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).

Home Prices Heading for a Triple-dip

It's no secret that the housing market is struggling and will continue to struggle for many reasons. Article

1. Foreclosures are still flooding the market.
2. High unemployment remains a problem.
3. Potential buyers struggling with bad credit.

Even though potential home-buyers have much to be glad about they are still fearful of the continuing lag in home ownership.  Rates are still sitting at historic lows and home prices are obviously extremely affordable.  Although the government makes efforts to stall future foreclosures by changing past programs to accommodate more people, many are still skeptical that those people underwater will still let their house go into foreclosure.  The demand for housing has not been able to find sustainable growth due to this weak confidence that the country has its problems under control. 

With this being the third dip in housing since the beginning of the economic woes there have been many efforts to spur growth or simply halt the fall of housing.  The government has given tax credits to first-time home buyers as an incentive to purchase. They have artificially made efforts to push home loan rates lower, and now make further efforts to offer refinancing for those upside-down in their home value.  With all of these things slowing the fall but not eliminating it, I am led to believe that maybe the invisible hand theory would have been best.  Maybe we would have seen one sharp drop and already begun the recovery in our economy.  While I always have believed that the economy could correct itself I was also fearful that without some assistance we wouldn't have been able to weather this storm.

Consumers May Be Heard After All

I wrote a post last month covering an article from the Wall Street Journal wherein Bank of America had made an announcement that it would begin charging monthly fees to its customers who elected to use a debit card. I couldn't help but notice a new article in todays edition of the Wall Street Journal dealing with the same topic. The article is entitled "Retreat From Debit-Card Fees Continues." I was naturally drawn to the title of the article, and what I found was very intriguing to me.

In my original post I mentioned that many of the larger banks were expected to follow suit, and begin charging similar fees just as Bank of America announced it would do. This was indeed the case. Since the time of the article, banks such as J.P. Morgan Chase and Wells Fargo announced they too would look at charging the same fees. However, according to Robin Sidel's comments in today's Wall Street Journal, Wells Fargo and J.P. Morgan Chase have just been joined by Sun Trust Bank and Regions Financial Corp. in their recent denouncement of test fees amongst certain groups of customers. Sidel explains in her article that these recent moves leave Bank of America as "...the only big bank that is still planning to levy the fee..."

It appears to me that banks across the country have tested the water with creative fees, and have determined that their customers are unreceptive and willing to look elsewhere for services historically offered at no charge. Seeing the free market operate is refreshing to me at a time when it so often seems that free market principles are under attack. The question is whether the trend will continue.

Pricing Decision of Redbox

Redbox recently announced that it would raise its nightly DVD rental fee from $1 to $1.20 due to increased costs, specifically the increase in charges for processing debit card transactions. In an article by Matt Brownell (http://www.thestreet.com/story/11293833/1/redbox-price-hike-could-dodge-netflix-outrage.html), Redbox's interchange fees are going to increase from $.06 to $.23 on average. In the days following the announcement, Coinstar, owner of Redbox, saw their share price drop by %10. This may have been worse, but Redox eased the new, higher price into the market by first testing it in different markets. However, despite the drop in the share price, the price increase on DVD rentals will pay off in the end. Some articles cite that after Netflix raised their prices 810,000 customers cancelled their subscriptions looking for a cheaper alternative (http://seekingalpha.com/article/302037-netflix-disaster-shifts-focus-to-redbox). Redbox in a prime position to win over those 800,000+ customers with their cheaper prices. The pricing decision must also have economic reasons backing it. In chapter 9 of the text teaches that "To maximize profits...management should take into account both the demand and the costs" (pg. 229). Specifically mentioned in making a pricing decision that will maximize profits are the marginal costs, the price elasticity of demand, and the incremental margin percentage. The authors explain that "...when marginal revenue equals marginal cost, then the incremental margin percentage equals the reciprocal of the absolute value of the price elasticity of demand" (pg. 228). Using the numbers from Matt Brownell's article, we know that Redbox's marginal costs are $.23 , with a price of $1.20 the incremental margin percentage will decrease to from .94 to .808. With an incremental margin percentage of .94, that would mean that the price elasticity of demand would have to be -1.237 so a 1% increase in price will lead to decline in demand of 1.237%.
It will be interesting given the recent price increase of Netflix and the number of cancelled subscriptions to see if the price increase will actually lower the demand for Redbox rentals.

