- 19 Sep 2007
- Working Paper Summaries
Strategic Interactions in Two-Sided Market Oligopolies
Strategic interactions and the logic of competitive advantage in 2-sided markets are fundamentally different than in traditional, 1-sided markets. For instance, an investment that decreases a firm's costs may increase the profits of its competitors and decrease the profits of the firm undertaking the investment. Such surprising effects arise because of the possibility that 2-sided platforms may end up subsidizing the participation of 1 side. There are also important implications for antitrust scholars: tying and other practices that may appear as harming competition in 1-sided markets can in fact benefit competitors in 2-sided markets. Key concepts include: If competing 2-sided platforms subsidize 1 side of the market, then a decrease in 1 of the 2 firms' costs may relax competition by making it less necessary for its competitor to subsidize. So, increasing competitive advantage through cost advantage for 1 platform may end up benefiting both platforms. In a 1-sided market, however, cost reductions by 1 firm always hurt rivals. Tying in a 2-sided market may cause no competitive harm to rivals. Closed for comment; 0 Comments.
- 18 Sep 2007
- Research & Ideas
How Brand China Can Succeed
A series of recent setbacks including the Mattel toy recalls threaten China's new and improving image, says Professor John Quelch. There is just not enough preexisting brand equity among the world's consumers to inoculate Brand China against the current tide of negative publicity. What should the country do to polish its image? Key concepts include: Recent setbacks threaten China's new and improving image. China looks like a country that loves the world's markets but does not play by the world's rules. To fix the situation, China should: Tighten and enforce nationwide manufacturing quality standards and health and safety laws. Move towards an economy based on invention rather than imitation. Use the Olympics as an event for national progress, not just Beijing progress. Closed for comment; 0 Comments.
- 18 Sep 2007
- First Look
- 18 Sep 2007
- Working Paper Summaries
Modularity, Transactions, and the Boundaries of Firms: A Synthesis
For the last 30 years economists have used the concepts of "transaction," "transaction cost," and "contract" to illuminate a wide range of phenomena, including vertical integration; the design of employment, debt, and equity contracts; and the structure of industries. These concepts are now deeply embedded in the fields of economics, sociology, business, and law. Theories explain how to choose between different forms of transactional governance. But why does a transaction occur where it does? Without this answer, the forces driving the location of transactions in a system of production remain largely unexplored. This paper explains the location of transactions (and contracts) in a system of production. It also presents a theory of technological change that predicts changes in the location of transactions and therefore in the structure of industries. Key concepts include: Transaction locations are not technologically determined, but arise through the interplay of firms' strategies and knowledge and the requirements of specific technologies. Because strategies, knowledge, and technologies all change over time, the location of transactions changes as well. Each firm participating in a task network will have inexhaustible opportunities to gain advantage by redesigning the portions of the task network it controls and the transactions it influences. At the same time, new firms can quite easily attach themselves to the network at the boundaries of modules. Closed for comment; 0 Comments.
- 17 Sep 2007
- Working Paper Summaries
Evidence on the Effects of Unverifiable Fair-Value Accounting
Since the late 1990s, the Financial Accounting Standards Board (FASB) has pressed for the use of fair values in accounting. When such fair values are based on verifiable market prices, they are less likely to be managed. However, in some FASB standards, fair values are based on managers' or appraisers' unverifiable subjective estimates. Agency theory suggests that managers will take advantage of this unverifiability to manage financial reports in order to extract rents. This paper considers a recent FASB standard known as SFAS 142, which relies on unverifiable fair-value estimates when accounting for acquired goodwill. The goal of the research is to see whether firms are using this standard to manage their financial reports. Key concepts include: The increased use of unverifiable fair-value estimates in accounting will lead to more opportunistic management in financial reports, absent increased monitoring. Firms that were predicted to have discretion are indeed managing their financials according to SFAS 142. Closed for comment; 0 Comments.
