First Look

February 18, 2009

Media firms face a juggling act. How should they strategize on pricing when they sell content to consumers and also compete for advertisers who want to be noticed by consumers? Forthcoming in Marketing Science, a new study by HBS professors David Godes and Elie Ofek and INSEAD colleague Miklos Sarvary finds that firms in a duopoly such as this may charge higher prices for content than those in a monopoly.

"This happens because competition for advertisers can reduce the return per customer impression from the ad market, making each firm less willing to underprice content to increase demand. Greater competitive intensity may thus increase content profits and decrease ad profits. These findings are in sharp contrast to those in a regular one-sided product market, in which competition typically lowers product prices and profits," they continue in their article, "Content vs. Advertising: The Impact of Competition on Media Firm Strategy."

Other faculty research this week describes how online advertisers can better deter fraud; and looks at international financial regulation as well as how the Bill and Melinda Gates Foundation teamed up with the Rockefeller Foundation to try to increase agricultural production in Africa.

— Martha Lagace

Working Papers

Deterring Online Advertising Fraud Through Optimal Payment in Arrears (revised)


Online advertisers face substantial difficulty in selecting and supervising small advertising partners. Fraud can be well-hidden, and limited reputation systems reduce accountability. But partners are not paid until after their work is complete, and advertisers can extend this delay both to improve detection of improper partner practices and to punish partners who turn out to be rule-breakers. I capture these relationships in a screening model with delayed payments and probabilistic delayed observation of agents' types. I derive conditions in which an advertising principal can set its payment delay to deter rogue agents and to attract solely or primarily good-type agents. Through the savings from excluding rogue agents, the principal can increase its profits while offering increased payments to good-type agents. I estimate that a leading affiliate network could have invoked an optimal payment delay to eliminate 71% of fraud without decreasing profit.

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Running Out of Numbers: Scarcity of IP Addresses and What to Do About It


The Internet's current numbering system is nearing exhaustion. Existing protocols allow only a finite set of computer numbers ("IP addresses"), and central authorities will soon deplete their supply. I evaluate a series of possible responses to this shortage: Sharing addresses impedes new Internet applications and does not seem to be scalable. A new numbering system ("IPv6") offers greater capacity, but network incentives impede transition. Paid transfers of IP addresses would better allocate resources to those who need them most, but unrestricted transfers might threaten the Internet's routing system. I suggest policies to create an IP address "market" while avoiding major negative externalities—mitigating the worst effects of v4 scarcity, while obtaining price discovery and allocative efficiency benefits of market transactions

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Leveraging Waste: Implications for Competition and Welfare (revised)


We study the competitive and welfare implications when a manufacturer converts its waste stream into a useful and saleable by-product. The term "by-product synergy" (BPS) has been coined to describe this practice. By converting waste into by-product, the firm not only reduces its waste disposal cost and potentially increases revenue, it may reduce its environmental impact by decreasing waste volume. The distinguishing operational characteristic of by-product synergy is that quantities of the primary product and by-product are linked, with production of the primary product defining the upper bound of the quantity of the by-product. Optimization of a by-product synergy operation requires the firm to shift from a "product and waste" mentality to a "product and product" mentality, and thereby actively manage the quantities of both products to maximize profit. Conditions in the two markets determine whether the firm should increase production of the primary product in order to capture value in the by-product market ("full+ conversion"), or only convert part of its waste into by-product so as not to flood the by-product market ("partial conversion"). As waste is now a useful input for by-product production, it may be optimal to increase the amount of waste generated to improve the efficiency of the by-product process. In addition to the managerial implications, this analysis can inform policy as we show that increasing disposal cost decreases the size of the primary market and increases the size of the by-product market. Therefore, increasing disposal cost decreases the amount of waste generated and, of the waste generated, more is converted into by-product. By-product synergy also shifts wealth from the primary market to the by-product market as disposal cost increases, and under certain conditions, increasing disposal cost may actually increase overall social welfare. We also consider the environmental impact of BPS and derive competitive conditions under which BPS reduces and increases emissions.

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Cases & Course Materials

Agion Technologies

Harvard Business School Case 609-070

An abstract is not available at this time.

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Alliance for a Green Revolution in Africa (AGRA)

Harvard Business School Case 509-007

In 2006, the Bill and Melinda Gates Foundation and the Rockefeller Foundation joined together to form a new organization, AGRA, to tackle the historic challenge of increasing agricultural production in Africa. Launched with much fanfare and led by former U.N. Secretary-General Kofi Annan as chairman of the board, AGRA sought to help millions of African farmers and their families achieve food security and lift themselves out of poverty. By 2008, AGRA had assembled a strong leadership team and had funded numerous small projects ranging from seed development to education. However, it needed to secure additional funding from public and private donors, gain the cooperation of governments, and catalyze private markets to achieve its goals.

