Coyote Blog

I know that flat screen Plasma and LCD TV's are very popular right now, especially as prices are falling.  They provide a good platform for viewing HDTV and widescreen DVDs.  As a longtime fan of widescreen, even before DVD's and HDTV, I understand the attraction well (and yes, you could get widescreen format movies on VHS and Laserdisc, but it was a pain in the butt and DVD is great).

If you are looking at a plasma TV for your main viewing or home theater room, I would like to encourage you to look at front projection before you make a purchase.  No, I don't have any financial interest in the technology, and no, it is not right for everyone.  For some applications, though, front projection can offer a dramatically better movie experience than plasma for the same money.  Why?  Two words:  110" Diagonal  (OK, thats sort of more than two words when you say it rather than write it, but you get the idea).

A projection system can be almost as big as you have space for.  You have never, never experienced the Superbowl until you have seen it on a 95" wide widescreen in HDTV.  If you get one, do not tell the neighbors unless you want them in your house every Sunday.  We almost never go to theaters any more - we have a great experience in our own house.  I have practically paid for this installation just from birthday party savings, as my kids now prefer to have movie parties at home. 

The installation in the picture above is my 95" wide 16x9 screen, and I took the photo so you could also see the projector hanging on the ceiling (the photo overemphasises the projector - it is actually not so prominent).  The screen is actually a special acoustically perforated kind, and the speakers are behind it (this is more expensive and hides the speakers but is not at all required).

OK, there are some downsides to this installation, which is why you do not see them everywhere:

• The wiring is tougher, since the projector usually is a long way from your video equipment - I had to get an electrician to run some wires for me
• The room has to be dark -- either with few windows or, in my case, with blackout shades on all the windows -- to be able to watch during the day.  If you look carefully in the picture above you can see the shade above the windows.
• They are harder to find -- Best Buy type stores do not sell these systems
• They are different esthetically than you are used to.  They take up less space than a big box rear-projection, but more space than a plasma. Yes, you can put in mechanisms to roll up the screen into the ceiling or even pull the projector up out of site when not being used, but these add a lot to the cost.
• Good systems are not at all cheap, and cost about as much as a good plasma - about $4000 for the projector and $1000 for the screen.  Really good systems go for crazy amounts of money - as much as $60,000 and more.  Don't be scared off - there are many good inexpensive projectors made today.

We have loved this system and have gotten more prolonged enjoyment out of it than anything else in our house.  It is not for everyone, and I don't expect everyone to choose to do the same thing I did, but I do think it is worth your time to take a peak at one when you are out shopping for that plasma TV.

Café Hayek has a good post on pricing and marginal cost:

Economists: loose your devotion to marginal-cost pricing. The best prices are not necessarily those that equal marginal cost. Prices above marginal cost help convey important information "“ namely, information about the value of the capital invested that makes provision of the good or service possible in the first place. This information, in turn, is important to entrepreneurs searching for profitable places to invest their money and energies.

This article is particularly helpful in the context of pharmaceutical cost regulation.  Activists of the socialist/progressive bent consider any pricing above marginal cost to be evidence of monopoly, market failure, rapacious greed or all of the above -- but in any case a call for government action.  This article helps reinforce the case of why pricing above marginal cost is not necessarily a market "failure".  In the case of US Pharmaceutical pricing, drug pricing today is evidence of market failure only if one wishes to see the market fail to develop any new drugs in the future.

Note:  I have posted a more recent article with updated data here.

Mises Blog has a good article on the "Peak Oil" meme.  You may have gotten investment solicitations urging you to invest in oil because production is supposedly going to peak in 2006.

Oil production will peak some day.  I do not know when.  I do know that when I was in high school debate in the late 1970's, the topic one year was on resource policies.  I read everything there was at the time on oil supply as well as other critical mineral supplies.  Most "experts" at the time were predicting that oil would "run out" in about 1985 or 1990.  As you can see below, folks who invested in oil in 1980, after a price run-up similar to the one we have seen lately, got slaughtered.

Think twice or maybe three times about this graph before you invest.  Notice that there is no long term trend in real oil prices, even over one hundred years!  To make money buying oil, you have to do it on timing, buying ahead of sharp temporary increases.  And given that we are at the top of one of those sharp increases, can now really be the time to buy?

