Price Discrimination in the Internet Age

Topic: Economics

Re: Boing Boing post - Why HP's region coding excuse is bogus

There is a simple method for large multi-national companies to use to protect against currency fluctuation. They can use foreign exchange futures to do so. Companies do this all the time (some also chose not to for their own business reasons). "Foreign Exchange is the largest of the global financial markets. Daily trading volume in the currency markets is estimated to be 1.1 US trillion dollars." - Smith Barney Citigroup. Some companies choose to speculate on the direction they believe exchange rates will go (either directly, or by not hedging when they believe rates will move in their favor and hedging when they predict doing so will benefit them).

In fact the United States government gives beneficial tax treatment (60% of profits are classified as long term capital gains, regardless of the holding period, thus reducing the taxes owed) to profits from "futures" trading. The reasoning is that creating a market for companies to hedge their risks is so important we must provide tax benefits to create a market for this activity. Some may think that the special tax advantages are more likely due to large payments from lobbyists to those who write the tax code than the merits of such tax law. In fact I may be one of them. Farmers often use futures contracts (on, for example, wheat or corn) in much the same way that companies can use future currency contracts to hedge their risks. That point is mentioned by the lobbyists, I would imagine.

The argument that you need to cripple products by geographic area to cope with currency fluctuations is false. It might be that a company wants to practice Price Discrimination (definition from US Federal Trade Commission or from the Digital Economist) to charge more where they can get more and less where they can get less. In the view of such a company, the internet, and other factors, have made it increasingly easy for people to buy in the low cost region and resell the items in the region where the company wants to charge higher prices. If you want to keep practicing price descrimination as a company you have to erect barriers to the free trade of your products by your customers.

Reimporting drugs is another clear example where companies try to use price discrimination - to charge US consumers more than Canadian consumers. Drug companies have successfully created legal road blocks to those trying to get around the geographic price discrimination. However, since lately those responsible for enforcing those laws have not been very eager to do so you can imagine the drug companies would like a drug that only worked in the country it was purchased. Another example of price discrimination are the regional versions of Windows.

I happen to believe companies should have the right to practice price discrimination. And in fact they should have the right to make products that have replacement parts that have been crippled to work only in products sold in specific countries. I would rather deal with companies that were trying to provide me more value not less. So I would be reluctant to buy from companies that practice such anti-consumer behavior. And luckily the internet and blogs are making it very difficult for companies to hind such practices. My guess is once attention is focused on such practices some companies will take advantage of such behavior by pledging "to do no evil." And those companies will gain customers. The process will be quite a bit more confusing in the real world but that is how things will play out in the long run.

Hedging Currency Flucuations:

• To Hedge or Not to Hedge? - for an individual investor (from Vanguard Australia)
• Foreign currency hedging transactions under Section 988 temporary regulations

Economics
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Operational Excellence

Topic: Management Improvement

re: Is Operational Excellence Dead?

In, the post "is Operational Excellence Dead?" the argument is made that operational excellence is dead as a differentiator of companies. "All of the emphasis on outsourcing to low labor cost countries seems to imply that organizations no longer consider their operations strategic." I would state that, in fact, the opposite is true.

Leading companies, for years, have focused on continual improvement. Toyota is the best known example. They drove the adoption of just in time inventory and then other lean practices. Dell, Southwest, Amazon and Walmart are further examples of companies that have focused on operational excellence.

Dell has continually improved their operational performance and has been growing dramatically (both by expanding the market and by taking market share from their competitors). Dell's advantage is almost solely in operational excellence. They are not know for product innovation or traditional customer service (compared to say IBM or Hewlett Packard). They have redefined customer expectations in a way that works very well for them. When Dell's competitors try to compete by combining forces (such as Hewlett Packard buying Compaq) they continued to lose market share. I would say they lost market share almost exclusively due to Dell's incredible focus on improving the performance of their operations.

Those companies that try to compete by outsourcing without management improvement will not be successful. There are situations where "outsourcing" would work well, for example, if a company had a competitive advantage in innovation and then they outsourced production to a company that focused on operational excellence in production (like Toyota, Dell or Solectron). This type of arrangement requires partnering with your suppliers in the way Dr. Deming taught Toyota in the 1950s.

