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MBADM 812 FA19 WHOLE COURSE

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Discussion 1: Price Elasticities of Demand and Supply – 812 Discussion Group 2

From MBADM 812 FA19

64 unread replies. 97 replies.

In Lesson 1 and Lesson 2, you learned that price elasticities of demand and supply are important for understanding the response of consumers and producers to changing demand and supply conditions. If any producer faces a perfectly inelastic demand for its products or services, the quantity demanded will not decline with increasing prices due to the fact that consumers cannot react to changes in prices with inelastic demand (see, for example, the cases in Section 2.4 of Pindyck and Rubinfeld, 2017). This means that regardless of the price the producer charges on such products or services, the consumer must get this product or service at the same quantities.

Related to this concept, one of the textbook questions (Question 10 in Ch. 2 in Pindyck and Rubinfeld, 2017) asks the following:

In a discussion of tuition rates, a university official argues that the demand for admission is completely price inelastic. As evidence, she notes that while the university has doubled its tuition (in real terms) over the past 15 years, neither the number nor quality of students applying has decreased. Would you accept this argument? Explain briefly. (Hint: The official makes an assertion about the demand for admission, but does she actually observe a demand curve? What else could be going on?)

Directions

Please discuss all of the following questions in your initial submission.

  1. Can there be such a case that producers can charge whatever price they want without any limit? Explain your answer. Try to find some examples.
  2. Even if consumers do not react to higher prices in the short run, is there a chance that they may react in the longer run? Explain your answer. Try to find some examples.
  3. In addition to inelastic demand, what else may explain increasing demand despite increasing prices? Suggest three possible reasons. Explain your answer and give examples.

Participation Expectations

Your initial discussion submission to the questions above must be at least 400 words and specifically reference some concept or content from the coursework lesson. You must complete your initial comment by the end of Lesson 2. See the Course Schedule for dates. Please note that you cannot edit, change, or delete your submissions. Thus, please double check your submission before you submit it.

After completing your initial submission, you will be able to see the comments by your peers. Read the posts your peers have made, and reply to at least two students by providing them with suggestions to improve their answers, making comments, or asking questions about their comments. Peer responses should reflect one or more of these types: (1) agreement with extension, (2) an alternative perspective with rationale, or (3) a respectful challenge with counterargument. Each of your peer responses are expected to be at least 100 words (in total at least 200 words). You must complete your peer comments by the end of Lesson 3. See the course schedule for dates.

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Rubric

The weight of this assignment is 4% of the final grade. Please note that the accompanying rubric will be used for your complete submissions, including the initial comments and peer comments. To view the rubric, click the three dots icon towards the top right of the page, and select Show Rubric. Seventy percent of your grade is for initial comments and 30% of your grade will be for peer comments. If you don’t respond to peer comments, you will lose 30% of your discussion grade.

 

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Prompt 1. Can there be such a case that producers can charge whatever price they want without any limit? Explain your answer. Try to find some examples.
Theoretically, at any given moment, any producer can charge any price they want without any limit. I have a cookie right here that is for sale, starting price is USD $3×10ˆ12, anyone?…
No?… Didn’t think so.
Prices make sense in economic systems not as something abstract but as a universal indicator of utility, factors of production, resource allocation, distribution models, subjective component and several other factors [1, 2]. Since the amount of known resources on the planet is finite (on the contrary to a popular belief, no, we cannot colonize Mars just yet), there is no such actual thing as unlimited prices due to the very nature of price as an economic concept [3].
Under various schools of thought, it is speculated that multiple economic models of price are possible, making room for several interpretations. For instance, earlier schools like mercantilism focused on the amount of wealth and its accumulation, stipulating that the value is created in the very moment of sale, hence price depends entirely on the process of generating revenues from reduced account deficit and maximized exports [4]. Under this model, if there is a colony to sell products to, the price range can be extreme [5].
Other early schools of thought, such as physiocracy suggest that one type of products (agriculture) should be priced higher than others, claiming industry and its results as “unproductive appendages” [7]. Under this set of approaches, price is a politically motivated category and can be set low or high depending on the dominating doctrine [6].
Under Adam Smith’s classical theory and its stillborn neo-classical descendant, demand and supply are the main factors that determine price, and any regulatory interference with that semi-natural process may lead to issues [8, 9]. The very nature of money in free market systems imposes a limit on what can be the terminal effective price, and market agents operate within economic laws, mathematically valid rules of the game that ultimately determine prices based on desirability and accessibility of goods, their marginal utility and multiple other factors. Choosing extreme prices would catastrophically impact the producer, and therefore is unlikely to occur.
Coming from the struggle with the Great Depression, Keynesian economic theory suggested that by influencing aggregate demand through activist stabilization and economic intervention policies by the government it is possible to achieve short-term benefits [10]. Under this concept, settling low or high prices can be important levers to steer the economic model. Under certain fiscal rules, producers may choose to set very high prices for certain goods and services with lower price elasticity to compensate for their losses.
Certain political systems assume command / planned economy (USSR, N. Korea, Cuba) and reserve the right for the government to ultimately decide on the price of goods and services, which leads to an interesting side effect when imported goods get smuggled into the country and are sold at extreme prices [11, 12]. Even in today’s world we may observe certain protectionist measures that lead to unsubstantiated price increase where political incentive, not economic laws, determine how much goods from China shall cost, and end consumers (and – you guessed it, not Chinese consumers) will have no choice but to pay more [13].
Monopolies or oligopolies could be another thing to consider. In certain conditions when a large economic entity is formed, such entity can dictate prices to its consumers without any economically-motivated limits [14]. If a renegade company with lower prices emerges, a monopolist can use economic levers such as damping prices, to destroy its competition, only to further raise the prices again to compensate for the loss.
There are several other situations where theoretically prices can be extremely high, sometimes simply due to corporate greed and / or ignorance of the general public. Insulin costs $2 to make, but in certain countries it costs a tremendous amount of money so that people who have no insurance are forced to ration it or die, and certain legislative initiatives make that possible [15].
The bottom line is that modern economics moved far away from the classical concepts of supply and demand as price regulators. A good example is how software is priced and sold. Normally one sale leads to stock supply to grow one unit short, however that doesn’t happen with digital goods which greatly damages the whole idea of elasticity. Think of data, insurance, e-books, movies or many other goods that can be viewed as intangible asset.
In the age of digital / information economics we can no longer rely on classic models and assume they still work, which is why this is a very good question. No, completely unlimited prices are science fiction. But so are laws of demand and supply when it all comes down to the little details.
Prompt 2. Even if consumers do not react to higher prices in the short run, is there a chance that they may react in the longer run? Explain your answer. Try to find some examples.
They will most likely tend to, but it heavily depends on the framework. In the long run, economic subjects are able to adjust all costs, whereas, in the short run, they are only able to influence prices through adjustments made to production levels, which creates an interesting constraint.
Under adaptive expectations, expectations of the future value of an economic variable are based on past values [17], and therefore are relevant only to what people perceive as high or low prices. In macroeconomics, there is hardly a concept of “high” prices as they level with wages. Under unstable economic systems (i.e. early Boris Yeltsin’s Russia), it might lead to hyperinflation when prices simply raise and the government chooses to perform currency emissions, so today’s high price becomes tomorrow’s regular price. Therefore under macroeconomic categories, the question itself is irrelevant since there might be nothing to react to.
However in microeconomics we may speculate that people might react differently, for instance the LRAC concept suggests that manufacturers will use any available opportunity to minimize their average costs and once they get to exceed the projected marginal costs, they may choose to adjust their outputs [18]. Which means their capital flow ultimately depends on price as a short-term category, and therefore consumers will most definitely have a delayed response to a price increase.
In Friedman’s quantity theory of money it is postulated that prices depend on the amount of money in circulation [18], which means consumer response shall be delayed proportionally by what the theorists refer to as velocity of money in final transactions. If we focus on money demand instead of money supply (Cambridge version of the model), we may assume that until a certain amount of money is withheld from transactions [19], its impact on the economic system (and therefore prices) shall be delayed.
To sum it up, yes, they will react, but not necessarily in any meaningful way on the large scale of events.
Prompt 3. In addition to inelastic demand, what else may explain increasing demand despite increasing prices? Suggest three possible reasons. Explain your answer and give examples.
1. Damaged economic system. In certain countries, there are presidents that want to make their homeland great again, annex neighbor states right after the Olympics or restrict the Internet, they tend to choose to impact the economic system the way they see fit. Not to rain on the Keynesian parade, but unless you have a tiny country like Singapore that you can regulate through an through, in turn, that creates a curious set of external effects when in spite of increasing prices, we see increasing demand as a result of direct or indirect administrative measures.
2. Disruption of economic ties or supply chains as a result of a natural disaster. This drives people crazy as they tend to secure their well-being in a short run since they predictably expect a shortage of certain resources, and even the infamous pubertal fatalistic mood somehow gives in to survival instinct. This usually leads to speculation on prices but no one really cares.
3. Christmas, weddings, divorces, funerals, wars (Trade wars?) and other disruptions to normal Tao of things. Seasonal changes in demand greatly impact certain categories of goods, and for that reason in spite of raising prices for goods that normally no one even cares about, these goods enable economic agents to derive monthly revenues in a couple of days simply because it’s what everybody thinks fun should look like.
Fun fact: in the past, men used to make weapons to fight wars. Now men make wars to justify making of weapons… Now that’s a whole new layer of how economy really works.
1. Schindler, Robert M. (2012). Pricing Strategies: A Marketing Approach. Thousand Oaks, California: SAGE. pp. 1–3. ISBN 978-1-4129-6474-6.
2. Friedman, M. Price Theory. 1963. NY: Routledge. 357 p.
3. Roover, R. The Concept of the Just Price: Theory and Economic Policy. Journal of economic history. Volume 18, Issue 4 December 1958 , pp. 418-434
4.  Johnson et al. History of the domestic and foreign commerce of the United States p. 37.
5. “Mercantilism,” Laura LaHaye The Concise Encyclopedia of Economics (2008)
6. “Physiocrat”. Oxford Dictionaries. Oxford University Press. Retrieved 02 Sep 2019.
7. Karl Marx and Frederick Engels (1988), pp. 348, 355, 358.
8. Popper, Karl (1994). The Open Society and Its Enemies. Routledge Classics. ISBN 978-0-415-61021-6.
9. Hayek, Friedrich (1941). The Pure Theory of Capital.
10. Chapellow, J. Keynesian Economics. Investopeia. Apr 11, 2019 [Electronic resource retrieved 02.09.2019] URL: https://www.investopedia.com/terms/k/keynesianeconomics.asp
11. Rudevich, A. Worth going to prison for: Getting hold of jeans in the USSR. Russia Beyond. Sep 16 2014. [Electronic resource retrieved 02.09.2019] URL: https://www.rbth.com/arts/2014/09/16/worth_going_to_prison_for_getting_hold_of_jeans_in_the_ussr_39833.html
12. Baretly Researh. North Korea’ Command Economy is Based on Agriculture and Natural Resources [Electronic resource retrieved 02.09.2019] URL:https://www.bartleby.com/essay/North-Korea-Command-Economy-is-Based-on-FKJ9U5GATC
13. Bul, Q., Russel, K. How Much Will the Trade War Cost You by the End of the Year? Sep 2019. NY Times. [Electronic resource retrieved 02.09.2019] URL: https://www.nytimes.com/interactive/2019/business/economy/trade-war-costs.html
14. Milton Friedman (February 2002) [1962]. “VIII: Monopoly and the Social Responsibility of Business and Labor”. Capitalism and Freedom (paperback) (40th anniversary ed.). The University of Chicago Press. p. 208. ISBN 0-226-26421-1.
15. Masurier, J. The price of insulin is killing Americans. France24. 02/04/2019 [Electronic resource retrieved 02.09.2019] URL: https://www.france24.com/en/20190402-focus-united-states-price-insulin-killing-americans-diabetics-us-health-medicine-pharma
16. Galbács, Peter (2015). The Theory of New Classical Macroeconomics. A Positive Critique. Contributions to Economics. Heidelberg/New York/Dordrecht/London: Springer. doi:10.1007/978-3-319-17578-2. ISBN 978-3-319-17578-2.
17. Grant, M., Kenton, W. Long Run. Investopedia. May 14, 2019 [Electronic resource retrieved 02.09.2019] URL: https://www.investopedia.com/terms/l/longrun.asp
18. Encyclopaedia Britannica. Quantity theory of money.[Electronic resource retrieved 02.09.2019] URL: http://www.britannica.com/EBchecked/topic/486147/quantity-theory-of-money
19. Froyen, Richard T. Macroeconomics: Theories and Policies. 3rd Edition. Macmillan Publishing Company: New York, 1990. pp. 70–71.