You can never get all the oil out of a field, and the exact amount of oil you can recover is dependent on how much you want to spend to do it, which in turn is related to oil prices (or expectations of oil prices).  The first 20% of the oil in a field might just squirt out under its own pressure.  The next 20% might have to be pumped.  The next 20% might need high pressure water injection to help it.  The next 20% might need expensive CO2 injection to help it.  If you ask the field manager how much oil was left, he would give you different answers at $20 and $45 a barrel, because he would make different assumptions about how far along this investment curve he would go.

If you are still thinking about investing, do one more thing: Study the famous bet between Paul Ehrlich and Julian Simon:

In 1980, economist |Julian Simon| and biologist Paul Ehrlich decided to put their money where their predictions were. Ehrlich had been predicting massive shortages in various natural resources for decades, while Simon claimed natural resources were infinite.

Simon offered Ehrlich a bet centered on the market price of metals. Ehrlich would pick a quantity of any five metals he liked worth $1,000 in 1980. If the 1990 price of the metals, after adjusting for inflation, was more than $1,000 (i.e. the metals became more scarce), Ehrlich would win. If, however, the value of the metals after inflation was less than $1,000 (i.e. the metals became less scare), Simon would win. The loser would mail the winner a check for the change in price.

Ehrlich agreed to the bet, and chose copper, chrome, nickel, tin and tungsten.

By 1990, all five metal were below their inflation-adjusted price level in 1980. Ehrlich lost the bet and sent Simon a check for $576.07. Prices of the metals chosen by Ehrlich fell so much that Simon would have won the bet even if the prices hadn't been adjusted for inflation. (1) Here's how each of the metals performed from 1980-1990.

Yesterday, my kids and I set out to buy ourselves a Christmas tree.  Instead of going to Home Depot first, like we usually do, we stopped at one of those tent places that grow up this time of year on vacant lots, mainly because the tent was closer.  We soon left the tent, though, moving on to Home Depot, but not before the tree sales person made sure to tell my kids that he thought their dad was a jerk.  Here is how we got there:

I walked around the lot - there were only about 20 trees up, which is kindof a small selection, but they were all sitting in a pan of water, which can be a good sign that they are trying to keep the trees fresh.  I immediately saw a couple of trees that would work fine, so I walked up to them, looking for a price tag -- no price.  I looked around to see a posted price list, or a list of prices per foot - no price list.  I asked the guy working there where the prices were - he said just pick the one I liked, bring the tag to the register, and they would tell me there how much it costs.

At this point, I turned to my kids and said "lets go someplace else".  In my book, businesses can operate and price most any way they like, but I can also decide if I want to do business with them.  I don't like doing business with companies that have no posted prices (similarly I hate doing business with people like car dealers whose posted prices aren't the real prices, but that's another story).

The guy asked me why I was leaving.  I should have known better.  I should have just said something like I don't see one I like.  But I actually tried to explain what I was thinking.  I said, "What would be your reaction if you went into a Walmart and none of the items had prices - if the only way you could find out what the prices were was when they rang you up at the register.  Would you shop there?"  What I left unsaid, because I didn't want to discuss it in front of my kids, was that I didn't want to be put in the position of having my kids fall in love with a tree (they get very emotional about this choice) and then having to tell them a few minutes later that sorry, it was too expensive.  I much prefer the Home Depot approach, where each set of trees is clearly marked, so I can steer them away from even looking at the $100+ trees.

Anyway, I confess I probably was huffy about it, because this is one of my hot buttons, and as I called my kids to me the guy told them their dad was a jerk.

I probably am.  I know this guy is trying to make a living.  He may well not have had prices posted just out of lack of sophistication rather than any sinister desire to trap me into buying more tree than I wanted.  So I probably need to be publicly chastised -- feel free to use the comment section to do so.

Good news for our business (I run a campground management company), the AP reports via our Arizona Republic that RV sales continue to surge, despite high gas prices.

RV sales are definitely riding the front end of the demographic wave, as new retirees look for more flexibility and mobility in their retirement years.   RV businesses are also benefiting from a post 9/11 reluctance to travel overseas or vacation at high-profile resorts or cities that might be targets.  I wrote on some of these trends in my post "the New American Nomads".

