Kelley School of Business - G202 Exam 1

Greenpeace gave BP the _____ award.

Greenwash of the year

When can government inefficiencies arise?

when policy makers become captive to the demands of lobbyists and special interests.

Describe Apple's first mover advantage.

1st to popularize listening to music on portable devices (iPods).

Name 3 functions of lobbyists.

-Find political opportunities and threats.-Inform politicians and influence public opinion.-Form coalitions: identify groups with 'similar' interests

General Results of a tax:

- Government revenue is collected. - Increased prices to buyers. (Consumer surplus decreases.) - Decreased prices to sellers. (Producer surplus decreases.) - Reduced quantity bought and sold. - Taxes are efficiency enhancing in markets that are over-producing relative to Qe.

Describe the general results of a productive regulation:

- Increased prices to buyers. - Consumer surplus decreases. - Decreased prices to sellers. - Producer surplus decreases. - Reduced quantity bought and sold. - Productive regulations are efficiency enhancing in markets that are over-producing relative to Qe.

Describe interest group politics.

-Active special interest groups are on both sides of the issue.-Example: Legalizing Marijuana: (NORML versus CALM)-Outcomes depend on the relative strength of lobbying.

Politicians support projects that have:

-Clearly defined current benefits, and future costs that are difficult to identify. -Maximized influence on current voters, at the expense of future generations. (Politicians are biased towards such projects even when they are inefficient.)

What was BP's motivation?

-Customers and building a brand to open more franchises -Employees to recruit the best of the best -Investors for funding

Describe entrepreneurial politics

-One special interest group is active against an issue. -Example: Nuclear waste dumps.-Successful lobbying will be costly.

Describe client politics

-One special interest group is active in favor of an issue.-Example: USDA Foreign Advertising Funds (MAP) -Lobbying will likely be successful.

Socially-responsible investors (SRIs) care. SRIs want:

-high returns with no guilt -Oil & Gas has high returns, but also high guilt (environmental degradation & climate change).-Beyond Petroleum helps to remove the guilt.

Risks/Rewards for 3 Ventria options?

1) Better growing conditions, less money to relocate, etc. (Relative strength with opposition) 2) It would be costly to keep up with all the demands of the adversaries, but also would save some money because they wouldn't have to relocate. 3) You'd have to find a place with a similar climate/soil, you'd have to spend money to relocate, and there's still a chance that Ventria might not be approved. It needs to be rural, yet a place where there are a lot of people looking for jobs.

Corporate Social Strategy Incentives?

1) Integrate non-market forces (Political, Economic, Social, and Technological) and societal concerns into your market strategy. 2) Exploit non-market opportunities 3)Mitigate non-market risks. 4) Engage non-market stakeholders like politicians and activists.

3 options for Ventria?

1) Stay in California and fight for approval based on terms that are currently existing in their proposal. 2) Stay in California and further compromise with the demands of traditional rice and the activist coalition. 3) Leave California and start over in another, hopefully more hospitable, location.

Rules for obtaining the socially efficient level of production (Qe), where marginal value equals marginal cost: (2)

1. Produce and sell product that consumers value more than the costs of production. 2. Avoid producing and selling product that consumers value less than the costs of production.

Detail the major adversarial stakeholders that are threatening the positioning and development of Ventria Bioscience. What PEST shocks are present in the adversaries? Try to gauge how much leverage you think the adversaries have over the issue of GM rice being grown in California.

ADVERSARIAL STAKEHOLDERS: Traditional Rice Industry (farmers, millers, exporters): Concerned about tainted rice Japanese Rice Retailer Association: Threatened California with not buying rice from them if they allow Ventria to go there. Activists (Friends of the Earth, etc.): Environmentalists are concerned about cross-hybrid rice species that would be bad for the Earth. Food Safety Activists are worried about allergies, etc. PEST SHOCKS: Political, Economic, and Social LEVERAGE quite a lot- opposing lobbying couldn't be stronger - they talk to the government with the art, and with the economic forces.