- 17 Sep 2007
- Research & Ideas
Broadband: Remaking the Advertising Industry
Evolving from the Marlboro Man in the 1960s to the Subservient Chicken in a recent Web campaign, advertising is undergoing a radical transformation. Harvard Business School professor Stephen P. Bradley, who is cowriting a book on how broadband technologies are remaking many industries, discusses how advertising is responding to the challenges. Key concepts include: Traditional advertising vehicles such as television are becoming less interesting to advertisers because of fragmented viewership and inadequate user data. Broadband technology is becoming more important to advertisers because of its ability to move the consumer closer to a transaction decision and to deliver clearly segmented audiences. The advertising industry is wrestling with this transformation in part by merging with media companies and by launching creative ad alternatives. Closed for comment; 0 Comments.
- 14 Sep 2007
- Research & Ideas
How to Profit from Scarcity
This past summer's launches of the iPhone and final Harry Potter book were textbook examples of companies profiting in part by creating the illusion of scarcity. Professor John Quelch explains the advantages of this strategy when executed well, and tells how to recover from a real product shortage. Key concepts include: Marketers understand that using the illusion of scarcity can accelerate demand by encouraging us to buy sooner and perhaps to buy more than normal. Using false scarcity as a strategy also carries risk: it invites heightened scrutiny and frustrates buyers. Even if you experience a real product shortfall, take steps to mitigate potential disaster. Closed for comment; 0 Comments.
- 12 Sep 2007
- Op-Ed
Building Sandcastles: The Subprime Adventure
The early days of the subprime industry seemed to fulfill a market need—and millions of renters became homeowners as a result. But rapidly escalating home prices masked cracks in the subprime foundation. HBS professor Nicolas P. Retsinas, who is also director of Harvard University's Joint Center for Housing Studies, lays out what went wrong and why. Closed for comment; 0 Comments.
- 12 Sep 2007
- Working Paper Summaries
The Ethnic Composition of U.S. Inventors
The contributions of immigrants to U.S. technology formation are staggering. While the foreign-born account for just over 10 percent of the U.S. working population, they represent 25 percent of the U.S. science and engineering workforce and nearly 50 percent of those with doctorates. Even looking within the Ph.D. level, ethnic researchers make an exceptional contribution to science as measured by Nobel Prizes, election to the National Academy of Sciences, patent citation counts, and so on. The magnitude of these ethnic contributions raises many research and policy questions: 4 examples are debates regarding the appropriate quota for H1-B temporary visas, the possible crowding out of native students from the science and engineering fields, the brain-drain or brain-circulation effect on sending countries, and the future prospects for U.S. technology leadership. This paper describes a new approach for quantifying the ethnic composition of U.S. inventors with previously unavailable detail. Key concepts include: Ethnic scientists and engineers are an important and growing contributor to U.S. technology development. The rapidly increasing ethnic contribution in high-tech sectors is due to the strong growth of the Chinese and Indian ethnicities. Shifts in the concentration of ethnic inventors appear to facilitate changes in the geographic composition of U.S. innovation. Closed for comment; 0 Comments.
- 11 Sep 2007
- First Look
- 11 Sep 2007
- Working Paper Summaries
Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates
This paper documents the existence of considerable variation over time in the covariance or correlation of Treasury bond returns with stock returns and with consumption growth. There are times in which bonds appear to be safe assets, while at other times they appear to be highly risky assets. The paper finds that time variation in bond risk is systematic and positively related to the level and the slope of the yield curve. These are factors that proxy for inflation and general economic uncertainty, inflation risk, and the risk premium on bonds. Key concepts include: The movement of bond returns together with stock returns (or consumption growth) can change significantly in business cycle frequencies. Bond risk changes over time, and these changes are correlated with time variation in the term structure of nominal interest rates. Closed for comment; 0 Comments.
- 10 Sep 2007
- Research & Ideas
High Note: Managing the Medici String Quartet
As one of the top ensembles in classical music, the Medici String Quartet has enjoyed a long and creative collaboration. But it hasn't always been harmonious. HBS professor Robert Austin explains what innovative businesses can learn about managing creative people. Key concepts include: Businesses emphasize technical mastery and the creation of predictable patterns. The Medici String Quartet aimed for more. The goal of each performance was never to render a piece exactly as the composer intended, but to interpret it in fresh and new ways. Financial pressures for the quartet could be intense. Among musicians, it's an old (but good) joke: How do you become a millionaire as a classical musician? Start as a billionaire. Businesses enjoy the notion that innovation happens when everyone is happy and satisfied. As the quartet proved, harmony comes in unexpected ways. Closed for comment; 0 Comments.
