite obvious.

With many of its locations closing, smaller ma and pa bookstores are supplying the demand for books now. Although this is quite unusual, experts believe that it is normal for the book industry.

In what situation do you think we would see the dissolution of Walmart? Armageddon?

Talkin' the Bakken - Part 2

North Dakota winters only get colder as we get deeper into winter, go figure. I continue to spend time asking as many questions as possible so that I may learn as much as possible about the oil boom that has engulfed this region.
I am sitting at Mcdonald's right now, with a job interview for a well-site worker taking place at one table, a discussion about how this lady's friend is a doctor and is being forced to live in his car in a parking lot, and is now being forced to leave the parking lot at the other table next to me. The line for power outlets for PC use here is not pretty and is not for the passive and or faint of heart.
The truck stop in Stanley sells between 45,000 and 50,000 gallons of fuel per day, resulting in gross sales of between $200,000 and $225,000, respectively, per day. Fuel sales do not contribute much to the margin, but it certainly drives sales. This is alot of traffic for a small truck stop in tiny Stanley, ND. All trash is emptied 2-3 times per shift and this is never enough as bins are ALWAYS full.
The colder weather has created a demand for propane tanks and torches to thaw out fresh-water trailers. The "flowback" water that is also being hauled is mostly salt water and as such has not been freezing. The lucky ones are hauling flowback these days, but the work right now has been with fresh water. There is usually a line on the really cold days of drivers going truck to truck seeking out torches as they dont have their own. I thought about asking for some money one day as I was inundated with requests for mine. Im glad I didnt however, as I needed to borrow some couplers from one of those same drivers on a later load. I have learned quickly that what comes around, goes around. I asked the worker filling propane tanks how many he fills on his 3-9 pm shift. He couldn't tell me, but he did point to his stack of slips that was between 1"&2" thick of just new sales. I guesstimated the count at around 15- slips and at $80 for the tank, torch, and propane, there is another p$12,500 in profit being contributed.
I continue to be fascinated at the lack of trash haul off. I have asked many people and the answer is always the same. They simply cant get it hauled off, so they jsut have the bins removed. Additional haul-offs are a minimum of $800 and this cost simply makes it economically inefficient to provide trash recepticles. Needless to say, finding any room in a trash can to dispose of their waste is a prized find. This may sound humorous, but it is a real problem. I heard ads on the radio the other day looking for waste company drivers, with bonuses being paid to new signees.
I spoke with a Stanley, ND police officer recently who had some interesting facts to share. The town currently employs only 3 officers with no new hires planned. The county employes 7 officers, with 4 new hires in the works. He informed me that traffic has increased about 1100% and crime rate has quadrupled. I assumed that DUI's would be a large percentage of this number as several co-workers of mine have been arrested for DUI's recently. (Side Note: I was pulled over the other night in my personal vehicle, but wasnt cited becuase he was only looking for drunk drivers. I told him I had quite a few sodas in me, but that was about it. So they are on the prowl) He added that shootings, rapes, and robberies had also quadrupled. The strain on the departments were evident he concluded, but he still loved his job.
I have spoken with several local female residents who are so concerned with the high occurrence of rapes, that they rarely leave their house alone anymore. It would be safe to argue that this oil boom has not been a good thing for them. The bartender at the Applebees in nearby Williston told me she makes about $1100 in one night serving drinks at the local gentlemans club. She added that the dancers there are averaging around $2500 per night. This is just crazy to me. I made friends with a flight attendant who told me one of her regular passengers is the owner of the gentlemans clubs who flies in every two weeks from California. He told her that this oil boom has allowed him to be much more selective about who he hires, and doesnt hire. I have included some of these random facts as a reminder that not all growth is good growth.
I can not recall if I included this in my last post or not, but the flight attendant also told me that her airline has to regulary deboard passengers due to weight concerns. NO, not because the particular passenger may be too heavy, but because there are power lines that border the end of the runway and if the aricraft is too heavy, the pilots are unable to clear the power lines. Here is revenue for the city/county that is being lost because no one can or is willing to move the power lines. Unreal!
The table next to me has now turned into a group all concerned about where they are going to move their cars or trailers. I have not figured out who they guy is they are complaining to, as I know he is just a customer too. He has offered his property for a couple of them to park on for a night or two "to get by", but he is now reminding them to save their money and to not go around spending foolishly. We can learn everywhere we go, if only we listen.
The issue of where to sleep makes me sad as I have spent plenty of nights in my own vehicle here and it gets extremely cold. You turn your car own, turn the heat on high for a few minutes, turn the car off, and then rush to fall asleep before it cools off. And this "game" is repeated throughout the night many times.
Until Next Time.....