Detail the major stakeholder allies that could rally around Ventria Bioscience and support its advancement going forward with GM rice. Try to gauge how much leverage you think the potential allies would have over the issue of GM rice being grown in California.

ALLIES: Bio-pharmaceutical industry (pro-GMOs) Investors/Employees (UC Davis) World Health Organization/UNICEF/American Red Cross (for saving children in the world) Infant Formula Industry -not a lot of leverage compared to strong opposition

How do criminals decide which crime to commit?

Acriminal is going to commit a crime with the highest end utility

Assess what type of political issue Uber's disruption of the taxi cab industry can be classified as (Majoritarian, Client, Entrepreneurial, or Interest Group)....Define the political action as making ride-sharing without government licensing an illegal activity.

An interest group OPPOSITION: taxi cab cartel (concentrated benefit) SUPPORT: Uber themselves (concentrated cost) investors, customers, drivers (widely dispersed group- these groups aren't supposed to effectively lobby)

Think about how the popularity of i-Pods (and other i-Devices) is related to the success of Apple capturing the value of the shift in music preferences. Apple was the first to drive business profits off of the digital music platform, but did those profits come from i-Tunes sales?

Apples value proposition = Sell though itunes -Spend $1, apple gets $0.2 -First launch they lost 5-7 cents for every dollar spent -Had to pay for fixed costs -3% profit now --> still not a lot How are they making money: their devices -1st mover advantage -Innovative value model (platform) -Special backing from labels (they had artists, just like their competitors) -Good branding -Closed eco systems (syncing apple products)

Why are Politicians (elected officials) are Vote-Maximizers?

Regardless of motivation, the ability of politicians to achieve their goals depends on their election or re-election.

Make sure to think about who Uber used to gain political leverage and credibility. Also detail how Uber initially overcame the cultural challenges that it faced? Make sure to think about how Uber gained the trust of its customer base.

Built cultural legitimacy with their customers- got customers to trust them via rating system and good customer service Uber + MADD Partnership helped them gain political leverage and customer trust

Why are Bureaucrats (hired civil servants) are Budget-Maximizers?

Bureaucrats seek promotions, higher pay, prestige, job security, etc...that all come with bigger budgets.

Consumer Surplus:

Difference between what customers are willing to pay (based on value) and the price they have to pay.

Outline the 3 types of property rights

Communal Property Rights:-No single owner, everyone has access while it lasts.-Over-utilization occurs, and no one has incentive to conserve for the future Government Property Rights:-Property decisions made by a small group of elected political representatives Secure Private Property Rights give property owners incentive to: -create value with property (benefit others).-maintain property and conserve for the future.-innovate and create new technologies.-engage in voluntary exchange.

What are the concerns for Uber about conglomerates

Conglomerates have a lot of political/lobbying power from donating millions of dollars in campaign donations.

Describe the general result of a subsidy

Decreased prices to buyers. Consumer surplus increases. Increased prices to sellers. Producer surplus increases. Increased quantity bought and sold. Subsidies are efficiency enhancing in markets that are under-producing relative to Qe.

Producer Surplus:

Difference between the price sellers receive and the minimum supply price needed to cover costs.

What are the competitive advantages that Uber has that allows it to disrupt the taxi cab industry? Are all of Uber's competitive advantages legal, or do some of them fall into the grey area of compliance with the law?

Efficient Scaling in 2-sided market: Surge pricing rules out some customers, drivers get more during surge hours Tech based reduction in search costs via heat maps Avoidance of regulatory costs What allows them to grow so fast since they don't incur these costs? Without regulations, the price stays low for the consumer. The only thing that's actually ILLEGAL is how they're under investigation for the heat mapping thing with public officials

What has to be true for a criminal to commit a crime?

Ending utility has to be greater than beginning utility

Name some of the "societal concerns" BP used in their social strategy:

Examples of societal concerns: environment & climate change, human rights, diversity and inclusion, gender equality, fair trade, no sweatshop, animal rights, anti-GMO, income inequality and poverty, health and substance abuse, etc...

NGO activists and public policy makers usually take action when market inefficiencies exist:

Examples: Lack of property rights, market power abuses, quality concerns, externalities (pollution), incomplete information, etc...

