Foreign Corrupt Practices Act

The Foreign Corrupt Practices Act (FCPA) was put in place in the United States to prohibit bribes from American firms to foreign officials.  This begs the question, is this policy good or bad for American businesses?  The argument against the policy has a good point.  Those against argue that bribes are just a part of doing business and it puts American firms at a disadvantage against firms that are willing to bribe.  American firms have lost a lot of projects by not choosing to use bribes, but the alternative brings a much higher cost than just the bribe.  I've been learning a lot about ethics and integrity in my classes this semester and this topic on bribes just solidifies how important it is to be ethical.  If a company chooses to use bribes as a business strategy, it creates an environment where corrupt behavior is more likely to appear, which will create agency problems.  Does the end justify the means?
To get a perspective on the rampant bribes these days, "the World bank estimates that more than $ 1 trillion dollars are paid each year-roughly three percent of the world economy."  How terrible is that number?
Bribes are a way for less competitive companies to gain projects and other incentives.  Going with this thought, the FCPA has been good for American firms because it has forced them to become more efficient, more competitive and find new ways of doing things.  All of which has a major impact on the global economy.
I believe the FCPA to be a good policy.  Is it perfect? Probably not, but at least it is something.  It is a step in the right direction to make that business practices and strategies are fair.

Foreign Corrupt Practices Act

Auctioning off the Auto Body Repair Industry

I have worked in the automotive aftermarket parts industry for thirteen years and have witnessed many changes within the industry. The most recent change took place in October 2013, when State Farm Insurance Company introduced an online parts ordering system called PartsTrader. The system is designed to force auto body repair shops to purchase parts from suppliers in an auction type environment. The auction is set up as a first-price, sealed-bid auction where each supplier submits a bid at the price they are willing to supply the parts to the repair shop for. The winner of the bid agrees to supply the parts to the repair shop for the amount they bid.  This auction style purchasing allows State Farm to reduce their cost on the parts supplied for insurance claims.

The question arises, does the economic theory of auctions we read about in our text book actually work in the real world? In the case of PartsTrader the answer is yes. For State Farm it is allowing them to lower their costs on insurance claims. As a supplier in the auction system, our optimal bidding strategy has been to bid less than our perceived value for the products. This is consistent with the recommendations for a first-price, sealed bid auction. Following this strategy has allowed us to win bids we otherwise would not have won. However, because our marginal costs are higher compared to other suppliers in the market, we often lose sales we would have earned outside of the auction. For a supplier, who has a low marginal cost, the auction system works to their advantage because they can bid lower than other suppliers. Bidding low and maintaining low marginal costs allows a supplier to win jobs they otherwise would not have been able to outside of the auction system.

Although State Farm is the only insurance company to utilize an auction based ordering system, it is likely that others insurance companies, due to the success of PartsTrader, will make the switch to auction based ordering systems. 

The Future of Delivery

Recently, Amazon released a video for Amazon Prime Air. Over the past year, there has been much discussion regarding Amazon using drones to deliver packages. Amazon touts the benefits of this service, suggesting deliveries can be made within a 30 minute timeframe. The video suggests this is how deliveries will be made in the not too distant future.

However, Amazon’s plan for drone deliveries has not been all smooth sailing. In June 2014, the FAA released a memo stating that Amazon’s plan for drone deliveries is illegal, which would seem to cause a rift between Amazon and the FAA.  Just last month, however, Amazon joined the FAA’s drone task force. The question I pose is, “why?”

On the surface, it would seem as though Amazon joined the task force because they want to make sure their business venture is successful.  As a member of the task force, Amazon may feel that they will be in a better position to help limit regulations, allowing them more freedom regarding drone deliveries. This may be true, but I think there is more to this.

As the drone registry program currently exists, there is no fee to register. A drone operator is only required to give his name and address, which is inputted into an FAA database. However, what if in a few weeks, those rules change? What if you now had to pay a high fee to register an individual drone? What if you had to go through expensive training to be allowed to register?  What if the FAA allowed only so many drones to operate in a given area, and sold the rights, similar to how cities sell taxi medallions?

