italics- highlighted, in red- comments
By Allison Schaefers
aschaefers@starbulletin.com
Friday, May 23, 2008
Visitor-industry executives and officials are facing worrisome signs that the recent spike in oil prices is starting to hurt tourism to Hawaii.
"We've definitely seen a reduction," said Jack E. Richards, president and chief executive officer of California-based Pleasant Holidays LLC, the largest wholesaler of Hawaii tours. "It's correlated with oil and the price of the fares and fuel surcharges."
The price of oil, which has jumped 13 percent in the past month and has nearly doubled from the prior year, has triggered higher fares and surcharges globally, and carriers that serve Hawaii are no exception.
Oil (fuel) is an important component of the raw materials required in the airline industry. Hence, and increase in oil prices equates to the increase in cost of production. A rise in cost of production will lead to a decrease in quantity supplied. Thus, the supply curve shifts leftward, and equilibrium price increases while equilibrium output decreases. Therefore, the increase in oil prices has triggered higher fares and surcharges globally.
Now there are early indications that the increase is cutting into demand for travel to the islands
When price of air fares increase, quantity demanded for it will decrease more than proportionately. This is because air tickets is considered to be a luxurious good (nature of good) and consists of a high proportion of income spent. Hence, there will be an upward movement of the original equilibrium point on the demand curve, resulting in a decrease in quantity demanded for air tickets caused by the increase in price.
While both May and June look strong for Pleasant Holidays and its sister company Hawaii World, bookings for July and August are weak, Richards said.
"The booking window is 90 to 120 days out, so most of the travel for May and June was booked before the worst of the fuel surcharges hit," he said. "The downturn in April's visitor numbers are a sign of what's coming, and it could get worse. If oil goes up to $150 a barrel, the airlines will park their airplanes."
Add to that the country's general economic woes, and "you almost have a perfect storm," Richards said.
State Tourism Liaison Marsha Wienert said no one knows at what point fuel prices will stabilize, but the answer has a huge impact on the local economy.
On top of the fuel crisis, Hawaii's visitor industry was already grappling with the loss of nearly 15 percent of its airline capacity as a result of the abrupt closures of ATA and Aloha airlines last month.
Please refer to Yanjun’s article- Fares will soar, Senate hears, for more details.
Rising fuel costs are only part of the problem, said Rex Johnson, Hawaii Tourism Authority president and chief executive officer.
"You can't attribute our problems to just fuel costs and the loss of ATA and Aloha," Johnson said. "It's all that combined with the mortgage crunch, volatility of the stock market and the U.S. economy about to become recessive. All of those things certainly give one cause to stay up late at night and think."
*Ceteris paribus does not hold true in reality.
“U.S economy about to become recessive”. à When a country’s economy is undergoing recession, demand for inferior goods will rise and hence, the airline industry should raise production of low-end goods (such as introducing or promoting budget airline- low quality of service/no frills/less frequent air travel services provided) so as to increase total revenue and cut down on the cost of production.
Wienert said that airfares are not the only way in which fuel costs can affect potential visitors.
"It's not only about airline costs; travel demand is also influenced by how much it costs to heat or cool your house and drive your car," Wienert said.
Due to the weakening of the U.S economy, quantity demanded of the air tickets will decrease significantly, as people will not want to travel unnecessarily so as to cut back on their expenses. For example, families may not go for their holiday trips (since air ticket is considered a luxurious good), businessmen will avoid overseas business trips etcetera. Therefore, travel demand decreases, which can be illustrated by an upward movement of the original equilibrium point on the demand curve.
In this kind of environment, Hawaii's challenge will be to convince people that travel is good for them, she said.
"Our message is that travel can relieve some of the stressors that people face today," she said.
The HTA, the Hawaii Visitors and Convention Bureau and the rest of the visitor industry will spend between $3 million and $4.5 million on marketing efforts to bring in Hawaii bookings to help protect against further cutbacks, Johnson said.
"To make sure that we will all be in the yield game rather than the market-share game, we need to drive demand," Johnson said, adding that strong demand is the only thing that will position Hawaii to weather any future airline cutbacks.
"My guess is that after the summer season more airlines will be cutting capacity," Johnson said. "We want to make sure that they don't have a reason to cut any of our flights."
Source: http://starbulletin.com/2008/05/23/news/story01.html
Love,
Zijia
Friday, May 23, 2008
Fares will soar, Senate hears
Aloha Airlines' CEO tells a committee that round trips to Hawaii will go up by $200
By Dave Segal dsegal@starbulletin.com
Red-Highlighted Italics-Comments
The average fare from the mainland to Hawaii could rise by $200 per round trip due to the shutdowns of Aloha Airlines and ATA Airlines, the chief executive of the Hawaii-based carrier testified yesterday at a U.S. Senate committee hearing in Washington, D.C.
Decrease in supply- price increases. Another factor leading to the increase in price may be that there will be fewer airline firms and hence the price elasticity of demand for air transport by these remaining firms will decrease, therefore the firms can increase the fares to increase revenue.
David Banmiller also told the Senate Committee on Commerce, Science and Transportation that interisland fares "certainly" will escalate to the levels where they were before Mesa Air Group's go! entered the Hawaii market in June 2006. Those fares were about $172 per round trip, almost double what they are now for the lowest fares.
In a hearing to assess Hawaii's air-service market, Banmiller testified that "predatory pricing" by Mesa Air Group's go!, along with record-high fuel prices, forced Aloha to cease passenger operations after no potential buyers could be found.
The practice of predatory pricing- selling below cost to drive out competitors.