Stockholder rights and executive bonus

I know, I know, executive pay has been written about more in the past five years than most subjects. Posting on this subject certainly runs the risk of "flogging a dead horse." But in light of the frustrations expressed towards the government in the media on a daily basis from both the Tea Party and the new Occupy movement I thought it worth revisiting.

Personally I don’t have a problem with a hefty and deserving executive bonus being paid. I do have a problem with ridiculously, excessive bonuses that are consistently paid to those who don’t bring at least that same value to the company. Apparently I’m not alone:

Four out of six chief executives or company presidents polled by the NACD in July and August said the compensation of top executives was high relative to their performance. Only 2.2 per cent of the nearly 70 chief executives and presidents involved in the survey said compensation was too low, while a third deemed it “just right”. Their views were backed up by outside directors, with more than 80 per cent of them saying chief executives were overpaid.

While this survey was conducted a few years ago I think it is still relevant. I wouldn’t even have a problem with incredibly huge bonuses if the money funding those bonuses are designed to benefit the stockholders. Which begs the question of what are the rights of stockholders and what happens when the government is a substantial stockholder? In our current system it seems that the common stockholder has rights but little to no voting rights that he/she can actually exercise. Thus having no rights regarding choosing a new board member, ultimately the CEO and influencing their pay. Most shareholders are relegated to either move their money to another stock with the same rights, or hold and hope for the best.

We (my family and I) have been in the position of trying to keep control of a company from other shareholders--to put it mildly--it was incredibly frustrating. But when we were trying to retain control it was a private corporation, born of a poor choice of partners. If the company is public, who really owns it? I understand equity is primarily a means of financing, but it is also a means of ownership that happens to have no real rights unless you have a lot of it. You not only have to have a lot of it, you have to have a lot of money to vote contrary to what the board proposes. How many of you have the money and time to organize a separate ballet and send them out to all the shareholders in hopes of convincing them to vote for another board-member? Me neither. I suppose this is the price one pays for diversifying his/her portfolio; if you are fully diversified you can hypothetically get rid of unsystematic risk. At the same time you also dilute your say in any single company’s decisions and hand it over to the mutual fund managers instead.

So what is the best incentive for executives to properly manage public companies with a long-term perspective? Even a better question, how should public companies determine what the executives' incentives for bonuses should be, and what role should the board and common shareholders have? Too many rights given to the stockholder could create a short term perspective, akin to what we see with our current political pendulum. Although, if the barriers of stockholder's rights are not decreased than stock being any type of ownership will continue to be a mirage except to the super rich. These are very important questions to have answered and become heightened by the fact that we now have a precedence for the government (taxpayers) becoming large shareholders of "too big to fail companies."

Pharmaceutical Companies Price Discriminate Too

Price discrimination is a very common type of pricing strategy engaged in by those businesses who have any control over their pricing, which includes most of them. "Price discrimination is a policy where a seller sets different incremental margings on various units of the same or similar prudcut. " (Managerial Economics, 3rd Edition, 2007. Png & Lehman. Pg 231.)

Pharmaceutical companies are no different in that the firm's profits are generally the main motivating factor behind pricing decisions. If pharmaceutical companies were not able to engage in price discrimination, who knows what potential life-saving medicines may never actually make it to market. Pharmaceutical companies, by the very nature of their business, have much higher R&D expenses, and as such, have price structures set well before a medicine makes its way to the pharmacy or store shelves.

The article, Pharmaceutical Price Discrimination and Social Welfare, http://www.bepress.com/cas/vol5/iss1/art2/, authored by Frank Lichtenberg, pointed out that people in the lowest income bracket pay 25% less than high income people. However, people in the middle income bracket pay 6% more than those same high income people. This should be an area of concern for regulators, or someone, in my opinion, as the middle income bracket appears to be bearing the higher burden. I will admit though, that I am very biased on this matter as I have a young daughter with major health issues. The most recent medicine the neurologist started her on comes with a jaw-dropping invoice each month. The pharmaceutical companies charge it because they can. Plain and simple. That does not make it right or fair, obviously, but how often in life is everything fair? I would pay whatever I was invoiced, as I have placed the opportunity costs of not having my daughter in my life as much, MUCH higher than the money that may or may not be residing in my pocket book.

