Article:
http://money.cnn.com/2008/05/06/news/economy/oil_profits_tax/index.htm?postversion=2008050612
Reflection:
According to the article, there has been a debate as to whether a tax on oil profits is feasible. Personally, I’m against a tax on the oil profit to a larger extent. By imposing such a tax, both the producer and supplier will suffer. Having taxes mean that cost of production increases and this will raise equilibrium price. Oil having a price inelastic demand will causes consumers to suffer the most from the taxes as more of their consumer surplus will be eliminated. This is shown from the incidence of taxation. The more price inelastic the demand, the greater the incidence of taxation on consumers.
To add on, with taxes in place, firms will have less incentive to carry out research and development. This will then means there will be fewer efforts to search for new oil resources. Even in the past, the search for new oil sources have been extremely costly and most seem to be futile efforts. This will means that supply of oil will be lower to a much greater extent. This will in turn cause the equilibrium price to increase to a new high. Hence, this will cause consumer to have a even harder time as they will have to absorb most of the increase in price. Hence, if a tax is to be imposed, the producer will only incur a small portion of the cost but still continue to earn supernormal profits. Thus, the aim of imposing such a tax will prove to be useless.
Gerald
Thursday, May 29, 2008
Sunday, May 25, 2008
May 23, 2008 7:33 AM PDT
Ballmer is trying to rewrite Microhoo history
Steve Ballmer is changing the script in the Microhoo saga.
During a speech Ballmer made Friday at a tech conference in Moscow, Reuters reported him as saying, "Yahoo was never the strategy we were pursuing, it was a way to accelerate our online advertising business...We will spend money on some acquisitions. You can do a whole lot of things with 50 billion dollars."
The money must be burning a hole is his pocket, given how ready he was to hand it to Yahoo, when he now says that the combination was "never the strategy."
If Yahoo was never the strategy, what was the last three-and-a-half-month pursuit of Yahoo for nearly $50 billion? It makes Ballmer look like a flip-flopper, distancing himself from his previous hot pursuit of the Internet portal. In his initial letter to Yahoo's board on January 31, which was clearly not a love note but a business solicitation, Ballmer wrote:
While online advertising growth continues, there are significant benefits of scale in advertising platform economics, in capital costs for search index build-out, and in research and development, making this a time of industry consolidation and convergence. Today, the market is increasingly dominated by one player who is consolidating its dominance through acquisition. Together, Microsoft and Yahoo can offer a credible alternative for consumers, advertisers, and publishers. Synergies of this combination fall into four areas:
• Scale economics: This combination enables synergies related to scale economics of the advertising platform where today there is only one competitor at scale. This includes synergies across both search and non-search related advertising that will strengthen the value proposition to both advertisers and publishers. Additionally, the combination allows us to consolidate capital spending.
• Expanded R&D capacity: The combined talent of our engineering resources can be focused on R&D priorities such as a single search index and single advertising platform. Together we can unleash new levels of innovation, delivering enhanced user experiences, breakthroughs in search, and new advertising platform capabilities. Many of these breakthroughs are a function of an engineering scale that today neither of our companies has on its own.
• Operational efficiencies: Eliminating redundant infrastructure and duplicative operating costs will improve the financial performance of the combined entity.
• Emerging user experiences: Our combined ability to focus engineering resources that drive innovation in emerging scenarios such as video, mobile services, online commerce, social media, and social platforms is greatly enhanced.
From that letter, it would appear that Yahoo was a strategy, and it went beyond just search.
Perhaps Ballmer's remarks in Moscow could be construed as a way to avoid uttering the "Google" word. Yahoo may not be the grand ultimate strategy, but preventing Google from getting in bed with Jerry Yang and company is--hence, Ballmer's continued pursuit of Yahoo's search business.
In speaking with CNET News.com on February 20, Chairman Bill Gates laid bare the Yahoo bride, revealing Microsoft's real strategy (as opposed to "the" strategy) around Yahoo, which it is now pursuing:
We have a strategy for competing in the search space that Google dominates today, that we'll pursue that we had before we made the Yahoo offer, and that we can pursue without that. It involves breakthrough engineering. We think that the combination with Yahoo would accelerate things in a very exciting way, because they do have great engineers, they have done a lot of great work. So, if you combine their work and our work, the speed at which you can innovate and get things done is just dramatically more rapid. So, it's really about the people there that want to join in and create a better search, better portal for a very broad set of customers. That's the vision that's behind saying, hey, wouldn't this be a great combination.
When Yahoo played too hard to get, Ballmer came to realize that swallowing Yahoo whole perhaps wasn't as good a strategy for Microsoft as it was for Yahoo shareholders. Doing anything to stop the fast-growing Google, which will generate about half the revenue Microsoft does this year, is the strategy. Hence, pursuing Yahoo's search business on one end and Facebook on another front to create more inventory and ride the social-networking wave.
It all sounds a bit desperate. Perhaps it should be looked upon as an "evolving" strategy. What's clear is that Ballmer and Yang never had the kind of relationship that could lead to a marriage. In the end, emotion trumped "the" strategy.Reflections
The merger between Yahoo and Microsoft was a very big thing in the technology sector as they are 2 of the biggest firms in the search engine. It will be a horizontal integration as both companies are in the same stage of production, which is the search engine market.
However, even if they were to merge, their market share would still be lower than Google which has around 60% of the market share for search engines so they will not be able to monopolise the market. Despite of this, by commanding a higher market share, they will be able to set their price better.
The factors for merger that the article has given is similar to what we study in the lecture. There will be significant internal Economies of Scale for Microsoft if they were to merge with Yahoo. This will lower their cost and in turn earn more profits. The factors given are Technical, Knowledge, Adminstration and Risk-bearing.
This merger has not taken place yet because the Board for Yahoo is trying to demand for a higher price. However, as Yahoo is not doing well at the moment, its share prices have been dropping due to this negative news and thus it is not advisable for them to hold out.
-Xiang Jing
P.S. It's a little late
Thursday, May 22, 2008
PETROL :D
Straits Times Article: KL plans subsidy cut for higher grade of petrol
Owners of high-end vehicles will have to pay more for their fuel under a government plan to reduce subsidies for a grade of petrol used by performance cars and sports utility vehicles (SUVs), Octone 99.
The other grade often used by motorcyclists and cheaper cars, Octane 95, wil be sold at a lower price, said Domestic Trade and Consumer Affairs Minister Shahrir Samad.
The subsidy on petrol may be revised with the bulk going to the regular petrol type so that prices will be kept down for the average motorist, Datuk Sharir was quoted as saying by the New Sunday Times newspaper.
He said the Octane 95 grade could be used in most vehicles but the government would also offer Octane 99, a more costly premium fuel that is usually used in higher-end cars. Both grades have not been introduced in Malaysia.
“The goal is to have subsidies targeted and more focused at those who need it, such as the lower- and middle-income groups, and give a choice to the rich on what petrol they want to fill in their tanks,” said Datuk Shahrir.