Who was neutral in the Ventria case?

FDA, USDA, EPA, etc. CA Secretary of Agriculture: Even though they created the CRC to make a decision, they still said no, which is why they are considered an adversary. CRC: An advisory group created by the US government composed of 4 farmers, 4 millers, and 4 public representatives. They approved the support of Ventria, which is why they would be more considered an ally.

Describe small, concentrated groups:

Gain political power as a result of their incentive to take action. -The individual benefit of taking action often exceeds the individual cost.

What type of political issue is GM rice being grown in California (Majoritarian, Client, Entrepreneurial, or Interest Group)?

Interest Group- theres two opposing, strong lobbying sides.

Why are TaxPayers/Voters are Rationally Ignorant?

It is costly to become informed of every candidate and every issue, while benefits of becoming informed are low.

Define Lobbying/rent seeking.

Lobbying/Rent Seeking: devoting resources to influence public policy formation in order to bring more income to your interests.

Describe majoritarian groups

No special interest groups take action on either side of the issue.-Example: Social Security.-Lobbying does not occur.

Competition in the marketplace tends to school managers to think in terms of:

Outcomes (Profits, Sales, Market Share, Etc...)

How robust is Uber's business model going forward? Think about the weaknesses of Uber's strategy to date and pinpoint where they may be susceptible to a disruptive shock. In other words, think about what may cause Uber's business model to collapse?

PROS: $7 billion in revenue, both sides of the market are subsidized and happy CONS: Uber has not been profitable due to legal battles THREATS: Artificial Intelligence, runs out of money from all legal battles, or people get pissed about surge pricing.

Outline the 3 types of intellectual property rights

Patent: Right to exclude all others from using, producing, or selling an invention. Examples: pharmaceutical drugs, manufacturing equipment, home appliances... Trademark: a word, name, symbol, or device that is used in trade with goods to indicate their source. Used to distinguish goods from competitors. Copyright: Right to exclude all others from reproducing, distributing, or performing a work. Examples: writings, software, music, art, movies, t.v. programs...

Assess what type of political issue music piracy can be classified as....Define the political action as making online file sharing without copyright royalties paid as an illegal activity.

Piracy = illegal Benefits of shutting down pirating sites: music labels -Users bear the costs --> rationally ignorant -Big large group doesn't lobby Concentrated cost: Napster, lime wire, who ever gets shut down -Took action (special interest groups) INTEREST GROUP POLITICS- depends on relative strength of lobbying

Ventria PEST shocks?

Political, Economic, and Social

Outline the probability of being caught with online file sharing.

Probability of being caught: Can the government significantly affect this with hundreds of millions of global users? NO...global enforcement is the problem: Copyright protection stops at a country's borders, unless other countries grant reciprocal protections. Targeting individual users comes with very high enforcement costs So, for the average user, the probability of getting caught is pretty close to zero.

However, in interactions with non-market players, ____ gain in relative importance.

Processes (Oversight, Quality Assurance, Social Reputation, Etc...)

Entrepreneur's Role:

Profit Discovery

Why is there a clear movement in consumer tastes and preference for digital music? What are the pros and cons of digital music from the consumer's point of view? Did the music labels first embrace digital? How have the music labels changed their business approach towards embracing digital and other online platforms?

Pros • Easy to port (portable) > share, buy, play, store • Cheap • Easy pay • More music • Customize/ Personalize • Easy to discover • Easy to share Cons • No physical product • Compatibility • Buy a device • No re-sell

Describe largely, widely dispersed groups:

Rarely gain political power because they do not have incentive to take action.-The individual cost of taking action often exceeds the individual benefit.

Economic profit:

Revenues minus all costs. Implicit costs are calculated as a normal rate of return.

BP found an avenue to create "shared value" by integrating societal concerns over fossil fuels with their core market strategy. Explain this with each group:

Shared value with employees led to improved recruiting, retention, and worker productivity.- Shared value with SRIs led to a larger capital investment to cover the high fixed costs of R&D.- Shared value with government officials led to policies that guaranteed demand for BP's solar.

