Is Wal-mart a monopsony?

Traditionally a monopsony represents a buyer who buys less in order to force prices lower. Wal-mart uses their huge buying power to force prices lower. On the surface, this appears as a benefit to society and the end user or consumer appears to have an increased surplus – in the short run. I challenge that it in fact is a detriment to society. Wal-mart prides themselves on being the low cost leader and driving prices down. In order for a company to continue to have their product sold through Wal-mart, they must continue to cut their own costs in production. There are only so many cuts that can be made, and still make a profit, before the quality of the product starts to suffer. End user surplus is not increased in the long run due to cheaper products falling apart sooner and increasing the ‘durables’ replacement frequency rate. So the low price, cheap deal is not always the best deal. For an example, if I buy a pair of levi’s (red tag) at Target I will pay $50 and they will last a good six months. If I buy a pair of levi’s (orange tag) at Wal-mart for $30 they will last less than three months. So in one year I can spend $100 or $120 for the same time coverage for a product. Levi started the color tag to differentiate its product because it could not meet Wal-mart’s demands on price and keep its high quality standards, so it created a new lower standard for their product sold only at Wal-mart and continued to keep its high quality product that was sold at other retail outlets. If you go to Levi’s website , they won’t even list Wal-mart as a retailer that sells their merchandise. there is a point where a good name and quality go hand in hand. I hear (from teenagers) the new name is Wal-mart Fall-apart (the same name consumers gave K-mart in the late 80's).

Patents and Trademarks

In Chapter 8 we talked about Intellectual Property and using copyright and patents to protect that knowledge. Patents and copyrights protect an investment and are seen as a barrier to entry. However, at least one company and one industry are proving that the opposite is in fact true. Coca Cola has registered their trademark but has NOT patented their ‘real thing’ recipe. Copyrights only afford protection for 20 years. If Coca Cola had patented their recipe it would now be up for grabs and by not obtaining a patent they have been in business for over 100 years. The fashion industry also has trademarks. However, the clothing design itself is not patented AND there was a Supreme Court Case in 1941 that states that the practices of patenting styles was a violation of antitrust laws. So if you design a new jean and it becomes a new fashion trend, you can expect very quickly for other companies to copy your design and slap their own trademark or logo on it and start competing with you. Normally, this would be seen as an industry that you would not want to enter because it is too easily copied and there is no way to differentiate your product and protect it. However, the fashion industry is decidedly fickle. Cool is only cool until uncool people start to pick up on the trend. Then a new trend has to be designed and marketed, and if successful, then copied. This trend for the fashion industry is successful because clothes are out of style before they are worn out necessitating the need for a high frequency rate of replacement. So in this case, the lack of intellectual property protection actually promotes the fashion industry, challenges them to come up with the next fashion trend, and charges them with continuous business. Quoting from a New York Times article “In some cases, it appears that lack of protection can lead to more vibrant and dynamic industry.”

Higher Wage for Higher Age

In America, it is traditional that the longer you are with a company the higher salary that you will make. Therefore 50 and 60 year olds make more than 20 and 30 year olds. This tradition gives a surplus to society by allowing American salaries to keep pace with increasing living standards and to cover higher mid life expenses such as college tuition for children. There was a recent article in the New York Times about how Circuit City laid off 8% of its workforce because their workers were being paid too much. So they eliminated jobs and will replace the laid off employees with new employees who will accept lower salaries. Obviously, they laid off the older workers rather than the younger workers. This is not an employment law class so I won’t go into detail about age discrimination. Economically, we know that paying workers based on ‘time on the job’ isn’t the most productive way to have a salary base. Paying a salary based on performance or productivity makes more sense. Those with more experience would receive higher pay due to prior knowledge and learning curve that in turn would relate to a higher output. The move by Circuit City however, is a very aggressive move to cut costs. 3,400 people will now no longer be able to afford their product and the PR nightmare that will ensue is going to cost them in advertising and legal fees. So is this a good move? I am sure there are a lot of companies that will be watching Circuit City real close in the upcoming months to observe the fallout of this attack. If Circuit City escapes unscathed then more companies will follow suit and start eliminating higher paying positions and then rehiring those same positions at a lower wage. I seriously doubt that the overall benefit to society is going to be positive. Less pay to Americans leads to a lower living standard. We are so worried as a county about increasing every other country’s standard of living, maybe we need to look in our own backyard first. When did increasing the dollar to the shareholder become more important than the dollar to the worker who produces the product? How is the shareholder going to get that dollar if no one can afford to buy the product?

Tee Time?

To some executives in the business world, golf plays a major factor when cutting deals and making contracts. It gives business men and women the opportunity to wine and dine their current or future clients. However, I recently read an article in the Salt Lake Tribune about how golf may be losing popularity. The article stated that for the first time, more courses closed in the United States last year than were opened. It also stated that approximately 600,000 people in the United States make a living from businesses related to golf in one way or the other. Because of the recent decline, many of "the game's movers and shakers have been doing a lot of soul searching to find ways to get golf growing again." These efforts include free lessons, new products, marketing professionals such as Tiger Woods, and other ways to attract new golfers. Because I am a poor college student, the only way I would play more golf is if the green fees were reduced. However, there are many people who are willing to pay much more than myself. So, what is causing the decline in golf and what will it take to become more popular? As far as I am concerned, it is the cost. I think that even if new golfers are attracted, they may not have a motive to keep with it if the cost continues to rise.

Is the Luster of Luxury Cars Waning?