Now many companies talk about partnering with their suppliers. The difference between those that are having great success and those that are fighting to stay alive is in the implementation of the concept. Saying the organization is focuses on new principles (partnering, lean, etc.) is not the same as applying those principles with the great success that Toyota does. That difference is huge and is driving many companies to outsource and try to dramatically cut costs. Reducing costs should be the outcome of improving efficiency.

Toyota is successful manufacturing in the USA. Dell is successful manufacturing in the USA. The key for those companies are managing effectively, not cutting costs. The focus in on lean principles, cutting all waste, never ending focus on how to make huge, or tiny gains in efficiency. Not on cutting costs for the sake of cutting costs. The difference may seem minor but the results are worlds apart.

I would agree that many companies don't understand the critical importance of management excellence. Rather than take the difficult path to lead real change in their organization they focus on simple cost cutting measures (though usually not cutting executive salaries which have grown dramatically and are excessive in the USA compared to the rest of the world). That won't work. You can't compete with companies like Amazon, Dell, Southwest, Toyota and Walmart without managing your company with every increasing effectiveness and efficiency.

Suggested reading (to improve the management of your organization):

• Lean Thinking Banish Waste and Create Wealth in Your Corporation by James P. Womack and Daniel T. Jones
• The Leader’s Handbook: Making Things Happen, Getting Things Done by Peter Scholtes
• Free, Perfect, and Now: Connecting to the Three Insatiable Customer Demands by Robert Rodin and Curtis Hartman
• Fourth Generation Management by Brain Joiner

USA Health Care Costs reach 15.3% of GDP - the highest percentage ever

Topics: Health Care and Economics

re: Health Care Spending In The United States Slows For The First Time In Seven Years

The Centers for Medicare and Medicaid Services (part of the United States Department of Health and Human Services) issued a report (the press release states that report will appear in the Jan/Feb edition of Health Affairs but does not provide a link so the link is my guess of where the report will appear) and a news release putting a positive spin on the data.

"Spending growth for prescription drugs decelerated significantly to 10.7 percent, down from 14.9 percent in 2002." So we only increased spending on prescription drugs by 10.7 percent? I guess that could be seen as positive? To me though increasing expenditures by 10.2 percent seems more like of a problem than a success, though I can't argue it is less of a problem than the year before. My last post was on prescription drug prices in the USA.

“This is good news for the public and our health care system and is the result of changes designed to slow down the growth in spending,” said Health and Human Services Secretary Tommy G. Thompson. “But we have more to do before we can declare victory over rising health care costs.”

I would agree with the second sentence. Since health care costs once again rose much more quickly than the economy overall we certainly shouldn't declare victory over "rising health care costs." Stating it as though declaring victory were even close to an option seems like an odd choice.

And some fairly strait forward data: "Health expenditures in the United States grew 7.7 percent in 2003 to $1.7 trillion, down from a 9.3 percent growth rate in 2002. On a per capita basis, health spending increased by $353 to $5,670. Health spending accounted for 15.3 percent of Gross Domestic Product in 2003, outpacing growth in the overall economy by nearly 3 percentage points." As Dr. Deming noted decades ago, the United States economy was being severely hampered by excessive health care costs. Since then health care costs have taken an every increasing burden on the economy.

On a per capita basis $5,670, just on health care. 15.3% of GDP. Those are amazingly high figures. The median per capita GDP for a country (according to the CIA world fact book) is $5,600 (Cyprus). That is not the median income on earth, that would be lower. The fact book lists China with a per capita GDP of $5,000 and India with $2,900.

Drug Prices in the USA

Topic: Health Care, Economics

re: Canada mulls end to drugs by mail order, by Colin McClell, Associated Press, 6 Jan 2005,

The discussion of restricting Americans from buying drugs from Canada highlights failures of the current system. Unfortunately the focus in not on health care or the best economic plan but rather monopolistic behavior and economic regulation that is politically motivated to support high drug prices within the United States.