What is the special interest effect?

Small group of people, with incentive to take political action, receive benefits at the expense of a large unorganized group of people.

Focusing on the institutional threats to Uber's legitimacy, how did Uber initially overcome the regulatory challenges that it faced?

Social media blowup (hashtag) Petition to city council Invested a lot of money in lobbying experts Built a strong legal team to fight regulations

Thinking about the PEST framework (Political, Economic, Social, and Technological), which non-market shock is most responsible for the disruption of the incumbent music industry? Within your analysis, think about the value chain of produced music from the artist all the way to the end consumer. How has the value chain evolved over time, given the PEST shock, and where does music streaming service fit? Where does music piracy fit?

TECHNOLOGICAL SHOCK 10% artists 70% records labels -Most power -Contracts to sign over copyrights -Production studio 20% Distributors -TECH SHOCK: college students --> overall negative impact Old school music distribution -Brick and mortar -Online retail -Radio/ads/movies File sharing +piracy: threat to total revenue +digital downloads +streaming users Revenue follows the copyrights

Outline the Spotify case.

THE MUSIC SHARING INDUSTRY- Early Stages... 1) MusicNet and Press Play -2 songs from same artist/month -couldn't be copied to portable devices -every song expired at end of month and needed re-downloaded 2) Internet Radio (Rhapsody) -$9.95/month -couldn't be downloaded to computers -$0.79/track to burn to CD -bought Napster and used its name 3) Itunes -huge success -didn't profit from Itunes Store, but drove iPod sales (soon Sony and Microsoft tried to replicate) Later on... 2 basic models- free streaming w/ ads, or paid "premium" owned versions 1) Streaming (Pandora, Slacker radio, MOS, etc.) -customized "radio stations" for free -revenue via ads -rise of smartphones helped make industry boom 2) Spotify -started with invites from existing customers to friends -free or premium -app -no listening/device # limit -Promos: 1 month premium free, partnership with Sprint -discover music -social features (follow friends, share music, etc.) -innovative "squads" to use hack time to innovate 3) Amazon -didn't use DRM (digital rights management) that limited the number of devices tracks could be burned on -inspired Apple to leave DMR The Problem with Profitability... -Royalty payments were a fixed percentage of revenue and were extremely high (about 70%) -artists still complained about not being paid enough (Taylor Swift) Spotify's competition... 1) New Entrants -Beats -Google and Apple (both came pre-installed on iPhones and Androids) 2) Old Competitors Adapt -Rhapsody and Rdio added premium options 3) Youtube -merged with GoogleMusic

In the Ventria Bioscience case, the major PEST shocks came from anti-GMO activists (Social), traditional rice (economic), and the CA Secretary of Agriculture (Political). Which non-market shock (Political, Economic, Social, and Technological) is Uber bringing to the taxi cab industry? Within your analysis, think about what it takes for Uber to create a two-sided market for ride services.

Technological shocks- Creates a 2-sided market through their benefits to each. > Driver: flexible hours, 80% revenue, car loans, easy entry, incentives to driver, more productive (more rides for the hours they work), heat mapping, upfront info, upfront pay >Rider: Convenient, quick, GPS tracking, more routes, upfront info, safe, no racial profiling, easy to pay, nicer cars than taxis

What can the cost of lobbying create?

The cost of lobbying can produce significant inefficiencies if its main affect is solely income redistribution.

Why are taxi companies upset with Uber?

The profit-maximization for the taxi cab industry is below what is socially efficient, causing higher prices (net benefit not realized). There's an opportunity for profit in the market, where people value the product more than it costs, which is what Uber is doing.

Describe the rice industry in California.

The rice industry is very important in California. California gets $500 Million in revenue each year from rice, where they export 40% of the rice they produce, and the U.S. in general accounts for 14% of the rice exported in the world. There are 2,000 rice farmers in California, and 40,000 employees in the rest of the rice industry (everything but Ventria).

What part of the Becker formula is strategic/completely controlled by the government?

The size of the punishment

Outline the variables of interest.

