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Wednesday, December 18, 2002 |
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Wednesday, December 11, 2002 |
"Microsoft Wages Quiet Campaign Against Free Software", WSJ, December 9 2002.
[Categories: Market Definition, Microsoft, Other (Incentives)]
P.S. Incentives part is that Microsoft claims that distributors will have little incentive to sell freely available software... What do you think about their argument?
6:44:37 PM 
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Thursday, December 05, 2002 |
"United Learns Size Isn't Everything", WSJ December 5 2002.
[Categories: Airlines, Costs, Demand, Game Theory (Commitment)]
P.S. Commitment piece is at the end, about United having little cash perhaps as a bargaining tactic to induce unions to accept less pay.
1:44:20 PM
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Tuesday, November 19, 2002 |
I'd like to thank Adam Kornick for this funny clip of Steve Ballmer eloquently emphasizing the importance of developers to the Microsoft OS.
4:12:49 PM
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Microsoft's Margins. Check out Microsoft's margins broken down by business segment: see Note 9 on their most recent 10Q SEC filing. (In case you experience problems linking directly to the 10Q report, go to SEC Edgar search engines and type in Microsoft and click on their most recent 10Q dated 2002-11-14, then click on file d10q.htm.)
I've cut-and-pasted the most relevant bit here.
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Three Months Ended Sept. 30
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Revenue
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Operating Income/(Loss)
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2001 |
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Client |
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$ |
2,076 |
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$1,708 |
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Server Platforms |
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1,330 |
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350 |
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Information Worker |
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1,932 |
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1,476 |
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Business Solutions |
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74 |
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(39 |
) |
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MSN |
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431 |
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(199 |
) |
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CE/Mobility |
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14 |
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(48 |
) |
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Home and Entertainment |
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236 |
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(68 |
) |
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Reconciling Amounts |
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33 |
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(283 |
) |
| |
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Consolidated |
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$ |
6,126 |
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$2,897 |
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2002 |
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Client |
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$ |
2,892 |
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$2,482 |
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Server Platforms |
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1,523 |
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519 |
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Information Worker |
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2,385 |
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1,879 |
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Business Solutions |
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107 |
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(68 |
) |
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MSN |
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531 |
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(97 |
) |
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CE/Mobility |
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17 |
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(33 |
) |
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Home and Entertainment |
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505 |
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(177 |
) |
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Reconciling Amounts |
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(214 |
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(455 |
) |
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Consolidated |
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$ |
7,746 |
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$4,050 |
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The Client segment includes revenue and operating expenses associated with Windows XP Professional and Home, Windows 2000 Professional, Windows NT Workstation, Windows Me, Windows 98, and embedded systems. Server Platforms segment consists of server software licenses and client access licenses (CALs) for Windows Server, SQL Server, Exchange Server, Systems Management Server, Windows Terminal Server, and Small Business Server. It also includes BackOffice/Core CALs, developer tools, training, certification, Microsoft Press, Premier product support services, and Microsoft consulting services. Information Worker segment includes revenue from Microsoft Office, Microsoft Project, Visio, other standalone information worker applications, SharePoint Portal Server and CALs, and professional product support services. Business Solutions includes Microsoft Great Plains; bCentral; and the newly-acquired Navision. MSN includes MSN Subscription and MSN Network services. CE/Mobility includes Pocket PC, Handheld PC, other Mobility, and CE operating systems. Home and Entertainment includes Xbox video game system; PC games; consumer software and hardware; and TV platform.