Discussion 2: Airbnb – 812 Discussion Group 2

From MBADM 812 FA19

62 unread replies. 82 replies.

In Lesson 3 and Lesson 4, we learned about the basic production and cost structure of firms, and in Lesson 5, we have started investigating the structure of competitive markets and different business strategies in such markets. Many online businesses operate in competitive markets and mostly need to take market prices as given. Their profit margins are relatively low due to continuous pressures from competitors. In such markets, firms develop different strategies to open room for their businesses and attract more customers. Airbnb, a private tech firm, is one of the most successful examples of such firms. Airbnb is a relatively new firm which operates in the competitive market of online platforms for booking overnight accommodations. The Economist article “Among Private Tech Firms, Airbnb Has Pursued a Distinct Strategy (Links to an external site.)” provides information about Airbnb’s strategies and explains possible challenges that the firm needs to overcome.

Article: “Among Private Tech Firms, Airbnb Has Pursued a Distinct Strategy (Links to an external site.),” The Economist, May 27, 2017 (or download as a PDF).

Directions

Please discuss all of the following questions in your initial discussion submission.

  1. In the article, different business strategies of Airbnb have been listed. Please list three of them. Which business strategy do you think helped them the most and is the key to their success? Why? Explain your answer.
  2. The article also listed possible challenges and solutions for Airbnb. Please list three of them. Please suggest alternative solutions to these challenges. Explain your answer. Try to find some examples.

Participation Expectations

Your initial discussion submission to the questions above must be at least 400 words and specifically reference some concept or content from the coursework lesson. You must complete your initial comment by the end of Lesson 5. See the Course Schedule for dates. Please note that you cannot edit, change, or delete your submissions. Thus, please double check your submission before you submit it.

After completing your initial submission, you will be able to see the comments by your peers. Read these posts your peers have made, and reply to at least two students by providing them with suggestions to improve their answers, making comments, or asking questions about their comments. Peer responses should reflect one or more of these types: 1) agreement with extension, 2) an alternative perspective with rationale, or a 3) respectful challenge with counter argument. Each of your peer responses are expected to be at least 100 words (in total, at least 200 words). You must complete your peer comments by the end of Lesson 6. See the course schedule for dates.

Rubric

Weight of the assignment is 4% of the final grade. Please note that the accompanying rubric will be used for your complete submissions including the initial comments and peer comments. To view the rubric, click the three dots icon towards the top right of the page and select Show Rubric. Seventy percent of your grade is for initial comments and 30% of grade will be for peer comments. If you don’t respond to peer comments, you will lose 30% of your discussion grade.

 

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  1. In the article, different business strategies of Airbnb have been listed. Please list three of them. Which business strategy do you think helped them the most and is the key to their success? Why? Explain your answer.  

The three strategies that stood out to me are: Cost minimization, the unique travel experience, and company partnerships. By operating as an intermediary between a buying customer and a rental unit owner, AirBnB is able to avoid the costs of owning units across the country. While this diminishes their revenue to a percentage of the rental cost, this significantly limits operating costs (AirBnB avoids mortgages, property taxes, electricity bills, etc.). In addition, this framework allows AirBnB to offer clients a unique experience of living in the city and to have an increased variety of inventory and economy of scope that hotels cannot match. However, the strategy that I believe is going to help them the most moving forward is the company partnerships. The article mentions that two key company partnerships are with Hyundai and Domino’s, but employees from over 250,000 companies now use AirBnB for their business travel. This high level of guaranteed revenue is crucial for a growing company. If AirBnB is able to expand their corporate travel base, they will be able to grow even faster.

 

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  1. The article also listed possible challenges and solutions for Airbnb. Please list three of them. Please suggest alternative solutions to these challenges. Explain your answer. Try to find some examples.

 

The three challenges that stood out to me from the article are: User safety, hotel lobbyists, and growing competition. User safety is an incredibly important aspect to both the end user of the product and the owner of the building. Travelers need to feel safe where they stay and need to believe that the rental unit was properly advertised. Additionally, the owners need to know that their property will not be misused. Consistent issues on either end could result in clients finding other lodging options. A way to combat this issue is by verifying their listings with local staff and by offering homeowners specific insurance policies to cover damages from renters. Hotel lobbyists and city regulations are a major issue. Hotels had a sort of oligopoly with the big brands earning a majority of the market share. With this market disruption from AirBnB, hotel lobbyists are fighting back hard by having cities require residential buildings to rent units for only an extended amount of time (most cities with restrictions require guests to stay 30+ days, some even longer). One solution to this issue is proper licensing. Some cities allow for short term rental companies to get licenses that allow them to operate normally. Finally, AirBnB is starting to face competition from similar companies. However, I believe some competitors could turn into allies. For example, the company that I work for is Stay Alfred, we rent apartments across the country, and rent them out on a nightly basis. While we could be seen as competitor because we offer short term rental units, we are also an ally. Stay Alfred posts their units on AirBnB for rent, which generates a significant amount of revenue for Stay Alfred, and, in turn, AirBnB. There are other companies like Stay Alfred out there, and if AirBnB can create partnerships with all of them, they would be able to increase the number of listings on their site and the number of bookings.