The possibilities exist for costs to rise extensively and quickly. I believe that is why Amazon is on this task force. They want such regulations to be put in place. They want the prices to jump, so that competition will be limited in the market. I believe Amazon sees this as a strategy to raise rival firms’ marginal and fixed costs. As Amazon works closely with those who make the regulations, they will be set to benefit from the regulations, while other firms may be squeezed out for their inability to comply.  Thus, Amazon will be able to corner the market on drone deliveries and increase their profits dramatically.

Buying an Income for Life

I am in my mid-twenties, and often think about how much I need to be saving for retirement. I never feel like I am putting in enough money for retirement.  This article from CNN Money had some ideas for retirement I didn’t know about. The article didn’t specifically put the information in economic ideas, but these are mine.

I had never thought of retirement in an economic mindset before. Marginal costs could be seen as your spending, and marginal revenues could be the amount that is to come out of you retirement account. To maximize the benefit of your retirement account, marginal costs should be about equal to marginal revenue.

Having a set amount of money in a retirement account doesn’t mean you are going to have a perfect retirement. Natural disasters, accidents, illness, inflation, and rising costs all take their toll on your time to relax. Retirement involves risk.

In retirement, you typically live off an investment account that has been accruing money over the time you were working. There are many types of retirement accounts and ways to invest. The article talks more about a specific way to have money to spend, called an annuity. An annuity is receiving an amount of money over a number of periods. In the retirement aspect, you can purchase an annuity to guarantee yourself some cash flows.

An annuity can hedge the risk faced by retiree’s. The CNN article says a typical $100,000 annuity can bring in $555 a month for a man and $530 a month for a woman. The type and amount of the annuity you pick depends on preferences and needs. The point is “to ensure that you won’t run out of income late in life” (Updegrave, 2015).  By spending some money early in life for an annuity, you can still have money in savings for retirement and the risk of casualties.

Reference

Updegrave, W. 2015. Make sure your retirement savings last a lifetime. Retrieved from:http://money.cnn.com/2015/11/25/retirement/retirement-savings-annuity/index.html?iid=SF_LN 

Using ISAs for College Funding

Many students struggle with paying for a college education and want easier terms for repayment of student loans. Bernie Sanders has even promised tuition-free and debt-free college. Sounds a little crazy to me, but an idea I think sounds fascinating is what Alex Tabarrok discusses in “Venture Capital to Buy Equity in Purdue Students”. An income-share agreement (ISA) is an alternative to private student loans in which an investor funds a student’s education and in return receives a percentage of that student’s earnings for a certain number of years after graduation. This concept is not unheard of, there are some companies that will help pay for an employee’s education as long as the student/employee agrees to work for the company for a certain number of years. But this idea is different because any investor could calculate the risks and take on this investment.

The article points out that this type of funding could be expensive for students who underestimate their earning potentials. Tabarrok offers this insight:

“Being unlucky or uninformed is less damaging [to the student] with an income share agreement than with a traditional loan. Loans have the greatest burden when a student overestimates their potential earnings and is poorer than expected. Thus, the loan offers no relief when relief is most needed. In contrast, payments under an income share agreement fall when income falls. An ISA does cost more than a loan when a student underestimates their potential earnings but in this case the student is richer than expected and can easily bear the extra burden. Thus, ISAs offer income insurance.”

Based on that I wonder if investors would only want to invest in students with higher earning potentials, while this option would actually attract students with lower earning potentials. In a Washington Post article that Tabarrok references, an executive from Vemo Education (a financial services firm working with Purdue students on the experiment) says that such adverse selection can be avoided. “It’s easier to scale [the agreements] and meet both investors’ and students’ needs if you fund people in groups.” The article continues, “By pooling agreements, investors could hedge against graduates who might wind up with low earnings or lose their job.” Students could be grouped by field of study or other characteristics to be better compared to their peers. This is a fascinating idea to help what some call the student loan crisis.

