Economics in the Real World

Dated Apr 18, 2020; last modified on Thu, 02 Sep 2021

Protectionism vs. Globalization

Prestige Ameritech is America’s #1 maker of surgical masks. In outbreaks, demand peaks, but when it’s all over, hospitals go back to exclusively buying cheaper masks from China. Reduced demand makes Ameritech lay off workers. Ameritech is pushing for a federal contract to stabilize demand over time.

India’s Foreign Exchange Act of 1973 gave Coca-Cola an ultimatum: hand over 60% of the local subsidiary to Indian partners and the syrup recipe. Coca-Cola left in 1977. With the fall of the Soviet Union, socialist India’s primary sponsor, India embraced the free market to fully finance its debts. Coca-Cola and Pepsi came back, but Indians kept drinking Thums Up (goes well with spicy food) and Limca (appeals to national love for lemonade). Coca-Cola bought both brands but still produces them.

Index Funds Reducing Market Effectiveness

Scenario: Company A has novel brand-name drug, poised to sell 10m pills @ $100 = $1b revenue. Company B can make generic non-infringing drug - say B sells 6m pills @ $20 = $120m, making A sell 6m pills @ $80 = $480m. B is better off ($0 -> $120m), A is worse off ($1b -> $480m).

Antitrust law prevents A from paying $200m to B to not produce generic drug. However, A can sue B for patent infringement, allowing them to settle an agreement where B agrees to delay its generic drug, and A writes B a settlement check. Viola! The law prevents other companies from introducing a generic drug, thus A only needs to pay off B.

Big shareholders that own both A and B tend to make the companies reach for such settlement faster.

Do Rewards Really Create Loyalty?

The costs of a rewards program are real, but the profits may be hard to attribute, hence the need to hone in on loyal customers. Short-sighted rewards only encourage customer hopping.

Causality is tricky business. See Tadelis on online advertising

Why is that apartments in Seattle offer 6 weeks free, instead of say, every 12th month will be free? Maybe tenants are less flexible, hence the need to lock them in with a long lease?

Reward programs should have as much of these as possible: cash value, relevance, choice, aspirational value, and convenience. Companies benefit from forming reward networks: fewer cards, more user choice, and a ton of sales data to mine.

References

  1. If you imagine that a local business making surgical face masks is working 24/7, guess again. Dave Lieber. https://www.dallasnews.com/news/watchdog/2020/04/03/if-you-imagine-that-a-local-business-making-surgical-face-masks-is-working-247-guess-again/ . Apr 3, 2020.
  2. It’s a Good Time to Raise Vaccine Money. Also prescient hedge funds, drug competition and sentimentality. Matt Levine. https://www.bloomberg.com/opinion/articles/2020-05-19/it-s-a-good-time-to-raise-vaccine-money . May 19, 2020.
  3. When India Kicked Out Coca-Cola, Local Sodas Thrived. Kylie Obermeier. https://www.atlasobscura.com/articles/what-is-thums-up . https://news.ycombinator.com/item?id=23740923 . Feb 15, 2019.
  4. Do Rewards Really Create Loyalty. Louise O'Brien; Charles Jones. https://hbr.org/1995/05/do-rewards-really-create-loyalty . 1995.