 

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Discussion 3: Coca-Cola’s Recent Business Strategies – 812 Discussion Group 2

From MBADM 812 FA19

111 unread replies. 128 replies.

In Lesson 8, we learned about pricing strategies in imperfectly competitive markets, and in Lesson 9 we investigated the structure of oligopoly markets and their business strategies. There are many firms operating in different oligopoly markets. One big example of such markets is the soft drink market in the United States. The rivalry between Coca-Cola and Pepsi has a long history. The companies in this market compete with each other in not only domestic but also international markets. The Economist article “Coca-Cola’s New Boss Tries to Move Beyond Its Core Product (Links to an external site.)” gives information about Coca-Cola’s recent business strategies to increase its profits and market share.

Article: “Coca-Cola’s New Boss Tries to Move Beyond Its Core Product (Links to an external site.),” The Economist, May 18, 2017 (or download as a PDF).

Directions

Please discuss all of the following questions in your initial discussion submission.

  1. The article lists some of Coca-Cola’s different business strategies. Please list three of them in your comments. Which business strategy do you think can help the company the most to increase its market share? Why? Explain your answer.
  2. Different studies show that people, especially in younger generations, are more health-conscious in recent years and care about what they eat and drink. Do you think that the soft drink market in the United States can continue to be a dominant power source in such an environment? What do you suggest soft drink companies do to continue their successful business model? Explain your answer. Try to find some examples.
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Participation Expectations

Your initial discussion submission to the questions above must be at least 400 words and specifically reference some concept or content from the coursework lesson. You must complete your initial comment by the end of Lesson 8. See the Course Schedule for dates. Please note that you cannot edit, change, or delete your submissions. Thus, please double check your submission before you submit it.

After completing your initial submission, you will be able to see the comments by your peers. Read these posts your peers have made, and reply to at least two students by providing them with suggestions to improve their answers, making comments, or asking questions about their comments. Peer responses should reflect one or more of these types: 1) agreement with extension, 2) an alternative perspective with rationale, or a 3) respectful challenge with counter argument. Each of your peer responses are expected to be at least 100 words (in total, at least 200 words). You must complete your peer comments by the end of Lesson 9. See the course schedule for dates.

Rubric

Weight of the assignment is 4% of the final grade. Please note that the accompanying rubric will be used for your complete submissions including the initial comments and peer comments. To view the rubric, click the three dots icon towards the top right of the page and select Show Rubric. Seventy percent of your grade is for initial comments and 30% of grade will be for peer comments. If you don’t respond to peer comments, you will lose 30% of your discussion grade.

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  1. The article lists some of Coca-Cola’s different business strategies. Please list three of them in your comments. Which business strategy do you think can help the company the most to increase its market share? Why? Explain your answer.

Coca Cola is a household name in the beverage industry in the world with revenues of $42bn and has held a monopoly of the market for the most part until the establishment of competitors like Pepsi. Over the past few years, the company has faced challenges in today’s market place because of market-driven changes, regulatory changes, and socio-economic changes. The organization recently changed its CEO, and he is burdened with the responsibility to resolve some of the highlighted challenges. Some of the strategies highlighted in the Economist article include the following:

  • Coca Cola Selling off vast networks of bottlers to make the firm more agile and profitable.
  • The need to diversify its product portfolio to include healthier options since the market trend has seen a decline in the demand for carbonated soft drinks.
  • Coca-Cola Seeking large volumes in younger markets and higher profits in old ones.

In my opinion, diversifying its portfolio to include healthier options will most likely drive demand upwards and increase market share. There has been a recent drive for healthier living, and most individuals are opting for healthier products in their shopping lists. I would advise the firm to invest more in its Venturing and Emerging brand business unit to come up with healthier options. This option should be introduced into their portfolio with the appropriate pricing strategy to resolve some of their pressing issues, including government regulations and market-driven changes fueled by increased demand for healthier options.

  1. Different studies show that people, especially in younger generations, are more health-conscious in recent years and care about what they eat and drink. Do you think that the soft drink market in the United States can continue to be a dominant power source in such an environment? What do you suggest soft drink companies do to continue their successful business model? Explain your answer. Try to find some examples.

The Market has seen a steady rise in health-conscious consumers over the past decade. These sets of individuals care about what they consume, and this has resulted in low demand for unhealthy food and drink options, which has resulted in lower prices.  The Soft drink market can play a significant role in driving the demand of health-conscious consumers by introducing healthier drinks in their portfolio. Adding various products that promote healthier living like aloe Vera drinks, coconut water, and smoothies introduced to the grocery shop shelves can result in soft drink manufacturers, noticing an uptick in demand. The business model I’ll advise the soft drink organizations to adopt is executing multiple pricing strategies dependent on market trends.

The Model will start up with second-degree price discrimination, which will involve pricing these newly introduced healthy soft drink bundles cheaper than individual bottles. The trend of the demand curve for the new products using the second-degree price discrimination strategy will determine the need to adopt a cross-subsidy pricing strategy. This Strategy will see the firm using the profits from the carbonated drinks to subsidize the price for the healthier options to drive demand upwards.  For Example, if the Coca-Cola brand introduces a healthier Smoothie product, it can use profits from Coke to subsidize the pricing of the new product to capture a significant market share. The Cross Subsidy Pricing model can be used Vice versa, depending on how the market reacts to the introduction of the new products. Having a diversified portfolio will allow the firm to reduce the effect of taxes on its carbonated drinks on the company’s profits.

References:

https://www.economist.com/business/2017/05/18/coca-colas-new-boss-tries-to-move-beyond-its-core-product (Links to an external site.)

https://www.forbes.com/sites/paultalbot/2019/04/26/inside-coca-colas-marketing-strategy/#155b6ebc1280

 

 

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Discussion 4: Business Strategies for Price Discrimination – 812 Discussion Group 2

From MBADM 812 FA19

63 unread replies. 89 replies.

In Lesson 9 and 10 we have learned about pricing strategies in imperfectly competitive markets. Firms follow many pricing strategies to maximize their profits in imperfectly competitive markets. We will learn about pricing strategies of airline companies (oligopoly firms). The article that you will discuss provides a perspective on the unique attributes of airline tickets as compared to tickets for sporting events or concerts. Perspectives from both the business and consumer side are both compelling.

Article: WSJ Article “If Only Airline Tickets Were Like Sports Tickets (Links to an external site.)”

You can find the article here https://www.wsj.com/articles/if-only-airline-tickets-were-like-sports-tickets-1540386771

or If Only Airline Tickets Were Like Sports Tickets – WSJ.pdf

Directions

Please discuss all of the following questions in your initial discussion submission.

  1. What type of price discrimination do we see in the article? Describe the price discrimination practiced by airlines with regard to business and leisure travelers?
  2. If prices were fixed (i.e. without any price discrimination) and they increased, how might that affect airline revenue with its mix of price-sensitive leisure travelers and business travelers?
  3. Why have airlines instituted high change fees (i.e., fees that are greater than a possible loss in profit from a change) and prevented the resale of tickets?
  4. Suppose an airline has two options: (1) set lower prices for tickets booked in advance and higher prices for tickets booked at the last minute; or (2) set the same price regardless of booking date. Which option is more profitable?
  5. Have you ever tried to buy a concert or sporting tickets that were only available from speculators or resellers? Describe how this model would affect both leisure and business passengers if it were used for airline tickets. How would it change airlines?

Participation Expectations

Your initial discussion submission to the questions above must be at least 400 words and specifically reference some concept or content from the coursework lesson. You must complete your initial comment by the end of Lesson 11. See the Course Schedule for dates. Please note that you cannot edit, change, or delete your submissions. Thus, please double check your submission before you submit it.

After completing your initial submission, you will be able to see the comments by your peers. Read these posts your peers have made, and reply to at least two students by providing them with suggestions to improve their answers, making comments, or asking questions about their comments. Peer responses should reflect one or more of these types: 1) agreement with extension, 2) an alternative perspective with rationale, or a 3) respectful challenge with counter argument. Each of your peer responses are expected to be at least 100 words (in total, at least 200 words). You must complete your peer comments by the end of Lesson 12. See the course schedule for dates.