The Washington Post article includes a brief discussion on potential government regulation that would inevitably follow and notes that Senator Marco Rubio and Representative Tom Petri have already introduced legislation to help facilitate the use of ISAs. There are a lot more details to work out, but it is an interesting discussion and an exciting prospect. I think it could help slowly remove the government from the student loan business. I’m interested to see what happens with the Purdue experiment.

Housing Prices Attract People to Smaller Cities

Anytime I see a news story headline with something like “Top 10 Worst…” or “Top 10 Best…”  I have to read it.  I especially am interested in rankings of cities.  In a recent article publised in USA TODAY, the city I live in was ranked number 1 in the country for the best city to live in.  This was a very cool to see, but when I saw a related article about the 20 worst cities I became very curious. 

In a sample size of cities with populations between 25,000 and 100,000 there were four dimensions that contributed to an overall score.  Those key dimensions are affordability, economic health, education & health, and quality of life.  One thing that really stuck out to me, other than the worst 20 cities were all from the same state, was that three of the four experts brought in for commentary mentioned that the number one attraction to a city in the sample size was housing affordability.  Further, one expert even mentioned that when you try and compete with a specific class new to that community, like the creative class, you don’t make an economic profit.  There are accounting profits associated with expanded offerings but when cities are smaller there is no net positive economic profit.

With explicit cost measurements, like housing, it is easy to benchmark cities against each other.  The implicit costs are harder to measure but tell a more powerful story.  In a smaller community there is more value placed upon commute times but there is difficulty in assessing what the value really is.  Further, is there more value placed on a short commute time in a city that gets a lot of snow?  Probably.  Since there are so many variables in evaluating implicit costs they are difficult to really measure in a macroeconomy.  One thing for sure is explicit cost driven studies are hard to argue with.

Side note:  If you look at the full listing, Cedar City is listed as number 650

Profit Maximizing Output

A very large part of what we have learned in this class has to deal with the combination of profit maximizing prices and profit maximizing output. These categories are measured quantitatively.  I want to vent for a moment on an output that is measured a bit more qualitatively.  I have pondered for years on the reason production companies release R rated movies.  It makes no economic sense to me.  I looked into the top grossing films of all time and there are only two in the top 100 that are rated R.  The highest on the list was number 66.  The list is primarily PG-13 but there are also quite a few PG titles.  I initially assumed that the top grossing films would also be the top profit producing films because of the incredibly high revenues.  As I looked into this assumption further I found that I was on the right track but not 100% accurate.  Different websites had different information of course, but according to the site the-numbers.com the top profit earning films are also PG-13 or PG.  If you look at the best return on investment the story changes and many more R titles make the list.

From my quick analysis I have found that the income of a film being produced on a low budget favors R and PG-13 ratings, while high budget films are almost always better as PG-13 or PG.  I admit that I have some personal bias on the subject because I choose not to watch R rated films and there are some that I would like to see if the ratings were different.  Even with my bias I see no economic reason for a large production company to produce an R rated film.  I know there are different markets for different products but are there really that many customers that would choose not to see a movie because it was only rated PG-13?  I have heard of companies fighting to receive PG-13 status because they understand the financial benefits so why not just make it PG-13 worthy in the first place?   There are many more arguments to the discussion than I have mentioned but shouldn’t stockholder return play the largest factor in the decision?  

PS4 Hits 30 Million, Xbox… Not So Much

Sony Computer Entertainment Inc. announced that its flagship entertainment center, the PlayStation 4, has sold more than 30.2 million units. The console launched in November of 2013 and has been the leader of the ‘Console War’ since its inception. Sony is estimated to have sold almost twice as many units as the next best competitor, Microsoft’s Xbox One.

There are many reasons why the PS4 has outsold the One. Many consumers made their choice to go with Sony the moment the two competitors announced their price models. Microsoft started their retail price at $499 which included the Kinect, an additional piece of hardware that can sense motion. This made many consumers angry because they felt like the Kinect was an additional item that they were paying for that they didn’t want or need. Sony priced their console $399. This difference immediately won those consumers that were on the fence.