“I was informed by Proton that a majority of cars can use Octane 95. The rich who use Octane 95 in their Mercedes, BMWs and SUVs would not get the performance that comes with the higher quality Octane 99,” he added.
He said the government would save costs by mainly subsidizing one type of fuel, Octane 95 as opposed to subsidizing two types of fuel.The proposal is being considered following meeting of the Cabinet Committee on Inflation chaired by Prime Minister Abdullah Badawi recently.
Reflections:
I feel that this is a really smart way of providing subsidy to the people in the country. Due to the rising oil prices, the Malaysian government gives subsidy based on the type of good purchased. Though both products are petrol, the types of petrol (Octane 95 - lower grade and Octane 99 – higher grade) are different. This subsidy allows consumers to pay a lower price and exchange a higher quantity. For the case above, Octane 99 is a higher- grade petrol. It can be seen as a luxury good. Only people with a higher purchasing power (OR rich people) are able to buy this good. However, the question would be how willing would they be to buy this good? Two main factors would determine how willing they would be to buy Octane 99. It is a question about car performance versus savings. Would they want to compromise on the performance of the car? As said in the passage, “The rich who use Octane 95 in their Mercedes, BMWs and SUVs would not get the performance that comes with the higher quality Octane 99”. However, if they downgrade their petrol grade to Octane 95, that would mean loads of savings for them.
The government subsidizes those that use Octane 95 with an assumption that its consumers would be those from lower-income groups/ motorists/ possess lower-end vehicles. However, this might not be true as people using higher-end vehicles (e.g. BMWs, Mercedes) might also go for the lower grade petrol. The government does not directly subsidize the lower-income groups, who are the people who are really in need of this subsidy. “The goal is to have subsidies targeted and more focused at those who need it, such as the lower- and middle-income groups, and give a choice to the rich on what petrol they want to fill in their tanks”, what would happen then if a large proportion of the rich people choose to fill their tanks with the lower-grade petrol? The government might just end up subsidizing most of the petrol-consumers again, which brings us back to square one.
Secondly, we all know that subsidies from the government come from taxes paid by tax payers. To the extent that tax revenues are used to finance the subsidy, there will be a transfer of income from taxpayers to the consumers. This decrease in subsidy on petrol would also mean that the tax payers would have to pay lesser taxes (as compared to the previous situation in which the government subsidized both the higher and lower grade petrol types). The lower income group would be very happy, as this would mean that they would still receive the subsidy without paying much tax. However, for the higher-income group, they would suffer a loss as they would still have to pay tax without receiving any form of subsidy. The tax which they pay would not benefit them in any way at all should they use the higher-grades of petrol.
In conclusion, this measure taken would help the lower-income group to a large extent, and the higher-income group to only a small extent. But, this is fair :)
-Gaomin-
Owners of high-end vehicles will have to pay more for their fuel under a government plan to reduce subsidies for a grade of petrol used by performance cars and sports utility vehicles (SUVs), Octone 99.
The other grade often used by motorcyclists and cheaper cars, Octane 95, wil be sold at a lower price, said Domestic Trade and Consumer Affairs Minister Shahrir Samad.
The subsidy on petrol may be revised with the bulk going to the regular petrol type so that prices will be kept down for the average motorist, Datuk Sharir was quoted as saying by the New Sunday Times newspaper.
He said the Octane 95 grade could be used in most vehicles but the government would also offer Octane 99, a more costly premium fuel that is usually used in higher-end cars. Both grades have not been introduced in Malaysia.
“The goal is to have subsidies targeted and more focused at those who need it, such as the lower- and middle-income groups, and give a choice to the rich on what petrol they want to fill in their tanks,” said Datuk Shahrir.
“I was informed by Proton that a majority of cars can use Octane 95. The rich who use Octane 95 in their Mercedes, BMWs and SUVs would not get the performance that comes with the higher quality Octane 99,” he added.
He said the government would save costs by mainly subsidizing one type of fuel, Octane 95 as opposed to subsidizing two types of fuel.The proposal is being considered following meeting of the Cabinet Committee on Inflation chaired by Prime Minister Abdullah Badawi recently.
Reflections:
I feel that this is a really smart way of providing subsidy to the people in the country. Due to the rising oil prices, the Malaysian government gives subsidy based on the type of good purchased. Though both products are petrol, the types of petrol (Octane 95 - lower grade and Octane 99 – higher grade) are different. This subsidy allows consumers to pay a lower price and exchange a higher quantity. For the case above, Octane 99 is a higher- grade petrol. It can be seen as a luxury good. Only people with a higher purchasing power (OR rich people) are able to buy this good. However, the question would be how willing would they be to buy this good? Two main factors would determine how willing they would be to buy Octane 99. It is a question about car performance versus savings. Would they want to compromise on the performance of the car? As said in the passage, “The rich who use Octane 95 in their Mercedes, BMWs and SUVs would not get the performance that comes with the higher quality Octane 99”. However, if they downgrade their petrol grade to Octane 95, that would mean loads of savings for them.
The government subsidizes those that use Octane 95 with an assumption that its consumers would be those from lower-income groups/ motorists/ possess lower-end vehicles. However, this might not be true as people using higher-end vehicles (e.g. BMWs, Mercedes) might also go for the lower grade petrol. The government does not directly subsidize the lower-income groups, who are the people who are really in need of this subsidy. “The goal is to have subsidies targeted and more focused at those who need it, such as the lower- and middle-income groups, and give a choice to the rich on what petrol they want to fill in their tanks”, what would happen then if a large proportion of the rich people choose to fill their tanks with the lower-grade petrol? The government might just end up subsidizing most of the petrol-consumers again, which brings us back to square one.
Secondly, we all know that subsidies from the government come from taxes paid by tax payers. To the extent that tax revenues are used to finance the subsidy, there will be a transfer of income from taxpayers to the consumers. This decrease in subsidy on petrol would also mean that the tax payers would have to pay lesser taxes (as compared to the previous situation in which the government subsidized both the higher and lower grade petrol types). The lower income group would be very happy, as this would mean that they would still receive the subsidy without paying much tax. However, for the higher-income group, they would suffer a loss as they would still have to pay tax without receiving any form of subsidy. The tax which they pay would not benefit them in any way at all should they use the higher-grades of petrol.
In conclusion, this measure taken would help the lower-income group to a large extent, and the higher-income group to only a small extent. But, this is fair :)
-Gaomin-
M18 GAMES! :D
Article from Straits Times: M18 games: Prices unlikely to go up
Distributors plan to absorb 80-cent sticker fee, starting with Grand Theft Auto IV. Extra costs arising from the implementation of the new M18 video classification will not be passed on to the consumer.
That is what the distributor of Grand Theft Auto IV (GTA IV), the first game to be affected by the revamped system, said.
The game will be released for Play Station 3 and Xbox 360 machines on April 29, a day after the new rating takes effect.