Rubric

Weight of the assignment is 4% of the final grade. Please note that the accompanying rubric will be used for your complete submissions including the initial comments and peer comments. To view the rubric, click the three dots icon towards the top right of the page and select Show Rubric. Seventy percent of your grade is for initial comments and 30% of grade will be for peer comments. If you don’t respond to peer comments, you will lose 30% of your discussion grade.

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Preface.

Maybe the US is a different story, but in the rest of the world, you are actually entitled to refunds and changes [1]. If you expect a change of plans, you simply pay more for a flex ticket [2]. Take it as a punishment for lack of organization.

If you’re really not happy with a certain deal, just talk to people. Most airlines will try to meet your reasonable expectations. If you want a guaranteed option, like extra leg room, better seats, you can make all these arrangements with a check-in app and a credit card [3].

While there’s definitely some price discrimination between economy and business class, it’s mostly driven by premium customers themselves, not airlines. It’s a matter of demonstrating status, like an expensive watch. Not every C-level executive likes flying next to people who take Greyhound with two crying babies and a toddler using a front seat as a drum. Demand bears supply, huh?

Prompt 1.

I really don’t like how this article / question oversimplifies everything… On average, airlines receive only about 60% of their income from passengers directly [4]. Speculating on price discrimination without considering certain third parties with intricate interest models, such as credit card companies that buy miles, is simply unprofessional to assume that simplicity.

But considering the narrative, here is my answer. First-degree price discrimination example. Airlines tend to charge the maximum possible price for each unit consumed when it comes to tickets sold on specific dates with high expected traffic (i.e. Christmas, Thanksgiving). The core idea is that you are forced to pay more on certain dates regardless of what class / airline you take [5].

Second-degree price discrimination. There are frequent flyer programs (OneWorld, Skyteam etc) that enable customers to get rewards and special conditions based on what they buy and how much they spend [6].

You can also choose to buy an expensive or cheap version of the same product / service. While it’s not entirely the case because the quality of such service depends on the cost, some may argue that the plane travel time, route and smoothness are the same for all passengers.

Discounts for large groups of customers (i.e. corporate clients) would be a third-degree price discrimination since the price varies based on the amount of goods purchased.

Business and leisure travelers differ in their corresponding flexibility, which in turn enables airlines charge higher prices for the former ones and give discounts to the latter group.

In addition to the idea of flexibility, logics behind that are simple. There is a certain known date and time when the flight takes off. If they can’t sell tickets at higher prices, at least make some profit and sell them cheaper. In a way, this is a first-degree price discrimination backed with the sense of not flying half-empty.

Prompt 2.

If prices were fixed and they increased in the context on an article (where we have some unrealistically simplified monopoly), considering low elasticity for business people and higher elasticity for leisure travelers, that would result in overall higher revenues.

Most of that 60% revenues that comes from travelers directly, apparently from business travelers, and they can’t just drive or take a boat / train to where they need to be (time = money) [4].

It’s a stretch, but inflation makes all goods and services gradually cost more. Air tickets are no exception, and in terms of pure numbers, airlines seem to be making more. But let’s not forget what money really is, and how economic mechanisms work.

We all seem to be making a whole lot more money now, just to find out that now we need 4459 hours of minimum wage to pay for 4 years of public college. Baby boomers only had to use 306 hours of their life, and price of college education is Increasing almost 8 times faster than wages… [7].

In a said hypothetical situation, an unsubstantiated price increase will not be beneficial to anyone, but it has not a lot to do with business / leisure travelers. There are economic reasons for goods and services to cost as much as they do.

Prompt 3.

Because in certain companies with poor management, every flight has to be a well-coordinated and thoroughly planned effort, and every change can disrupt the schedule. Normal companies offer changes at a normal cost. Do something like that in France, Taiwan or Hong Kong, and you’ll likely get a strike or, if it touches a lot of people, even a coup so that even Forbes writes recommendations how not to be in the middle of one [9, 10]. People actually stand up for themselves and elect functional governments / managements.

But in the article’s narrative, because it’s economically possible for an oligopoly / monopoly to charge higher prices and maximize their profits in every possible way, by selling amendments as a separate service they increase median cost of air travel for a statistically average passenger. By charging higher prices, they also discourage travelers from making changes because they have legal and administrative opportunities to do so.

Prompt 4.

If we are talking about a healthy economic system with no abnormal findings like subsidized Crimea flights at the expense of taxpayers [10], and we assume that “in advance” vs “last minute” are separated with at least a month of actual time, an airline will make more money with the Option One.

Since most revenues come from business travelers who tend to book their flights need-based, that model has the potential of increasing profits by an increment of business travelers that take that particular airline. Moreover, a good indication of this policy in action would be the fact that many airlines actually tend to increase prices for returning website visitors [11].

Prompt 5.

This actually happened in China a couple of years ago. The working class here is quite different from that of the US, with a lot of labor migration going on. Most factory workers return to their homes to spend the Lunar new year with their families, it’s a cultural thing and a tradition, which is why air/train/ any tickets become super expensive and rare on hat week or two (imagine a billion people rushing to their homes).

In cities like Shenzhen where 95% of the workers’ population comes from elsewhere, it became a big problem that train, bus or air tickets were all bought by smart individuals who then were re-selling these tickets at super-inflated prices to everyone in need.

When you don’t really have any other options, and you must come home, people were forced to pay 500-1000% more for these tickets (more if you look rich, less if you look poor). Transporters’ revenues remained unchanged (since there are laws to restrict these prices). All the extra cash stayed with the speculating market agents.

As of 2017, in China you can’t buy more than one train ticket with one state-issued ID without a special permit. This area had to be state-regulated, with terminals installed at every train / bus station and airport, and if you buy a ticket online, you need to enter a passport number.

It did not affect the airlines to any extent (judging by publicly available information on their stock dynamics), because in the real world there are multiple balancing factors, and nothing is ever that simple.

But in a spherical model of the article, it’s supposed to have increased the airline revenues since they’d be able to charge market agents even higher prices, as if they only cared for the number of tickets sold.

 

References:

  1. EVA Air cancellation policies. Official website. [Electronic resource retrieved 04 Nov 2019] URL: https://www.evaair.com/en-us/misc/cancellation-policies.html
  2. Air Canada. Flex Ticket fare rules. Official website. [Electronic resource retrieved 04 Nov 2019] URL: https://www.aircanada.com/ca/en/aco/home/book/fare-options-and-fees/within-canada.html
  3. Cathay Pacific. Reserve an extra leg room. Official website. [Electronic resource retrieved 04 Nov 2019] URL: https://www.cathaypacific.com/cx/en_HK/manage-booking/travel-extras/reserve-your-seat/extra-legroom-seat.html
  4. How much of Airlines’ Revenue comes from business travelers. Investopedia, 15 Jul 2019. [Electronic resource retrieved 04 Nov 2019] URL: https://www.investopedia.com/ask/answers/041315/how-much-revenue-airline-industry-comes-business-travelers-compared-leisure-travelers.asp
  5. Steen, F, Sorgard, L. Price discrimination in the airline industry. Norwegian School of Economics and Business Administration. [Electronic resource retrieved 04 Nov 2019] URL: https://akkonkstrat.portfolio.no/data/488df06e-5051-42a8-818e-ca5f50fd7d37
  6. Varian, H. Handbook of Industrial OrganizationPrice discrimination. Chaprer 10. (1989). pp 597-654.
  7. Maldonaldo, C. Price Of College Increasing Almost 8 Times Faster Than Wages. Forbes, 24 jul 2018. [Electronic resource retrieved 04 Nov 2019] URL: https://www.forbes.com/sites/camilomaldonado/2018/07/24/price-of-college-increasing-almost-8-times-faster-than-wages/#49bbd0b166c1
  8. EVA Air news. EVA Welcomes End of Strike, Apologizes for Inconvenience to the Public. [Electronic resource retrieved 04 Nov 2019] URL: https://www.evaair.com/en-jp/about-eva-air/news/travel-news/2019-07-06-strike-1st-news.html#
  9. Theissen, T. Traveling To France? How To Negotiate The Train Strikes. Forbes. 1 Nov 2019. [Electronic resource retrieved 04 Nov 2019] URL: https://www.forbes.com/sites/tamarathiessen/2019/11/01/traveling-to-france-how-to-negotiate-the-train-strikes/
  10. Russian government to continue financial support of regional air travel. Russian Aviation insider. Dec 25 2018.[Electronic resource retrieved 04 Nov 2019] URL: http://www.rusaviainsider.com/russian-government-financial-support-regional-air-travel/
  11. Scott, K. The 15-second step that could save you hundreds on your next airfare. HoneyTravel, 2017. [Electronic resource retrieved 04 Nov 2019] URL: https://travel.nine.com.au/recommended/clear-cookies-cache-to-save-on-airfares/e4a0f470-851a-4f16-9d3e-8207a5eb3164
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    •  

      Very interesting research on how airlines tend to increase prices for returning website visitors, this is a great example of how they implement the first-degree price discrimination strategy! At the end of the day, is it the goal of the airline to ensure all seats on a flight are booked? Why might they want to strive for this goal? Could this be correlated to the high change fee?