My $500 Hand Cream

A few months ago I went to the dermatologist because my hands were extremely dry and itchy. This had happened once before so I knew exactly what cream I needed prescribed. Previously I had a friend (who is a doctor) prescribe a cream that cost the insurance company about $40—it worked very well so naturally I hoped to use the same treatment—I was sorely disappointed.

Instead I got a shot in the backside ($50+), and was prescribed a cream that cost over $500! I protested when he told me how much his prescription would cost my insurance company, but he flatly said, “your insurance will cover all of if because of the coupon I gave to you…so it doesn’t matter.” I even called his office while I was standing in line at the pharmacy but he insisted that his recommendation was justified and because I had all ready paid to see him I wasn't going to visit another doctor and be charged twice. Three weeks later my hands still itched and I called my doctor friend again to get the old prescription ($40), and within a week my hands were no longer itching.

Why would this doctor be so insensitive to overall cost? Does the pharmaceutical representative buy him that many lunches? Are these conflicts of interest influencing patient care and overall expense? According to the New England Journal of Medicine these conflicts of interest are incredibly influential. I think coding reimbursement also contributes to wasteful diagnosis. To receive payment from insurance companies’ physicians perform pre-approved procedures at pre-approved rates; these procedures are given a code (sometimes broadly) and billed to the carrier. Because doctors have an incentive to maximize profits, they bill codes that are most profitable by categorizing a visit/procedure accordingly (limited by ethical diagnosis). What most interested me when I thought back to this experience is the contrast of recommendations from each doctor and their incentives. My doctor friend simply wanted to help me get feeling better and was sensitive to price; the other doctor billed and prescribed in a way that maximized his utility at the hefty expense of the insurance company and therefore my expense (remember insurance is pooled risk of policy holders). My doctor friend’s treatment plan cost about 7% of the other doctor’s treatment plan and was more affective.

Our health-care-system is wasteful for many reasons but two of the primary reasons are misaligned incentives (for both physicians and administrators), and conflicts of interests. Managing any large organization requires understanding economic incentives and this is especially true when managing organizations within health-care.

Collusion in the air

Currently there is a group of transatlantic flight providers who are colluding on prices. The big problem is that the Department of Transportation has no intentions of stopping it. Star, oneworld, and Skyteam are able to not only agree on the prices of transatlantic flights but they are also allowed to share the cost. When passengers are in search of a ticket if there are any connecting flights and one of the providers is not a member of the alliance the providers will actually increase the price of their flight to detour passengers from selecting that flight option, which in turn will encourage passengers to select flights from the alliance members.

One great thing about the free market is that when it is allowed to work and move properly the market will find the equilibrium price for goods. In the article the writer encourages Congress to allow the Department of Justice to aid in the situation to make the three producers compete more directly with one another, and to look for opportunities to help other producers to survive.

Japan, Toyota Feeling Impact of Highly Inflated Yen

As a follow-up to a recent post regarding the institution of a free-trade agreement between the U.S. and Japan, a November 29, 2011, article published on bloomberg.com reveals that the modification of international tariffs is not the only factor playing a role in the Japanese automobile industry, not to mention the entire Japanese economy.

Upon reading the article one is left with a feeling of deja vu. Talk of historic inflation rates, bail-outs and stimulus packages is all to familiar to Americans. Now, its apparently Japan's turn to go through the same cycle. The Yen is reaching historically high inflation rates - comparable to post WWII rates that were the country's highest ever - and company's as large as Toyota are feeling the crunch. The company's president, Akio Toyoda, even said that his company “will collapse” unless the currency weakens. While there seems to be added stability to the U.S. automobile industry at the moment, it leads one to wonder how effective, in fact, were the changes and aide given to U.S. automakers and will the industry continue to improve in the long run? Now, with Japan in a very similar position, what is their best plan of action? Is a short-term solution the key or should long-term adjustments be made?