Cross elasticity of demand- a positive cross elasticity of demand exists between air transport services provided by Mesa and Aloha since the two are substitutes. Hence a decrease in the fare charged by Mesa brought about a decrease in the quantity demanded of Aloha’s services.
Banmiller said he continues to hold out hope that investors would look at resurrecting Aloha's passenger operations, but he is not optimistic. He said there are 40 interested parties, including five that are serious, for the company's profitable cargo business.
Risk-bearing economies- diversification into cargo business apart from passenger airline services, such that the firm may still survive when demand for passenger airline services decrease as this may be offset by higher demand in cargo business.
If mainland-Hawaii tickets do rise by $200, it will not happen right away, said Rick Seaney, CEO of ticket-pricing Web site FareCompare.com.
"I think what happens is in a few months you'll see a shakeout where they will start to creep up, and you won't see any competitive pressure to pull them down," Seaney said. "Two weeks from now, airlines aren't going to raise their price $200 to Hawaii. But it could happen over the next two years if you don't see somebody jumping in to fly those routes. It could be a sticker shock two years from now."
Market structure of monopoly/oligopoly after shutdown of 2 airline companies- lack of competition, demand becomes less price elastic and producers can raise the price of air tickets to increase revenue since consumers are unable to turn to other alternatives.
Banmiller said that although the Airline Deregulation Act of 1978 opened the playing field of competition, deregulation has proved to be potentially harmful in achieving stable air transportation service for smaller regional markets like Hawaii.
Banmiller cited the collapse of Hawaii-based airlines Mid-Pacific, Mahalo and Discovery, and two bankruptcy filings each by Hawaiian Airlines and Aloha.
"Deregulation only (affected) the revenue side of the business, not the cost side," Banmiller said. "And despite deregulation 30 years ago, the airline industry continues to be one of the most heavily regulated and taxed businesses in America."
Deregulation: process by which governments remove, reduce, or simplify restrictions on business and individuals with the intention of encouraging the efficient operation of markets (source: www. wikipedia.org)
Taxation is viewed as an increase in the cost of production by producers.
U.S. Sen. Gordon Smith of Oregon, a Republican, asked Banmiller whether he thought the airline industry should be re-regulated, but Banmiller said it was too late for that.
"I don't think toothpaste can be put back in the tube," Banmiller said. "I think for the state of Hawaii it was a problem because it wasn't geographically considered."
Democratic U.S. Sen. Daniel Inouye of Hawaii, who chairs the committee, asked Banmiller whether the U.S. Department of Transportation was aware of Aloha's concerns about predatory pricing. Banmiller said he had spoken to two directors at the DOT, as well as attorneys for the Department of Justice.
"And what was their action or response?" Inouye asked.
"'We'll look into it,' and that's all l heard," Banmiller said. "When we followed up ... the comment back ... was that predatory pricing is very hard to define, and our interest is for the consumer and low fares."
Michael Reynolds, the DOT's acting assistant secretary of transportation for Aviation and International Affairs, said Aloha's claim was different from past predatory-pricing claims by other airlines because it usually is the new entrant coming into the market that complains about the incumbent carrier lowering prices and dumping capacity.
"At least initially, it didn't have the look of the traditional case we've seen in the past," Reynolds said.
Jonathan Ornstein, chairman and CEO of Mesa, said in an interview last night that "the DOT had it right."
"We entered the market with 7 percent of the capacity, offered low fares, and the incumbent carriers did exactly what the definition of predatory pricing is, and added significant capacity to push us out of the market."
Charles Willis, owner and chairman of Hawaii-based Island Air, testified that his airline has lost $5 million and seen a 30 percent drop in revenue since go! entered the market. Willis said Island Air was forced to cease nonstop service to eight neighbor island markets, cut scheduled flights by 38 percent and lay off 40 percent of its work force.
He said Island Air intends to restart service to the eight city pairs it eliminated, hire laid-off Island Air and Aloha employees and add more routes. He also said Island Air plans to bring in up to three de Havilland Dash 8s for the summer, as well as bring back Q-400s by mid- to late summer if warranted.
The airline industry involves high set-up costs due to the capital and technology involved, hence there is great potential for reducing the average cost of production. There is significant internal economies of scale and the LRAC falls over a large range of output.
Expansion of the firm to enjoy internal EOS:
-Technical Economies: indivisibilities of capital- the firm can spread the fixed costs of aircrafts over larger output levels, lowering unit costs.
-Marketing Economies: bulk purchase of in-flight meals, fuel for engines. Large-scale advertising to differentiate air travel services such that demand becomes less price elastic. The advertising cost per unit per be lower for a firm producing at a higher output.
-Financial Economies: with higher sales volume and more assets to offer as collateral, it will be deemed to be more credit-worthy by lenders. It will also enjoy lower interest rates when it borrows a large sum of money.
-Risk-bearing Economies: with a larger market share, the company can predict the demand for air travel more accurately.
-Administrative and Managerial Economies: with higher output, the cost of administration, which generally does not rise with level of output, will be much reduced per unit of output.
Willis said Island Air needs the committee's support in getting the Hawaii Legislature to pass bills that exempt airlines from the fuel tax and provide loan guarantees.
http://starbulletin.com/2008/04/11/news/story03.html
Yanjun :)
By Dave Segal dsegal@starbulletin.com
Red-Highlighted Italics-Comments
The average fare from the mainland to Hawaii could rise by $200 per round trip due to the shutdowns of Aloha Airlines and ATA Airlines, the chief executive of the Hawaii-based carrier testified yesterday at a U.S. Senate committee hearing in Washington, D.C.
