Sunday, August 28, 2011

Rent Seeking in Wine Distribution

The following story is a great example of rent seeking behavior on the part of the wine and beer distributors.

"It's very important for us to ship our wine across state lines," she said. "It's a very important revenue stream for us."

But Woolsey and representatives of the growing number of small wineries in Arizona fear that a bill pending in Congress could lead them to lose the ability to sell directly to customers beyond - and perhaps even within - the state.

The reason for the proposed law:

Pitts called the legislation, introduced by Jason Chaffetz, R-Utah, an attempt by wholesalers to monopolize the distribution of alcohol.

"There are only about half-a-dozen major wine distributors in the U.S. due to mergers and acquisitions," he said. "They're trying to change the federal law to guarantee that their business model would be effective."

The basic idea is that if you can't win in the marketplace, get the government to intervene. The small wineries and brewers won't have the resources to fight state and local laws. The big distributors do have the resources to get the laws passed.

The distributors face the same problem as the big record labels. If producers (artists, wineries or brewers) are able to bypass the distributors (record companies, liquor distributors) then the distributors' revenue stream dries up (and consumers and producers benefit.)


Friday, August 12, 2011

My Reaction to the Fed Statement

The FOMC statement this week contained a time line. It said:

The Committee currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.

When the S&P downgraded US debt they basically said two things. First, US finances are unsustainable in the long run. Second, the political system isn't showing any signs of fixing the problem.

By saying that they will keep interest rates low until the middle of 2013, I think the Fed is telling everyone that they agree with S&P's second point. We're going to have to go through another election cycle before the political system changes enough for the politicians to really deal with the problem.

The election will be in November, 2012 and the new government will take office in January, 2013. The Fed then gives them another 6 months to head one direction or the other.


Wednesday, August 10, 2011

Hiring the Right Customers

Bryan Caplan over at EconLog asks an interesting question.

Firms are usually picky about who they hire. But when they spot potential customers, their standard slogan is "Come one, come all." Sure, there are some exceptions. A few restaurants still have dress codes, and some rental car companies won't rent to under-25s. But by and large, firms welcome paying customers of all shapes and sizes.

You can read the whole post to get a better understanding of the entire question. Here's my answer:

Bryan needs to take a class in Services Marketing. (BTW, we've got a great services marketing group at the ASU business school.)

In marketing you worry about the 4 P's - Product, Pricing, Placement and Promotion. Any reasonable marketing class will cover those areas. The trick is that those things work for physical products. For Services you've got 3 additional P's - Process, Physical Evidence and People. It's the People part that answers his question.

Services are produced and consumed simultaneously. (If you ever figure out how to store a service, let me know. We're going to make a lot of money.) Services are often face to face. You're working directly with the customer and you have to adjust your service delivery based on your real time interaction with that customer.

In many cases you are dealing with several customers at the same time. Customers can interact and that will affect the delivery of services to each customer.

I teach economics at Mesa Community College. I deliver educational services. I have up to 35 students in each of my six classes. As any student will tell you, one disruptive student will ruin the class for everyone else. Given that problem, you have some options.

You can let them ruin the class for everyone and decrease the value of your service. This negatively impacts the future profitability of your classes.

You can fire the disruptive customer (drop them from your class) and carry on with the remainder. This decreases profitability but maintains the value of the delivered service for others.

You can deal as best you can with the disruption and try to minimize the impact on other students. This maintains the income stream from the problem student while minimizing the detrimental impact of others.

At the Community College we take all comers so that rules out the option used by other institutions - Admissions selects who shows up. This helps ensure a quality experience for all involved.

Every service delivery organization makes these choices. In rare cases, they do actually fire customers. They do that because certain customers are not only not profitable, but reduce profitability with their other customers.

With that preface, let me answer Bryan's 4 questions directly.

1. Service delivery business owners can very quickly assess whether a potential customer is profitable or not. If they can't, they won't be in business very long. As a test, ask any server in a restaurant. They'll point out the big tippers and the lousy tippers as they walk in the door.

2. Yes, good customers are offered better deals than bad customers. This is especially true in professional services where it is easy to price discriminate.

3. Tolerate times or not, service businesses are selective. The selection methods may be subtle - not marketing to a particular potential client, or overt - suggesting that a client go elsewhere next time or refusing to take a customer as a client.

4. Bad behavior on the part of service delivery personnel is easy to deal with in the private sector. They get fired. In the public sector, it is more problematic. Bad Behavior on the part of customers can also be dealt with. In most cases their price goes up. In other cases, they get fired (asked to go elsewhere or dropped as a client.)

If you would like examples, just talk to service delivery business owners, especially those that focus on professional services - doctors, lawyers, accountants, financial advisors... and education professionals.


Sunday, August 07, 2011

Three Word Assessment of the Downgrade

Dr. Christina Romer, Chair of the Council of Economic Advisors during the first two years of the Obama Administration provides a concise assessment of the downgrading of US debt. Her description of the Treasury Secretary's language is also interesting.

Caution: foul language.