The size of the punishment (F). Strategic Variable for government. The probability of being caught (π). Government can affect this with detection technology. Criminals can affect this with their technology. Payoff of the crime (G). Once a particular crime is chosen the payoff is fixed so this is not considered "strategic" to anyone. Income (Y). Changes in Income do not affect the decision to commit a crime in this simple model.

Biggest issue with Ventria?

They have a patent that is running out and it worries investors (which is important since they are a small start-up company)

Why do taxi cab companies complain about Uber?

They omit regulations, don't buy drivers insurance, background checks not as intense, etc.

Creative Destruction

When entrepreneurial change makes older industries or technologies become obsolete. Less efficient industries die off, and free resources that can go to new more efficient industries. Government sometimes chooses to block creative destruction by enacting policies to protect the dying industries. Example: City governments protecting taxi cabs from Uber.

What happens with the Becker model when expected utility = beginning utility?

When expected utility from committing a crime is EQUAL to current utility, the Becker model has no predictive power and it is up to the person.

What is Spotify's value proposition to consumers and how does it capture the market trend in consumer tastes and preferences? Why has Spotify been earning losses since its inception despite its rapid growth in users and revenue?

Winner takes all market > Spotify Winner Takes all market • High switching costs > no • Barriers to entry > no • Network effect (facebook got big because everyone was on facebook)

Demand and Supply capture...

all the metrics needed to gauge social efficiency.

Intreprenuer:

an entrepreneurial individual that is employed by a firm. - Needed to keep ahead of rival firms. - Needed to improve overall efficiency & technology. - An effort to keep the brightest minds within the corporation. - Incentive to incorporate more profitable projects.

Taxes imposed on sellers:

cause an inward shift of the supply curve (decreased supply).

Describe the effects of productive regulation

cause an inward shift of the supply curve (decreased supply). The regulation causes sellers to incur higher operating costs (compliance costs).

Subsidies given to sellers:

cause an outward shift of the supply curve (increase supply).

Supply is based on the _________ to Producers.

cost

Name another way public policy inefficiencies can arise.

from the interaction of voters, politicians, and bureaucrats.

Entrepreneurs take risk in order to...

find what ventures are profitable.

Implicit costs:

involve the firm's resources, but do not have a monetary payment. Example: Opportunity cost of the owner's investment.

In commodity markets, _____ are most important for customers. Brand does not influence purchases of commodities.

price and convenience

Subsidies given to sellers effectively...

lower the costs of production.

The Beyond Petroleum brand resulted in heightened public expectations, especially from

non-governmental organizations (NGO-activists)

Public policy changes can correct existing inefficiency if they push the market production level closer to Qe. However...

public policy changes can also be the cause of inefficiency if they push the market production level away from Qe.

Taxes on sellers...

raise the costs of production.

If all value and all costs are accounted for in the D&S curves respectively, then...

social efficiency occurs at the market equilibrium.

To maximize social efficiency...

society wants to get the most net value out of the limited resources available.

Entrepreneur:

someone who tries to exploit opportunities that exist within markets. - Offer New Products or Open New markets. - Create a Lower Cost Technology. - Find new resources.

Let's examine the impact of the three major policy tools of government:

taxes, subsidies, and productive regulation

Demand is based on the _______ to Consumers.

value

Normal rate of return:

what firms could get by investing in businesses with similar risk.

Explicit costs:

when a monetary payment is made. Example: Wages paid to labor.

Does Spotify have a competitive advantage that can be defended within the music streaming business? Think about how Spotify has differentiated itself within the industry, and if those differences can be sustained. How does network valuation fit into Spotify's business proposition?

• the next step is to disrupt the stronghold that the labels have on the artists relation to the distributors, and basically partner with artists and skip the record labels • Examples Radio heads "Pay what you want" >$9.99 to buy a radio head album >in ITunes, radio head would get $1.40 >Based on downloads and donations, radio earned $2.26 per album, generating roughly a million more in earnings for the band • Frank Ocean direct relation with distributors and skipped the record label costs (Frank 70% Apple 30%)