Decrease in supply- price increases. Another factor leading to the increase in price may be that there will be fewer airline firms and hence the price elasticity of demand for air transport by these remaining firms will decrease, therefore the firms can increase the fares to increase revenue.
David Banmiller also told the Senate Committee on Commerce, Science and Transportation that interisland fares "certainly" will escalate to the levels where they were before Mesa Air Group's go! entered the Hawaii market in June 2006. Those fares were about $172 per round trip, almost double what they are now for the lowest fares.
In a hearing to assess Hawaii's air-service market, Banmiller testified that "predatory pricing" by Mesa Air Group's go!, along with record-high fuel prices, forced Aloha to cease passenger operations after no potential buyers could be found.
The practice of predatory pricing- selling below cost to drive out competitors.
Cross elasticity of demand- a positive cross elasticity of demand exists between air transport services provided by Mesa and Aloha since the two are substitutes. Hence a decrease in the fare charged by Mesa brought about a decrease in the quantity demanded of Aloha’s services.
Banmiller said he continues to hold out hope that investors would look at resurrecting Aloha's passenger operations, but he is not optimistic. He said there are 40 interested parties, including five that are serious, for the company's profitable cargo business.
Risk-bearing economies- diversification into cargo business apart from passenger airline services, such that the firm may still survive when demand for passenger airline services decrease as this may be offset by higher demand in cargo business.
If mainland-Hawaii tickets do rise by $200, it will not happen right away, said Rick Seaney, CEO of ticket-pricing Web site FareCompare.com.
"I think what happens is in a few months you'll see a shakeout where they will start to creep up, and you won't see any competitive pressure to pull them down," Seaney said. "Two weeks from now, airlines aren't going to raise their price $200 to Hawaii. But it could happen over the next two years if you don't see somebody jumping in to fly those routes. It could be a sticker shock two years from now."
Market structure of monopoly/oligopoly after shutdown of 2 airline companies- lack of competition, demand becomes less price elastic and producers can raise the price of air tickets to increase revenue since consumers are unable to turn to other alternatives.
Banmiller said that although the Airline Deregulation Act of 1978 opened the playing field of competition, deregulation has proved to be potentially harmful in achieving stable air transportation service for smaller regional markets like Hawaii.
Banmiller cited the collapse of Hawaii-based airlines Mid-Pacific, Mahalo and Discovery, and two bankruptcy filings each by Hawaiian Airlines and Aloha.
"Deregulation only (affected) the revenue side of the business, not the cost side," Banmiller said. "And despite deregulation 30 years ago, the airline industry continues to be one of the most heavily regulated and taxed businesses in America."
Deregulation: process by which governments remove, reduce, or simplify restrictions on business and individuals with the intention of encouraging the efficient operation of markets (source: www. wikipedia.org)
Taxation is viewed as an increase in the cost of production by producers.
U.S. Sen. Gordon Smith of Oregon, a Republican, asked Banmiller whether he thought the airline industry should be re-regulated, but Banmiller said it was too late for that.
"I don't think toothpaste can be put back in the tube," Banmiller said. "I think for the state of Hawaii it was a problem because it wasn't geographically considered."
Democratic U.S. Sen. Daniel Inouye of Hawaii, who chairs the committee, asked Banmiller whether the U.S. Department of Transportation was aware of Aloha's concerns about predatory pricing. Banmiller said he had spoken to two directors at the DOT, as well as attorneys for the Department of Justice.
"And what was their action or response?" Inouye asked.
"'We'll look into it,' and that's all l heard," Banmiller said. "When we followed up ... the comment back ... was that predatory pricing is very hard to define, and our interest is for the consumer and low fares."
Michael Reynolds, the DOT's acting assistant secretary of transportation for Aviation and International Affairs, said Aloha's claim was different from past predatory-pricing claims by other airlines because it usually is the new entrant coming into the market that complains about the incumbent carrier lowering prices and dumping capacity.
"At least initially, it didn't have the look of the traditional case we've seen in the past," Reynolds said.
Jonathan Ornstein, chairman and CEO of Mesa, said in an interview last night that "the DOT had it right."
"We entered the market with 7 percent of the capacity, offered low fares, and the incumbent carriers did exactly what the definition of predatory pricing is, and added significant capacity to push us out of the market."
Charles Willis, owner and chairman of Hawaii-based Island Air, testified that his airline has lost $5 million and seen a 30 percent drop in revenue since go! entered the market. Willis said Island Air was forced to cease nonstop service to eight neighbor island markets, cut scheduled flights by 38 percent and lay off 40 percent of its work force.
He said Island Air intends to restart service to the eight city pairs it eliminated, hire laid-off Island Air and Aloha employees and add more routes. He also said Island Air plans to bring in up to three de Havilland Dash 8s for the summer, as well as bring back Q-400s by mid- to late summer if warranted.
The airline industry involves high set-up costs due to the capital and technology involved, hence there is great potential for reducing the average cost of production. There is significant internal economies of scale and the LRAC falls over a large range of output.
Expansion of the firm to enjoy internal EOS:
-Technical Economies: indivisibilities of capital- the firm can spread the fixed costs of aircrafts over larger output levels, lowering unit costs.
-Marketing Economies: bulk purchase of in-flight meals, fuel for engines. Large-scale advertising to differentiate air travel services such that demand becomes less price elastic. The advertising cost per unit per be lower for a firm producing at a higher output.
-Financial Economies: with higher sales volume and more assets to offer as collateral, it will be deemed to be more credit-worthy by lenders. It will also enjoy lower interest rates when it borrows a large sum of money.