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Columbus Tubing: Steel Is Real

Harvard Business School Case 609-042

Columbus Tubing must choose to improve an old technology (steel) or to develop a new material (carbon fiber). The decision must take into account a complicated context: increased demand for the "old" steel products made in Italy, increasing power of carbon fiber manufacturing partners in Asia, growing wage rates in Asia, and high wage rates in Italy. Two plans have been presented to the CEO, Antonio Colombo. The first is to push development of all of the company's technologies, perhaps even seeking new markets for them. The second is to rationalize operations and to redirect R&D resources to marketing of stylish, lower-tech bicycles. The company's future hangs in the balance.

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KPMG (B): Risk and Reform

Harvard Business School Supplement 409-075

Under the leadership of Tim Flynn, Chairman and CEO of KPMG, the firm made a number of changes in compensation, governance, and culture in order to address the underlying reasons for actions that occurred prior to him becoming CEO that led to the accounting giant paying $456 million to the federal government over allegedly selling illegal tax shelters. These changes included a common compensation bonus pool for the entire firm and rewarding people for professionalism as much as for business development; strengthening governance by adding a lead director to the board, removing the chairman and deputy chairman from board member selection, and creating separate committees for professional practice, ethics, and compliance and operations; and enhancing its ethics and compliance program through human resource processes (e.g., recruiting, orientation, training, and exit interviews), implementing periodic and required ethics courses, active firm leadership in these courses, and establishing multiple channels of communication for employees to raise concerns with an explicit "no retaliation" policy. In January 2007, 86% of the employees were proud to work for the firm, compared to 60% in 2005. Employee turnover was at an all-time low. And the Tax Practice, the source of the problems, was the fastest growing such practice in the Big Four accounting firms at 18%.

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Londolozi: Towards a Sustainable Business Model and Ecological Integrity in Southern Africa

Harvard Business School Case 709-001

The Londolozi game viewing reserve in South Africa became a defining icon of ecotourism during the 1990s and early 2000s-that is, a tourist business promoting ecological land management and, at the same time, local economic development. The reserve was in a region in the northeastern part of the country, not far from Mozambique, that sorely called out for progress in both these dimensions. The Sabi Sand Game reserve (within which Londolozi was located) was initially created by the government to provide hunters with an area in which to hunt wildlife. The government retained a portion of the reserve as the Kruger National Park, which allowed visitors to view wildlife, but banned hunting, in an effort to boost wildlife populations. The KNP was initially fenced off from the Sabi Sands Game reserve to prevent hunters from moving into the wildlife reserve. The fence, however, also prevented traditional east-west migration of animals across the region. Through the 1980s and 1990s, the farms within the Sabi Sand Game reserve converted their functions from hunting to wildlife viewing, and the fence was taken down. The new challenge for the farms while transforming into wildlife viewing became land management and local economic development.

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Playing With Fire at Sittercity (A)

Harvard Business School Case 809-009

To help her finance her aggressive expansion plans, Genevieve Thiers plans to raise venture capital for the first time. She has spent the last six long years building Sittercity into the nation's leading babysitting web service, larger than all of its competitors combined. In the process, she brought her boyfriend and his sister into the business to help her, and ended up learning important lessons about mixing family and business. Now looking to raise venture capital, Thiers has just received an email from a general partner at a top VC firm, proposing another meeting and asking her to bring to the meeting an extensive list of proprietary information. This was a promising development, but Thiers was unsure whether she wanted to discuss Sittercity in such depth, especially when the venture capital firm had refused to sign a non-disclosure agreement. How should she respond?

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Responding to the Wii?

Harvard Business School Case 709-448

After years of gaming console industry leadership, how should Sony respond to the overwhelming success of competitor Nintendo's user-friendly Wii over Sony's high-tech PlayStation 3? It was August 2008 and Kazuo Hirai, chief executive of Sony Computer Entertainment Inc. (SCEI), was contemplating questions from reporters about how Sony planned to respond to Nintendo's Wii console, which was dramatically leading Sony's PlayStation 3 and Microsoft's Xbox 360 consoles in sales. The Wii's supremacy was especially disconcerting to Hirai, given that Sony had dominated the video game industry, and largely defined its course, since 1995. But the tables had turned dramatically in the current generation. Though the Wii was technologically much less advanced than PS3 and Xbox 360, the Wii's ease of use, innovative motion-sensitive controller, and simple but fun games had made the console a hit with all demographics: 9 to 65 years old, male and female. As a result, Nintendo had stolen a march on its two larger rivals by appealing to people who were traditionally not avid video game users. Microsoft's and Sony's more powerful machines remained targeted at the traditional "core gamer" audience: 18 to 34 year old males. Hirai was determined to restore that supremacy, in the current generation or the next. He knew that, whether or not he publicly defined SCEI's strategy as a response to Wii, he had to find a way for his company to deal with the new order of the video game industry that Nintendo had created. In seeking to do so, Hirai might find guidance in the history of the industry, which had been marked by rapid and frequent changes of fortune.