 Nearly two years later Sony has continued to put the pressure on Microsoft buy procuring 30 day exclusivity rights on major game titles such as Call of Duty, Destiny, and Star Wars: Battlefront. The 30 day exclusivity means that PS4 owners will get downloadable content, or DLC, 3 days before the other consoles. By securing exclusivity on these popular titles, Sony is winning over consumers that used to be Xbox loyal. The professional Call of Duty players have made the switch to the PlayStation 4 after the announcement of the Call of Duty World League that will be operated by the game’s developer Activision.

Sony keeps making decisions that increase their grip on the console market. They seem to know what the consumer wants and when to play their cards. When asked if the Xbox could catch up, Phil Spencer, the head of Microsoft’s console division said  “I don’t know… You know the length of the generation — Sony has a huge lead, and they have a good product.” It seems like Xbox needs to make a move and soon if it wants to stop the bleeding that the PS4 has caused.

Name Brand or Generic?

In a Freakanomics podcast entitled, “How to Save $1 Billion Without Even Trying”, a group of individuals were given a peanut-butter-and-jelly sandwich taste test.  The taste-testers were given two sandwiches; one was made with Skippy peanut butter and the other with a generic store brand.  They were then asked to identify which sandwich was made with the name brand, Skippy peanut butter, and which was not. 

The testers began to describe the differences between the two sandwiches.  They described the Skippy peanut butter as being nuttier, having less sugar, and more delicious; and the generic peanut butter did not have the same level of excellence.  After they had all shared their perspectives, the testers were then told that all of the sandwiches had been made with the same generic store brand.

Consumer behaviors and the relationships we create with certain brands is a complex enigma.  Companies spend countless dollars promoting their brands and indoctrinating consumers with the ideology that their product is far superior to the competition, but is it really? 

My wife and I have arguments about certain products we purchase in our home.  For example, if I am going to the drug store to purchase headache medicine, I will select Tylenol.  My wife on the other hand will always purchase the store brand.  She is a R.N. and she knows that the active ingredient in Tylenol is acetaminophen.  I, on the other hand, have no idea what acetaminophen is.  I recognize the Tylenol bottle; I know what it does—end of story.  My decision is based upon familiarity, rather than knowledge of the products.

There are a variety of other factors that affect our consumer behaviors.  As the podcast points out, many of our purchasing habits are completely irrational.  Our decision making process is often influenced by external factors.  As a child, my mother would only purchase the generic cereal in a bag.  You know, the cereal found on the bottom shelf of the cereal isle.  I now find myself purchasing only name brand cereal in a box.  I hope I’m not the only one with such a traumatic childhood.  

Smart Apartments

In today’s world we are surrounded by new technologies.  Research done by Felix Richter and published on statista.com shows that Americans ages 18 and older spend on average 11+ hours a day on electronic devices.  Such focus on smart phones, smart TVs, smart watches, etc. has helped make way for smart apartments.

In a recent Bloomberg article called, Putting the App in Apartment, Kyle Chayka discusses how the world of apartments is beginning to change.  One company called Common, is creating the future of apartments in New York.  From your IPhone or IWatch you can unlock your apartment door, turn the lights on and off, change the temperature in the room, etc.  Another competitive advantage of Common is the month-to-month rental contracts and the idea of co-living.  Co-living is the idea that you can stay a month in one of Common’s apartments in New York and then the next month live in one of their apartments in Los Angeles or another city.

Common is able to increase their profits by being one of the first-movers to this technology focused living.  By being the first to install innovative services, Common will have a leg up on the competition that is using outdated, inconvenient services.  This allows them to set a high price and develop a strong network with the suppliers of new technologies before competitors enter the market.

Common needs to be aware of the second-mover advantage.  New York has a $50 billion rental market with several large players that could potentially kick companies such as Common out with predatory pricing.  It will be important for Common to maintain their competitive advantage by capitalizing on their technology network strengths.