-Risk-bearing Economies: with a larger market share, the company can predict the demand for air travel more accurately.
-Administrative and Managerial Economies: with higher output, the cost of administration, which generally does not rise with level of output, will be much reduced per unit of output.
Willis said Island Air needs the committee's support in getting the Hawaii Legislature to pass bills that exempt airlines from the fuel tax and provide loan guarantees.
http://starbulletin.com/2008/04/11/news/story03.html
Yanjun :)
Thursday, May 22, 2008
Impact of fuel prices not that significant yet
Oil prices at the current levels will not dampen the demand for cars in Malaysia but if they continue to rise, demand for bigger engine cars would be affected.
Second Finance Minister Tan Sri Nor Mohamed Yakcop was recently reported as saying that the review of the subsidies did not necessarily mean a reduction in the fuel subsidies, and stressed that the review was unrelated to the general election.
An analyst with a local brokerage said a fuel subsidy cut appeared unavoidable, but the Government would have to tread carefully on the matter.
MIMB Investment bank analyst Rosnani Rasul expects at least a 30 sen hike in petrol price this year, saying the Government could no longer subsidise the oil price at high levels.
“If price of petrol continues to rise, some consumers might become more prudent in their petrol consumption and would opt for a smaller engine car, thus affecting sales of big engine cars,” she said.
Rosnani also cautioned that PLUS Expressways Bhd was still negotiating toll hikes with the Government and any toll hike would discourage people from using toll highways and buying big-engine cars.
However, she expects a 5% growth in vehicle sales this year.
Analysts said fuel-efficient cars might attract increased interest. They said Toyota's models and Perodua's MyVi might stand to benefit due to their fuel-efficiency.
Fuel-efficient cars may be an (imperfect) substitute for cars. CED>1, and is positive. While they may provide the same level of comfort as ordinary petrol-run cars, it is more difficult to obtain the alternative fuels (such as natural gas) since they are only available at limited petrol stations.
“Consumers might complain about rising petrol prices (if it happens), but without a reliable public transportation system, owning a car is important,” an analyst said, adding that public transportation fares would eventually be increased as well.
He said the rise in petrol prices would not dampen the demand for cars because the cost of petrol relative to the cost of a car in Malaysia was almost immaterial, unlike in other countries where petrol was more expensive.
He also said that petrol prices would not impact the sale of commercial vehicles, as they would be needed to conduct business.
Commercial vehicles are more price inelastic since they are deemed as a necessity especially by businessmen/ salesmen/ people making deliveries, as compared to cars being a luxurious good to most other people.
Analysts pointed out that hybrid cars, which run on petrol and electricity, would be the trend going forward. They believed it was just a matter of time before they caught up to normal cars.
“These (hybrid) cars are still relatively expensive compared with normal cars and have limited support in Malaysia,” he said.
The key factors expected to drive growth include demand from buyers wishing to replace their cars, a favourable economic environment and new model variants throughout most segments.
http://biz.thestar.com.my/news/story.asp?ile=/2008/1/14/business/19975167&sec=business
yuxi :)
Changes in price of related goods will affect consumer demand. In this case, petrol and cars are complements (jointly demanded as they are used in combination to satisfy consumer wants), a rise in petrol price will lead to a fall in demand especially for cars with bigger engines since it will require more petrol.
“Petrol remains affordable because it is subsidised by the Government. While high petrol prices may deter some people from buying a car with a higher cc engine, the impact would be minimal because these vehicles, bought by the higher income group, have lower price elasticity of demand,” an analyst said.
For the higher income, the proportion of income that is spent on big cars (and therefore, petrol) is less than that of the middle/lower income. This makes their demand for cars (and hence, petrol) less price elastic.
On Jan 3, New York's light sweet crude reached a record high of US$100.09 per barrel while London's Brent crude hit a historic peak of US$98.50.
The Government is expected to unveil a new subsidy scheme whereby the rich will pay more for fuel and the poor less.
Subsidization occurs whenever the government uses its power to redistribute wealth or access. It probably aims to narrow the income disparity between the rich and the poor. the provision of such services has a strong moral justification and virtually no environmental side-effects. These are clearly of good subsidies, at least in intent. However, when these subsidies are not well targeted and expensive, substantial public resources are diverted from programs that could be of great benefit to the truly poor in society. (http://www.eoearth.org/article/Subsidies_and_market_interventions)
The current petrol price is RM1.92 per litre.
Second Finance Minister Tan Sri Nor Mohamed Yakcop was recently reported as saying that the review of the subsidies did not necessarily mean a reduction in the fuel subsidies, and stressed that the review was unrelated to the general election.
An analyst with a local brokerage said a fuel subsidy cut appeared unavoidable, but the Government would have to tread carefully on the matter.
MIMB Investment bank analyst Rosnani Rasul expects at least a 30 sen hike in petrol price this year, saying the Government could no longer subsidise the oil price at high levels.
“If price of petrol continues to rise, some consumers might become more prudent in their petrol consumption and would opt for a smaller engine car, thus affecting sales of big engine cars,” she said.
Rosnani also cautioned that PLUS Expressways Bhd was still negotiating toll hikes with the Government and any toll hike would discourage people from using toll highways and buying big-engine cars.
However, she expects a 5% growth in vehicle sales this year.
Analysts said fuel-efficient cars might attract increased interest. They said Toyota's models and Perodua's MyVi might stand to benefit due to their fuel-efficiency.
Fuel-efficient cars may be an (imperfect) substitute for cars. CED>1, and is positive. While they may provide the same level of comfort as ordinary petrol-run cars, it is more difficult to obtain the alternative fuels (such as natural gas) since they are only available at limited petrol stations.