An IPO of Epic Proportions

According to an article by Shayndi Raice published today in the Wall Street Journal, Facebook, Inc. is moving closer to an Initial Public Offering. It is expected that Facebook will make its offering in mid-2012. As the article outlines, "Companies often explore an IPO once they have $100 million in revenues." In stark contrast, Raice points out that "Facebook is expected to debut with more than $4 billion in revenue."

These numbers are extremely impressive. What's even more impressive is this company was founded by Harvard University student Mark Zuckerberg a mere seven years ago in his dorm room. The fact this company has grown to a potential valuation of more than $100 billion in seven short years is more than impressive, especially given the fact they have grown during a major economic recession. To top all of this, Facebook is expected to make an offering of approximately $10 billion. According to the article, this will place them in company with only three other United States issuers of more than $10 billion in size including Visa, General Motors, and AT&T.

This is an IPO that is sure to have a significant impact on the United States economy. Facebook has already had a major economic impact on not only the United States economy, but on the international economy. Marketing and communications have forever been changed in huge proportions due, in large part, to the innovation of Facebook, Inc. I ask myself...has there ever been a company, a web company to be exact, that has created this kind of economic impact?

NBA Union

The NBA and the Players Association have reportedly agreed to a new collective bargaining agreement. After a long negotiation process, all that is left is for both sides to approve and sign the deal. From the text book we read that a labor union's goal is to "restrain the amount of employment so as to raise wages above the competitive level" (pg. 309). But with the amount of money that NBA players make, was it really necessary to hold out for so long? In an article by Tim Reynolds of the Associated Press, a large obstacle to the deal being finalized was "The target [of] a 50-50 split" of basketball-related income between the players and the owners. The players wanted a 51-49 split, which might seem like a lot of money to us, but to an NBA player it is pocket change. Is it fair/ethical for the Players Union to make such demands in order to get higher wages?

Economic Efficiency Paradox

Which is more economically efficient, philanthropic efforts focused on non-government related causes or philanthropic efforts focused on government programs? In a New York Times article, entitled “Policy-Making Billionaires”, the topic of philanthropic economic efficiency is discussed. The article claims that philanthropic dollars which are used outside of the government system can produce results faster and better than dollars spent in government programs. Yet the article also states that philanthropic efforts which are not channeled through government programs cannot make an impact on a large enough scale to truly achieve social change.

Our book states that an allocation of resources is economically efficient if no other reallocation of resources can make one person better off without making another person worse off. So the question remains as to which philanthropy option is the most economically efficient. The use of philanthropic dollars in non-government projects is more cost effective and produces results quicker. However, directing the funds through government channels helps more people and can create change on a broader scale. I have always been taught that governments are run inefficiently, but if a larger scale change can take place through that channel maybe it is more economically efficient and I should support it.

Holiday Credit Card Spending: “Deal” or “No Deal”

Do holiday credit card bonuses or cash back rewards out way the negative consequences? Credit card companies are offering unusual rewards for making purchases at specific stores this holiday season. According to a recent article from USA Today, American Express, among others, is offering five times the amount of reward points when their card is used on purchases at certain chain stores.

There is no question that five times the reward points is a huge bonus for those who do or want to collect reward points. Credit card holders who change their shopping habits just to receive the bonus rewards, as the credit card companies hope, may believe they are getting the better end of the deal. However, consumers need to read the “fine print” as they may not receive what they think they will receive.

The most important factor for a consumer to consider when using a “bonus” credit card is the ability to pay off the bill in full at the end of the month. Not paying the full amount due negates the rewards, according to the article mentioned above. Credit cards give purchasers an immediate satisfaction, but that satisfaction is gone when the bill comes and they are not able to pay the bill in full. Credit card companies design such campaigns for their chain store clients, realizing that they will not have to pay up most of the bonuses offered. According to an Excel file from BBA, 67.4% of credit card balances were bearing interest in February 2011. This is mostly carry-over spending from the holidays.