      – Katlin (TSS)

 

  1. What type of price discrimination do we see in the article? Describe the price discrimination practiced by airlines with regard to business and leisure travelers?

The price discrimination for the airline companies are the third-degree price discrimination. The demand of the business travelers is very inelastic, and the demand of leisure travelers is much more elastic. There are multiple practices to make price discrimination. For example, the prices of first class and business class, which is used by the business traveler are much more expensive than the economic class, which is generally used by the leisure travelers. The change fee mentioned in McCartney’s article is another price discrimination tool. The demand of changing the flight for business traveler is inelastic so the airline charges the change fee and have the restriction of reselling tickets and changing names.

  1. If prices were fixed (i.e. without any price discrimination) and they increased, how might that affect airline revenue with its mix of price-sensitive leisure travelers and business travelers?

The total revenue of the airline might decrease without price discrimination. Since the demand of the price-sensitive leisure travelers is more elastic, with the price increase, the demand of leisure traveler will decrease. If the fixed price is between the previous business price and leisure price, the revenue from the business traveler will also decrease since the demand is inelastic and the price drops. If the fixed price is even above the previous business price, the total demand will significantly shrink while the airline still needs to pay almost same cost per flight with less percentage of the seat occupancy. Most likely, this strategy will decrease the airline total revenue.

  1. Why have airlines instituted high change fees (i.e., fees that are greater than a possible loss in profit from a change) and prevented the resale of tickets?

Like discussed in the previous two questions, business travelers have much more inelastic demand of changing flights while leisure travelers typically don’t have much demand of flight change and are more price sensitive. As discussed in McCartney’s article, high change fee will prevent the business travelers from buying cheap tickets and switching flights to fit their changing schedules. They have to pay for the changing fee or buy the last-minute ticket, which is also expensive. This setup could bring more profit to the airline company since there are negligible cost differences of changing flights. The same concept applied to the prevention of resale of tickets since the travelers might have changing schedule, the prevention of resale of tickets made them have the only two choices of paying the changing fee and buying a new ticket.

  1. Suppose an airline has two options: (1) set lower prices for tickets booked in advance and higher prices for tickets booked at the last minute; or (2) set the same price regardless of booking date. Which option is more profitable?

The first option will be more profitable. This is also a third-degree price discrimination strategy. While people book the ticket in advance, the decision is more price sensitive. Because of that, booking in advance is more elastic than booking at the last minute if we consider both group of behaviors as the demand. According to Lesson 9 and 10, for a clear divided group like that, the price discrimination will bring more profit to the company.

  1. Have you ever tried to buy a concert or sporting tickets that were only available from speculators or resellers? Describe how this model would affect both leisure and business passengers if it were used for airline tickets. How would it change airlines?

 

Yes. I have bought the concert tickets from the resellers. If this model applies for the airline tickets, the business passengers could try to buy the last-minute ticket from the leisure passengers with a higher price than the booked price. They could also sell their tickets with a cheaper price to the other passengers if they have to change their schedule. In that way, the airline won’t be able to make as much profit as they have now. That’s the reason why no airlines allow the ticket resale because the airline industry is oligopoly industry.

 

Reference

1. “If Only Airline Tickets Were Like Sports Tickets”, McCartney S., Wall Street Journal, 2018

2. Microeconomics Pindyck R. S.  & Rubinfeld D. L. 8th Edition

 

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You mentioned that airlines will still have to absorb the cost of the flight, regardless of the price of the tickets (or revenue). This means, they want to ensure that all seats are sold on a flight. Does this have any correlation with high change fees? Why, or why not? Also, do you think airlines have any way of implementing a first-degree price discrimination practice?

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For your first question, I think this correlate with the high change fees. Since for each flight, the total cost is almost fixed no matter how many customers are on the flight. Charging a high change fee makes the demand of changing flight very low so people rather buy another ticket instead of changing the flight. One vivid example is that I am trying to change the time of the airline ticket for my mother-in-law to go back to China from San Francisco. I found United airlines charge for $1000 for changing the flight but buying a new ticket on the same day is only $400. I would definitely buy a new ticket without cancelling the previous one. In this way, the airline gain more revenue by selling two tickets for one traveller.

For your second question, I think right now the technology doesn’t allow the company to do a first-degree price discrimination. However, since all the identity information is required for purchasing, in the long run, while the big data tools are mature enough, AI could potentially predict for every single person, how is their price tolerance. At that time, the first-degree price discrimination could potentially be possible. Like Priceline.com, they have the bid system which is already close to a first-degree price discrimination.

 

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    Thanks for a great post, I think you have some really great insights on what’s going on with the airline tickets and how price discrimination works for specific cases raised in the article.

    I think tickets are not transferable for a number of reasons, one of them being security. There are sources [1] that illustrate several attempts of individuals to start an online system that would people from the same flight to freely interchange seats, however according to the authors, “every single lawyer told them the airlines would rant and sue for that”. Ever since the tragedy of 9/11, literally anything can be explain with that word – “security”. It’s not bad per se, it’s nice to feel protected… But… just how really well-protected are we?

    There are articles that claim American TSA operate at extremely low efficiency levels compared to other countries (like Israel for example), “95% inefficient”, many sources flat out say that the TSA is a waste of money that doesn’t save lives and might actually cost them [2, 3, 4].

    I think the truth is probably somewhere between these two opposite ideas, and perhaps transferring seats or exchanging tickets can someday become a thing. I honestly can’t think of a valid reason why an airline would lose money when a ticket is sold (revenue generated), but a passenger comes with a different passport than stated in their reservation data. Some can argue that certain people aren’t allowed to board the plane, and security checks allow to validate that… but seriously, in the world where a full-blown disposable passport from a small country that no one can point on a map costs $1000 on the black market [5], and airports like Hong Kong have tens of thousands of people who fly in and out, all that is nothing more than a joke.  Also, there are actually airlines that sell transferable vouchers [6].

    What do you think?

    1. https://www.quora.com/Why-is-it-not-possible-to-resell-airline-tickets-in-the-way-concert-tickets-can-be-re-sold (Links to an external site.)

    2. https://www.vox.com/2016/5/17/11687014/tsa-against-airport-security (Links to an external site.)

    3. https://www.debate.org/opinions/is-the-tsa-effective (Links to an external site.)

    4. https://www.citylab.com/transportation/2015/06/airport-security-astoundingly-expensive-and-95-percent-ineffective/394778/ (Links to an external site.)

    5. https://www.comparitech.com/blog/vpn-privacy/passports-on-the-dark-web-how-much-is-yours-worth/

    6. https://www.news5cleveland.com/money/consumer/dont-waste-your-money/heres-why-you-cant-resell-your-unwanted-airline-ticket

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    I agree with you that one of the discriminations described in the article is third-degree price discrimination. Third-degree price discrimination occurs when companies price products and services differently based on the unique demographics of subsets of its consumer base, such as students, military personnel, or seniors” (Czerny & Zhang, 2015). In the real world and especially nowadays, third-degree price discrimination is quite common and exists in all forms of business, and the airline in the current case is no different. I also agree that without any price discrimination, the price would decrease as leisure travelers may avoid flight due to their price sensitivity. On the other hand, business travelers may pose consistency as their schedules are tight.

    Reference

    Czerny, A. I., & Zhang, A. (2015). Third‐degree price discrimination in the presence of congestion externality. Canadian Journal of Economics/Revue canadienne d’économique, 48(4), 1430-1455.