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Margins, then, calculated as in class (p-MC)/p corresponds roughly to (REV-COST)/REV:
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SEGMENT |
2001 MARGIN |
2002 MARGIN |
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Client |
82.27% |
85.82% |
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Server Platforms |
26.32% |
34.08% |
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Information Worker |
76.40% |
78.78% |
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Business Solutions |
-52.70% |
-63.55% |
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MSN |
-46.17% |
-18.27% |
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CE/Mobility |
-342.86% |
-194.12% |
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Home and Entertainment |
-28.81% |
-35.05% |
According to our discussion in class, we expect Microsoft to reap high sustainable profits in markets where they dominate the market and enjoy a strong network externality do to developers' incentives to write software for the dominant platform. So it's no surprise profits are high in Windows and Office. On the other hand, is it any surprise that profits are lowest in PDAs, where Palm provided a potentially viable threat to the Windows programming platform? I'm less knowledgeable about MSN, servers, business solutions, and home & entertainment. But to the extent that network externalities are strong in these segments and monopoly power with high barriers to entry is a real prospect, it makes sense for them to endure losses today in these segments. (Some of the media coverage seems to suggest that Microsoft would not be a viable business without being able to exercise their monopoly power -- "they can't make money in any other business than Office and Windows!" -- but this ignores the fact that Microsoft may be losing money in these businesses for the express purpose of maintaining / extending that market power.)
[Categories: Demand (Network Externalities), Microsoft, Other]
4:01:47 PM
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Thursday, November 14, 2002 |
Milk in New England. Dairy farming and processing has become much more concentrated in New England. The latest proposed merger between the two biggest milk players (the Dallas firm distributes to all Stop+Shop as well as several other big supermarkets): "Hood Plans to Merge with Dallas Dairy Firm". Not surprisingly, milk prices have risen considerably and are much higher than other parts of the country.
Nonetheless, Hood is suing a small player (Midland) for charging prices below marginal cost. See "Economists Find High Markup of Regional Milk Prices". Apparently the story is a bit more complex than I described in class. The suit is brought under an old Massachusetts law that prohibits below-MC pricing in dairy. But as Midland rightly argues, this law is outdated: it assumed a competitive landscape and was aimed at averting monopolization. Now it is being misused by firms with market power to maintain their market power. There is no chance that by charging less than MC this dairy might hope to gain market power, so no federal case could be brought here. I hope they get this right: modify the law and account for this sort of anti-competitive litigation in the review of the Hood merger!
[Categories: Other (Antitrust)]
10:44:32 AM
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Tuesday, November 12, 2002 |
"Truck-School Loans Hit Rough Spot", WSJ November 12, 2002.
Securitized school loans for truck-driving school have unprecedented default rates of 70%. Why? (a) Adverse selection among truck-driving students? (b) Perverse incentives on part of truck-driving schools? and/or (c) Perverse incentives on the part of the loan consolidator (SFC)?
[Categories: Adverse Selection, Insurance, Moral Hazard]
3:32:22 PM
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"After Managed Care: 'Consumer-driven' insurance plans promise to unleash the power of the market on health care", WSJ November 11, 2002.
Consumer-driven insurance clearly seems designed to mitigate the moral hazard problem, that insurees will get more health care than they need. What about the adverse selection problem, that only the sickest insurees will be attracted to the plans with the most benefits?
"Other consumer-driven insurance plans give the insurers more money for sick enrollees." Will this policy align patients incentives to reveal their true health? Would you suggest corporate adoption of such a health plan?
[Categories: Adverse selection, Insurance, Moral hazard]
3:22:48 PM
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Friday, November 08, 2002 |
"The $199.86 Solution: Microtel's bargain-basement PC is OK for basic computing, but face it -- the Lindows O/S is a major trade-off", BusinessWeek November 11, 2002.
[Categories: Demand (network externality in O/S), Market Definition, Microsoft]
3:55:06 PM
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"Airbus is Set to Give Final Nod for Superjumbo Jet", WSJ December 19, 2000.
"Airbus Comes of Age with A-380 Super-Jumbo Jet Challenges Boeing's Last Monopoly", USA Today June 21, 2001.
"Boeing Weighing Speed and Efficiency in Deciding Newest Plane", Associated Press November 7, 2002.
