Wednesday, July 31, 2013

Physician Induced Demand

Are physicians willing to perform more invasive procedures if there are financial incentives to do so? A physician usually is better informed about the risks and returns to a procedure than the patient is and can exploit this knowledge. Usually, but not if the patient is also a physician. In a new working paper "Physicians Treating Physicians: Information and Incentives in Childbirth," Rehavi and Johnson compare obstetricians' choice of C-section during childbirth when the expectant mother is herself a medical doctor to when she is not. From their abstract:
... Consistent with PID [Physician Induced Demand], physicians are almost 10 percent less likely to receive a C-section, with only a quarter of this effect attributable to differential sorting of patients to hospitals or obstetricians. Financial incentives have a large effect on C-section probabilities for non-physicians, but physician-patients are relatively unaffected. Physicians also have better health outcomes, suggesting overuse of C-sections adversely impacts patient health.

Monday, July 29, 2013

Will Auto Black Boxes Reduce Insurance Costs?

The NY Times reports that new cars are now routinely being equipped with "Event Data Recorders" (EDRs) that can be refereed to after a wreck.
So, when the lieutenant governor says he was doing nothing wrong when his car crashed, it is possible to verify this:
But a different story soon emerged. Mr. Murray was driving over 100 miles an hour and was not wearing a seat belt, according to the computer in his car that tracks certain actions. He was given a $555 ticket; he later said he had fallen asleep.

This additional monitoring should have the effect of both deterring poor driving behavior and reducing the costs of adjudicating insurance claims.

HT: Mungowitz

Thursday, July 25, 2013

Inequality is good?

So says the Economist, at least when it comes to fostering entrepreneurship.  Rather than promoting particular types of industries or clusters (e.g., biotech), politicians should:

  • remove barriers to entry, and growth, for all sorts of business; and 
  • recognizee the importance of the profit motive.  The chance of making big money is what drives people to take huge risks and endure years of hardship.

Finally, Politicians and bureaucrats often fail to recognize that entrepreneurial success entails things that "set their teeth on edge."

Entrepreneurs thrive on inequality: the fabulous wealth they generate in America makes the country more unequal. They also thrive on disruption, which creates losers as well as winners. 

Does the US tolerance for inequality drive our growth?

Tuesday, July 23, 2013

TW/CBS Negotiations

Time-Warner and CBS are in the middle of a nasty negotiation dispute over how of a fee Time-Warner should pay to carry CBS programming. This has happened before. This time though, websites like Aereo provide viewers with an increased ability to view CBS over the Internet. According to the New York Times,
While Time Warner Cable does not seem ready or willing to deploy Aereo-like technology, a spokeswoman, Maureen Huff, said Sunday that it would recommend Aereo to its New York subscribers if CBS was blacked out. The distributor may also underline the fact that Aereo, which normally costs $8 a month, offers a 30-day free trial. (Ms. Huff also pointed out that many CBS shows are available online on a delayed basis, and that “all of CBS’s broadcast TV programming is available free over-the-air,” so subscribers can use antennas.)

This raises the disagreement value for Time-Warner and likely lowers its fee.

Monday, July 22, 2013

Microsoft Restructuring

Microsoft has had a number of semi-autonomous divisions but wants to re-organize to benefit from a more centrally organized decision making process. This seems to be due to the transitioning of the industry to devices and services and not just software. Also, increasing competitive pressure seems to require divisions to work together better.
Ballmer today in effect jettisoned the longstanding divisional hierarchy that took shape under his mentor, company co-founder Bill Gates. Certain business functions, including finance, marketing and business development, will move out of separate divisions and into their own company wide groups with overarching senior execs.

Tuesday, July 2, 2013

Prices and R&D

According to the news, Tesla Motors appears to be doing well. Its stock price is up 500% in three years and it is building electric cars as fast as it can sell them. So it is rolling out new, more affordable models. How to price them? I hope this is the reporter speaking and not a company manager,
"Prices for the Model X have not been announced, but Tesla hopes to deliver the Gen 3 at a much lower cost than the Model S because it will spend much less on research and development."

At the time that you are determining prices for an innovative new product, the development costs are all sunk. They are not relevant for pricing decisions.

When determining whether to go ahead with the project, one might consider that, by innovating, the market will bear a price premium. Proceed only if the implied contribution margin for anticipated sales exceeds the development costs. Or the causality expressed above is backward; the additional R&D is lower because the anticipated price is lower.