“Consumers might complain about rising petrol prices (if it happens), but without a reliable public transportation system, owning a car is important,” an analyst said, adding that public transportation fares would eventually be increased as well.
He said the rise in petrol prices would not dampen the demand for cars because the cost of petrol relative to the cost of a car in Malaysia was almost immaterial, unlike in other countries where petrol was more expensive.
He also said that petrol prices would not impact the sale of commercial vehicles, as they would be needed to conduct business.
Commercial vehicles are more price inelastic since they are deemed as a necessity especially by businessmen/ salesmen/ people making deliveries, as compared to cars being a luxurious good to most other people.
Analysts pointed out that hybrid cars, which run on petrol and electricity, would be the trend going forward. They believed it was just a matter of time before they caught up to normal cars.
“These (hybrid) cars are still relatively expensive compared with normal cars and have limited support in Malaysia,” he said.
Hybrid cars seem to be an upcoming trend yet the demand for such a product will depend on consumers' taste and preference. Advertising by companies producing hybrid cars would help create wants in consumers and create awareness of this type of car.
On the other hand, consumers may expect the price of petrol to go up futher and may consider buying a hybrid car to save on petrol costs in the long run.
However since hybrid cars are 'relatively expensive' they are likely to take up a larger proportion of consumer income, which may deter some consumers from buying it.
He added that although hybrid cars had limited acceptance here, the demand for those cars were very strong globally, especially in the US.
Since hybrid cars and normal cars are substitutes. When the price of petrol decreases, the demand for normal cars will increase, leading to a decrease in demand for its substitute, hybrid cars.
He expects Perusahaan Otomobil Kedua Sdn Bhd (Perodua) to continue to perform while Proton should still do “alright” despite all the negative publicity it had been receiving.
According to the Malaysian Automotive Association (MAA), Perodua remains the best selling car in Malaysia in the first half of 2007 despite a slight decrease in its sales. Perodua sales fell to 75,483 units from 79,738 units previously, with a market share of 34.2%. (1)
Proton was ranked second. Its sales declined to 46,955 units from 60,291 in the same period previously. Its market share also dropped to 21.3% from 24%. (1)
Analysts said the outlook for this year should be positive but manufacturers would still need to keep coming up with new models and market them efficiently. (2)
- Possible market structure of Malaysian cars: oligopoly. Presence of a few dominant firms-- Perodua 34.2%, Proton 21.3% market share, each selling a differentiated product (each car model is different). Entry to industry is restricted due to high start up cost.
- Even when the industry consists of a few dominant firms, they cannot afford to be complacent. They must still engage in R&D leading to product differentiation or to develop new products. They can also engage in advertising campaigns, which once successful, will create a strong brand name and make the demand for that model of car be more price inelastic so that the company can increase price to increase total revenue.
According to Frost & Sullivan, sales in the local motor vehicle industry are expected to improve this year with the total industry volume expanding 7% to more than 500,000 units.
The automobile industry is experiencing external EOS. Automobile firms will likely experience a fall in unit cost of production because the entire industry expands. There could be economies of information where common information services (eg, how to make the most durable cars) are provided and the cost of research is shared. The automobile industry may also choose to spilt up production processes and specialise in a single process (eg, producing tyres, windscreens) as such mass productions lower unit cost.The key factors expected to drive growth include demand from buyers wishing to replace their cars, a favourable economic environment and new model variants throughout most segments.
http://biz.thestar.com.my/news/story.asp?ile=/2008/1/14/business/19975167&sec=business
yuxi :)
Wednesday, May 21, 2008
hello again :D
i dont know if this article is relevant or not, but i think it's really interesting!
:) :) :)
S'pore the second most competitive economy
Sat, May 17, 2008 The Business Times
(SINGAPORE) Singapore remains the world's second most competitive economy but is closing the gap on the top-ranked United States, according to an annual analysis.
Now in its 20th year, the World Competitiveness Yearbook (WCY) by Swiss business school IMD gives Singapore a score of 99.33 in its 2008 study, up from 99.12 last year. The US - firmly entrenched in pole position since 1994 - has the 100 perfect score.
But the latest report has IMD asking if the US run will continue - or go the way of Japan, which was by far the most competitive in 1989, when the WCY was first published but has since dropped out of the top league, beset by numerous domestic economic crises. (In the 2008 rankings, Japan is 22nd, up from 24th in 2007.)
Says Stephane Garelli, director of IMD's World Competitiveness Center: 'In our 20th anniversary edition this year, we may be seeing the US in the number one position for the last time. Singapore is closing the gap with the US and 2008 might be the turning point where the US falls from its leadership of top competitors.'
Taking lessons from Japan's downfall in the 1990s, Prof Garelli says that the present turmoil in the US 'bears some resemblance' with past crises in Japan that followed 'a period of economic boom, real estate price follies and exuberant assets expansion'.
But there are also huge differences between the two economic societies, he notes: Apart from 'notable successes' such as Toyota and Canon, much of Japanese industry was 'paralysed' by the 1990s as 'the Japanese never practised creative destruction'.
The US, on the other hand, 'because of its openness, resilience and entrepreneurship, always seems to find the means to re-invent itself in ways that Japan (and much of Europe) often lacks', he says.
In any case, one takeaway from 20 years of analysing competitiveness: 'No nation, however competitive, is immune to a breakdown, especially when it stems from the financial sector.'
The WCY - which sees competitiveness as essentially the capacity of a country to manage its long-term prosperity - uses a mix of hard statistical data and soft survey feedback for its analyses. In all, 55 economies are assessed on some 330 criteria in four broad factors: economic performance, government efficiency, business efficiency and infrastructure.