- 07 Sep 2007
- What Do You Think?
Are Elite Business Schools Fostering the Deprofessionalization of Management?
Summing Up. The founders of top business schools wanted to make management a profession similar to law, medicine, and theology. But the results look different, according to a new book, From Higher Aims to Hired Hands, by HBS professor Rakesh Khurana. Now Jim Heskett asks: How, and to what extent, are business schools themselves contributing to the situation? Forum now closed. Closed for comment; 0 Comments.
- 07 Sep 2007
- Working Paper Summaries
Diversification of Chinese Companies: An International Comparison
Many observers have argued that Chinese managers are particularly quick to diversify their enterprises. Fueled by robust economic growth and the scant enforcement of intellectual property rights that could serve as barriers to entry, Chinese companies appear to be aggressively expanding into new industries whenever economic opportunities appear to beckon. There is much anecdotal evidence to support this view. But because the Chinese economy is extraordinarily large and dynamic, it is difficult to know whether anecdotes reflect an underlying trend toward greater diversification. This paper provides systematic evidence about the scope of Chinese companies, and compares the data with the evolution of firm scope in 8 other large economies. Key concepts include: This research shows no evidence that emerging-market companies are systematically more diversified than their developed-market counterparts. Contrary to some claims, the level of diversification of Chinese firms has remained stable over the past 5 years. In all other countries in the research sample, firms have become more focused over time. Chinese companies did not follow this trend. Chinese state-owned enterprises diversified their operations more aggressively than other Chinese firms. Closed for comment; 0 Comments.
- 06 Sep 2007
- Working Paper Summaries
Why We Aren’t as Ethical as We Think We Are: A Temporal Explanation
People commonly predict that they will behave more ethically in the future than they actually do. When evaluating past (un)ethical behavior, they also believe they behaved more ethically than they actually did. These misperceptions, both of prediction and of recollection, have important ramifications for the distinction between how ethical we think we are and how ethical we really are, as well as understanding how such misperceptions are perpetuated over time. This paper draws on recent research in psychology and decision-making to gain insight into these forces. It also provides recommendations for reducing them. Key concepts include: All individuals have an innate tendency to engage in self-deception around their own ethical behavior. Organizations worried about ethics violations should pay attention to understanding these psychological processes at the individual level rather than focus solely on the creation of formal training programs and education around ethics codes. Closed for comment; 0 Comments.
- 06 Sep 2007
- Working Paper Summaries
The Excess Burden of Government Indecision
Virtually all U.S. policymakers, budget analysts, and academic experts agree that the United States faces a very serious, if not a grave, long-term fiscal problem. Yet few policymakers will publicly say how or when they would fix it, perhaps because they fear being the bearer of bad news and getting voted out of office. Delaying the resolution of fiscal imbalances incurs two costs, however. First, it leaves a larger bill for a smaller number of people to pay. Second, and of primary interest to this research, it perpetuates uncertainty, leading economic agents to make suboptimal saving, investment, and other decisions, and reducing welfare. This research identifies and measures this "excess burden" of government indecision and finds that it is economically significant. Key concepts include: Whatever policymakers gain from delaying bad news, delay fosters and exacerbates economic uncertainty. As individuals wait to learn the level of future Social Security benefits, the fact of having to wait materially affects their consumption, saving, and portfolio decisions. Most important, it reduces welfare. The result of government indecision, in this instance, can exceed more than .5 percent of individuals' resources, a significant amount. The excess burden is highly sensitive to the degree of risk aversion, the number of years one must wait to have the policy uncertainty resolved, and the size and probability of policy changes. People experience sizable welfare gains from learning early about future changes in benefits and tax rates regardless of their attitudes toward risk or the uncertainty they face about their own labor earnings. Closed for comment; 0 Comments.