The ability of these firms to price discriminate increases the chances that more medicines have a chance to make it to market, which will hopefully save or improve more lives, including my daughters. If these firms were regulated as to what "had" to be charged, the R&D process might be halted too soon for any benefit to ever be realized.

Liquid Gold

Investors of oil futures contracts took necessary profits Friday as the market cooled off from the best weekly oil rally for nine months. This following months of extreme uncertainty of global economics centered on the U.S. and European debt crisis. According to this Bloomberg article by Moming Zhou, crude oil prices increased 4.2 percent on Thursday due to the report that economic growth has accelerated at the highest rate in the past year, and “European leaders agreed on a plan to curb the region’s debt crisis” (Zhou, 2011).

Though we are not extremely happy when fuel prices increase from $3.00 to $4.00 per gallon, this is a great sign that consumer spending has increased, causing a greater demand for oil and consequently, increasing oil prices. Where the U.S. has had a more difficult time drilling for oil because of administration regulations and offshore drilling issues over the past couple of years, there has been only a slight incline in the supply of oil produced in the U.S.

Big moves in commodity markets are driven highly off of speculation and reported news. For example, if I hear news that the demand for oil has drastically inclined because Japan is back on track after the quake, this will drive up prices as investors buy up oil contracts anticipating the big move. Due to increased contract buying volume, the contract prices will increase at a rapid rate. Oil will eventually reach natural equilibrium as the demand curve shifts to the new demand for oil. Sadly, Zhou's article also describes the contrary status of Japan, markets cooled off on Friday because Japan is still not doing so well economically following the quake, this lowering demand for oil.

According to this article by Ron Cooke on the Energy Bulletin in 2007, “oil demand … has been relatively inelastic since 1982” (Cooke, 2007), meaning that these big price swings do not effect crude barrel purchasers greatly, mostly due to the fact that these prices will eventually be passed through production and manufacturing to us as the consumer, and we as the consumer, use a lot of oil, and will unhappily pay the price.

So next time you fill up at the pump and notice that fuel prices have increased yet once again, remember that it may be due to the fact that our local and global economy may be improving.

Please see the market for Crude Oil on the CME here.

Coupon Sites

The way we do business continues to change with technology. Coupons have been traditionally used as a means of price discrimination. For example, people who think it is worth the extra effort to cut coupons out of newspapers take advantage of price savings while those who are less sensitive to price don't bother with the coupons.

In this article about coupon web sites, the author discusses how the latest technology is impacting the way coupons are used. In the example previously mentioned about cutting a coupon out of the newspaper, a consumer must subscribe to the newspaper and also take the extra time to cut the coupon out. But now in the day of sophisticated phone apps, consumers have the capability of finding and redeeming coupons very easily. The author of the article contends that the whole purpose behind coupons are beginning to be lost with web sites and phone apps, since the deals that are being offered are so easily accessible.

In order for coupons to still be used for price discrimination, it will be important in the future for companies to require a little bit more out of their customers than simply Googling and downloading phone apps that give nearly effortless access to coupons.

Illegal Immigrants Impact on the U.S. Economy

I have often wondered what kind of impact the 12 million immigrants might have on the U.S. economy. We are at a time when jobs are getting a little harder to find now verses 6-10 years ago. Could the large population of immigrants be a contributor to the decrease in jobs available?

Many of the jobs occupied by illegal immigrants are not desired by legal citizens. The article mentions that the only population these jobs are affecting are the high school drop outs who desire the same jobs. Many of the illegal immigrants do not pay taxes but still take part in many government programs funded by these taxes. Would this distort the supply and demand of these government programs?

If you removed all of the illegal immigrants out of the three major cities you would see an increase in wages almost immediately. But shortly after you would get a large supply of employees moving to that area for higher paying wages and it would bring the equilibrium of wages down once again. So the overall impact of illegal immigrants to the job market is very minimal if any in most areas.

Occupy This

How can I help but focus my post on the current furor aimed at the heart of our capitalistic foundation? Academia, a sympathetic "free press", union money, and thousands of people with nothing better to do are occupying this park and that street and myriad airwaves with demands for changes to the systems that made this country the most prosperous and free society in history- free even to become fat and lazy and demand more entitlements from a benevolent group of public servants.