So the question is…are holiday deals purchased with credit cards really worth it? The answer will boil down to the ability of the credit card purchaser being able to pay off their bill in full when the next billing cycle comes around.

Lifting the Tariff

According to Bloomberg, after years of delay the US and South Korea are initiating a free-trade agreement beginning in January.

Yim Eun Young, an analyist with Dongbu Securities Co. suggested, "The traded deal will help expedite Korean car-parts makers' efforts to increase overseas orders as the tariff removal will give them a competative edge".

What effects will the free-trade agreement have on US automakers domestically? What gaming strategy should GM and other US automakers take?

Cutting Prices

Article

Nectar of Life is a coffee producer like Folgers, Maxwell House, and Starbucks and while all other industry leaders in the coffee world are raising their prices due to higher costs; Nectar of Life is going against the grain.   They are choosing to go against rising costs by reducing their prices in a calculated risk to attract new customers and build some brand loyalty.  They are opting to using some of their producer surplus to appeal to these new consumers and work with smaller margins.

Due to the addictive nature of the product, coffee manufacturers are given an almost essential position in the market place.  Nectar of Life is choosing a Dominant Strategy that will likely have a negative impact on its competitors but could also have a negative impact on the company that squeezes its own margins.  Some economists say this will force them to raise prices eventually.  I think that the company is better off choosing the Nash Equilibrium by raising its price in an effort to maximize its profits and still gain profit share.

Bernanke: Economic Improvement Frustratingly Slow

Charles Evans, President of the Federal Reserve Bank of Chicago has recently demanded “increased amounts of policy accommodation” in order to be proactive in reducing the current national unemployment rate which has hovered around and refused to drop below nine percent since 2009. In Caroline Salas Gage’s November 15^th article on Bloomberg, Fed Chariman Ben S. Bernanke discusses the very real possibility that the current unemployment rate may not budge more than one percentage point in a positive direction within the next two years. For Evans, as well as many other national officials, this projection is unacceptable.

While current efforts to improve the economic climate and the current unemployment rate are seemingly ineffective, a few suggestions, all built around the idea of economic stimulus, have been brought to the table. Don’t worry, we’re not talking about free handouts. The latest suggestions include: a commitment to keeping interest rates as low as possible until the unemployment rate falls consistently below seven percent; increased purchasing of mortgage bonds; new communication methods to inform the public of the Fed’s policies and goals; and, additional asset purchases. While the suggestions are innovative and certainly proactive, the question still looms from the public voice, “Is it enough and will it work?” While the Fed declares that the economy is headed in the right direction, reports the national GDP will increase from 2.5 to 3 percent by the end of the fourth quarter are not the clean cut figures that the public wants to hear. Are we doing enough to get Americans back to work? Are our current efforts the most efficient ways to meet the nation’s needs? And, most importantly, are unemployed Americans going to have the patience to wait two years or more before we see any substantial improvements?

China Record Corn Crop Still Failing to Meet Demand for Feed: Commodities

According to Bloomberg, China has reached its seventh record corn crop in eight years. That still will not be enough to meet demand, driving a fivefold gain in imports as prices head for the highest ever annual average.

Even though this year’s corn production in China is 6.7% more than last year, China will need to import 5 times more corn than predicted. The demand for corn in China is higher than the quantity being supplied.

Corn futures on the Chicago Board of Trade have gained 3.9 % to $6.535 a bushel this year and averaged $6.90, heading for the highest-ever annual figure.

This is an example of what happens when demand is greater than the quantity supplied. Excess demand is the amount by which the quantity demanded exceeds the quantity supplied. This excess demand has placed the corn market out of equilibrium. The result is a record high price for corn. Because of the excess demand, China is also willing to import corn from the U.S. at a much higher price, in order to meet the demand.

According to the article, the lower price of wheat should help keep the cost of corn down a bit. As the price of corn increases, farmers will switch to cheaper supplies for feed. Wheat is a substitute for corn. As the price of corn increases the demand for wheat will increase. The increase in demand for wheat will slightly reduce the demand for corn helping to keep its price from going through the roof.

Fair Competition?