Most articles on reimporting drugs to the USA will mention the idea that the United States FDA does not trust the drugs manufactured by American companies overseas. Why should Americans have to believe the contention of the United States FDA over Canada, Germany or Japan's drug regulators? If American's want to trust that the drugs sold in one of those countries by one of the largest drug companies in the World selling drugs is good enough for them why does the USA have to laws to prevent it? The argument that the drugs sold by these companies worldwide are dangerous seems like a poor argument to me.

Second there is the contention that without the ability to overcharge American's the drug companies won't invest in Research and Development. This is such a poor argument I can't believe people can make it without suffering a big blow to any credibility they had. Obviously drug development has a very cost (creating a high fixed cost) and often drug manufacture has a small marginal cost (though at times the marginal cost is also high). Right now the companies count on the American market to provide funds for much of the research, development, marketing and profits. Then they sell the drugs in other markets only looking to maximize profits looking at marginal costs. Obviously, if they no longer could count on excessive prices in the United States they would have to spread the fixed cost over the rest of the world. The argument that they won't invest in research and development without excessive costs in America is false. They would adjust their pricing structures around the world based on losing the cash cow of the American consumer. That should be obvious to anyone who even took one economics course.

Should the drug companies have the ability to use price descrimination. Probably. So if they want to say that people in Manhatten have to pay 5 times as much as those in Madison, Wisconsin that is their option, right? I don't have a problem with that, but, actually I am not sure they have that option. My guess is US laws would prevent this but I may be wrong.

Should the drug companies have the right to say if you buy the drug in Madison you can't sell it to anyone in Manhatten. This doesn't seem right to me. Now drugs have the complication of medical necessity, etc. so in order for a person in Manhatten to buy and use them they would have to comply with the laws the government has setup to regulate medical care. So whatever those medical requirements are would have to be met but arbitraty rules about pricing should not be in any way a part of that discussion. The ability to allow price descrimination is the trickiest part of this issue. I support the idea the drug companies should be allowed to use that tool. If the drug was developed from basic research funded by the American taxpayer, how should that be factored in? What about just favorable tax treatment the company may receive? More time needs to be spent on this facet of the health care system.

Should the drug company have the right ot only sell the amount they want in Madison at the low prices? Maybe. Should the drug company be able to limit the amount it sells to Canada. Probably.

So now "Canadian health officials are drafting a proposal to prevent Internet pharmacies from selling mail-order prescription drugs to U.S. consumers." Why would they do this? They are restricting the economic activity in their country. Are they doing it because they don't believe their drugs are safe as the United States FDA contends? I don't think so. Are they doing it because they fear their country will be punished by the drug company and their citizens will suffer health consequences of those actions by the drug companies? I doubt it. Are they fearful of political repercussions from the United States? Possibly, but I doubt it. I believe they fear the overall economic result of allowing free trade of medical drugs would be less beneficial than the current deals they have negotiated with the drug companies. So their economy would suffer more from lossing special deals the American drug companies offer in selling drugs to Canada then the economy gains from the trade.

Is Canada deciding not to sell drugs to United States citizens via the internet within their rights? I sure think so. It soes raise the quesiton why the Canadian politicians have managed to get American companies to give their citizens better deals than the American citizens recieve. It seems if you look at the money the American politicians take from drug companies it is pretty obvious why they setup rules that result in Americans having to pay much more for the same drugs manufactured by American companies than do the citizens or Canada, Germany, England, Japan, Australia, Mexico or pretty much anywhere on earth.

If the Canadian government decides to shut off a way United States citizens had found to take advantage of the better deal the Canadian government got Canadians than the United States government got their citizens that may be the function of the market (the free market is obviously not so free when you examine the issue of drug prices). The fact that Canada chooses to maximize the benefit for Canada, even if that means American consumers suffer, should not be seen as the Canadian government selling out. They are doing what they exist to do, provide their citizens the best results they can. Now, how you describe how the American goverment has created situation where their citizens have to pay much higher prices for drugs that American companies make that is a different story. In that case it does seem like something that could be described as selling out.