Summary: Airbus' super-jumbo has received numerous orders. Boeing appears to have backed off from competing directly against Airbus' super-jumbo, instead favoring a smaller plane that will greater distances. According to Boeing, this plane may also be much faster (as in the Sonic Cruiser idea) or just super-fuel efficient. (See most recent AP article.)
[Categories: Airlines, Demand, Game Theory (first-mover, threats & commitments), Market Definition]
3:52:25 PM
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"Air Canada Rides Out Stormy Weather", WSJ October 28, 2002.
"Air Canada this summer started four niche airlines: Tango (a low-cost, low-fare national carrier), Zip (a low-fare carrier in Western Canada) ... [and is considering niches focused on] cargo service and business travel." (See also Air Canada Vacations and Jetz -- the new business travel-oriented subbrand.) What do you make of this "subbrand strategy"?
Demand issues: Is flying Tango substantially different than flying on a standard flight with a cheap, restricted ticket? What about flying Jetz vs. on a standard flight in business class?
Cost issues: Are cost advantages to segment-specialization great enough that we can ever expect airlines to totally specialize in this way (for all of their flights)? In particular: who is more vulnerable to entry, an airline that carries several types of passengers on several flights or one that carries only a single type of passenger on each flight?
Price Discrimination Issues: Does Tango need to require advance purchase and a Saturday night stay to segment the market of business travellers from leisure travellers? (One can argue this both ways: What facts could we learn to decide the issue?)
[Categories: Airlines, Demand, Market Definition, Price Discrimination]
3:16:28 PM
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"Fast-Food Chain makes a Move Out of the 'Box'", WSJ October 29, 2002.
Jack in the Box plans to open 100 to 150 convenience stores that will be co-located with their restaurants.
[Categories: Costs (Economies of Scope), Demand, Other (Bundling)]
2:58:03 PM
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Imports to the West Coast ground to a halt in late September 2002 as the dispute between dock owners and the ILWU grew heated as owners shut down the docks. A federal judge ordered a 60-day colling off period in which workers were required to return to work. Shortly thereafter, the main issue of contention appeared to be resolved: and "West Coast Ports Set Tentative Deal", WSJ November 4, 2002.
If the dock owners were able to make a truly take-it-or-leave-it offer, would the ILWU have accepted a deal in which new technologies are introduced and new technology jobs are non-unionized? If the ILWU were able to make a truly take-it-or-leave-it offer, would the dock owners have been willing to accept a deal in which no new technology is ever introduced? My own opinion is that the dock owners truly required that the new technologies be introduced, so in fact the final deal is very close to their outside option, i.e. the union was the big "winner". (In terms of our class game, they offered the owners only $1 and the owners accepted.)
How could the parties come to agreement -- with the union victorious -- so quickly after a judge forced the workers back to work? Which of the following helped the union and which (if any) helped the owners: (i) Christmas, (ii) 60-day limit to cooling-off period, (iii) AFL-CIO involvement?
[Categories: Game Theory]
2:14:17 PM
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"Dot-Com IPO Pricing Baffles Economists", WSJ September 30, 2002. (Apologies for white line created by copier problem.)
The article presents several potential explanation for IPO underpricing: (1) compensation for bearing risk, (2) indifferent executives, (3) "bogus belief" about importance of buzz due to "thought contagion", or (4) subversion by executives in exchange for personal access to other IPOs. What do you think?
[Categories: Moral Hazard]
1:49:48 PM
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"Drug Cost-Control Plans Push Many to Do Without", WSJ October 29, 2002.
Doubling a uniform co-payment from $5 to $10 per prescription lowered per person drug costs from $725 to $563, a 22% drop. But doubling co-payment using a two-tiered system of (cheaper) preferred drugs and non-preferred drugs led to a 33% drop in per person costs. Explain why one would expect this result, that a two-tiered system will reduce spending by more.
[Categories: Insurance, Moral Hazard]
1:35:26 PM
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© Copyright 2002 David McAdams.
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