Singapore is third on economic performance (up from fourth last year); up to second on business efficiency (fourth in 2007); and retains for the second straight year its first and third places on government efficiency and infrastructure, respectively.
Singapore's challenges are, in the short term, managing costs in a global inflationary environment, and in the medium term, becoming a globalised, entrepreneurial and diversified economy, IMD notes.
According to Prof Garelli, a more advanced economy increasingly focuses on the 'something else' that makes the difference between economic growth and prosperity, such as sustainable development, quality of life, even happiness. 'These objectives, which would not be attainable without economic growth, are very subjective, hard to measure and linked to national value systems,' he says. 'Managing the 'softer' side of an economy is thus a priority for any leader today.'
Competitiveness encompasses all these dimensions, and remains the key to success and prosperity, he maintains.
i dont know if this article is relevant or not, but i think it's really interesting!
:) :) :)
S'pore the second most competitive economy
Sat, May 17, 2008 The Business Times
(SINGAPORE) Singapore remains the world's second most competitive economy but is closing the gap on the top-ranked United States, according to an annual analysis.
Now in its 20th year, the World Competitiveness Yearbook (WCY) by Swiss business school IMD gives Singapore a score of 99.33 in its 2008 study, up from 99.12 last year. The US - firmly entrenched in pole position since 1994 - has the 100 perfect score.
But the latest report has IMD asking if the US run will continue - or go the way of Japan, which was by far the most competitive in 1989, when the WCY was first published but has since dropped out of the top league, beset by numerous domestic economic crises. (In the 2008 rankings, Japan is 22nd, up from 24th in 2007.)
Says Stephane Garelli, director of IMD's World Competitiveness Center: 'In our 20th anniversary edition this year, we may be seeing the US in the number one position for the last time. Singapore is closing the gap with the US and 2008 might be the turning point where the US falls from its leadership of top competitors.'
Taking lessons from Japan's downfall in the 1990s, Prof Garelli says that the present turmoil in the US 'bears some resemblance' with past crises in Japan that followed 'a period of economic boom, real estate price follies and exuberant assets expansion'.
But there are also huge differences between the two economic societies, he notes: Apart from 'notable successes' such as Toyota and Canon, much of Japanese industry was 'paralysed' by the 1990s as 'the Japanese never practised creative destruction'.
The US, on the other hand, 'because of its openness, resilience and entrepreneurship, always seems to find the means to re-invent itself in ways that Japan (and much of Europe) often lacks', he says.
In any case, one takeaway from 20 years of analysing competitiveness: 'No nation, however competitive, is immune to a breakdown, especially when it stems from the financial sector.'
The WCY - which sees competitiveness as essentially the capacity of a country to manage its long-term prosperity - uses a mix of hard statistical data and soft survey feedback for its analyses. In all, 55 economies are assessed on some 330 criteria in four broad factors: economic performance, government efficiency, business efficiency and infrastructure.
Singapore is third on economic performance (up from fourth last year); up to second on business efficiency (fourth in 2007); and retains for the second straight year its first and third places on government efficiency and infrastructure, respectively.
Singapore's challenges are, in the short term, managing costs in a global inflationary environment, and in the medium term, becoming a globalised, entrepreneurial and diversified economy, IMD notes.
According to Prof Garelli, a more advanced economy increasingly focuses on the 'something else' that makes the difference between economic growth and prosperity, such as sustainable development, quality of life, even happiness. 'These objectives, which would not be attainable without economic growth, are very subjective, hard to measure and linked to national value systems,' he says. 'Managing the 'softer' side of an economy is thus a priority for any leader today.'
Competitiveness encompasses all these dimensions, and remains the key to success and prosperity, he maintains.
Hey all :)
This is an interesting video on the topic of cobweb theory- market failure in agricultural markets. I think this theory was mentioned in class before, though not in great detail...yeah, so go take a look to understand it better :D
and here's a second one by the same teacher in the previous video. This one is a revision for the argument on whether monopoly is bad. Note the terms used, such as "contestable markets". haha. happy viewing! :)
Love,
Zijia
This is an interesting video on the topic of cobweb theory- market failure in agricultural markets. I think this theory was mentioned in class before, though not in great detail...yeah, so go take a look to understand it better :D
and here's a second one by the same teacher in the previous video. This one is a revision for the argument on whether monopoly is bad. Note the terms used, such as "contestable markets". haha. happy viewing! :)
Love,
Zijia
Apple's largest U.S. store highlights growth strategy
italics- highlighted, in red- comments
BOSTON, US - Apple Inc unveiled its largest U.S. store on Wednesday, a glass-facade building sheathed in steel that a senior company official said reflects Apple's plans to expand retail ventures at home and abroad.
Sandwiched between aging brick buildings, the minimalist 20,000-square-foot store stands out on Boston's historic Boylston Street, featuring a ground floor with more than 100 Mac laptops and computers, a second level for iPod music players and iPhones, and a third entirely for service.
*Ease of accumulating stocks
The easier the stock accumulation, the more price elastic the supply is. Hence, since it is easy to store unsold stocks at low cost, the Apple firm will be able to meet sudden increase in demand by running down stocks. Likewise, they can respond to a sudden fall in demand and price by taking supply off the market and by diverting production into stock accumulation. Therefore supply of Apple goods is very price-elastic.
Apple's second-largest store globally after London's Regent Street offers a vivid glimpse into the latest retail thinking at the Cupertino, California-based company as it prepares to expand internationally with a new store in Beijing this summer.
