Apple wanted a most favored nation clause

The WSJ reports that has appealed a decision that it fixed prices on ebooks. What caught my eye was a reference to a most favored nation clause.

SUMMARY: On Monday, an appeals court is scheduled to consider whether Apple's pricing agreements with e-book publishers amounted to a deft market maneuver or an illegal conspiracy. "Apple's agreements ceded the power to set prices to the [five major] publishers.... A key provision of the contracts required the publishers to give Apple's store the best deal that they gave anyone on e-books. That assured the publishers would force Amazon to change its business model, otherwise they would suffer heavy losses matching Amazon's discounted prices-$9.99 for most best sellers-in Apple's e-book store, prosecutors said. Prices on many e-books increased immediately." Related article: Justice Department lawyers faced aggressive questioning from judges reviewing a finding that Apple conspired with book publishers to raise the price of electronic books in 2010.

CLASSROOM APPLICATION: Students can evaluate whether "most-favored nation" clauses in contracts result in higher or lower prices. "So-called most favored-nation clauses are common in industries ranging from health care to television to financial services. Such clauses, like those in the Apple agreements, guarantee the recipient the lowest prices or rates charged to any buyer. In theory, such arrangements encourage competition and lower prices for consumers, but in practice they sometimes establish a minimum price, according to antitrust lawyers and government officials."

QUESTIONS: 
1. (Introductory) What are "most-favored nation" requirements? What are possible motivations by Apple to place most-favored national clauses in their contracts with book publishers?

2. (Advanced) What are the potential effects on competition among manufacturers of most-favored nation requirements between retailers and manufacturers?

3. (Advanced) What are the potential effects on retail prices of most-favored nation requirements between retailers and manufacturers?

Reviewed By: James Dearden, Lehigh University

Museums begin to engage visitors to capture and to mine data

The article in the WSJ reports that museums are starting to use tracking devices and digital social engagement to collect data for consumer research.

To hedge or not to hedge?

Southwest won big in 2008 when it hedged. Delta Airlines lost in 2014 when it hedged.

Why are wireless prices decreasing?

This article from the WSJ reports that wireless "carriers are waging a price war to attract new customers" and that "churn", the movement of a customer from one carrier to another, has increased. 

SUMMARY: AT&T, Verizon say they need to work harder to expand subscriber counts; T-Mobile unveils a new deal.

CLASSROOM APPLICATION: The article prompts the question about the factors that are causing lower prices among wireless providers. While the article reports on the competition to attract new customers, it does not examine the possible causes. Two factors about industry structure that affect equilibrium prices are quality differences among wireless providers and costs to consumers of switching providers. Students can discuss whether shrinking quality differences among providers and reductions in switching costs leads to lower equilibrium prices.
QUESTIONS: 
1. (Advanced) What is the effect on a price war among wireless carriers on whether consumers switch carriers? What is the "prisoner's dilemma"? In what sense is a price war among wireless carriers like a prisoner's dilemma?

2. (Advanced) Research question. What factors are causing wireless carriers to engage in a price war?

3. (Introductory) Research question. Why is T-Mobile gaining customers?

Reviewed By: James Dearden, Lehigh University

Online sales

This article in the WSJ discusses the profitability of online sales. It reports that shoppers continue to move to online purchases. It reports that many traditional retailers have lower profitability on online sales than in their stores and that "Primark, the European discount retailer that plans to open eight U.S. stores, has shunned online retailing altogether because it deems it unprofitable". 

Analyze this:
"If the e-commerce business was inherently so much more profitable, pure e-commerce companies would have higher margins," said Simeon Siegel, an analyst with Nomura.

"I don't care if customers buy online or in store," he said. "We're focused on sales."

"Another factor weighing on e-commerce margins is that online sales have a higher degree of variable costs." 

Questions to consider:

1. Do traditional retailers have a competitive advantage in online sales? If not, what is the future of traditional retailers? If so, what is the future of Amazon?

Coase Theorem in action

This ad is a good illustration of how the Coase Theorem works.