The additional expense stems from the Media Development Authority’s (MDA) 80-cent charge for every M18 label issued.
So for game distributor Infocomm Asia Holdings (IAH), which plans to import 20,000 copies of GTA IV, this means an upfront payment of $16,000 to the MDA.
“The regulations of the new system were announced after we submitted our suggested retail price. WE are keeping to it,” said Mr Jonathan Sze, assistant director of IAH’s product management division.
Sales volume will help determine whether the company will absorb the additional charges for other games. For GTA IV, 80 per cent of the 20,000 copies have been pre-sold
A Sunday Times check with other major distributors such as Microsoft, Atari, Maxsoft and Electronic Arts revealed that most of them plan to absorb the new charges, though nothing has been finalized yet.
Only New Era, another big player, has confirmed that it will not pass on the fee to the consumer.
This move has got the thumbs up from retailers.
“It would be best if distributors were to absorb the sticker fees” said MR Ong Jenn Long, 30, a purchasing communicator at video retailer G3. “This way, we do not have to burden our customers or incur possible losses at the end”.
But retailers are worried that they could be charged fees similar to those currently imposed on DVD and VCD retailers.
DVD and VCD retailers pay a one-time fee of $30,000 as a security deposit and an annual fee of $1200.
If these fees are levied on video-game retailers, the likely result is that consumers will feel the pinch
“We would have to charge around $5 or more for each game,” said Mr Koh Kew Siong, 38, manager of The Software Boutique. “We might not carry M18 games then.”
Purchaser Easter Seah of Comics Connections, another games retailer, shares her sentiments.
“ If that really is the case, we won’t carry M18 games anymore,” she said.
The move to introduce M18 and another category – Age Advisory – is meant to open up more choices for consumers.
Without the new regulations, GTA 4 would most liklet be banned, just as GTA I, II and III were.
Reflections:
This article talks about the incidence of taxes, which is the division of tax between the consumers and producers.
This new game, GTA IV that would be launched in the market soon, has yet to test the market of its receptiveness towards this game since GTA I, II and III were all banned. This would officially be the first time that GTA IV gets launched in the market, as the move for M18 games were open to provide “more choices for consumers”.
It is clear why the extra costs arising from the implementation of the new M18 video classification will not be passed on to the consumer. Firstly, the demand for such game softwares is highly price elastic. There are many cheaper and better alternatives that the consumers can turn to. Due to large scale of the computer games market, there is a lot of competition in the industry. Therefore, firms need to have an upper hand advantage by reducing the cost incurred from the classification in order to draw more consumers to purchase its goods.
Secondly, such video games are deemed as a luxury good. People are often not willing to pay extra for such goods. Besides, since it’s the first launch of GTA IV, the success and value of the game has not been guaranteed. No one has ever played this game before, so no addiction towards this game has been formed. This firm thus, does not have a fixed pool of people that would be hooked on the game and buy it no matter what price it would be. Therefore, in order to ensure that the consumers would support this game, the firm definitely needs to use a low price as a luring factor.
Since the demand for GTA IV or any gaming software is price elastic, the greater the incidence of taxation would be on producers. It was also mentioned in the passage that absorbing the sticker fee by the software firm would be beneficial to both the consumer and producer as they “do not have to burden customers or incur possible losses at the end (by producers)”. Raising the price of the software might deter many from buying it. In addition, the consumer size has been sized down to those above 18 years of age, due to the addition of a new category M18. Therefore, it is more important to capture the remaining consumers left and persuade them to choose this game over the rest. If the price is raised, it might cause consumers not to “carry M18 games anymore”.
This new sticker fee would also serve as a barrier to entry for new emerging gaming firms. As said in the passage, if “game distributor Infocomm Asia Holdings … (would have to pay) an upfront payment of $16,000 to the MDA”. Having less firms in the market, would mean less competition in the market. GOOD news or BAD news for the consumers? IT DEPENDS :D
-Gaomin-
Distributors plan to absorb 80-cent sticker fee, starting with Grand Theft Auto IV. Extra costs arising from the implementation of the new M18 video classification will not be passed on to the consumer.
That is what the distributor of Grand Theft Auto IV (GTA IV), the first game to be affected by the revamped system, said.
The game will be released for Play Station 3 and Xbox 360 machines on April 29, a day after the new rating takes effect.
The additional expense stems from the Media Development Authority’s (MDA) 80-cent charge for every M18 label issued.
So for game distributor Infocomm Asia Holdings (IAH), which plans to import 20,000 copies of GTA IV, this means an upfront payment of $16,000 to the MDA.
“The regulations of the new system were announced after we submitted our suggested retail price. WE are keeping to it,” said Mr Jonathan Sze, assistant director of IAH’s product management division.
Sales volume will help determine whether the company will absorb the additional charges for other games. For GTA IV, 80 per cent of the 20,000 copies have been pre-sold
A Sunday Times check with other major distributors such as Microsoft, Atari, Maxsoft and Electronic Arts revealed that most of them plan to absorb the new charges, though nothing has been finalized yet.
Only New Era, another big player, has confirmed that it will not pass on the fee to the consumer.
This move has got the thumbs up from retailers.
“It would be best if distributors were to absorb the sticker fees” said MR Ong Jenn Long, 30, a purchasing communicator at video retailer G3. “This way, we do not have to burden our customers or incur possible losses at the end”.
But retailers are worried that they could be charged fees similar to those currently imposed on DVD and VCD retailers.
DVD and VCD retailers pay a one-time fee of $30,000 as a security deposit and an annual fee of $1200.
If these fees are levied on video-game retailers, the likely result is that consumers will feel the pinch
“We would have to charge around $5 or more for each game,” said Mr Koh Kew Siong, 38, manager of The Software Boutique. “We might not carry M18 games then.”
Purchaser Easter Seah of Comics Connections, another games retailer, shares her sentiments.
“ If that really is the case, we won’t carry M18 games anymore,” she said.
The move to introduce M18 and another category – Age Advisory – is meant to open up more choices for consumers.
Without the new regulations, GTA 4 would most liklet be banned, just as GTA I, II and III were.
Reflections:
This article talks about the incidence of taxes, which is the division of tax between the consumers and producers.
This new game, GTA IV that would be launched in the market soon, has yet to test the market of its receptiveness towards this game since GTA I, II and III were all banned. This would officially be the first time that GTA IV gets launched in the market, as the move for M18 games were open to provide “more choices for consumers”.
It is clear why the extra costs arising from the implementation of the new M18 video classification will not be passed on to the consumer. Firstly, the demand for such game softwares is highly price elastic. There are many cheaper and better alternatives that the consumers can turn to. Due to large scale of the computer games market, there is a lot of competition in the industry. Therefore, firms need to have an upper hand advantage by reducing the cost incurred from the classification in order to draw more consumers to purchase its goods.