"Concierges" stand at attention in orange shirts bearing the slogan "I know people" -- part of changes made in recent weeks to more thoroughly identify roles played by employees with the color of their shirts worn in Apple stores.
A sales force of "specialists" wear aqua blue and technicians are each dubbed "genius" as they work the third floor wearing dark blue -- all projecting a trademark retail image that has helped drive sales growth.
"These stores have served them very, very well and really raised the bar in terms of technology customer service," said Michael Gartenberg, an analyst at Jupiter Research, a technology consulting firm.
In its latest financial quarter to March 29, Apple's store sales leapt 74 percent in dollar terms to nearly US$1.5 billion.
Great increase in supernormal profit earned. This could be partly due to high quality of service provided by the firm to its customers as mentioned above.
Average revenue per store in the quarter reached US$7.1 million, up 48 percent from US$4.8 million a year earlier. Meanwhile, operating profits at the stores more than doubled, to US$334 million in the quarter.
INTERNATIONAL PUSH
Ron Johnson, the senior vice president who leads Apple's retail strategy, told Reuters on the sidelines of a news briefing that international retail presence would be an important driver of future sales.
"Today, Apple is about 50 percent international revenue and about 50 percent in the U.S.," he said, standing next to a large Apple icon hanging in the storefront that glows at night. "We increasingly want to get our retail presence out in the other countries."
Apple's latest filings with the U.S. Securities and Exchange Commission show they operated 208 stores at the end of the second quarter to March 29, compared to 177 a year earlier. Of these, nine were considered "high profile" in high-traffic neighborhoods (these locations will place them in a very favorable position, since there is high human traffic and thus leading to higher sales volume) with extensive amenities and products.
Increase in the number of retail outlets both locally (U.S) and internationally allows the firm to expand its plant size, and hence, be able to reap internal economies of scale. When the firm reaps internal economies of scale, its unit cost of production will fall when the firm increases output by expanding its scale of production.
The various types of internal economies of scale that can be applied here includes:
- marketing economies
- bulk purchase of raw materials such as machinery parts for gadgets,
at a lower price
- bulk distribution will be more cost-efficient for the firm
- Large scale advertising: although the advertising expenditure may be
substantial, the advertising cost per unit may be lower than that for a
smaller firm because of larger output level.
- Risk-bearing economies
- Able to predict demand more accurately, since they will have a larger
share of the market. Therefore they will bear lower risks and potential
losses and thus lead to cost savings (which they can in turn use it for
research and development to further improve their goods and services)
- diversification, such as production of ipod, mac, itunes etc
- Financial economies
- Being a large firm, Apple will have higher sales volume and more assets to
offer as collateral, and is deemed by lenders to be more credit-worthy
compared to a small firm. Hence banking and financial institutions are
more willing to offer loans or extend credit to them.
- Technical economies
- Division of labour: greater scope of specialization of man and machines,
thereby increasing efficiency and productivity, and lowering unit cost of
production.The Boston store, which formally opens Thursday, also features
a glass spiral staircase leading from the first floor to the third, where
Apple technicians field questions at a "genius bar" that can serve 1,000
people a day.
Source: http://digital.asiaone.com/Digital/News/Story/A1Story20080515-65283.html
love,
Zijia
BOSTON, US - Apple Inc unveiled its largest U.S. store on Wednesday, a glass-facade building sheathed in steel that a senior company official said reflects Apple's plans to expand retail ventures at home and abroad.
Sandwiched between aging brick buildings, the minimalist 20,000-square-foot store stands out on Boston's historic Boylston Street, featuring a ground floor with more than 100 Mac laptops and computers, a second level for iPod music players and iPhones, and a third entirely for service.
*Ease of accumulating stocks
The easier the stock accumulation, the more price elastic the supply is. Hence, since it is easy to store unsold stocks at low cost, the Apple firm will be able to meet sudden increase in demand by running down stocks. Likewise, they can respond to a sudden fall in demand and price by taking supply off the market and by diverting production into stock accumulation. Therefore supply of Apple goods is very price-elastic.
Apple's second-largest store globally after London's Regent Street offers a vivid glimpse into the latest retail thinking at the Cupertino, California-based company as it prepares to expand internationally with a new store in Beijing this summer.
"Concierges" stand at attention in orange shirts bearing the slogan "I know people" -- part of changes made in recent weeks to more thoroughly identify roles played by employees with the color of their shirts worn in Apple stores.
A sales force of "specialists" wear aqua blue and technicians are each dubbed "genius" as they work the third floor wearing dark blue -- all projecting a trademark retail image that has helped drive sales growth.
"These stores have served them very, very well and really raised the bar in terms of technology customer service," said Michael Gartenberg, an analyst at Jupiter Research, a technology consulting firm.
In its latest financial quarter to March 29, Apple's store sales leapt 74 percent in dollar terms to nearly US$1.5 billion.
Great increase in supernormal profit earned. This could be partly due to high quality of service provided by the firm to its customers as mentioned above.
Average revenue per store in the quarter reached US$7.1 million, up 48 percent from US$4.8 million a year earlier. Meanwhile, operating profits at the stores more than doubled, to US$334 million in the quarter.
INTERNATIONAL PUSH
Ron Johnson, the senior vice president who leads Apple's retail strategy, told Reuters on the sidelines of a news briefing that international retail presence would be an important driver of future sales.
"Today, Apple is about 50 percent international revenue and about 50 percent in the U.S.," he said, standing next to a large Apple icon hanging in the storefront that glows at night. "We increasingly want to get our retail presence out in the other countries."