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Semiconductor Manufacturing International Corporation: 'Reverse BOT'

Harvard Business School Case 609-062

Semiconductor Manufacturing International Corporation (SMIC) is executing a strategy that leverages the desires of municipalities in China to build clusters of high technology companies. By partnering with those cities to build new semiconductor fabs that SMIC would then operate under contract, the company could build scale without necessarily confronting immediate large capital outlays. Unlike the Build-Operate-Transfer model that some municipalities were using to build infrastructure like the new subway in Shenzhen, in the SMIC "Reverse BOT model" a municipality would build a capital-intensive fab and SMIC would operate it, sharply lowering its capital costs. This model gave the company a unique level of flexibility in an industry where capital costs were the major driver of product costs.

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Syndexa and Technology Transfer at Harvard University

Harvard Business School Case 808-073

Gokhan Hotamisligil is a star researcher at Harvard School of Public Health who has made groundbreaking discoveries linking fat cells, inflammation, and diabetes. He now wants to form a company to commercialize these discoveries. At the same time, Isaac Kohlberg, the head of Harvard's Office of Technology Development (OTD), is eager to improve Harvard's record in commercializing science. Describes the negotiations between Hotamisligil, OTD, the new company, and the School of Public Health to establish appropriate licensing and sponsored research agreements.

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Wolf Elmore Brewer, Inc.

Harvard Business School Case 809-098

This case describes how Alex Wolf, the founder of a small architecture and urban planning firm based in Portland, Oregon, decides to offer partnership to two trusted colleagues, and then how strains develop in their relationship. It asks what can be done to improve these work relationships and if these three individuals can be successful partners.

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Content vs. Advertising: The Impact of Competition on Media Firm Strategy


Abstract: Media firms compete in two connected markets. They face rivalry for the sale of content to consumers, and at the same time, they compete for advertisers seeking access to the attention of these consumers. We explore the implications of such two-sided competition on the actions and source of profits of media firms. One main conclusion we reach is that media firms may charge higher content prices in a duopoly than in a monopoly. This happens because competition for advertisers can reduce the return per customer impression from the ad market, making each firm less willing to underprice content to increase demand. Greater competitive intensity may thus increase content profits and decrease ad profits. These findings are in sharp contrast to those in a regular one-sided product market, in which competition typically lowers product prices and profits. We extend the framework to examine competition across different media (e.g., between magazines and cable TV) and show that firms in a duopolistic medium may benefit from more intense competition from a monopolist in another medium. We characterize the conditions for each firm in the duopoly medium to bundle more ads and earn greater total profits than the rival firm in the monopoly medium.

Goals Gone Wild: The Systematic Side Effects of Over-Prescribing Goal Setting


Goal setting is one of the most replicated and influential paradigms in the management literature. Hundreds of studies conducted in numerous countries and contexts have consistently demonstrated that setting specific, challenging goals can powerfully drive behavior and boost performance. Advocates of goal setting have had a substantial impact on research, management education, and management practice. In this article, we argue that the beneficial effects of goal setting have been overstated and that systematic harm caused by goal setting has been largely ignored. We identify specific side effects associated with goal setting, including a narrow focus that neglects non-goal areas, distorted risk preferences, a rise in unethical behavior, inhibited learning, corrosion of organizational culture, and reduced intrinsic motivation. Rather than dispensing goal setting as a benign, over-the-counter treatment for motivation, managers and scholars need to conceptualize goal setting as a prescription-strength medication that requires careful dosing, consideration of harmful side effects, and close supervision. We offer a warning label to accompany the practice of setting goals.

Level Playing Fields in International Financial Regulation


We analyze the desirability of level playing fields in international financial regulation. In general, level playing fields impose the standards of the weakest regulator upon the best-regulated economies. However, they may be desirable when capital is mobile because they counter a cherry-picking effect that lowers the size and efficiency of banks in weaker economies. Hence, while a laissez faire policy favors the better-regulated economy, level playing fields are good for weaker regulators. We show that multinational banking mitigates the cherry-picking effect and reduces the damage that a level playing field causes in the better-regulated economy.

Bargaining with Imperfect Enforcement


The game-theoretic bargaining literature insists on non-cooperative bargaining procedure but allows "cooperative" implementation of agreements. The effect of this is to allow free-reign of bargaining power with no check upon it. In reality, courts cannot implement agreements costlessly, and parties often prefer to use "non-cooperative" implementation. We present a bargaining model which incorporates the idea that agreements may be enforced non-cooperatively. We show that this has a substantial impact in limiting the inequality of agreements and results in a non-montonicity of the discount rate. The general need to maintain incentives for cooperation means it may appear that "other-regarding" elements enter agents' utility functions. This helps us to understand why experimental subjects might begin negotiations anticipating "fair" bargains. The model also explains why some parties may have incentives to deliberately write incomplete contracts which cannot be enforced in a court of law.