With the new healthcare reform bill phasing in over the next few years, there has been much debate over whether or not the new healthcare bill passed last year is constitutional or not. Personally, forcing people to buy health insurance, is not constitutional. Not only that, it creates what the text book calls a negative externality. The text book defines a negative externality as "...when one party directly imposes a cost on others" (pg. 327). By forcing people to buy insurance and by passing legislature requiring insurance companies to offer coverage regardless of whether or not the individual has a pre-existing condition or not, it increases the cost to those who are paying premiums. An article by Sheryl Gay Stolberg of the New York Times explains that "Requiring coverage brings both sick and healthy people into the pool of those insured, which is essential because premiums paid by the healthy offset the cost of covering the sick. Otherwise, healthy people wait until they are ill to buy insurance, which leads to what policy analysts call a “death spiral” in which premiums skyrocket out of control"(http://www.nytimes.com/2011/11/16/health/policy/insurance-mandate-may-be-health-bills-undoing.html). The government has stepped out of bounds by passing the new healthcare reform bill. By requiring insurance companies to cover a larger pool of individuals, the cost to the companies will rise and we as a result will have to pay higher premiums. The healthcare reform bill creates a negative externality for society. Whether it is by paying higher premiums or paying higher taxes in order to support the new socialized medicine program, the cost to us will continue to increase.

Kindle Fire

Yesterday as I listened on the radio to NPR’s report on the “wild frontier of e-books” I connected the concept of public goods as introduced in Chapter 12 of the text. As reported by Lynn Neary in her piece, Kindle Offers Lending Library to Customers, Amazon is treading new waters in an effort to sell more Kindles – which in turn is designed to sell more books. In short, Amazon has created a lending library of books, available to Amazon Prime members for two weeks for free. Members can read (and perhaps in many cases just review and consider a purchase) books by authors and publishers without their permission. This is similar to the example given by Dr. Tufte in his lecture on externalities. Dr. Tufte instructed that individuals taking music from their MP3 players and uploading it are attempting to make a public good without the permission of the producers. The same is now happening on a much larger scale and not for the little savings of a few friends, but for the greater profits of Amazon.

In a type of follow-up report just today, NPR reported that Amazon is actually selling the Kindle Fire at a loss. Obviously there is more to Amazon selling the Kindle Fire at a loss so Prime members can access the lending library for free (perhaps a further loss). The lending library gives Amazons’ customers more exposure to books, that can subsequently be purchased, than they might otherwise get without a free look. However, authors and publishers are mad when they find out their books are included in the lending library without their permission. Author Robert Goolrick testifies that his new book "A Reliable Wife" would never ever have become a best seller without the support and hand-selling of independent book sellers. He says anything that weakens independent book sellers weakens the entire literary discourse in the country and he is all for a healthy and vibrant literary discourse. Additionally, author Brian DeFiore contends that giving away someone's creative work as an incentive to buy some other service or product – whether it's legal or not – certainly feels problematic. While Amazon might counter that exposure will ultimately drive book sales, which is good for both them and the authors and publishers, the concept of expanding these creative works into the realm of public good through a free lending library may become a disincentive to authors. In the meanwhile, Amazon's market dominance allows it to forge ahead without the need for consensus from its content suppliers.

Urbanization Shrinking Farmland, and Margins

Have you ever noticed that milk is always located in the back of the grocery store along with the eggs, butter, and bread? Well, little did you know that this milk and butter placement strategy is known by all grocery store chains. Why is it in the back? Before the answer is revealed, let’s consider another question. Do you ever leave the grocery store without milk? Milk is a good that has historically been priced extremely low by grocers. It is placed in the back because the grocery store knows that in order for consumers to get to this staple they will have to pass other goods that have a much higher profit margin. In talking with the manager at Lee’s Marketplace in Logan, Utah, it was explained to me that milk has the lowest markup of any product in the store. This is one of the many reasons that dairy policies have been implemented in the United States.