Secondly, such video games are deemed as a luxury good. People are often not willing to pay extra for such goods. Besides, since it’s the first launch of GTA IV, the success and value of the game has not been guaranteed. No one has ever played this game before, so no addiction towards this game has been formed. This firm thus, does not have a fixed pool of people that would be hooked on the game and buy it no matter what price it would be. Therefore, in order to ensure that the consumers would support this game, the firm definitely needs to use a low price as a luring factor.
Since the demand for GTA IV or any gaming software is price elastic, the greater the incidence of taxation would be on producers. It was also mentioned in the passage that absorbing the sticker fee by the software firm would be beneficial to both the consumer and producer as they “do not have to burden customers or incur possible losses at the end (by producers)”. Raising the price of the software might deter many from buying it. In addition, the consumer size has been sized down to those above 18 years of age, due to the addition of a new category M18. Therefore, it is more important to capture the remaining consumers left and persuade them to choose this game over the rest. If the price is raised, it might cause consumers not to “carry M18 games anymore”.
This new sticker fee would also serve as a barrier to entry for new emerging gaming firms. As said in the passage, if “game distributor Infocomm Asia Holdings … (would have to pay) an upfront payment of $16,000 to the MDA”. Having less firms in the market, would mean less competition in the market. GOOD news or BAD news for the consumers? IT DEPENDS :D
-Gaomin-
Tuesday, May 20, 2008
Now services
May 15th 2008 SAN FRANCISCO
From The Economist print edition
Having bested Dell for the time being, Hewlett-Packard takes on IBM
DURING the first half of this decade Carly Fiorina, then boss of Hewlett-Packard (HP), was forever answering the same frustrating questions about Dell and IBM, HP's two more successful rivals. Dell, she said, offered computers that were “low-tech and low-cost”, whereas IBM offered “high-tech and high-cost”. Only HP, she said, was preparing to give customers “high-tech and low-cost”.
It was easier said than done. When Ms Fiorina tried to buy the computer-services arm of PricewaterhouseCoopers in 2000 to compete with IBM, the leader in that field, IBM beat her to it. And when she bought Compaq to take on Dell, the leading PC-maker, shareholders revolted. In 2005 the board fired her and hired Mark Hurd, a disciplined operations type, to focus on execution rather than vision.
Three years on Mr Hurd has mostly done that. HP, having fully digested Compaq at last, has surpassed Dell to become the world's biggest PC-maker. This means that Mr Hurd is now ready to take on IBM, which has more than 7% of the $748 billion market for services, such as running the data centres of large companies and governments, or handling entire functions, such as personnel or claims processing. The second-largest services firm, Electronic Data Systems (EDS), has much lower profit margins. HP lags in fifth place.
Mr Hurd's answer, announced this week, is to buy EDS for $13.9 billion. He is getting a big name: EDS, founded by Ross Perot in 1962, pioneered the business of outsourced data-management. But the company has been through turbulent times. Mr Perot sold EDS to General Motors in 1984—an unhappy combination that ended in 1996, when EDS was spun off. It then suffered during the technology bust and made a big loss. Under a new boss, it went into profit again, but with unimpressive margins. Its subsequent boss, Ronald Rittenmeyer, will now become head of the combined services arm of EDS and HP, which will be almost as large as IBM's.
The prospect of digesting yet another big acquisition after Compaq may seem daunting. Middle managers at HP still subscribe to the gentle, collegiate “HP way” of doing things. The culture is that of Silicon Valley—relaxed and casual—and the cafeteria is big on ahi tuna. At EDS, based in Plano, Texas, the style is “military, buttoned-down, and staid,” says Rick Sturm, the founder of Enterprise Management Associates, a consultancy. People wear ties. The cafeteria is full of steak and fries. Compared with other services firms, which increasingly hire and operate in India, EDS is overwhelmingly American.
Mr Hurd, who came to California from Ohio, is likely to feel the culture clash less than his colleagues in the ranks. His demeanour makes him “an EDS guy sitting on top of the HP way,” says one consultant. Culture aside, EDS's big selling point is to be the largest services firm that is independent of any hardware or software vendor. It will continue to advise clients to buy systems from all vendors, says Mr Hurd, but those clients are now likely to pay more attention when the boxes come from HP.
Nonetheless, the deal marks another step in HP's impressive comeback. This week Mr Hurd increased his estimate of this year's revenues to over $114 billion, despite the weak economy. The verdict on Mr Hurd is that he has skilfully executed the strategy of his flamboyant predecessor. The verdict on that predecessor, Ms Fiorina, has also improved. Her idea was controversial, but apparently right. Fittingly, Ms Fiorina seems to be making her own comeback now. As a supporter of John McCain, she is playing a bigger role in his presidential campaign by the week.
Article Review:
The merging between HP and EDS is considered as a horizontal integration in the service sector. The merging will be able to increase their service arm to as big as the IBM’s, which means HP will have the similar market size in the service sector and therefore be able to compete with IBM in terms of market power.
The purchase will allow HP to enjoy internal EOM and reduce the production cost. In this case, the company will most likely to enjoy marketing economics. As the firm size increase, it can increase its scale of advertising and do bulk distribution which lowers the unit cost because of the large output level.
It will also be able to do more research and development in the long run as it will have larger profit to invest in. This is critical to HP if it wants to take on IBM who is famous of its ‘high-tech’.
However, on the downside of this strategy the merger may be just another failure as the previous one between HP and Compaq. The most serious problem would be the brain drain caused by axing thousands of well qualified people and cutting research funding in order to pay the purchase of EDS. This will seriously reduce the competitiveness of HP as compared with IBM. Now HP is nothing but another white box vendor like Dell. If HP cannot make its own identity there is no way for it to beat IBM.
Also as said in the article, the clash in the different cultures between HP and EDS may be another problem. It will take some time for the two styles to integrate which may lower the efficiency of the company.
From The Economist print edition
Having bested Dell for the time being, Hewlett-Packard takes on IBM
DURING the first half of this decade Carly Fiorina, then boss of Hewlett-Packard (HP), was forever answering the same frustrating questions about Dell and IBM, HP's two more successful rivals. Dell, she said, offered computers that were “low-tech and low-cost”, whereas IBM offered “high-tech and high-cost”. Only HP, she said, was preparing to give customers “high-tech and low-cost”.
It was easier said than done. When Ms Fiorina tried to buy the computer-services arm of PricewaterhouseCoopers in 2000 to compete with IBM, the leader in that field, IBM beat her to it. And when she bought Compaq to take on Dell, the leading PC-maker, shareholders revolted. In 2005 the board fired her and hired Mark Hurd, a disciplined operations type, to focus on execution rather than vision.
Three years on Mr Hurd has mostly done that. HP, having fully digested Compaq at last, has surpassed Dell to become the world's biggest PC-maker. This means that Mr Hurd is now ready to take on IBM, which has more than 7% of the $748 billion market for services, such as running the data centres of large companies and governments, or handling entire functions, such as personnel or claims processing. The second-largest services firm, Electronic Data Systems (EDS), has much lower profit margins. HP lags in fifth place.