- 05 Sep 2007
- First Look
- 05 Sep 2007
- Working Paper Summaries
Global Currency Hedging
This article is forthcoming in the Journal of Finance. How much should investors hedge the currency exposure implicit in their international portfolios? Using a long sample of foreign exchange rates, stock returns, and bond returns that spans the period between 1975 and 2005, this paper studies the correlation of currency excess returns with stock returns and bond returns. These correlations suggest the existence of a typology of currencies. First, the euro, the Swiss franc, and a portfolio simultaneously long U.S. dollars and short Canadian dollars are negatively correlated with world equity markets and in this sense are "safe" or "reserve" currencies. Second, the Japanese yen and the British pound appear to be only mildly correlated with global equity markets. Third, the currencies of commodity producing countries such as Australia and Canada are positively correlated with world equity markets. These results suggest that investors can minimize their equity risk by not hedging their exposure to reserve currencies, and by hedging or overhedging their exposure to all other currencies. The paper shows that such a currency hedging policy dominates other popular hedging policies such as no hedging, full hedging, or partial, uniform hedging across all currencies. All currencies are uncorrelated or only mildly correlated with bonds, suggesting that international bond investors should fully hedge their currency exposures. Key concepts include: It is striking that the U.S. dollar, Swiss franc, and euro are widely used as reserve currencies by central banks, and more generally as stores of value by corporations and individuals around the world. Interestingly, the euro, the Swiss franc, and a long-short position in the U.S. dollar and the Canadian dollar are negatively correlated with world equity markets. By contrast, other currencies such as the Australian dollar, the Canadian dollar, the Japanese yen, and the British pound are either uncorrelated or positively correlated with world stock markets. These patterns imply that international equity investors can minimize their equity risk by taking short positions in the Australian and Canadian dollars, Japanese yen, and British pound, and long positions in the U.S. dollar, euro, and Swiss franc. For U.S. investors, currency exposures of international equity portfolios should be at least fully hedged, and probably overhedged. Exceptions are the euro and Swiss franc, which should be at most partially hedged. Risk management demands for currencies by bond investors are small or zero, regardless of the home country of these investors, and regardless of whether these investors hold only domestic bonds or an international bond portfolio. Closed for comment; 0 Comments.
- 04 Sep 2007
- Working Paper Summaries
Why Do Intermediaries Divert Search?
(Previously titled "Designing a Two-Sided Platform: When to Increase Search Costs?") Conventional wisdom holds that at the most fundamental level, market intermediaries exist in order to reduce search and transaction costs among the parties they serve and that they are more valuable the larger the cost savings they generate. This would seem to be true of both traditional, brick-and-mortar intermediaries (retailers, shopping malls, brokers, magazines, market exchanges) and "new economy" ones (Amazon, eBay, iTunes, Yahoo), all of which connect buyers and sellers of goods or services. However, many intermediaries, while providing the relevant information, seem at some stage of the process to do the opposite of reducing search costs—and by purposeful design rather than by accident. Retail stores, for instance, stack the products they carry so that the most sought-after items are hard to find and thereby induce consumers to walk along aisles carrying other products. This paper challenges the conventional wisdom that intermediaries create value by reducing search and transaction costs. It proposes a model that sheds light on the economic motivations that in some contexts may lead intermediaries to make it harder for the parties they serve—consumers and third-party sellers—to find each other. Key concepts include: This paper helps make sense of strategies employed by some intermediaries, which seem to purposefully make it hard for their consumers to find what they want: shopping malls, retail stores, popular magazines, and even Internet portals. When an intermediary derives higher revenues from consumers shopping at lesser-known stores relative to revenues from consumers shopping at more popular stores, it is more likely to degrade the quality of the search service offered to consumers. The intermediary may have an incentive to degrade the quality of search even further when its design decision influences the prices charged by stores. Closed for comment; 0 Comments.
How to be a Customer
Sure, most marketing efforts aim to influence consumer behavior. But consumers can also market themselves to influence vendors, says Professor John Quelch. Want to get a little extra whipped cream from your neighborhood barista? Here are tips to become a valuable customer. Key concepts include: Customers should market themselves to sellers to obtain an advantage over their competition—other customers. Vendors appreciate customers who are demanding, respectful, reliable, surprising, and engaging. Closed for comment; 0 Comments.