The last two sentances of the article by Colin McClell:

"Despite the Bush administration's support for a ban, importing cheaper drugs from Canada is popular with U.S. lawmakers of both parties and has considerable support in Congress. The House has passed a bill allowing reimportation, and lawmakers in both parties say that it would pass the Senate if Republican leaders would allow it to come up for a vote there.

While reimporting drugs is technically illegal, those laws are not enforced. Ten million illegal shipments of prescription drugs worth $1.4 billion entered the United States in 2003, about half of them from Canada."

Other Links:

• Prescription for Power: New Common Cause Education Fund Study Exposes How Drug Companies Prevail Over Consumers and Public Health Groups in Washington
• The Battle Over Americans' Rights to Affordable Reimported Prescription Drugs
• More on excessive medical costs from Curious Cat Article Connections
• A Question of Drug-Making Donors
• Drug Companies Major Contributors to Bush-Cheney, United Steelworkers of America Political Action Fund
• Drug bill a well-financed victory for industry

Wikipedia and Anti - Elitism

Topic: Internet

re: recent post by by Larry Sanger, co-founder of Wikipedia: Why Wikipedia Must Jettison Its Anti-Elitism

Wikipedia is an awesome example of the power of the internet. Essentially it is a freeware, open source encyclopedia. The results are amazingly good, still it could be improved. Many have knocked the Wikipedia because they can't believe a project that allows anyone to edit the content could possibly work. I must admit I am amazed how well it does work. Larry's long post makes some great points about what needs to be improved.

He focuses on "the root problem: anti-elitism, or lack of respect for expertise." He also points out a serious problem: "So, for any person who can and wants to work politely with well-meaning, rational, reasonably well-informed people--which is to say, to be sure, most people working on Wikipedia--the constant fighting can be so off-putting as to drive them away from the project." I hope they can find a way to work on improving both these problems. His suggestion of a trusted source releasing "vetted versions of Wikipedia articles" sounds like a good one to me. In any event I hope some solution is found and Wikipedia continues to flourish rather than colapse under its own weight.

The Open Directory project was another useful open source freeware project that had a great begining but now has deteriorated to the point of insignificance. I think Wikipedia will be successful, the question is how successful. I hope Larry's ideas result in improvements.

Digital Rights Management

Topics: Miscellaneous and Economics

From Cory sets DRM strawmen ablaze:

"For starters, any market-correction for DRM will surely involve informed customers making good purchase decisions about the DRM in their devices. That's what this debate is all about. The implicit, "Stop complaining and let the market sort it out" in these comments ignores the fact that complaints about DRM are vital to the market sorting it out."

This quote cuts to one of the critical issues in the current debate on digital rights management. I believe the market will most often reach the best solution. That does not mean regulators do not have a role to play, they do definitely have such a role. I tend to prefer limited regulation while relying on the market to reward the bestsolutions.

The idea that the marketplace works without debate and comment is fundamentally flawed. The way the marketplace will reach the best solution is through open and honest debate, competition and educated consumers. The emergence of world wide web and blogs do a great deal to make the market more efficient and effective. The invisible hand is more capable with more informed actors in the marketplace.

When consumers are ignorant they make decisions based on incomplete understanding of their interests the effect is to have the market's invisible hand reinforce the wrong behavior. This is a fundamental shortcoming in the market. The increase in customer knowledge will not only increase the individual's happiness but the overall performance of the economy.

The debate over digital rights management should continue (see Cory responds to Wired Editor on DRM ). I must admit I am surprised at the playing field now. I would have thought less restrictive solutions would win out in the marketplace (I actually still think they will). Right now very restrictive solutions seem to be winning. My guess is that once consumers learn more about the current path, those consumers will search for options that give them better options. Then some producers will seek to fill those desires. Advocacy from parties other than those who seek to maximize their profits in selling digital content is a very good thing. Owners of digital content should be able to seek to maximize their profits but a market solution does not mean they alone dictate the terms of the solution.

