Sunday, November 23, 2008

Broadband as Public Infrastructure

Just having a highway like the 60 through town isn't enough. Now we also need the Information Super Highway.

SUPERIOR - There was a time when Mila Lira wasn't able to run her online business effectively out of this former mining town 60 miles east of Phoenix. Not on a dial-up connection.

"I use the Internet daily for e-mail and marketing," Lira said.

But today Lira is enjoying broadband Internet access as she provides virtual administrative help for offices around the country through Miracle Executive Services.


"Having high-speed in rural communities is like having a sewer system; it's needed for a healthy community," Lira said.

Since 2007, Superior residents have been able to pay $29.99 a month for unlimited high-speed Internet access through WI-VOD, a company that specializes in providing broadband in rural communities. There are about 100 customers here so far.


Allan Meiusi, CEO and chief architect with WI-VOD, said it's fundamentally important to get high-speed Internet into communities that lack it.

"By enhancing access to the Internet, rural communities can build an increasingly diverse economic foundation and, with it, higher-paying, service-oriented jobs that are not limited by geographic circumstance or characteristics," Meiusi said in an e-mail interview.

Apparently the World is Flat in rural Arizona.

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A Negative Marginal Cost?

Subsidies can distort markets. In this case, wholesale electric power producers are paying customers to take their output.

In the first half of 2008, prices were below zero nearly 20 percent of the time. During March, when negative prices were most frequent, prices were below zero about 33 percent of the time. After mostly taking the summer off, negative power prices were back to near 10 percent in October.

This seems a little crazy. During these negative price periods, suppliers are paying ERCOT to take their power. Consumers (at least at the wholesale level) are getting paid for using power, and the more power consumers use the more they get paid.

Thanks to Michael Giberson at Knowledge Problem.

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Thursday, November 20, 2008

US Airways Relents

One model of oligopoly behavior that isn't used a lot anymore is the kinked demand curve. Basically it says that if an oligopoly lowers its price other firms will as well causing their demand curve to be more inelastic. On the other hand, if they raise thier price, they assume that others will not and hence their competitors will take part of their market share making their demand curve more elastic.

Overall, this behavior makes prices "sticky" - airline price changes don't stick unless every else goes along.

Apparently this also works when an airline reduces perks - another way of raising prices on certain customers.

US Airways is restoring key frequent-flier perks that it was blasted for eliminating earlier this year.

The Tempe-based airline today will announce the return of bonus miles and minimum mileage for its top frequent fliers, benefits that fatten members' accounts and spur loyalty...

Despite the industry's pack mentality on everything from fares to food, no one followed US Airways' decision in June to eliminate bonus mileage. For travelers in the top tier of its Dividend Miles program - those who log at least 100,000 miles a year - the move effectively cut their mileage balance in half.

US Airways was also the first airline, in February, to stop offering a minimum of 500 miles for short flights. It initially had company on that front, but United and Continental recently rescinded their policies...

Petersen said the anecdotal evidence that US Airways lost or was about to lose customers is overwhelming.

Since no one followed their lead, US airways was forced to revert back to the status quo.


Tuesday, November 11, 2008

DHL Pulls Back in the US

Apparently DHL just couldn't get big enough to compete with FedEx and UPS. It spent almost $10 B trying. Oligopolies often exist because of economies of scale. Those make it very difficult for a new entrant to the market to get big enough to be viable.

Global shipper DHL Express said Monday it may close a data information center in north Scottsdale as a result of the company’s decision to cease package-delivery operations in the United States.

About 610 DHL employees and 126 contract employees will definitely lose their jobs, with the layoffs taking place in stages beginning in January and continuing to mid-summer 2009, according to a DHL spokeswoman, who asked not to be identified.


"We've invested a massive amount of money to break into the market and be a third choice, but reality . . . has just made it impossible for us to make it economically viable," John Mullen, global chief executive officer of DHL Express, said in a conference call.

He estimated DHL will have spent $10 billion from 2003, when it acquired Seattle-based Airborne Inc. to enter the U.S. market, to when it books the expenses of closing U.S. operations.

Mullen said competition with UPS and FedEx was more of a factor in the pullback than the poor U.S. economy.


Saturday, November 08, 2008

Investment Demand and Business Expectations

I think these two stories are related. First we've got a decrease in SBA loan guarantees.

According to the data, the number of loans made through the SBA in fiscal 2008 -- which ended Sept. 30 -- fell 27 percent, bringing the total to 2,022. The value of those loans also plummeted 32 percent to $880 million.

In fiscal 2007, the SBA reported 2,960 loans were handed out, adding up to about $1.2 billion.

Second, we've got a story about business owners perceptions of the future.

Arizona small business owners are becoming more pessimistic about the economy, according to a poll released Friday by a Tempe-based public opinion research firm.

The Arizona Economic Indicators Monitor compiled quarterly by O'Neil Associates found that 91 percent of the business owners polled rated the U.S. economy as either fair or poor, and 85 percent rated the Arizona economy as fair or poor. Only 9 percent rated the national economy as good or excellent, and 15 percent so rated the Arizona economy.

Although some seem to think that freeing up credit will restart investment...

But there is hope on the horizon, said Sandy K. Baruah, SBA acting administrator.

He said that the recently signed Emergency Economic Stabilization Act of 2008 could "unclog the arteries of our financial system, allowing credit and capital to flow once again."

I suspect that it won't turn around until business owners feel that they can make a profit on new investments.

But small business owners see hope for future improvement. Twenty-four percent think the economy will be better in three months, up from 17 percent the previous quarter. When the horizon is expanded to one year, 55 percent think the economy will improve over that time, up from 49 percent the previous quarter.

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Sunday, November 02, 2008

Trashing the Economy

Is trash an economic indicator?

The two of us were discussing actual garbage, and how the amount of junk, dreck and debris that we pack into those big city-supplied containers might be a better indicator of how the economy is going than anything we get from Wall Street or Washington.

I'd heard recently that trash collectors around town have noticed that they were hauling less garbage. Shiya confirmed it.

He sent me some figures indicating that for fiscal year 2007-08, the total trash tonnage dropped 2 percent. More dramatically, bulk trash - the old couches and big tree limbs that we periodically leave in the back alley or out by the curb - had dropped nearly 15 percent.

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Saturday, November 01, 2008

Mexican Consumer Interest Rates

And I thought US credit card rates were unusually high. Have a look at Mexico.

Since December, average bank credit-card rates have risen 10 percentage points, from 31.61 percent to 41.78 percent in September.

Pamphlets advertising Wal-Mart's variable-interest credit cards warn applicants that interest rates could be 65 percentage points higher than Mexico's prime rate, currently at 8.73 percent.

Costco charge cards carry a 52 percent interest rate. Visa cards from Banamex, Citibank's Mexican branch, charge 46.49 percent.

Woolworth charges 61 percent on a store credit card financed by General Electric. And Suburbia, a chain of clothing stores owned by Wal-Mart, is charging 70.6 percent on its variable-rate card.

Part of it is a smaller supply of loanable funds while another part is a lack of competition.

Credit has always been more expensive in Mexico than the United States, said Rafael Amiel, Latin America director at Global Insight, a consulting firm.

Capital is scarcer in Mexico, and thus, banks can charge more for it, Amiel said.

There are fewer banks, meaning less competition. And the banks charge high service fees, allowing them to make profits even though they loan less money.

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