Mr Hurd's answer, announced this week, is to buy EDS for $13.9 billion. He is getting a big name: EDS, founded by Ross Perot in 1962, pioneered the business of outsourced data-management. But the company has been through turbulent times. Mr Perot sold EDS to General Motors in 1984—an unhappy combination that ended in 1996, when EDS was spun off. It then suffered during the technology bust and made a big loss. Under a new boss, it went into profit again, but with unimpressive margins. Its subsequent boss, Ronald Rittenmeyer, will now become head of the combined services arm of EDS and HP, which will be almost as large as IBM's.
The prospect of digesting yet another big acquisition after Compaq may seem daunting. Middle managers at HP still subscribe to the gentle, collegiate “HP way” of doing things. The culture is that of Silicon Valley—relaxed and casual—and the cafeteria is big on ahi tuna. At EDS, based in Plano, Texas, the style is “military, buttoned-down, and staid,” says Rick Sturm, the founder of Enterprise Management Associates, a consultancy. People wear ties. The cafeteria is full of steak and fries. Compared with other services firms, which increasingly hire and operate in India, EDS is overwhelmingly American.
Mr Hurd, who came to California from Ohio, is likely to feel the culture clash less than his colleagues in the ranks. His demeanour makes him “an EDS guy sitting on top of the HP way,” says one consultant. Culture aside, EDS's big selling point is to be the largest services firm that is independent of any hardware or software vendor. It will continue to advise clients to buy systems from all vendors, says Mr Hurd, but those clients are now likely to pay more attention when the boxes come from HP.
Nonetheless, the deal marks another step in HP's impressive comeback. This week Mr Hurd increased his estimate of this year's revenues to over $114 billion, despite the weak economy. The verdict on Mr Hurd is that he has skilfully executed the strategy of his flamboyant predecessor. The verdict on that predecessor, Ms Fiorina, has also improved. Her idea was controversial, but apparently right. Fittingly, Ms Fiorina seems to be making her own comeback now. As a supporter of John McCain, she is playing a bigger role in his presidential campaign by the week.
Article Review:
The merging between HP and EDS is considered as a horizontal integration in the service sector. The merging will be able to increase their service arm to as big as the IBM’s, which means HP will have the similar market size in the service sector and therefore be able to compete with IBM in terms of market power.
The purchase will allow HP to enjoy internal EOM and reduce the production cost. In this case, the company will most likely to enjoy marketing economics. As the firm size increase, it can increase its scale of advertising and do bulk distribution which lowers the unit cost because of the large output level.
It will also be able to do more research and development in the long run as it will have larger profit to invest in. This is critical to HP if it wants to take on IBM who is famous of its ‘high-tech’.
However, on the downside of this strategy the merger may be just another failure as the previous one between HP and Compaq. The most serious problem would be the brain drain caused by axing thousands of well qualified people and cutting research funding in order to pay the purchase of EDS. This will seriously reduce the competitiveness of HP as compared with IBM. Now HP is nothing but another white box vendor like Dell. If HP cannot make its own identity there is no way for it to beat IBM.
Also as said in the article, the clash in the different cultures between HP and EDS may be another problem. It will take some time for the two styles to integrate which may lower the efficiency of the company.
Monday, May 19, 2008
Sunday, May 18, 2008
Malaysian minister steps into airline price war
http://sg.biz.yahoo.com/080515/1/4gjt8.html
Malaysia's transport minister said Thursday he would try to resolve a cut-throat fare war between the national carrier and budget airline AirAsia, whose founder has complained of unfair competition.
Malaysian Airlines said Wednesday it would give away fares weekly to 20 Asian destinations, prompting criticism from Air Asia's founder Tony Fernandes since the government subsidises some of the national carrier's international flights.
Both Malaysian Airlines and Air Asia had earlier announced similar offers for domestic flights, even though soaring oil prices and a slowing global economy are squeezing the aviation industry.
"I personally will step in to investigate," Transport Minister Ong Tee Keat told the official Bernama news agency. "I should talk to both of them at this juncture to find out exactly what went wrong."
He said he had "no qualms about healthy competition" but that conflicts between operators should be minimised.
However, Fernandes has argued that Malaysian Airlines enjoys government backing.
"The government will never allow MAS (Malaysian Airlines) to fail but a private company? Who is going to save us?" the New Straits Times quoted Fernandes as asking.
"I'm not against competition but it has to be a level playing field. You can't send me into a boxing match with one hand tied behind my back," he said, referring to issue of the government subsidy.
AirAsia also wants to be given equal rights to fly the Singapore-Kuala Lumpur air route, one of the region's most lucrative connections. Malaysian Airlines currency has many more flights on that route.
Earlier Thursday, AirAsia X, a sister company of budget-carrier Air Asia, launched a new six-weekly service between Perth and Kuala Lumpur starting November 2, the airline said in a statement.
The airline said it planned to launch flights to Britain in the fourth quarter of 2008, with London and Manchester being considered. It is also eyeing more destinations in China as it expands its network.
Review:
As mentioned in the article, Malaysian Airlines (MAS) and AirAsia are the two major airline companies operating in Malaysia. However, the former is a national carrier while the latter is a private budget airline company. These two companies are substitutes of each other. The cross elasticity of demand of them is high.
Compared to MAS, AirAsia is smaller in size. It has fewer planes and limited flight routes (as it is asking for more routes such as Singapore-Kuala Lumpur). The only reason why it can still survive with existence of its much stronger rival, MAS, is because it has a much lower price by cutting cost from the lowering the quality of service compared to MAS. In economics concept, the demand for AirAsia is said to be price elastic to most of people as it takes up a large portion of their income. By offering a lower price, more people will be attracted to it and hence increase the total revenue.
Now, Malaysia government intervenes into the competition between these two airlines. It is offering subsidies to MAS so that MAS can reduce its cost of production and hence reduce its ticket price near to that of AirAsia to increase its competitiveness. In this way, AirAsia is being put into a more disadvantaged position as its only strength (low price) in the competition with MAS has been severely weakened. To consumers, they would rather choose to fly with MAS which offers much better and convenient service with a bit higher price than AirAsia. This threatens the survival of AirAsia and hence prompts criticism from Air Asia's founder Tony Fernandes. Rather than further slashing its price which may lead to subnormal profit, Fernandes is wisely asking for more flight routes to promote its product diversity to attract consumers and make profit from other markets(lowering risk).
Tianning
Malaysia's transport minister said Thursday he would try to resolve a cut-throat fare war between the national carrier and budget airline AirAsia, whose founder has complained of unfair competition.
Malaysian Airlines said Wednesday it would give away fares weekly to 20 Asian destinations, prompting criticism from Air Asia's founder Tony Fernandes since the government subsidises some of the national carrier's international flights.
Both Malaysian Airlines and Air Asia had earlier announced similar offers for domestic flights, even though soaring oil prices and a slowing global economy are squeezing the aviation industry.