Over the past few decades our nation has experienced exponential growth. As the population and economy grow, rural farming areas are urbanized which results in a decreased supply of rural farm ground and an increase in food demanded. As rural areas are urbanized, farmable land is depleted and the price of commodities is driven up. As commodity prices grow higher, there is a decreased margin between input feed costs and milk prices; thus, lower profit margins are realized by producers. One of the reasons that the dairy industry has always struggled is because highly variable commodities such as corn and other grains are inputs used to produce commodities such as milk. Because dairies are “price takers”, meaning they have no control of input feed costs and milk prices, the Dairy Security Act was implemented to assist dairy producers who were failing to meet desired margins due to the increasingly high price of input commodities.

The Dairy Security Act provides a Dairy Producer Margin Protection Program (DPMPP). The DPMPP works much like a financial stock option where the dairy eliminates downside marginal risk so long as they pay the premium up front for the protection. The act will eliminate many elements of the current dairy policy including one main point which provides a price floor for milk producers. An article produced by the National Milk Producers Federation weighs the effectiveness of the act here.

For anyone associated with dairy production or simply interested in how efficient and useful this margin protection insurance will be, the margin protection calculator can be located here.

China's Grip on Harley-Davidson

According to Bloomberg Businessweek, Harley-Davidson has been struggling to establish any presence in the Chinese market for two wheel vehicles due to regulations on motorcycles. These regulations include the banning of motorcycles from elevated highways and major roads to help limit the amount of external noise and drive-by thefts in major cities, such as Shanghai and Beijing. Even though Harley-Davidson has attempted to ease these laws by lobbying the Chinese government, all of Harley's attempts have come up empty handed. Harley-Davidson projects that if the Chinese government will allow motorcycles into certain areas, sales could jump by as much as 40% annually despite the fact that Harley motorcycles are subject to import taxes that can add up to 30% percent to the sticker price of the motorcycle. The 30% increase in price does not even figure in China's consumption and value-added taxes either. Should Harley-Davidson look at there investment into the Chinese government as sunk cost if they are not able to get legislation passed in their favor? Or is the chance at such a high profit margin increase truly worth the risk? Something interesting to keep in mind is that Honda sold 1.29 million scooters in China last year compared to only 268 Harley-Davidson's that were sold in China last year. If Harley could switch some of those 1.29 million buyers to motorcycles, will profits rise or will the amount spent on lobbying the government play into their profit equation as well?

The Cost of Educationhttp://www.blogger.com/img/blank.gif

Trends in obtaining a higher education have been on the rise the past 20 years. There has been a current trend of increasing tuition costs around the country. Due to the increase in costs, many students have had to take out student loans. But the economic situation in which we find ourselves today, many are defaulting on student loans. Is an education really worth what students are paying?
The education level needed has also been on the rise. It used to be that a high school diploma would get you a descent job, then it was an Associates degree, then a Bachelors degree. Now if you want a descent job, you need a Master's degree.
With the value of degrees decreasing and the cost to obtain the degrees increasing, is the marginal benefit of a degree worth the marginal costs?

North Dakota - Talkin The Bakken

The Bakken is a rock unit that occupies the subsurface ofthe Williston Basin, in Northwest North Dakota. I decided to make the journey up here in search of work and to find out what all the talk is really about.

The news sources are spot on about the lack of housing facilities. I tried in vain one night to get a motel room in Stanley, ND, only to have the clerk laugh at me. She told me the entire place was rented out to one company, and somehow I was supposed to have known that. My bad. The so-called man camps we hear so much about are a site to behold. Any Hilton or Las Vegas Resort Property would be envious of the parking lots of these camps and these po-dunk motels. They are not cheap either. I took a photo at the local restaurant the other night of some of the prices being charged on the local community board. $1218 per month for a twin bed in a shared room, with 3 other guys. Not a bad profit.

The truck stops are a site to behold. I counted 31 across and 3 deep at the truck stop in Stanley, ND the other night while waiting in line for over an hour to fuel. This facility could not havec been designed to accomodate more than a dozen or two, tops. The manager told me that this particular truck stop services over 5000 total customers daily. Demand from oil field workers for cold-weather and flame-resistant clothing has created an entire new market, for this truckstop. They went and added on at the rear of the facility and made it into a cold-weather, flame resisistant clothing store. The margins are outrageous. However, you are not allowed onto some sites without flame-resistant clothing and ifyou dont want to freeze, what else are you going to do? The nearest competition is 75 miles away in Williston or 65 miles away in Minot? The other item they have by the case load, and I know becaue I snooped, is 5-Hour energy drinks. Normal DOT hours-of-service rules do not apply to trucks hauling water to the well sites as exists for most truck drivers who operate on federal highways. Consequently, there is not a lot of sleep to be had and trucks run all night. Most of the drivers I have spoken with average 2-3 hours per sleep per night and I have found firsthand that is a rather accurate number. The margins on the 5-Hour drinks are substantial and simply add to an already impressive bottom line.