Since I need to focus my post through economic glasses, I think that this movement is doing a masterful job of misdirecting attention through a frenzied advertising campaign whose message is that we need to look at reforming everything and anything, as long as it's not our overreaching bureaucracy. The protesters need to occupy Washington and demand some political leaders who will allow the invisible hand to do its thing!

“You can always count on Americans to do the right thing – after they’ve tried everything else,” said Churchill. In this article within The Economist, a new prescription for the poor is introduced. America’s healthcare system for the poor is in the process of being transformed. The typical process for Medicaid providers is to bill a fee for each service they performed on behalf of the patient. In short, the more services they provide, the more they bill and the more money they make. In that same moment, the more we as taxpayers pay into this system. Providers are incentivized to keep patients unhealthy, bill for more services and make more money. This is a win-lose. Many states are introducing “managed care” into their Medicaid systems. Managed care programs cap the rate for the care of its members based upon a pre-determined agreement between the state Medicaid system and providers. If someone gets sick, the healthcare costs rise and the provider’s margins reduce. Providers are given a huge incentive to keep their patients healthy. This is a win-win. Advocates of managed care also testify that costs are made more predictable. Not only is a greater investment and emphasis placed on preventative care, providers working under a cap find a way to work within that budget. Also, the greatest change will come in improved patients’ health, standard of living, and longevity. The text (page 89) also introduces the economic benefits of managed care systems. The costs associated with the typical Medicaid pay-per-service systems are unpredictable and extremely variable. The managed care blueprint shifts the costs to a predictable, agreeable fixed amount.

Beat the Recession Blues. Take Up... Golf?

We speak often of normal, inferior, and luxury goods and the personal adjustments we make in our spending as our income fluctuates. When times are good, we spend. When times are bad, we still spend... just not as much and on inferior products. So, let's discuss what happens when luxury goods are all of a sudden within our price range, or at least close to it, and it is the supplier not the consumer who is making the adjustments.

In the October 2011 issue of Golf Digest, John Barton wrote an article titled, "The Price is Right: Affordable Golf is Not Only Plentiful, it's Preferable". Barton shares the following statistics concerning the game of golf in the United States:

• The average golfer spends $1,620 a year on the game (including $406 on equipment, $338 on green fees and $64 on lessons)
• Only 3.6% of individuals with incomes below $30,000 are golfers
• 14.8% of individuals with incomes above $125,000 are golfers
• As of 2010, there were15,890 golf courses in the U.S. with a median green fee of $37 (nearly a $3 drop from the previous year)

The point that the author is trying to make is that golf, now more than ever, is becoming more affordable for those who have only dreamed of leaving the driving range and stepping foot onto a course to actually play. Golf successfully originated in Scotland in the 1600's and was considered a game reserved only for rich males. Gentlemen Only, Ladies Forbidden - as the G.O.L.F. acronym denotes - has long been the motto maintained by players of the game even up until recent decades.

Times have now changed and golf courses are doing all they can to attract players to their courses. Greg Nathan, Senior Vice President of the National Golf Foundation, is quoted in Barton's article saying: "Because of the supply-and-demand imbalance, there has been a meaningful price compression. All the course owners and operators are competing very hard. Really nice courses are financially within reach, perhaps more than ever before. Playing golf has become more affordable." Barton continues to explain that there are all kinds of deals, discounts, two-for-ones and special rates. If you're playing as a family, 899 facilities across the U.S. offer free green fees to children with an accompanying paying adult, and 2,278 facilities have special rates for juniors. Many courses are coming up with innovative ideas to make the game even cheaper and attract more players to the game, he explains.

The new affordability of golf is undoubtedly a result of lower national incomes and, thus, less dispensable income to spend on recreation and not necessities. So, maybe now is the best time to take up the game? Whether it is or not, it is still interesting to consider the economic changes in the golf industry and the efforts being made by course owners and operators everywhere to make the game more affordable to the public and not just the wealthy.