"I personally will step in to investigate," Transport Minister Ong Tee Keat told the official Bernama news agency. "I should talk to both of them at this juncture to find out exactly what went wrong."
He said he had "no qualms about healthy competition" but that conflicts between operators should be minimised.
However, Fernandes has argued that Malaysian Airlines enjoys government backing.
"The government will never allow MAS (Malaysian Airlines) to fail but a private company? Who is going to save us?" the New Straits Times quoted Fernandes as asking.
"I'm not against competition but it has to be a level playing field. You can't send me into a boxing match with one hand tied behind my back," he said, referring to issue of the government subsidy.
AirAsia also wants to be given equal rights to fly the Singapore-Kuala Lumpur air route, one of the region's most lucrative connections. Malaysian Airlines currency has many more flights on that route.
Earlier Thursday, AirAsia X, a sister company of budget-carrier Air Asia, launched a new six-weekly service between Perth and Kuala Lumpur starting November 2, the airline said in a statement.
The airline said it planned to launch flights to Britain in the fourth quarter of 2008, with London and Manchester being considered. It is also eyeing more destinations in China as it expands its network.
Review:
As mentioned in the article, Malaysian Airlines (MAS) and AirAsia are the two major airline companies operating in Malaysia. However, the former is a national carrier while the latter is a private budget airline company. These two companies are substitutes of each other. The cross elasticity of demand of them is high.
Compared to MAS, AirAsia is smaller in size. It has fewer planes and limited flight routes (as it is asking for more routes such as Singapore-Kuala Lumpur). The only reason why it can still survive with existence of its much stronger rival, MAS, is because it has a much lower price by cutting cost from the lowering the quality of service compared to MAS. In economics concept, the demand for AirAsia is said to be price elastic to most of people as it takes up a large portion of their income. By offering a lower price, more people will be attracted to it and hence increase the total revenue.
Now, Malaysia government intervenes into the competition between these two airlines. It is offering subsidies to MAS so that MAS can reduce its cost of production and hence reduce its ticket price near to that of AirAsia to increase its competitiveness. In this way, AirAsia is being put into a more disadvantaged position as its only strength (low price) in the competition with MAS has been severely weakened. To consumers, they would rather choose to fly with MAS which offers much better and convenient service with a bit higher price than AirAsia. This threatens the survival of AirAsia and hence prompts criticism from Air Asia's founder Tony Fernandes. Rather than further slashing its price which may lead to subnormal profit, Fernandes is wisely asking for more flight routes to promote its product diversity to attract consumers and make profit from other markets(lowering risk).
Tianning
Saturday, May 17, 2008
China and the Great Pig Panic
http://www.newsweek.com/id/107548/output/print
The article describes the rapidly increasing price of pork in China. I will further explain this situation by using demand and supply concepts.
Supply:
One of the main reasons why the price of pork in China keeps rising is that there is a shortage of pork supply. When supply falls, the supply curve will shift to the left, driving the price up. The factors affecting the fall in supply is as follows:
Firstly, the inflation rate is extremely high in China today. Inflation drives the price of almost everything up including feed-grains for hog farming. The increase in the cost of production will result in a fall in supply. Even though “the Chinese government has doubled subsidies to pig farmers to encourage them to raise more hogs”, this is not enough to compensate the increase in cost of production, thus not effective in convincing the farmers that hog farming would be lucrative.
Secondly, climatic conditions and unexpected diseases contribute to the decrease in supply. “The outbreak of deadly blue-ear disease last year hit Chinese hog farms, infecting hundreds of thousands of animals and necessitating an enormous cull”. Moreover, “Attempts to increase supply are being hindered by recent winter storms, which have snarled traffic and prevented shipments from reaching their markets.”
“Discouraged by their losses and by rising feed-grain prices, many farmers soon gave up on raising hogs. Pork supplies dropped by a tenth, driving prices up about 55 percent, to more than $4 a kilo today.”
Demand:
The Chinese’ demand for pork is growing extremely fast and thus lead to a rightward shift of the demand curve, raising the price of pork.
As vividly explained by the author, “To understand why, start by considering just how hooked on the meat the Chinese really are. Their addiction parallels Americans' oil habit”. Yes, truly, pork has been a mainstay of the Chinese diet for millennia.
Pork is certainly a daily necessary for many of the Chinese. It has also been their habit or even addiction to eat pork. Hence, the demand for pork is extremely price inelastic. Increasing the price will result in a less than proportionate change in quantity demanded.
In addition, there are few substitutes for pork. Though there are many other kinds of meat, the Chinese’ special penchant for pork cannot be replaced by any other types of meat. To them, pork just tastes very different from others. This makes the demand price inelastic as well.
Price control:
On Jan. 16 this year, Beijing imposed short-term price controls for large-scale producers of staples including pork to alleviate the detrimental effect brought by inflation. Despite the effectiveness of this measure, as we have learnt from the chapter of price control, price control (price ceiling in this case) generates problems. As the price is set below the market equilibrium price, there will be a shortage of pork. The goods will be sold base on first-come-first-serve basis. Therefore, many people cannot get what they want for their daily necessities. Black market may arise as well.
Xu Hao
The article describes the rapidly increasing price of pork in China. I will further explain this situation by using demand and supply concepts.
Supply:
One of the main reasons why the price of pork in China keeps rising is that there is a shortage of pork supply. When supply falls, the supply curve will shift to the left, driving the price up. The factors affecting the fall in supply is as follows:
Firstly, the inflation rate is extremely high in China today. Inflation drives the price of almost everything up including feed-grains for hog farming. The increase in the cost of production will result in a fall in supply. Even though “the Chinese government has doubled subsidies to pig farmers to encourage them to raise more hogs”, this is not enough to compensate the increase in cost of production, thus not effective in convincing the farmers that hog farming would be lucrative.
Secondly, climatic conditions and unexpected diseases contribute to the decrease in supply. “The outbreak of deadly blue-ear disease last year hit Chinese hog farms, infecting hundreds of thousands of animals and necessitating an enormous cull”. Moreover, “Attempts to increase supply are being hindered by recent winter storms, which have snarled traffic and prevented shipments from reaching their markets.”
“Discouraged by their losses and by rising feed-grain prices, many farmers soon gave up on raising hogs. Pork supplies dropped by a tenth, driving prices up about 55 percent, to more than $4 a kilo today.”
Demand:
The Chinese’ demand for pork is growing extremely fast and thus lead to a rightward shift of the demand curve, raising the price of pork.
As vividly explained by the author, “To understand why, start by considering just how hooked on the meat the Chinese really are. Their addiction parallels Americans' oil habit”. Yes, truly, pork has been a mainstay of the Chinese diet for millennia.
Pork is certainly a daily necessary for many of the Chinese. It has also been their habit or even addiction to eat pork. Hence, the demand for pork is extremely price inelastic. Increasing the price will result in a less than proportionate change in quantity demanded.