I was at the local library the other day while we were slow following the first storm of the season. I overheard a local man telling the librarian how his landlord had just raised his rent from $1000 per month to $4000 per month. This gentleman was now looking for a new place for his wife and kids to live as he could not afford the new rent amount. They then started to complain together about how these "landlords need to realize that not every citizen in town has a royalty check coming in from the oil companies, and how unfair it is." I decided it was safe to infer from their conversation that most citizens DO have a check coming in from the oil companies. This guy did not want to move however because his wife was doing so well at her beauty salon. I needed a haircut, so I decided to patronize her shop, a way to help a guy out in need. "Today is not my day for walk-ins", I was told, and not very nicely at that. I wonder how she is doing so well with such poor customer service skills. The stylist at a nearby salon repeated almost verbatim, and with the same poor attitude, as the first. The landowners who happen to own the mineral rights on thier property are doing very well. Unfortunately, those landowners who do not, are only receiving a fraction of the amount to simply lease their land to the oil companies for thier oil rigs. The lesson to be learned for all of us: Make sure you know who owns the mineral rights to your land. Jsut because you own the land, does NOT mean you own the mineral rights.

Which leads me to my next point. Customer Service is horrible almost across the board in the region. It simply does not have to be superior in my opinion. Where else are the workers and customers going to go? It is my opinion that they know this and act and serve accordingly. I have learned that a lot of these service employees are spouses of oil-field workers who have followed their significant others here and prefer to saty buys during the day.

One of my most interesting observations has been the comraderie among the workers and drivers alike. It is truly impressive. Whether it be at the stores, at the pumps, in line in traffic, or at the well sites, the workers are very courteous and respectful for the most part. There are always a few, but I have found them to be few and far between. I would have thought that with the long hours, the terribly cold temperatures, the poor customer service at most of the stores, the workers would be more agitated and take it out on each other in one form or another. This is not the case at all. Doors are help open, and if you're in a hurry, they will let you cut in line. If youre stuck trying to get on a road, most will slow and let you merge. They dont cut in line while waiting to be loaded at the well sites, they wait their turn and will help when asked. (And I have to ask a lot!)It is encouraging to observe.

As mentioned, most service businesses are doing very well. Truck stops, c-stores, cold-weather clothing stores, etc. We have heard about a lot of these on the news. One market that is underserved with room for increased competition, is laundry services. I took my first "oil shower" the other night and have been unable to get the clothes clean, and cleaning myself was not much easier. I have noticed laundromats popping up at the rear of personal residences, etc., but they need so many more and in more convenient locations.

The weather is only getting colder and the roads icier. This should make for an interesting winter. It there is oil to be found, there is work to be found.

Italy's new leader

Mario Monte has been selected to serve as Italy's next Prime Minister. Given the fact that Italy is Europe's third largest economy (keep in mind the turmoil that Greece's debt, Europe's 23rd largest economy, has caused), the steps that Mr. Monte will be able to take to bring Italy's debt crisis under control will have huge repercussions on the world's markets. Hopefully, he will be able to initiate reforms that will prove successful and show our own government leadership that fiscal responsibility is the only way forward.

Groupon's Market Power

There has been a lot of talk about Groupon over the past couple of weeks due to their initial public offering on November 4th. Although Groupon enjoyed a strong IPO many analysts have raised concerns over the company’s long term viability. There was an interesting article in Forbes last week that spoke about Groupon’s economic strengths and weaknesses. The article, entitled "Groupon’s Advantage", makes points as to why Goupon’s business model works so well now and why it is not sustainable in the future.