For society the best possible result is a free exchange of ideas and education of the various players in the market. Then let those players vote with their decisions in the marketplace. My guess is people will prefer to have digital works with less restriction and will reward those that offer such products with purchases that would otherwise go to those with restrictive policies. However, if consumers are ignorant they won't know the limitations imposed on the digital content they believe they are buying (or the product they buy to manage their digital content that cedes what they would think of as their right to control the content on their device to others). Individual players can suffer, as the advantage they were able to gain by taking advantage of the ill informed is lost, but overall that is the best result for society.

One interesting option in the market now is the Creative Commons.

The Greatest Wall Street Danger of All: You

Topic: Investing

re: Born Suckers - The greatest Wall Street danger of all: you by Henry Blodget.

Henry Blodget mentions two profoundly (though simple) important factors that lead to poor investment decisions: Prospect Theory and Outcome Bias. He lists 7 factors, I find two profound.

Prospect Theory (more details) essentially states people are eager to "lock in gains" (sell positions with profits to realize gains) and hold losses (deffer selling positions in which they have losses so as not to "realize" the loss). Like many profound ideas the simplicity of the idea undermines the importance. This factor can make a huge difference in investment results. Many of the most successful investors understand the importance of this idea. And they repeat the importance of taking action to avoid falling into the patterns prospect theory predicts.

William O'Neil (founder of Investors Business Daily) - "Remember, 7% to 8% is your absolute loss limit. You must sell without hesitation - no waiting a few days to see what might happen or hoping the stock rallies back; no need to wait for the day's market close" page 90, How to Make Money in Stocks: a winning system in good times or bad, 3rd Edition, 2002.

From The New Market Wizards: Conversations With America's Top Traders by Jack Schwager
Schwager: "What else have you learned from Soros?"
Stanley Druckenmiller: "I've learned many things from him, but perhaps the most significant is that it's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." (page 207)
This is obvious, so what value does it offer? As Prospect Theory states peole have a tendency to sell profits and hold losses. Often this means you make less when you are right. It can also mean you loss more when you are wrong (because you are reluctant to sell - I must admit I can still fall into this trap).

Outcome Bias - "We tend to evaluate decisions based on outcomes instead of probabilities. Thus, we congratulate ourselves for stupid choices that happen to turn out well and vow to never again make smart choices that happen to turn out badly." from Born Suckers. For example, I decide to thrown a dart at the newspaper and move all my portfolio into the one stock that is hit. If that stock is the best performer of the year I will have very good results, however, the that will not be due to my great decision but luck. Luck is a factor in investing, but the way to achieve exceptional performance is to developing investment strategies that give you an advantage in the market.

I have used an online portfolio management and performance tracking tool for several years: Marketocracy. It is a tool that helps me learn, by seeing the real results of my investing decisions. It is also a great way to provide others a view of how my ideas have played out as measured by Marketocracy. My marketocracy fund has beaten the S&P 500 by an average annual rate of 10.32% (as of this posting) since it was started in 2000.

One final thought on investing from Jesse Livermore (as remembered by his sons) - From page 141 How to Trade in Stocks: "the stock market must be studied, not casually either, but deeply, thoroughly. It's my conclusion that most people pay more care and attention to the purchase of an appliance for their house, or when buying a car, that they do to the purchase of stocks. The stock market, with its allure of easy money and fast action, induces people into foolishness and the careless handling of their hard-earned money, like no other entity."

Good investing to you in the new year.

Google Photo Management Software - Picasa

Topics: Freeware - Photos

I am a big fan of Google, the search engine, and the company. Google bought Picasa, digital photo management software, a few months ago and decided to give the software away as freeware. I just got around to downloading Picasa. My initial reaction is that this is a wonderful product. I suggest you give it a try. It can automatically inventory all the images on your computer and it does a great job of organizing the photos for you.

The only Google service I would not recommend at this time is their desktop search software. It is amazing powerful and seems like it could be a great help. But it seems to me to the possible security issues warrant holding off using it until they improve the software, which I am confident they will do.

This Blog, is run on Blogger, another Google purchase. Blogger is good but I sure hope they offer some enhancements fairly soon, especially the ability to assign topics to individual posts (like the labels they use in Gmail).

One one final Google not, if you would like an invitation to get a free Gmail account (Google's email service), just let me know and I can send you an invitation (until I run out of invitations).

Happy Holidays,