In addition, there are few substitutes for pork. Though there are many other kinds of meat, the Chinese’ special penchant for pork cannot be replaced by any other types of meat. To them, pork just tastes very different from others. This makes the demand price inelastic as well.
Price control:
On Jan. 16 this year, Beijing imposed short-term price controls for large-scale producers of staples including pork to alleviate the detrimental effect brought by inflation. Despite the effectiveness of this measure, as we have learnt from the chapter of price control, price control (price ceiling in this case) generates problems. As the price is set below the market equilibrium price, there will be a shortage of pork. The goods will be sold base on first-come-first-serve basis. Therefore, many people cannot get what they want for their daily necessities. Black market may arise as well.
Xu Hao
Tuesday, May 6, 2008
Coffee & chocolates, more sophistication & innovation
Yeah, it's me again. The boarding school wireless is really terrible, so I have to post the two altogether.
The increasing sophistication of coffee drinkers is good for producers
http://www.economist.com/business/displaystory.cfm?story_id=11058477
Excerpt: As consumers in India and China develop a taste for the drink(coffee), prices are likely to keep rising. Meanwhile something new is happening in developed markets. Europeans, Americans and Japanese are switching to higher-quality coffee. Discerning consumers now demand authenticity: they want stories about where their coffee beans come from. So the best coffees will increasingly be differentiated, like fine wines and spirits, and sold at previously unthinkable prices.
A start-up innovates in an unexpected field – chocolates
http://www.economist.com/business/displaystory.cfm?story_id=11058598
Excerpt: Its founders believe there is vast scope for innovation in the way chocolate is made and sold. Most cocoa farmers have never tasted chocolate, and produce cocoa beans without any idea of how they will be used. So Mr Childs wants to put things on a more technical footing—just as Americans formalized techniques for winemaking in the 1970s. He has developed ways to analyze and grade beans. ……worked out how to get cocoa beans to reveal their complex flavours and to get chocolate to solidify evenly.
Review:
These two articles about coffee and chocolates have illustrated similar economic concepts.
Both mention that the differentiation of the products is good for the producers. This is because by making the products more unique, there will be fewer substitutes, cross elasticity of demand is reduced. Fewer substitutes also make the demand more price inelastic. Thus, by charging higher prices, the producers are able to earn more revenues.
First article also mentions the developing taste of Chinese and Indian consumers for coffee. As coffee gradually becomes a habit of life or even an addiction for the Chinese and Indians, change in price will not affect much on their consumption. Hence, demand for coffee will be more price inelastic. As a result, the best coffees can be “sold at unthinkable prices”.
As for the second article, I think monopolistic competition may be useful in explaining the innovation in chocolates production. Chocolates market well fit the characteristics of monopolistic competition. They are
- There are many producers and many consumers in a given market.
- Consumers perceive that there are non-price differences among the competitors' products.
- There are few barriers to entry and exit
- Producers have a degree of control over price.
If the company manages to produce the chocolates with uniquely complex flavors, it will create a new brand of chocolate for itself. Under the monopolistic market structure, the company will have a degree of control over its price. Due to loyalty to the brand, the company may charge a relatively high price for their chocolates products. They may be earning supernormal profits in the short run. In the long-run, however, whatever distinguishing characteristic that enables the company to reap monopoly profits will be duplicated by competing firms. This competition will drive the price of the product down and, in the long-run, the monopolistically competitive firm will make zero economic profit.
Xu Hao
The increasing sophistication of coffee drinkers is good for producers
http://www.economist.com/business/displaystory.cfm?story_id=11058477
Excerpt: As consumers in India and China develop a taste for the drink(coffee), prices are likely to keep rising. Meanwhile something new is happening in developed markets. Europeans, Americans and Japanese are switching to higher-quality coffee. Discerning consumers now demand authenticity: they want stories about where their coffee beans come from. So the best coffees will increasingly be differentiated, like fine wines and spirits, and sold at previously unthinkable prices.
A start-up innovates in an unexpected field – chocolates
http://www.economist.com/business/displaystory.cfm?story_id=11058598
Excerpt: Its founders believe there is vast scope for innovation in the way chocolate is made and sold. Most cocoa farmers have never tasted chocolate, and produce cocoa beans without any idea of how they will be used. So Mr Childs wants to put things on a more technical footing—just as Americans formalized techniques for winemaking in the 1970s. He has developed ways to analyze and grade beans. ……worked out how to get cocoa beans to reveal their complex flavours and to get chocolate to solidify evenly.
Review:
These two articles about coffee and chocolates have illustrated similar economic concepts.
Both mention that the differentiation of the products is good for the producers. This is because by making the products more unique, there will be fewer substitutes, cross elasticity of demand is reduced. Fewer substitutes also make the demand more price inelastic. Thus, by charging higher prices, the producers are able to earn more revenues.
First article also mentions the developing taste of Chinese and Indian consumers for coffee. As coffee gradually becomes a habit of life or even an addiction for the Chinese and Indians, change in price will not affect much on their consumption. Hence, demand for coffee will be more price inelastic. As a result, the best coffees can be “sold at unthinkable prices”.
As for the second article, I think monopolistic competition may be useful in explaining the innovation in chocolates production. Chocolates market well fit the characteristics of monopolistic competition. They are
- There are many producers and many consumers in a given market.
- Consumers perceive that there are non-price differences among the competitors' products.
- There are few barriers to entry and exit
- Producers have a degree of control over price.
If the company manages to produce the chocolates with uniquely complex flavors, it will create a new brand of chocolate for itself. Under the monopolistic market structure, the company will have a degree of control over its price. Due to loyalty to the brand, the company may charge a relatively high price for their chocolates products. They may be earning supernormal profits in the short run. In the long-run, however, whatever distinguishing characteristic that enables the company to reap monopoly profits will be duplicated by competing firms. This competition will drive the price of the product down and, in the long-run, the monopolistically competitive firm will make zero economic profit.
Xu Hao
The merger of Delta and Northwest
Though Mr Ho talked about this topic some days ago, here I want to share my further findings about this topic.
Reasons for merger:
Many US airlines including Delta and Northwest encountered the problems of starving capital and underinvestment in aircraft and customer service. Given a free choice, hardly anyone would travel with a US airline on an international flight, because of the bad meals served, the surly staff and the old aircraft. Due to consumers’ change in tastes and preferences, the demand for Delta and Northwest fell. While the demand curve shifts to the left, the price and output decreases at the same time, hence there would be a decrease in total revenue earned.
This was definitely not what the airlines wanted to see, hence they had been trying to improve their fleets since returning to profit two years ago but were once again being undermined by the rising price of fuel. Oil supply has constantly been in shortage, which drive up the oil price over the years. Rising oil price increases the cost of production of the airlines which causes the supply curve(near vertical) to shift to the left. This would result in a rise in price which was not to the airlines’ advantage, since higher price means fewer customers.