We all know how Groupon works, by providing strong word of mouth marketing to suppliers and deep discounts to consumers. This business model was a brilliant idea and has proven to be a very successful one. However, I completely agree with the Forbes article contributor, Dr. Mourdoukoutas, who states that unless Groupon makes changes to its business model they will not be viable in the long run.

In chapter 8 of our textbook it talks about the conditions that give a company market power. These conditions are: having access to a unique resource, control over intellectual property, economies of scale, product differentiation, and regulation. As I study Groupon I do not find them strongly possessing any of these conditions. A firm must have market power to prevent its competitors from entering the market and gobbling up their market share. Due to a lack of barriers to entry we can see that the Groupon business model is being duplicated many times over across the country. In fact, there are currently 3 web based group discount companies existing in St George alone. Groupon has a size advantage over many of its new competitors, however there are other companies with similar large user bases such as Amazon, Google, and Priceline that can enter the online group discount market at any time. I think Groupon must gain market power and keep competitors out of the market if they want to survive in the long run. It will be interesting to see what Groupon does with their newly raised IPO capital to help them strengthen their market power and sustain long term viability.

Kraft's Pricing Strategy

After reading chapter 10 in the text, I was wondering how a company would actually go about signalling to competitors what it intended to do involving pricing strategies. I don't recall ever catching onto a company's "hints" in any reading I've ever done. This could however be because I wasn't looking. I found an article published by a game theories strategy website that outlined Kraft's attempt at signalling its competitors. Kraft like many other companies faces a prisoners' dilemma in their pricing strategy. In the outlook section of their press release they said:

"We're realizing better alignment between pricing and input costs, and
volumes to date have held up well. At the same time, raw materials costs
continue to escalate and the economic environment remains unsettled."

If I were to casually read this, I probably wouldn't have got much out of it. However this is an attempt by Kraft to signal to it's competitors that they too can raise their prices and move to a more profitable position than they are currently in. How the competitors take this news and act on it is beyond Kraft's control. Competitors could see this as a chance to keep prices low and steal market share from Kraft, or they could raise prices to raise profits. However, if they keep prices low, chances are Kraft will also drop their prices back to competitive levels. This will result in lower profits for both Kraft and it's competitors, which is better for you and I as consumers.

How Business Owners Protect Profits

Most if not all business owners have been faced with increased costs to do business over the last two years. Increased fuel costs, decreased consumer spending and an overall lack of consumer confidence often equals shrinking profit margin for businesses.

What happens economically when one simply raises prices when overall demand is low? What additional strategies can be considered to protect or maintain adequate profits?

In a businessweek article written by Monica Mehta, several strategies are suggested. The first suggestion is to consider introducing lower priced items as a substitute for products that require price increases. A second suggestion is to move production closer to customers. For some international companies, that may mean off-shoring some facilities. A third recommendation is to alter the product by substituting ingredients with lower cost alternatives. A final way that is mentioned is to offer uniqueness in your product by finding a specialty niche in your product market.

What other ways can small business owners can maintain profits when costs are increasing besides those listed?

Peanut Butter

If you love peanut butter you may have already noticed an increase in price recently. This is due to peanut shortages in several different states in the U.S. Drought was one of the factors that has contributed to the shortage of peanuts. The other main reason for the lower supply of peanuts is the decision of many peanut farmers to plant cotton.

Unfortunately, many of the peanut farmers of will not reap the benefit of the high prices, since much of their crop was already contracted before the prices began to increase. Despite this, the Executive Secretary of the Peanut Growers Cooperative Marketing Association Dell Cotton seems to have a good handle on the economic strategy for the peanut farmers. He states that "the cupboard is bare, so we've got to build the supplies back...But we've got to be cautious about that. You can't oversupply, because that kills the prices the other way."

With the increase in price for peanut butter, Kara Yorio provides a few alternatives in this NorthJersey.com article. Here are some of the suggestions she gives: almond butter, soy butter, sun butter. I have never tried any of these, but I suppose if I ate peanut butter often and was unwilling to pay the higher price, I might give them a try. It will be interesting to see what kind of domino effect the peanut shortage will have on other goods. One example is strawberry jam. Since the jam complements peanut butter, surely the demand for the jam will fall (ceteris paribus).