When was the last time you paid attention to the cost of any medical procedure (not your copay or share - but the actual cost)?  When was the last time you balanced whether to have an incremental medical procedure, such as an extra test, based on cost vs. benefits?  If you are like most Americans, the answer is "not lately" because our health care system does not give the end consumer any of the normal incentives to "shop" that they would when, say, buying a TV.

Marginal Revolution has a great post on laser eye surgery, probably one of the most popular medical procedures not covered by traditional insurance (I would normally guess "most" popular surgery, but having lived in Dallas and Scottsdale, I am all-too-aware of the popularity of breast implant surgery as well).  Guess what - it is one of the few medical procedures with high satisfaction and falling prices.

Business Pundit has a post today about a new auction site named jittery. 

One thing BusinessPundit mentions is that the new site will have a

"Buy Offer" feature, which I believe gave him the idea in the first place. Basically, instead of buyers competing over an item and raising the price, buyers specify what they want to buy, which features are important, what prices they want to pay, and sellers compete to give them the best deal.

I am extremely skeptical that this would work.  As background, I ran the marketplace portion of Mercata, that similarly tried to bring a different, more buyer focused model to table and failed fairly spectacularly.  We found that you can be as innovative as you want, but you need a lot of traffic to your site, and building such traffic takes a lot of time or a lot of money or both.  You also need to provide a value proposition for both buyers AND sellers.

A LOT of people have tried some sort of reversal of the auction process, where buyers specify the goods they want and sellers bring them to the table, bidding against each other (ie lower and lower prices) to get the business. FreeMarkets made some hay with this in the B2B world, but from the beginning the auctions were never really the money maker, but were a Trojan horse for supply chain consulting, which helps to explain why they merged with Ariba. 

The only people to make this model work in the consumer area is Priceline.  However, what most people fail to realize about Priceline is that it fulfilled a real business need for SELLERS, even more than for buyers. 

Airlines have a classic fixed cost pricing problem.  They want to sell as many tickets at a high price as possible, but an incremental passenger costs them nothing, so if the plane is not full, getting even $50 for a passenger to fill an empty seat at the last minute is profitable to them.  The problem is somehow offering the $50 fare only to the passenger who would not fly otherwise, and not cannibalizing the customers who are willing to pay $300. 

The problem is, if they offer the $50 fare to anyone, they can't hide the fact very well.  The airline industry, as most know, have very transparent computer systems that let everyone know their prices on every route every minute of the day.  If an airline cuts prices on a route, everyone knows - so that competitors can match the cut immediately and customers can switch from the higher to lower fairs.  Airlines protect themselves somewhat with limited availability of certain fares and advanced purchase requirements - so that people, particularly business travelers, who need to maintain flexibility, have a reason to pay higher fares.

However, advanced purchase requirements were not providing enough protection.  What airlines really wanted was a way to cut fares for one person who might not have flown otherwise, and let no one else see them do it.   And Priceline was the answer.  Yes, airlines had to tell the Priceline computers what the lowest bid they would accept from a customer for a flight was, but this did not constitute an official price that went into the reservation systems.  So, the airlines could cut their price (via Priceline), but only the customer who got the price ever saw it.

In fact, the story is even better.  At the time Priceline came around, one airline had a particular problem they needed to solve.  When TWA got a loan from Carl Icahn, an almost unnoticed part of the deal was that a certain travel agency owned by Icahn, small at the time, would be guaranteed TWA tickets at a healthy discount off the lowest published fares.  This agency, with this boondoggle, grew to enormous size as Lowestfare.com.  TWA, beyond the reasons listed above, therefore had a second reason for not wanting to publish their lowest possible fare.  Normal limitations that most airlines could set on how many seats would be available at their lowest fare could not be enforced by TWA.  If they offered a new $100 fare, Lowestfare.com could blow out an unlimited number of tickets at $80 or less and TWA would have to accept it.  Therefore, by offering discounts unpublished via Priceline, TWA prevented the travel agency from getting inventory even cheaper.  And so, a huge portion of the early Priceline inventory was TWA.  (ironically, after the American Airlines acquisition of TWA killed the deal, the Lowestfare.com URL was bought by ... Priceline.