 

As Pindyck and Rubinfeld (2013) present, price discrimination is the practice of “charging different prices to different customers, sometimes for the same product and sometimes for small variations in the product” (p. 399). In terms of airlines, companies participate in price discrimination through several means. For one, airlines change ticket prices based on time of purchase; that is, typically customers are able to get cheaper tickets when they book several months in advance. This correlation is due to the fact that airlines change prices based on demand; if tickets for a flight are selling well, the airline is able to charge higher prices for the remaining tickets. In this same regard, airlines also price discriminate between their business and leisure travelers. For instance, Scott McCartney provides that change fees are superfluous as airline executives have admitted that the charges are not “to cover the minimal cost of altering a reservation but to discourage business travelers from buying cheap tickets and switching flights to fit their changing schedules” (2018). Similarly, airlines have also prevented the allowance of name changes on tickets; although the companies claim that this policy protects the current pricing structure and prevents price gauging on the part of 3rd parties like StubHub, its easy to see how the practice also protects the firm’s revenues. As I’m sure most of us have experienced, tickets bought through 3rd party speculators/resellers typically come with a premium attached to the base cost; this premium is usually made up of processing and transactional fees from which the 3rd part makes its profits. Understandably, this business model raises concerns with its applicability to the air travel industry. If firms were allowed to purchase flight tickets and then resell those tickets to consumers at a markup, airlines would be losing out on the extra profits to which they’ve become accustomed. This strategy might also hurt airlines long-term as consumers shy away from air travel in the face of increased transactional charges. Additionally, airlines are also charging extra for consumer choice of cabin, seat, and other “amenities,” but when you strip away the extraneous offerings, all customers are paying for the same thing—transportation from one place to another. As such, airlines are tapping the extra consumer surplus by charging different rates to different consumers while providing a slightly different service.

Instead of practicing price discrimination, if airlines set fixed prices and then those rates subsequently increased, I would expect the firms’ revenues to be negatively affected. That is, by removing any discrimination in their pricing, airlines are relinquishing some of their producer surplus and allowing for a more elastic consumer base. Although price increases in the short-run may have a negligible effect on revenues, I would expect that more long-term, sustained price hikes will reduce airline revenue as customers turn to alternate modes of transportation.

Lastly, in regard to the two different pricing options, I believe that setting lower prices for tickets booked in advance and higher prices for tickets booked at the last minute is the more profitable strategy. For one, as discussed above, this pricing discrimination allows the airlines to capture additional consumer surplus. Moreover, this strategy also allows airlines to continue to advertise low-cost tickets. No matter what strategy is chosen though, the goal for airlines must be to sell all tickets for every flight as most costs associated with flying are fixed costs, and as a result, the marginal cost of an extra passenger is relatively low.

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Discussion 5: Data – 812 Discussion Group 2

From MBADM 812 FA19

76 unread replies. 89 replies.

Throughout this course, we have extensively used different data, graphical, and tabular analyses. Data are essential to understand the cost and production structure of businesses. Data also help firms understand the needs of their customers and the demand for their products. Firms shape their business strategies based on data. In recent years, digital information is commonly available to many firms. It is known that this information is expected to be very valuable. However, firms are still trying to understand how they can use this huge amount of raw digital information, especially about current and potential customers, in an efficient way.  The article attached gives information about the importance of data and how data shape the new economy. The whole article is very interesting and contains valuable information about the importance of data, but it would be enough you to read the first five pages of the article to answer the discussion questions listed below.

Article: Data Is Giving Rise to a New Economy (Links to an external site.) (The Economist, printed edition: May 6, 2017)

You can find the article here too: Discussion 5 – Fuel of the Future: Data Is Giving Rise to a New Economy.

Directions

Please discuss all of the following questions in your initial discussion submission:

  1. The article explains the value of data for businesses, how data are collected, and how these collected data have been used by different companies. Please list a couple of them. Which example do you think is the most interesting? Why? Explain your answer.
  2. Please discuss the importance of data for your current or prospective job/business. Does your firm collect any data? How are they collected? Please suggest different ways of using collected information in an effective way to increase the success of the business. Explain your answer. Try to find some examples.

Participation Expectations

Your initial discussion submission to the questions above must be at least 400 words and specifically reference some concept or content from the lesson. You must complete your initial comment by the end of Lesson 14. Please note that you cannot edit, change, or delete your submissions. Thus, please double-check your submission before you submit it.

After completing your initial submission, you will be able to see the comments by your peers. Read these posts and reply to at least two students by providing them with suggestions to improve their answers, making comments or asking questions about their comments. Peer responses should reflect one or more of these types: (1) agreement with extension, (2) an alternative perspective with rationale, or (3) a respectful challenge with counterargument. Each of your peer responses are expected to be at least 100 words (in total at least 200 words). You must complete your peer comments by the end of Lesson 15.

Rubric

The weight of the assignment is 4% of the final grade. Please note that the accompanying rubric will be used for your complete submissions, including the initial comments and peer comments. To view the rubric, click the three dots icon toward the top right of the page, and select Show Rubric. Seventy percent of your grade is for initial comments, and 30% of your grade will be for peer comments. If you don’t respond to peer comments, you will lose 30% of your discussion grade.

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PROMPT 1.

I find it interesting how Facebook and Google switched from using data for developing improved advertisement solutions to AI-driven services that create new products or even profile people based on their search history and interests [1].

Since Google never removes users’ personal search history [2], it’s actually terrifying just how much data they know about every and each user. With a little bit of help from statistical analysis algorithms, it’s fairly easy to predict what exactly a user or group of users might be planning to do: what café to eat at on a given day, what medical symptoms currently concern you, what neighborhood you live it, how much money you might have, what new job you might be looking for, who your friends are – and a lot more. Moreover, it’s not difficult to see what drivers and search results modify behavior, to create more effective methods to reach desirable effects.

As AI platforms gain more processing power and become armed with more refined algorithms, we incorporate them in our everyday lives to simplify and automatize routine processes, we trust machines to make choices that we don’t want to burden ourselves with. Google’s machine translation software [3], for instance, can deliver very satisfactory results in many everyday cases; a job that’s traditionally referred to as something purely human, nowadays becomes a hybrid, with systems like Grammarly [4] that have the power to rephrase sentences, optimize content and suggest better ways than an average human would. Better grammar, clearer sentences, greater spellchecking, all that is only a click away.

I find it equally enjoyable and at the same time… terrifying. While Google and Facebook know so much about us all and offer tools to make everything look better to create entirely different products, services, and experiences, I personally think our individualities slowly begin to fade away, into the vast void of data. Every new piece of information, as the article says [1], becomes less relevant and it becomes increasingly difficult to separate a genuine desire of creating a perfect AI, from paranoid psychosis of never having enough data to perfectly describe and predict everything under the sun.

I do find the original comparison strange; in an economic sense, data are nothing remotely close to an oil refinery for one fundamental reason that data can be described with. Data are infinite. When copied from one source, it does not disappear at that source. Traditional economic systems are built around classic ideas such as scarcity of goods that impacts demands, prices and all that, but no one really can tell how specifically can we judge situations when copying data costs absolutely nothing, how instant distribution impacts supply chains, and what effect on human personality might all that instant gratification have [5].

Humans are generally conditioned to always look for “more”. Corporations plan product lifecycles, slow older phone models down to push new products onto the market while truly lacking innovation. All those digital tools made it possible for companies not to care about their individual customers but create a baseline behavioral model that we are all expected to follow, with social dynamics compensating for any issues along the way.

I think in the context of this article, “it’s what you know” could be an obsolete concept. “It’s what you choose NOT to know” might be a far better idea. In a world when machines like those Google and Facebook have, pave their way to make statistic assumptions, analyze likeliness of various behaviors, we might be losing something greater in exchange to all that convenience.

What precisely? There are multiple utopian novels that describe worlds where machines label humans as a threat and chose to eliminate us all, while in others we are portrayed as fat and bored creatures that require self-driving chairs. Perhaps neither of that will ever be the case. But just think about it… We no longer say “BRB”. We no longer “Log out”. We are stressed, tired and our anxiety levels match those of crazy people some 50 years ago [6]. Humans generally don’t quite possess evolutionary strategies to handle that much.

Economic systems generally exist so that we can trade our labor (literally embodied as the time of our lives spent doing that) by doing something that has value to others, to trade it for their time. If you want a $1000 iPhone and you work 8 hours a day for $10 per hour, you need two weeks of your life to get it.

Now, just to illustrate how broken this new “digital” economy is, think about this. If you earned $2000 an hour and worked full-time from the birth of Jesus Christ to today, never paid taxes and saved every penny, you’d have $8.3B today. There’d still be 30 Americans richer than you. That wasn’t the case 60 years ago before “digital” became a thing.

So all those bells and whistles that come with the new age are good. We can’t quite give up on AI and all the benefits it brigs, with all that globalization and openness but… if being able to drive home with a fancy GPS that knows where you live and automatically order pizza just before you get there sounds like a fair trade to you, think again. Perhaps sometimes it’s a good idea to take it slow and to… log out? There is a movie that illustrates how by making everything automatic we skip on most of our life that actually can be enjoyed [7].