Shortage in Supply

Each year car companies release new products and improved models in order to increase the quantity demanded in their product. I was talking with a Ford representative and found it interesting that they were experiencing several shortages in their products. This is due to various causes. First is they are having a hard time getting key electronic equipment from suppliers in ravaged Japan. The second reason is that they failed to make an accurate sales forecast for their new product. According to the article “Ford Raises Sales Forecasts for EcoBoost F-150s”, found in the Wall Street journal, Ford did not properly plan for such demand and are left with a low supply of parts to build the trucks with the new EcoBoost engine. Ford now has a new sales forecast for 2012 and feel they will meet demand next year. So what does this mean for the customer? Typically a shortage in supply of any product will increase prices. In this case I think it means smaller factory rebates and discounts and customers may just have to wait until next year to buy that new truck they want.

From Un-employed to Government Employed?

There have been a lot of plans from different public officials trying to spurs debate over how to get our country back to work.  One recently caught my attention.  A representative from Ill. proposed a bill for the federal government to employ all 15 million of the countries un-employed at $40,000 per year.  According to the representative putting 15 million people back to work immediately would create new tax revenue and spur new spending in our economy. While there are a number of negatives economically to this proposal I would like to focus on what this could do to the labor markets?

If the government was able to employ that many people it would immediately reverse trends in the labor markets.  Currently the demand for labor is low but the supply is high.  This reversal in the labor market could have a number of negative effects. 

1.      Supply of available labor would be reduced drastically.

2.      Labor wages would be drive upward in most parts of the Country causing the private sector to retract even greater in efforts to remain competitive.

3.      Inflation while somewhat contained would enter the markets at a much more rapid pace.

4.      Those currently employed for less than the established $40,000 per year would all seek other opportunities within the government causing an exodus from the private sector into the public sector

This proposal while noble would rotate the labor market from one dilemma to another.  Public sector would grow exponentially and the private sector would be forced to retract causing our nation to fall even greater from its status as an economic power as more jobs would be moved overseas due to non-competitive markets and lack of qualified work force in the United States. While this proposal is a five year deal to many jobs would be moved overseas during that time period to create enough jobs to employ those individuals when the five years is up.  ARTICLE

A Question of Efficiency

One topic from the course textbook that I wanted to better understand was that of economic efficiency. The textbook lists three requirements for achieving economic efficiency, which are "1. All users achieve the same marginal benefit, 2. all suppliers operate at the same marginal cost, 3. every user's marginal benefit is equal to every supplier's marginal cost (pg. 145)." When i set out to find a current example that would help explain economic efficiency, I found an article written by Matthew Saltmarsh of the New York Times, titled "Britian Considers a New Kind of Stimulus-Higher Speed Limits (http://www.nytimes.com/2011/10/01/business/global/britain-considers-a-new-kind-of-stimulus-higher-speed-limits.html)."
The title of the article more than hints at what the article is about; the British government is considering raising the speed limit from 70mph (113 k.p.h.) to 80 mph (130 k.p.h.) in order to "improve economic efficiency and personal satisfactionby shaving valuable minutes from some journeys." I suppose that the improved economic efficiency would be from users (citizens) spending more time at work, spending money, etc., pretty much something more productive than driving in a car. However, when we consider the definition of economic efficiency offered us by Ivan Png and Dale Lehman, we discover significant flaws in Britian's plan. Let us first consider the increased costs of the increased speed limit, some of which are mentioned in the article. Increased costs would come in the form of more oil consumption and fuel emissions, increased risks of car accidents leading to an increase in medical expenses, insurance costs, and wages/salaries paid to paramedics and police officers, costs to study the effects of the increased speed limit, quicker depreciation in the value of vehicles, just to name a few. The benefits, however, are far fewer in number. Benefits might include, less stress (no one enjoys sitting in traffic), more free time for users to provide some sort of benefit to society, and possibly even an increased involvement/investment into cleaner modes of transportation.
It appears to me that this, more than anything, is about political motives that it is about economic efficiency. The marginal costs clearly outweight the benefits and the proposed speed limit increase, while may in fact be an ok idea, will in no way improve economic efficiency.

Netflix

Remember when Blockbuster and Hollywood Video began to look more like a ghost town than profitable businesses? The speed at which these businesses went from dominating the market to closing their doors was almost alarming. While some believe it had more to do with"inertia", I would contest game changing technology—in this case—multiple new technologies; elasticity of demand; and change in consumer tastes were all major contributors to Blockbuster and Hollywood Video's inability to compete.