Anyway, I just don't see how reverse auctions can work in the consumer world, particularly if the customers are allowed to specify price and quality and features, etc.  The transaction costs for suppliers would be just too high wading through this stuff -- in fact, many companies in the B2B world, where transaction sizes are in the millions, have come to this same conclusion - for a variety of reasons, they are choosing not to participate in reverse auctions (here too).

Marketplaces must offer value to both buyer and seller.  If you don't offer honest value to sellers, then no products appear on the site and it will fail.

Basically, there are two gorilla's in the online marketplace arena - eBay and Amazon.  eBay had the head start in building a brand and community in the marketplace space, but Amazon has brought some really nifty technology to the table.

As a user of both, I welcome a new competitor, sortof.  I hope that there will be competitors who force eBay to adopt some overdue new features (e.g. auction sniping protection and better search features on past auctions) but I don't really want any to be successful enough to create a third or fourth or fifth major platform out there, because that just increases my search costs and time when I want to buy something.

UPDATE

I missed pointing out one bit of irony.  The Internet is generally attractive to consumers because it increases product information, and particularly increases knowlege about market pricing.  However, in this case, Priceline's attractiveness to airlines was that it decreased pricing transparency in the market.

UPDATE #2

Welcome Carnival of the Capitalists readers.  Have a look around, and check out our thoughts on replacements for Dan Rather.

Socialized medicine supporters in the US often talk about Canada's really, really good and affordable care. Except no one can have any, but if they could get any care, I am sure they would love it. Check out this company, Timely Medical Alternatives. Specializes in getting you to the US so you can actually have your operation. Sure must be a mess if there is a niche for this.

And by the way, please don't tell me about lower drug prices in Canada. International markets pay marginal cost for drugs (ie just production cost) and we in the US pay full cost (ie including the development costs of the drug plus all the failures). Expanded programs to import marginal cost drugs from Canada will only mean that Canadian drug prices will go up - ours are not going down to those levels. And, if you pass a law saying somehow that they can't raise their prices in Canada and we can import at those prices, then drug R&D is over. Even if you told the drug companies that they were working for the good of man rather than profits, and dropped all their profits into lower pricing, you wouldn't get more than a 10-20% (depending on the company) price decrease for drugs. Are you really ready to kill all future drug innovations for a 15% discount on the current ones?

UPDATE

The Canadians have now made clear that they will not accept the Kerry plan for mass drug re-importation from Canada. Why? One would think that the socialized medicine supporting politicians in Canada would support Kerry and other socialized medicine supporters in the US. Fellow travelers stick together.

The reason, is, of course, that the Canadians have long ago recognized the truth in what I said above. US massive drug re-importation will just cause drug companies to raise prices in the target countries. Canada likes the below-full-cost pricing they get on drugs, and are opting to let the US keep paying for its drug development.

Courtesy of Business Pundit, this article on customer loyalty programs and whether they actually increase profits.

To me, you can make a good case for them in commodity undifferentiated products like commercial airline service, but now it seems like every store, from Best Buy to Barnes and Noble have them. It strikes me that stores like these should have plenty to differentiate them without a loyalty program.

I'm no psychic, but I can probably guess what's in your wallet. Chances are it's stuffed with loyalty cards from this airline and that hotel, not to mention a handful of point-accruing credit cards. And your key chain probably has a few hanging versions of the same"”video store tag, gas station "quick pass," grocery store card. You probably belong to more loyalty groups than you can count.

Do you really think your customers are any different? It's hard to expect your affinity program to inspire loyalty when all of its members carry your competitors' cards as well.

Face it: Loyalty programs have reached the saturation stage. The first-mover advantage gained by the pioneers in this field is long past. Now as common as kudzu, affinity programs have lost their distinction and, as a result, much of their value.

I am actually sick of these programs. It increasingly irritates me to have to carry 354 pieces of plastic in my wallet to get the best prices every where I shop. I am old enough to remember when you had to have every stores proprietary charge card to shop there - so you had to have a bunch of department store cards and gas cards, etc etc. I am thrilled nowadays to shed all that crap in my wallet and just use my Visa card everywhere. Now, though, we are rolling back the clock to plastic proliferation. I find myself actually growling at the poor Borders Books checkout person when they ask me if I have (or want) a Borders loyalty card.

Coming soon, I hope, is the backlash, with stores competing with a saying like "you don't have to have a special card to get our best price".