I recently read an article from the online version of BusinessWeek entitled, "Luxury Cars Losing Luster?" The picture at the right is an automobile of the super luxury class called a Maybach. It is produced by Mercedes Benz, which is owned by DiamlerChrysler, and can be purchased for a mere $1.4 million. This vehicle leads the pack as one of 2007's most expensive super luxury vehicles. This automobile is designed to be the answer to pulling up luxury car sales from a slump. The article states that in the 1990's many of the car manufacturers were looking to release models into the super luxury market (over $100,000 in price) due to the economic prosperity being experienced at the time. But, even despite record pay bonuses, sales even the luxury class sales have drifted downward. How can offering a more expensive product attract more customers? The answer given by car manufacturers to cure lack luster sales is the super luxury class, which will concentrate on great design and the feeling of exclusiveness for the buyer. The introduction of a super luxury class basically boils down to product differentiation. Each car manufacturer is trying to gain monopoly power by making the most exclusive automobile. But, can the market support rising price tags and unlimited customization? Or, will a super luxury class further dampen sales for luxury vehicles? In theory the product differentiation strategy should work to the advantage of luxury car manufacturers, but only time will tell. What do you think?

Red Hat's Ideas for the Future: Linux for a Price.

I just finished reading an article about the company Red Hat, the leading distributor of Linux software. The article talks about the dilemma Red Hat is faced with as they try and sell software that is free. I was very interested in this article because I love Linux software and I've heard nothing but good about it. One very large selling point, of course, is that it is free. This article talks about what Red Hat is doing to try and make profits by selling this product. from what I understand of the article, Red Hat is starting to sell subscriptions to a new operating system. The article states that the operating system is an advanced version of Linux. Red Hat is specifically marketing this product to larger corporations with the hope that they will buy the product for its added benefits and better service capability. I am very concerned about the strategy because I question a company trying to make a profit off a product that has always been free. I think people love Linux because it is a wonderful product that doesn't cost them anything. I think that if consumers are going to have to pay for the higher-quality versions of Linux and only have low quality versions for the free price, demand for the Linux operating system will drop drastically. It's true that only moderate profits are realized now through tech support and services, but I think that is a much better plan than starting to charge for a service that is so famous because of its very attractive price.

Grad Salary

I read an interesting article found here. It talked of the rise of offers for certain graduates. This is of particular interest as I am about to graduate college and one wonders what all that time and energy spent on school work was for. Some of the biggest increases were in Marketing and Engineering. I think this is due in turn to the low unemployment rate that the nation is experiencing. With more and more employers looking for workers, it naturally causes the price paid for the workers to go up. An easy adjustment to the supply and demand curve. The low unemployment is also apparent in that more and more employers are looking at colleges for employees. With such a low unemployment, companies know that they are not going to be able to hire an already experienced employee, and thus turn to these graduates for employees. I am glad for the low unemployment and the benefits that it offers.

Focus on Global Warming Poises Firms to Profit

A recent article on CNN's economic news page describes how the increased focus on global warming is increasing demand for technologies that reduce greenhouse gasses, the generally-accepted culprit of the so-called crisis. Companies who have developed or are developing such technologies are well-positioned for high profits if this demand continues to increase. Just this week, the Supreme Court recognized the Environmental Protection Agency's authority to start acting to reduce greenhouse gasses, and large amounts of legislation regarding greenhouse gasses is also imminent. Some of these technologies simply create power more efficiently, so they could possibly pay for themselves in the long run. However, one new type of power plant (IGCC) costs 30% more to build than a regular power plant. The company developing this technology has received over $30 million in incentives to date. This is another example of a company making decisions that benefit all of society (no matter your take on global warming, less pollution is probably good for society), but only after incentives are provided to do so.

Raise Taxes!

Raising taxes is a necessity if we are to fix health care. This is what many Democrats will say in order to justify their wants of raising taxes. Republicans have usually said that by raising taxes the economy will fall. So, how do we fix health care? In an article I read the author says that all we need to do is take the costs of health care that businesses pay, which is around 500 billion dollars a year, and let the government assume the responsibility of paying it. After that there needs to be a tax that is equal in amount to pay for the newly acquired debt. The author suggests that the government could impose taxes in various forms such as carbon taxes. The tax would also help environmentally as well. This plan simply shifts the cost of health care from businesses to the general public. This plan should actually help businesses because it is cutting a big portion of their total costs. This idea may seem quite crazy, but it is one that is being discussed even as we speak.

Tax Time! Standardizing

There are some of us that are willing to dig deep to get a greater refund as we prepare our federal tax return. The one-time credit relating to a federal telephone excise tax is an example. An article in late January describes how individuals are willing to do great amounts of legwork to get a higher refund. For me I was willing to take the standardized credit instead of pulling phone bills for the past ten years and adding them up to see if I could achieve a higher refund for past payments of the federal excise phone tax.

Needless to say, time is valued differently for each of us. Some might assume that the government added all of the past federal telephone excise tax, estimated the number of returns to be filed and then set the value for each number of exemptions. For myself I would assume that the government estimated the value per exemption based on a price that would create a higher demand for taxpayers to take the standard credit and not do the legwork that would reveal the higher refund that they could achieve, meanwhile still having the greatest amount of surplus for government as possible. The government may seem greedy, but one may also say I am not greedy enough!

Rebates, don’t you just love them?

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

Make way for John Deere!

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

Yellow vs. Red

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

One product fits all?

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

Kobe Bryant Is Good For The Economy

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

World Economy

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

How high will gas prices rise?

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

Default or fixed rate mortgages

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

Doctors, Drugs, and Money

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

Pay to sing Happy Birthday

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