Netflix picked up considerable market share by offering DVD’s via mail, and providing movies that can be streamed on their website. Redbox built upon existing technology (vending machines) and applied them to the movie rental market. Why was this combination so potent to the traditional main street movie store? Beyond the introduction of new technology, these new companies had much less overhead to contend with, and in Netflix's case, a compressed distribution chain and favorable economies of scale were also at work. Maybe most influential was the price. These business models proved to be efficient, and allowed them to offer movies at a much lower price; waiting in line for 20 minutes on Friday night (despite the cool posters and popcorn) was no longer appealing when we could pay a quarter the price with almost zero wait time.

Netflix may have forgotten how it captured as much of a market share as it has: price and flexibility for the consumer. Netflix recently increased their price from $9.99 (for online streaming and DVD by mail) to $7.99 for each. Obviously, management believes their demand to not be overly price elastic (meaning they know it is not inelastic), and will therefor not experience too many lost subscriptions. However, if they are wrong, they may have jumped into a conundrum. The most profitable arm of Netflix is the streaming side of the house, yet they cannot grow the streaming division without additional quality content. Thus far, their streaming service has provided inferior movies and release dates, but compensated by offering documentaries, and TV shows that are not usually offered in a Redbox. Initially they even made things worse by making it more complicated for customers to order movies by dividing the streaming and mail order sites into two different businesses. Of course this was short lived and Netfilx has done an about-face by announcing they will keep both services on one site. Still, are re-runs and old movies enticing enough to compensate for higher prices and lack of flexibility? Can re-runs and dated movies grow subscriptions? If they do not grow their subscription base, content providers become less willing to provide the additional content needed to grow. According to Jason Gilbert of the Huffington Post, Starz, a content provider for over a 1000 online Netflix movies, will not renew their contract for 2012 so Netfilix will have to fill its content with less re-run friendly networks such as the CW.

If the elasticity of quantity demanded is greater than management believed: Netflix subscriptions will continue to fall and they may have just given the increasing number of substitutes available a chance at substantial market share. Management would do well to remember what made them successful in the first place.

Government Pricing Policies In The Dariy Industry

I grew up on a family dairy farm and have always known the government had some sort of control over the pricing of milk. I wasn't sure exactly how or why they decided to stick their nose into the dairy industry until just recently. The government started regulating milk prices back in the 1930's. I found an article written by Chris Edwards in June of 2009 that outlined 5 ways in which the government intervenes into the dairy markets.
The first way is through marketing orders. Marketing orders are essentially a minimum price set by the federal government. Two-thirds of the milk produced in the U.S. is sold under these marketing orders, with much of the remaining one-third sold under similar state government schemes. These marketing orders work essentially like cartels to limit competition. Entrepreneurs are not allowed to operate outside of the marketing order system to provide milk to consumers at a lower price. The system also prevents lower-cost milk from area's of more efficient operation such as the Midwest from gaining any market advantage over higher-cost milk from other regions.
The second way the government intervenes is through price support programs, which keep the price of milk artificially high by guaranteeing to purchase any quantity of milk produced at a minimum price. This program creates a steady demand and higher prices.
The third way the government intervenes is through an income support program. This program provides monthly payments to dairy farmers when the market price drops below target levels. These payments tend to encourage overproduction which as we learned drives the price of milk down.
The fourth way is through trade barriers which limit the amount of dairy products that can be imported into the U.S. These barriers are intended to keep prices artificially high.
The fifth method used by the government is export subsidies. This method is used to entice the dairy industry to export milk. It is necessary because with the artificially higher prices received in the U.S. nobody would want to export any milk and receive a lower international price.
I remember a few years back the government sponsored a milk buyout program trying to reduce the amount of milk being produced to give a higher price to the dairymen. Under the buyout program producers were paid higher than normal prices to send their milk cows to slaughter. They had hoped this decrease in cows would decrease milk production. Their idea was a complete failure. Producers saw the buyout as an opportunity to get rid of their low producing cows at a better than normal price and in turn used that money to buy better replacement heifers. The program actually ended up hurting dairy producers that didn't participate and also beef producers because the beef market was flooded with dairy cows causing the price of beef to go down.
All these different government programs make one wonder what it would be like if the government didn't step in and regulate things. They have probably saved many small family dairy operations such as my family's or at least prolonged their existence. At any rate they are costing the consumers lots of money every year.