Lemon Problem

This week we discussed the concept of the Lemon Problem in respect to the used car market. This problem is that since it is not possible to distinguish between reliable cars and lemons, there are too many lemons and too few reliable cars. The seller has no incentive to be truthful and they also have little incentive to care for their cars.

I would argue that due to an increase in the awareness of the average consumer that the Lemon Problem is more common with private sellers rather than dealerships. There are a multitude of websites and networking communities that a consumer can rate a dealership on which is an increased motivation for the dealership to provide it's customers with quality vehicles. If they routinely sell lemons then they will not receive referral based business and they will also get a bad reputation among consumers. Before the popularity of the internet this was not as much of a concern but now there are simply too many available options for consumers for a dealership to overcome a bad reputation.

A private seller does not have this limitation in that they will not be reviewed with the same publicity. They are typically selling a vehicle once every few years so the Lemon Problem certainly applies to them.

Predatory Pricing

This week we discussed the concept of predatory pricing, which is the act of setting a low price to drive competitors out of business with the intent to establish a future monopoly. Specifically we discussed some of the practices of Wal-mart and the accusations of predatory pricing against them.
I would argue that this is just another business practice that is done on a daily basis in business. If Wal-mart drops the price of certain DVD's from $20 to $5 for a period of time then they are not only going to sell more of those DVD's but they will also have traffic through their store to purchase other items as well. Convenient Stores do this all the time as HESS has times that they sell soda for $2 per 12 pack. Obviously the store is not making money on this particular item but they are making money on other items that are purchased.
When a large retailer can sell an item at cost or even at a loss but increase their business because of that reduction then I would consider it a smart business move. That company should not be penalized for having success that allows them to operate at a more productive level than a local retailer.

Monopolistic Competition

This week we discussed monopolistic competition and realized that most of the real world markets are monopolistically competitive. An interesting aspect of this market is in the area of product development and marketing. We looked at innovation and differentiation and questioned whether all innovation was really innovative. By keeping up with technology or spending money on advertising a company could increase the value of their product. Looking at a shift of the demand, production costs, and price we saw that this innovation did not always increase the profits of the company. I would wonder how long this would be the case though as if nothing is done to advertise the product or keep up with technology then sales will eventually decrease and production costs will increase. Less profit now could still result in more profit in the long run which shows that this could be a case of making a long term business decision based on short term data.

Monopolies

This week we are discussing the concept of Monopolies and, being a sports junkie I am interested in the relation to professional sports. The definition of a monopoly includes the following criteria:

- A market with a single supplier
- No close substitutes
- Barriers to entry

I would like to examine these requirements in relation to Major League Baseball in order to determine how much of a monopoly the sport truly is.

First off, the criteria of a market with a single supplier is both true and not so true in that we can consider minor league baseball as a division of the MLB so they are not competition for the big club. In a worldwide sense there are other popular professional leagues like the Japanese League but none as popular as MLB. Some people would stop there and determine that MLB meets this criteria but I would argue that we can also group the NFL, NHL, NBA, and other professional in with the MLB and say that there is some competition. Often times the public is forced to decide to spend money at one event and not the other so this would disqualify MLB from being the single supplier.

The second criteria of no close substitutes is also disqualified by the other professional leagues for many consumers but a die hard baseball fan will not be accepting of a basketball game instead of a baseball game. That fan may be able to substitute a local high school baseball game instead of going to a major league game though, so ultimately this criteria depends on the individual and not the group.

Finally, there are a great number of barriers to entry involved in professional baseball which make it impossible for someone off the street to just start a team. A rival league would take not only a lot of money but it would require the collaboration of multiple cities and businessmen making it very unlikely.

After breaking Major League Baseball down into the three requirements I would conclude that there is not a clear cut answer to whether or not MLB is a monopoly. If you are a potential major leaguer or an avid fan of baseball then in many ways it is a monopoly. However, if you are a casual fan or a die hard sports fanatic then the numerous options for enjoying different professional sports make this not a monopoly but rather another option in the sports market.

Technology Changes

This week we discussed the idea of the perfectly competitive markets and the effects in the change in supply, demand, and technological changes. The perfectly competitive really does not exist but the requirements for a market to be perfectly competitive are as follows:

-Many sellers, many buyers, identical good
-No barriers to entry or exit
-Buyers and sellers enjoy perfect information
-Established firms have no built-in advantage

The requirements of a market being perfectly competitive make it more of a mythical idea but the effects of changes can be applied to markets that are nearly perfectly competitive. I am most interested in the effects of a technological change on this perfectly, or near perfect, competitive market.

The theory regarding the technological changes is that the new technology will improve effecience thereby lowering costs and lowering prices. But in order to implement this new technology a firm must have the funding as well view it as a beneficial change for the future. While most instances where conforming to the technology changes would be necessary there are examples of firms reacting to the changes instead of conforming with them.

One example of this would be in the banking industry with the bank Charles Schwab. While most banks have utilized the technology provided with the ATM's Charles Schwab chose instead to react to the changes by eliminating the need for their own ATM's. All banks charge a usage fee for using their machines so if a Bank of America customer withdraws money from an ATM owned by Wachovia then they are charged a fee. Charles Schwab chose to pay their customers back that fee that is charged instead of attempting to operate their own ATM's. Instead of competing with the other banks by utilizing the technological advances they utilized the advances of the other banks which increased their customers available ATM's to all of the ATM's in existence.

Short Run Cost

Short run costs include the ideas of total cost, average cost, and marginal costs. While it is important as a business to understand these costs I believe that they must be utilized as a tool to allow for long term success of the business and not as a quick decision tool. Small businesses are often started with limited financial backing and therefore are susceptible to small changes within their business plan. If sales are not at a projected level for a quarter then the business may lay off employees when in fact the best course of action would be to maintain these employees and focus on building sales.
This does bring about an entirely separate issue of businesses starting without a well-thought business plan but this happens so often that I am willing to ignore that and look at how they can succeed despite that failure. Short run costs can be affected by a variety of factors such as increased demand, unexpected weather, labor disputes, and so on. It is the ability of the business to weather the unexpected events of the present and focus on the growth in the long run.
I believe that short run costs are a very important function of business. They need to be examined carefully to determine how certain changes in the business effect the long term success of the business. Without careful examination of these costs a business owner would not be able to continue evolving the business in order to grow.

Questions of Utility

A few weeks ago we discussed the concept of Utility (benefit), which is the question of how much do you want an item. The overall goal for an individual is to maximize utility with their choices. We looked at this with examples of one good in exchange for another, but I am thinking of utility in a bit larger sense.

My wife and I recently made the decision that I would return to school and complete my Bachelor's Degree. This decision was made by comparing the overall costs to the long term benefits. The initial costs are numerous due to the reduction in my monetary contribution to the household, these can include nights out, new clothes, vacations, new furniture, and many more items which make life more enjoyable. The benefits are not guaranteed though, which makes me question the role of risk in the equation of utility. If I complete my schooling, and am able to secure a position due to my degree then my utility was reasonable. If I am either unable to complete school, or unable to secure a position due to the degree earned then I have sacrificed valuable time and money to go to school unsuccessfully.

In this situation, my utility cannot be determined until many years after the initial decision was made to go down this path. So is utility actually a perceived concept or is it more of potential utility than a guaranteed thing?