 

PROMPT 2.

We operate on a highly competitive market (video games), and our firm naturally collects data to sell more and target customers in more effective ways. We use marketing platforms to analyze what products can become trendy in both short and long runs, create campaigns to highlight advantages that people might be looking for and find new business opportunities by reviewing data that comes in as reports or aggregated recommendations/industry trends.

Since ultimately companies are resource processing centers that convert inputs into outputs while generating profit, there is information that comes from all departments: sales, marketing, product development, research, designers, and that information serves the purpose of making economic decisions… There are 3 questions that classic economic theories often mention [8], applied to decision making: what to produce, how to produce and how many to produce, and all these questions largely depend on data.

I would like to specifically address a type of data that we benefit most from, and it might sound not very obvious but… it’s data from our product reviews that our competitors get. Since generally customers are hard to satisfy, and it’s particularly true for our industry, there are always unhappy people who complain about certain features, mechanics or concepts. “The character could jump higher! Your level design is too straightforward!” and other ideas like that quite often allow us to see our products from a different angle and see the opportunities that others might have missed or could have implemented better, to immediately introduce these changes in the product that we make. Naturally, there are multiple issues with our products as well, but they are only useful in retrospect. Competitors’ information is immediately useful, and that data is definitely worth collecting, analyzing and being used to create unique competitive advantages.

Another way that we use to improve our business performance is Gantt charts that are basically a project management tool that puts all project activities on a timeline. It’s very easy to lose track of the time required for certain tasks or to have an illusion of having enough time to accomplish everything. Quite often that’s not even remotely the case, and having a timeline with key activities, milestones, and workload, aligned with people responsible for reaching these goals, helps to eliminate multiple scheduling issues, and poor scheduling can be very expensive.

Since this is my last opportunity to post something publicly in this course, I’d like to take a moment and thank Dr. Bayraktar for this course, and her TSS for supporting us all. It’s been a fun part of the journey!

 

Andrew

References:

  1. Data is giving rise to a new economy. The Economist. May 6th 2017. [Electronic resource retrieved 04 Dec 2019] URL: https://www.economist.com/news/briefing/21721634-how-it-shaping-up-data-giving-rise-new-economy
  2. Newman, L. Limit How Long Google Keeps Your Data With This Overdue Setting. WIRED, 05 Jul 2019.[Electronic resource retrieved 04 Dec 2019] URL: https://www.wired.com/story/google-auto-delete-data-privacy-setting/
  3. Google Translate official webpage. [Electronic resource retrieved 04 Dec 2019] URL: www.translate.google.com
  4. Grammarly official webpage. [Electronic resource retrieved 04 Dec 2019] URL: www.gramarly.com
  5. Patel, N. The Psychology of Instant Gratification and How It Will Revolutionize Your Marketing Approach. June 24 2014.[Electronic resource retrieved 04 Dec 2019] URL: https://www.entrepreneur.com/article/235088
  6. Twenge, J.Studies Show Normal Children Today Report More Anxiety than Child Psychiatric Patients in the 1950’s. APA, Dec 14 2000. [Electronic resource retrieved 04 Dec 2019] URL:https://www.apa.org/news/press/releases/2000/12/anxiety
  7. Click, 2006. Movie by F. Coraci. https://www.imdb.com/title/tt0389860/
  8. Three Economic Questions: What, How, For Whom? Encyclopedia.Com. [Electronic resource retrieved 04 Dec 2019] URL: https://www.encyclopedia.com/finance/encyclopedias-almanacs-transcripts-and-maps/three-economic-questions-what-how-whom
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  1. The article explains the value of data for businesses, how data are collected, and how these collected data have been used by different companies. Please list a couple of them. Which example do you think is the most interesting? Why? Explain your answer.   

It has become no secret that there is data out there on almost everyone. This data can be collected and used in a variety of ways, both malicious and benign. “Data are to this century what oil was to the last one” (The Economist, 2017). The use of data drives everyday business decisions across the globe. Companies know that the successful or failure of their business can likely come down to their collection and analysis of data. No company knows this better than Facebook. Facebook started out as a benign social networking website that was aimed at keeping friends in touch. Fast forward only three years from Facebooks inception in 2004, to the first major privacy scandal that struck Facebook. In 2007, Facebook began collecting data on users who were visiting other websites. This data was then manipulated in the first attempts to monetize users profile data (Sanders, 2019). By this time, Facebook knew that they could turn a profit off the data they were collecting on their users. Facebook become one of the first major companies to show an interest in personal user data. Over the next decade, Facebook would continue sharing user data at the benefit of other companies. Advertising companies were one of Facebook’s main customers of the user data. This user data enabled the advertisers to more accurately target demographics based on their likes and activity on Facebook.

To me, Facebook gives data collection a bad name because there are several ways that data collection can improve everyday life, and not just deepen pockets. Two companies in particular from the articles stand out for attempting to improve everyday life, Tesla and Nexar. Tesla, the electric vehicle manufacturing giant, collects incredible amounts of data from their user’s vehicles. This data collection and analysis allows Tesla to more thoroughly understand their computing systems. The quick data feedback loop enables Tesla to continually improve their systems. The improvements, for example, have recently resulted in an auto-pilot update that can recognize traffic cones on the road (Fingas, 2019). This sounds relatively insignificant at first, but it’s a step in the right direction for Tesla to roll-out a full autopilot feature in the future. Similarly, Nexar retrieves data from their users in the form of dash cams. Their app provides users with a free dash cam that can be used to detect anything from a car suddenly stopping, to a pothole in the road. Nexar’s vision is to use this data to better inform drivers on the road to improve safety. Yes, the end goal of these companies is to bring in more profit with how they’re using data, but at least they’re providing the public with a safer experience while they improve their systems.

  1. Please discuss the importance of data for your current or prospective job/business. Does your firm collect any data? How are they collected? Please suggest different ways of using collected information in an effective way to increase the success of the business. Explain your answer. Try to find some examples.

I work for a successful consumer products company. We’ve been around for almost a century and are the leader in our market. We make over one hundred million products a year of varying SKUs. Over the last decade, we’ve been pushed to automate manufacturing and data retrieval more efficiently. There are over a dozen steps in the making process of our products. This means there is a significant amount of process data that can be used to track the effectiveness of making systems. Upon completion of the products, they’re run on numerous tests to confirm their quality before they’re sent to retail stores. This creates another data stream, product data. These two data streams are incredibly important to the success of the business. The process data stream is tracked and manipulated through process control strategies. Process control is a practice that tracks processing data to ensure the processes are run repeatedly, efficiently, and safely. The analysis of this data is intended to show shifts in processing that could result in poor quality product. These shifts are expected to be caught in real-time, so that any effect on product quality can be caught before too many products are impacted.

Similarly, the product data stream is tracked and analyzed to correlate processing and product changes. One of the company’s shortfalls that makes this correlation understanding difficult is the variability within the system from the raw materials and processing. The company is continually tasked with changing product designs for continuous product improvement. This causes the product designs to become more ambitious, therefore, higher risk for processing issues. This higher risk incorporates more variability in the processing and final products. From a statistical standpoint, more variability makes it difficult to identify signals in the data. My recommendation for improvement would be to focus more on reducing variability in the processing and final products to enable a more accurate interpretation of the data. One major improvement to reduce processing variability is to standardize the process conditions and equipment across sites. This creates a level playing field amongst plants that can enable a cleaner analysis of the data. This is a common practice that is used among the major industries that rely on process control strategies; chemicals, pharmaceuticals, energy, auto manufacturers, etc.

 

References

The Economist. (2017, May 6). Data is Giving Rise to a New Economy. Retrieved from The Economist. https://www.economist.com/briefing/2017/05/06/data-is-giving-rise-to-a-new-economy (Links to an external site.)

Sanders, J. (2019, July 24). Facebook Data Privacy Scandal: A Cheat Sheet. Retrieved from Tech Republic. https://www.techrepublic.com/article/facebook-data-privacy-scandal-a-cheat-sheet/ (Links to an external site.)

Fingas, J. (2019, November 3). Tesla Autopilot Now Recognizes Traffic Cones. Retrieved from Engadget. https://www.engadget.com/2019/11/03/tesla-autopilot-traffic-cones/ (Links to an external site.)