Therefore, in order to gain a considerable market share in the airline industry, two airlines Delta and Northwest decided to merge so that they can enjoy internal economies of scale thus cut cost, making themselves more competitive.
Benefits of merger:
Merging enables the new Delta to increase its market share so that the combined entity is able to compete with international airlines.
Moreover, the new Delta is able to reap internal EOS to cut costs. Here we can apply the MRFAT concepts. M: there can be bulk purchase and distribution of hardware for aircrafts as well as lower cost of advertising per unit. R: Delta’s flights are concentrated in the Southern USA, while Northwest has a more widely-spread routes. The merging of two airlines reduces the risks and potential losses as a fall in demand for one airline can be offset by higher demand for another airline in different markets. F: the new Delta is larger after merging; hence it is more credible to banking and financial institutions, hence easier to access credit and funds. A: cut costs by centralizing back-office operations and cutting management jobs. T: more investment in R&D to improve the quality of customer service and aircraft.
Problems after merging:
Firstly, despite efforts to restructure, the mergers are still lumbered with inefficient route patterns based on flying from city hubs. This puts them at a severe disadvantage to low-cost rivals such as Southwest Airlines, JetBlue and now Virgin America.
Secondly, Northwest's pilots remain bitterly opposed, due mainly to unresolved seniority issues. They have already refused to go along with proposed changes to their terms.
Thirdly, the barriers to entry remain low for the US airlines industry, therefore intense competition will persist.
Fourthly, they will also face the threat of superior financial clout and modern planes of the big European network carriers, such as Air France-KLM and Lufthansa.
Merging does help the two airlines reduce their costs and increase their market share, but whether they can remain competitive are dependent on other factors as well such as their quality of service and operation after restructuring.
References:
http://ft.onet.pl/0,8933,the_airlines_merger_that_will_not_fly,artykul_ft.html
http://www.economist.com/business/displaystory.cfm?story_id=11058463
Xu Hao
Reasons for merger:
Many US airlines including Delta and Northwest encountered the problems of starving capital and underinvestment in aircraft and customer service. Given a free choice, hardly anyone would travel with a US airline on an international flight, because of the bad meals served, the surly staff and the old aircraft. Due to consumers’ change in tastes and preferences, the demand for Delta and Northwest fell. While the demand curve shifts to the left, the price and output decreases at the same time, hence there would be a decrease in total revenue earned.
This was definitely not what the airlines wanted to see, hence they had been trying to improve their fleets since returning to profit two years ago but were once again being undermined by the rising price of fuel. Oil supply has constantly been in shortage, which drive up the oil price over the years. Rising oil price increases the cost of production of the airlines which causes the supply curve(near vertical) to shift to the left. This would result in a rise in price which was not to the airlines’ advantage, since higher price means fewer customers.
Therefore, in order to gain a considerable market share in the airline industry, two airlines Delta and Northwest decided to merge so that they can enjoy internal economies of scale thus cut cost, making themselves more competitive.
Benefits of merger:
Merging enables the new Delta to increase its market share so that the combined entity is able to compete with international airlines.
Moreover, the new Delta is able to reap internal EOS to cut costs. Here we can apply the MRFAT concepts. M: there can be bulk purchase and distribution of hardware for aircrafts as well as lower cost of advertising per unit. R: Delta’s flights are concentrated in the Southern USA, while Northwest has a more widely-spread routes. The merging of two airlines reduces the risks and potential losses as a fall in demand for one airline can be offset by higher demand for another airline in different markets. F: the new Delta is larger after merging; hence it is more credible to banking and financial institutions, hence easier to access credit and funds. A: cut costs by centralizing back-office operations and cutting management jobs. T: more investment in R&D to improve the quality of customer service and aircraft.
Problems after merging:
Firstly, despite efforts to restructure, the mergers are still lumbered with inefficient route patterns based on flying from city hubs. This puts them at a severe disadvantage to low-cost rivals such as Southwest Airlines, JetBlue and now Virgin America.
Secondly, Northwest's pilots remain bitterly opposed, due mainly to unresolved seniority issues. They have already refused to go along with proposed changes to their terms.
Thirdly, the barriers to entry remain low for the US airlines industry, therefore intense competition will persist.
Fourthly, they will also face the threat of superior financial clout and modern planes of the big European network carriers, such as Air France-KLM and Lufthansa.
Merging does help the two airlines reduce their costs and increase their market share, but whether they can remain competitive are dependent on other factors as well such as their quality of service and operation after restructuring.
References:
http://ft.onet.pl/0,8933,the_airlines_merger_that_will_not_fly,artykul_ft.html
http://www.economist.com/business/displaystory.cfm?story_id=11058463
Xu Hao
Saturday, May 3, 2008
Emission Taxes
Emission taxes provide a solution to the failure of the free market caused by problems involving negative externalities.
Using an emission tax, the government simply sets an amount of tax that companies pay for every unit of pollution they produce. The ideal tax rate would be the exact social cost per unit of pollution.
This policy has a couple of advantages. For one thing, it successfully forces businesses to internalize negative externality costs.
It also solves the problem of economic inefficiency by allowing firms to maximize profits and pollute at the most efficient level. If one company incurs great expense in reducing pollution, it can simply pay the tax. If another company can easily reduce pollution, it will do so to avoid having to pay the tax. This means that less cost is induced by eliminating the same amount of pollution.
This method is superior to direct controls (setting allowable pollution levels) because direct controls are economically inefficient. However, the comparison with tradable emission permits is more complicated.
One drawback to emission taxes is that the government must correctly calculate the tax level to maximize economic efficiency. This requires a thorough analysis of all the social costs caused by each unit of pollution.
Sometimes a government may want to ban all emission of a pollutant. In this case, adirect control preventing any pollution would be most effective.
A final problem occurs with all types of pollution regulation. It is not always easy to measure exactly how much a company is polluting, which makes regulating pollution levels a difficult task.
____________________________________http://library.thinkquest.org/26026/Economics/emission_taxes.html
Why are direct controls over pollutant emissions less economically effective than setting emissiont taxes? To start with, direct controls impose an absolute level of allowable pollution. Polluters will face varying costs in trying to reduce pollution to certain levels. Unfortunately, the simplification of standard pollution levels creates problems. I got this example from the same website: Imagine that Company A can reduce pollution much more easily than Company B. Rather than mandating that Company A and Company B reduce pollution to a medium level, it would be more efficient to have Company A reduce pollution greatly, and B only slightly. As a compensation, Company B could make a payment to A.
In the above example, money would be saved overall by not using direct pollution controls. This example is basically an illustration of the use of what are known as tradable pollution permits. As an alternative, emission taxes also provide an economically efficient solution.
Another problem with direct pollution controls is one that arises only in practice, not in economic theory. Clearly the government cannot monitor every single car or factory to ensure that they comply with pollution regulations. The difficulty of enforcing direct pollution controls reduces their effectiveness.
NG MIN XUAN
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