BCOR Module 5

Competition and Price Relation

- Prices reflect value - They are determined by supply and demand - Suppliers compete and buyers compete to arrive at an equilibrium price. - this price determines that amount of capital that needs to be allocated or a particular purpose (Hayek)

Game Day 1

- Society has a vested interest in keeping collusion down - Tradeoff between liberty (to seek private self-interest) and regulation (to promote public interest)

Vertical Merger

- Two companies that are NOT direct competitors join forces - Goal: achieve greater market integration, penetration, and efficiency - potential byproduct: vertically integrated supply-chains - ex. AT&T buying Time Warner (selling content to company that delivers digital access

Horizontal Merger

- Two companies that are direct competitors join forces - Goal: improve economies of scale and reduce competition - Rollup: one variation of the horizontal merger - ex. TMobile and Sprint Merging (reduces economies of scale)

Just Price

- a concept involving economics and ethics - attempts to distinguish between fair and unfair methods of gain in business or in the free market - concept of the just price is associated with the medieval Roman Catholic philosopher and theologian Thomas Aquinas

Monopolies

- anti-competitive because monopolist gets to set the prices at which their goods are sold - leads to higher prices and lower value for consumers

What is creative destruction?

- when something new brings about the demise of whatever existed before it - recognizes change as the one constant in capitalism. - societies see the benefits of new and better products - makes scarce resources more productive - is caused by the "invisible hand" - is related to industrial mutation

Virtual Competition

promise of a better competitive environment

information fiduciary

when you give your personal information to an online company in order to get a service, that company should have a duty to exercise loyalty and care in how it uses that information

How did Thomas Aquinas define a just price?

"To sell a thing for more than its worth, or to buy it for less than its worth, is in itself unjust and unlawful."

Risks of Algorithms (opposes idea of invisible hand)

- Anti-competitive collusion - Loss of transparency - Engineered manipulation of consumer behavior

benefits and drawbacks of creative destruction

- BENEFITS: Economy grows more productive and richer, New and better products, Better jobs, Higher standards of living - DRAWBACKS: Lost jobs Ruined companies, and Vanishing industries

Vance (Myth of Just Price)

- Big Idea: "I can therefore passionately say about my subject that, in the absence of fraud, not only is any price agreed upon between a willing buyer and a willing seller the just price, that alone is what makes it the just price." - separation of market and state is just as important as separation of church and state

Godwin (Facebook Request)

- Big Idea: Doctors and lawyers have codes of ethics. Digital engineers should, too. - Treat users like non-users; - Individuals should be treated with care, loyalty, and confidentiality. - Get consent before sharing data

Yglesias (Push to Break Up Big Tech)

- Big Idea: It's tough to apply anti-trust law to an anticompetitive company like Amazon because the law focuses on negative impact to customers. And Amazon is (often) great for customers. - Raising prices? Quantitative and objective standard

Invisible Hand

- Competition results in a socially- beneficial allocation of resources - Threat of market failures - Works without the intentional cooperation of market participants - Encourages the division of labor

Digital Hand

- Competition results in an allocation of resources designed by programmers. - Threat of manipulation, discrimination, and lack of transparency - Depends upon the engineering of market participants - A function of the division of labor

Hall, Kendrick, Nosko (Uber Price Surging)

- High prices encourage additional supply - Communicate the current value of Uber's service to customers to bring demand into equilibrium with supply - Uber's surge algorithm very effective and efficient - The surge algorithm filters demand and encourages supply such that a ride is almost always fewer than 5 minutes away.

Powles (Invisible Hand in Cyberspace)

- Lack of effective antitrust oversight leaves us at the mercy of digital platforms - challenges with interfaces could lead to legal obstruction - collusion, behavioural discrimination, and asymmetric "frenemy" dynamics replaced invisible hand - widespread deployment of algorithmic tools can intensify, rather than reduce, the chasm between the wealthy and the vulnerable

Govt Intervention to Set Just Prices

- Minimum wage - Sugar price supports - Price gouging (when a seller spikes the prices of goods, services or commodities to a level much higher than is considered) - Dumping - Usury

Cox, Alm (Creative Destruction)

- capitalism: perennial gate of destruction - example: transportation (steam power/railroads took over carriage use) - creative destruction recognizes capitalism as a constant, makes societies wealthier - entrepreneurship and competition fuel creative destruction - producers survive by streamlining production with newer, better tools to make workers more productive - embracing capitalism leads to economic prosperity, but some societies will try to block creative destruction and resist economic change (backfires)

Kolhatkar (Uber and Out)

- company was celebrated for its better-to-ask-forgiveness approach to business (displayed corporate behavior that violated rules but bolstered profits) - as long as Uber was growing at a brisk pace, behavior that could be characterized as rule-breaking was framed as bold disruption - using self-driving-car technology stolen from Waymo

Competition

- critical element of free markets - Incentivizes mergers, acquisitions, collusion, and consolidation to share additional profits (loss of trade results, hurts consumer) - reduction leads to increased prices, decreased supply, decreased labor needs, and increased profits

Schumpeter, Cox, and Christensen

- economic development is revolutionary and revolutionary

Schumpeter (Capitalism, Socialism and Democracy)

- in dealing with capitalism we are dealing with an evolutionary process - capitalism can never be stationary - industrial mutation incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one - KEY QUESTION: How do new companies/products/processes get catalyzed through sudden bursts of transformation? - imperfect competition is a feature of capitalism

Anti-competitive Behavior

- price fixing - quasi-monopolies - referring business from one subsidiary of a company to another - common ownership of competitors

What does disruptive innovation mean?

- the moment in the process of creative destruction when a sudden burst of transformation happens - an innovation that creates a new market and value network and eventually disrupts an existing market and value network

Pro-Market

govt should - expand competition w/ lower prices and better quality goods - ensure level playing field for competition

revolutionary

Change in business is often sudden, unforeseen, and discontinuous; not always slow, gradual, and incremental

How is creative destruction both like and unlike evolutionary natural selection?

Constant innovation by new entrants or by those seeking to survive competition result in "creative destruction" and the evolution and growth of the market

Sustaining Innovation

Improving existing products Usually at higher tier of market

Pro-Business

govt should - limit competition - protect domestic industry - directly assist industries and businesses

evolutionary

New, more advanced economic products, systems, and organizations develop through a process of 'natural' selection: - Less efficient things die - More efficient things are born

Zetlin

Some drivers are intentionally manipulating the platform to trigger surge pricing - This drives up prices for consumers; - It also provides higher compensation for drivers - drivers might be complaining, striking, or working together to game the system to try and earn a little more (way to introduce competition in "big-tech" industry)

What is the innovator's dilemma?

how successful, outstanding companies can do everything "right" and yet still lose their market leadership - or even fail - as new, unexpected competitors rise and take over the market

collusion

illegal cooperation/conspiracy to deceive others

Christensen (Disruptive Innovation)

disruptive innovations... - create new markets by discovering new categories of customers - improve the current technology - change current production processes

Paradox of Progress

society cannot reap the rewards of creative destruction w/o accepting that some individuals may be worse off

Without regulation, competitive markets...

tend to merge and consolidate and can result in loss of consumer welfare (regulators typically look at price to see whether monopoly exists, but some rethinking this approach to anti-trust)

Usury

the practice of lending money at exorbitant rates of interest

Customer Lifetime Value (CLV)

way to measure potential financial value of customers (way to determine what prices you pay, ads you see, etc.)