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Data collection, which is the process of gathering information in an established systematic way that helps firms resolve research issues, test specific hypotheses, and evaluate outcomes, has seen a recent uptick due to technological advancements in the area of IT. According to the economist article, data is the “new asset class,” which will result in a data economy (Demand & Supply), where firms will bid for bytes of data. The following are some of the ways in which data can be collected:

  • Social Media- Through Sharing of Photos, Text & Photo Messaging (Facebook, WhatsApp)
  • Mapping and Navigation Apps- (Waze, Google Maps)
  • Meteorology
  • Health Care
  • Business networking (LinkedIn)
  • Self-Driving Cars- (Mobileye, Tesla)

These collected data can be used by organizations through an algorithm to solve other pressing needs of the firm requiring information from data collected. Some firms even collect data and sell them to other firms, which creates further complications in relation to Antitrust and Privacy laws.  For example, GE has a Predix system that collects data from connected devices. It then incorporates other data that can help in the operations and maintenance of industrial machinery. Uber also collects a big pool of data about their drivers and passengers for personal transportation. Tesla collects data to optimize its self-driving algorithm to create a better experience for its drivers. One of the fascinating ways I have seen data used is through Facebook and Google. These firms track your browsing habits and present goods and services to you based on your browsing history. Recently I have been on several sites like Jackrabbit looking for good quality running shoes, and now when I am even reading a regular article on CNN, an advert showing different shoes from jackrabbit pops up. In my opinion, the government should enact a Contractionary fiscal policy within the economy that could prevent organizations from utilizing data and that will drive demand downwards.

I presently work for one of the top Jet Engine Manufacturer, and the importance of data cannot be overemphasized. The engines that we manufacture are packed with sensors that collect data in real-time during a flight (about one terabyte of readings per flight) and are simultaneously analyzed to improve the performance and safety of the jet engine and aircraft.

Some of these sensors mounted on these jet engines also feed data back to an operation software in which engineers can use the data collected to carry out modifications for the present engine or utilize that data to improve their design of future engines. Customers of jet engines (Airbus, Boeing, Embraer, Military, etc.) require engines that are reliable, durable, and cost-effective to maintain. Practices, as mentioned above, can be an effective way jet engine manufacturers use data to improve the reliability and durability of their engines, which allows the firm to remain competitive in the market and yield a high return on investments. 

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Question 1:

As the article provides, “[d]igital information is unlike any previous resource; it is extracted, refined, valued, bought and sold in different ways” (The Economist, 2017). In this regard, companies of all sizes are trying to harness the power of big data. For instance, one of the most superfluous applications of the collection and distillation of consumer data is targeted advertising. As the Goodwill Community Foundation provides, this technique “is a form of online advertising that focuses on the specific traits, interests, and preferences of a consumer” (n.d.), and is accomplished through the collection of data from cookies, search engines histories, social media profiles, and other sources. Tech giants such as Amazon and Facebook are especially adept at using targeted advertising; these companies leverage their massive stockpiles of consumers’ online buying habits and personal information to secure business with ad agencies that want to use that data to optimize their marketing efforts. For example, as Karen Weise with The New York Times presents,

[w]hen a financial services provider wanted to promote its retirement advisory business, it directed ads to people in their 40s and 50s who had recently ordered a personal finance book from Amazon. And when a major credit card company wanted new customers, it targeted people who used cards from other banks on the retail site. (Weise, 2019).

But data is not just being used to increase consumption; of extreme interest to me, companies all around the world are harnessing the power of big data to improve services and quality of life. Healthcare, for instance, is one industry that benefits from industry adoption of data analytics and artificial intelligence. As the New England Journal of Medicine presents, big data in the health care system “refers to the abundant health data amassed from numerous sources including electronic health records (EHRs), medical imaging, genomic sequencing, payor records, pharmaceutical research, wearable, and medical devices, to name a few” (2018). When analyzed and applied correctly, the data generated from these sources can provide lifesaving benefits. For example, after a National Health Service pilot program outfitted 500,000 people with vital-sign monitoring, Wi-Fi enabled armbands, artificial intelligence was able to analyze the data in real-time to improve patient care resulting in reduced hospital readmission rates as well as fewer emergency room and in-home visits (Guest, 2019). To me, this empowerment of healthcare workers through the application of big data is incredible. Moreover, this example also highlights an important facet of AI—its almost limitless economy of scale. AI promises accurate predictions at near-zero marginal cost; put another way, we as a society have already amassed a seemingly infinite amount of data, a stockpile that continues to grow exponentially—now we just need to apply that data in the right ways.

Question 2:

As a chemical engineer, data plays a crucial role in my job and the business as a whole. Just at my plant alone, we collect information from a variety of different sources:

  • Process variables generated from the plethora of sensors throughout the site are constantly tracked and recorded in our historian, which enables engineers and plant personnel to monitor the process, detect upsets before they occur, and troubleshoot incidents to prevent them from reoccurring
  • Business processes (sales and distribution, production planning, logistics execution, financial and managerial accounting) and the associated information are all stored in SAP
  • Product quality data is generated and meticulously tracked through a laboratory information management system which automatically generates certificates of analysis and a variety of statistical process control dashboards

Simply put, we use the massive amount of data generated from the chemical processes in order to increase yields, reduce costs, and ultimately deliver greater value to the customer and our own bottom line. But my company, Honeywell, does not just stop at improving its own manufacturing facilities; in pursuit of increasing the success of its business, my organization has expanded its suite of big data analytics software by offering the services to other firms. Honeywell’s Connected Plant Uniformance Cloud Historian makes it possible to leverage insights found at one plant across all plants and provides benefits such as “high bandwidth communications and massive cost-effective storage in the cloud, low-cost pervasive sensor technology” and unification of existing data silos within an organization (Bonner, 2018). This unification allows firms to more accurately develop their strategies and tailor their business processes.

 

References:

Bonner, P. (2017). Honeywell connected plant. [PowerPoint]. Retrieved from https://www.honeywellprocess.com/library/news-and-events/presentations/hon-emea17-honeywell-connected-plant-analytics-and-beyond.pdf

The Economist. (2017, May 6). Data is giving rise to a new economy. Retrieved from https://www.economist.com/briefing/2017/05/06/data-is-giving-rise-to-a-new-economy (Links to an external site.)

Goodwill Community Foundation. (n.d.). What is targeted advertising? Retrieved from https://edu.gcfglobal.org/en/thenow/what-is-targeted-advertising/1/ (Links to an external site.)

Guest, A. (2019). Current remote patient monitoring reduces readmissions at Dartford and Gravesham NHS trust. Retrieved from https://healthtechpulse.com/2019/01/30/current-remote-patient-monitoring-reduces-readmissions-dartford-and-gravesham-nhs-trust (Links to an external site.)

New England Journal of Medicine. (2018, January 1). Healthcare big data and the promise of value-based care. NEJM Catalyst. Retrieved from https://catalyst.nejm.org/big-data-healthcare/

Weise, K. (2019, January 20). Amazon knows what you buy. And its building a big ad business from it. The New York Times. Retrieved from https://www.nytimes.com/2019/01/20/technology/amazon-ads-advertising.html

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1.

My best friend used to work in an Amazon data center, and while lots of what went on was confidential, he did tell me the great lengths that they go to keep the data units themselves at a very cool temperature. So much so that they have employees with the main purpose of walking from unit to unit and checking the temperature of the area and also monitoring the building automation system which tracks the status of the equipment. Obviously, Amazon is tracking data for a million reasons. What blew my mind about this article was the paragraph on Caesars Entertainment. When they went bankrupt their most valuable asset ($1B) was the customer loyalty data of its 45 millions customers (The Economist, 2017). As someone who goes to Vegas once a year and enjoys gambling from time to time this is crazy to me. The data is worth $1B but the rewards in their loyalty program (for just about everyone but high rollers) is free parking and a buffet once in a while. To me, this is the perfect illustration on how powerful and valuable data can be, and we as customers just give it up. As consumers we do little to protect our data and the truth is that it is just inconvenient to do so. I do believe in privacy and I think as a society we are flirting with an invasion of privacy that in the long run we will not be comfortable with on a day to day basis.

2.

I work in Supply Chain for a large chemical company. I would say the most important data that we collect would be the forecasting data. This data which is collected from historical sales, input from customers, and analysis of market share is critical to the business. It allows a forecast to be created based on seasonal trends, market size fluctuations, and statistics. The accuracy of this forecast allows us to create production schedules to meet customer demand, but also keep inventory at a reasonable level.

We are a raw material supplier and a successful forecast accuracy for us is around 70-75%. It is often said that the further you are from the customer the more difficult it is to forecast. In order to increase the success in the accuracy of our forecast and therefore our business, I would like to see us collect data from downstream customers. So instead of collecting data from our customers, we also need to collect it from our customers, customers such as Proctor and Gamble.

 

The Economist, 2017. “ Data is giving rise to a new economy” https://www.economist.com/briefing/2017/05/06/data-is-giving-rise-to-a-new-economy

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