Apple's latest filings with the U.S. Securities and Exchange Commission show they operated 208 stores at the end of the second quarter to March 29, compared to 177 a year earlier. Of these, nine were considered "high profile" in high-traffic neighborhoods (these locations will place them in a very favorable position, since there is high human traffic and thus leading to higher sales volume) with extensive amenities and products.
Increase in the number of retail outlets both locally (U.S) and internationally allows the firm to expand its plant size, and hence, be able to reap internal economies of scale. When the firm reaps internal economies of scale, its unit cost of production will fall when the firm increases output by expanding its scale of production.
The various types of internal economies of scale that can be applied here includes:
- marketing economies
- bulk purchase of raw materials such as machinery parts for gadgets,
at a lower price
- bulk distribution will be more cost-efficient for the firm
- Large scale advertising: although the advertising expenditure may be
substantial, the advertising cost per unit may be lower than that for a
smaller firm because of larger output level.
- Risk-bearing economies
- Able to predict demand more accurately, since they will have a larger
share of the market. Therefore they will bear lower risks and potential
losses and thus lead to cost savings (which they can in turn use it for
research and development to further improve their goods and services)
- diversification, such as production of ipod, mac, itunes etc
- Financial economies
- Being a large firm, Apple will have higher sales volume and more assets to
offer as collateral, and is deemed by lenders to be more credit-worthy
compared to a small firm. Hence banking and financial institutions are
more willing to offer loans or extend credit to them.
- Technical economies
- Division of labour: greater scope of specialization of man and machines,
thereby increasing efficiency and productivity, and lowering unit cost of
production.The Boston store, which formally opens Thursday, also features
a glass spiral staircase leading from the first floor to the third, where
Apple technicians field questions at a "genius bar" that can serve 1,000
people a day.
Source: http://digital.asiaone.com/Digital/News/Story/A1Story20080515-65283.html
love,
Zijia
Sunday, May 18, 2008
Is Microsoft a monopoly? If so, why does it matter?
Red- Highlighted, Italics- Comments
Why do we need government? One of the most important answers to that question is that we need government to compensate for "market failures."
The United States economy is based on the presumption of a free market. This means that individuals and groups are free to do the work they choose to do, provide goods and services of their choosing and to spend money on the things they want. The government, for the most part, does not limit the range of goods and services available or set the prices that are charged for them. The amount of money an individual or business can charge for a product is set by the supply and level of demand for that product. Popular products that are scarce will have higher prices than unpopular and readily available products.
Free market- Perfect market where free competition exists. Existence of many buyers and sellers such that no individual buyer/seller can influence the market demand, supply and price. Equilibrium price and output are set by market demand and supply.
Laws of Demand and Supply- High demand and low supply of a product result in high prices while low demand and high supply result in low prices.
For the most part, the market produces economic outcomes that are efficient and fair. However, there are some instances in which the market fails. Economists generally include on the list of market failures monopolies, the under-provision of public goods, externalities, incomplete markets, information shortages and high unemployment and inflation rates.
When the market functions properly, competing individuals or businesses provide the same (or similar) goods and services to consumers. Because consumers have a choice, providers will lower their prices to win consumer dollars. The interplay of competition to supply a good or service and consumer demand for it will set a fair and efficient price in a free market. However, when there is no competition (and only one individual or business provides a good or service) the market cannot set an efficient price. In such instances, a monopoly is said to exist.
In a PC market, many firms produce homogenous goods of the same quality. Consumers are indifferent to the sources of the goods, resulting in a high price elasticity of demand for the good. Faced with such fierce competition, firms need to lower their prices to increase total revenue.
Allocative efficiency is achieved in a PC market since marginal cost equals price at the profit-maximising output.
However, economists maintain that a monopoly does not exist simply because there is only one provider of a good or service. For example, in the Microsoft case, the Windows operating system is enormously popular, but the potential for a competing firm to provide a similar product exists. In fact, Macintosh is a small but important competitor in the computer and operating system market. Linux has also emerged in recent months as a viable alternative to Microsoft Windows.
Reason as to why Microsoft continues to innovate through R&D despite having monopoly power. Emerging firms such as Macintosh and Linux are producing products that may be substitutes for Microsoft Windows. The availability of such substitutes may eventually drive Microsoft out of the industry if it becomes X-inefficient.
But is Microsoft's market share (about 90%) so massive that it can behave like a monopoly? A monopoly can set prices artificially high because it has no serious competitors to force it to do otherwise. It can also arbitrarily limit the supply of the good or service it provides to create scarcity and drive prices up. In either case, the monopoly collects a "rent" on its domination of a particular sector of the economy. This rent represents income above and beyond the efficient price it could charge for its product in a competitive market environment.
Allocative inefficiency exists in monopoly when the firm charges a price that is higher than the marginal cost. There is a loss in consumer surplus as compared to the price charged in a PC market.
Legally, a monopoly or "trust" exists when an individual or firm can explicitly force competitors out of business by slashing prices, buying up and hoarding supplies, bribery or intimidation (Clayton Antitrust Act of 1914). Earlier this year, a federal judge ruled that Microsoft has, indeed, engaged in many such practices on the basis of its monopoly power in the computer operating systems market. Discussions between Microsoft, the U.S. Department of Justice and the Attorneys General of several states are ongoing to decide what, if anything, should be done to Microsoft given this ruling.
Barriers to entry- controlling key factors of production and engaging in predatory pricing to drive out competitors.
Many observers have argued that to break up Microsoft would send the wrong message to individuals and businesses in the United States. If a company produces a product that is so good that everyone wants to buy it, should that company be punished? But dividing the company into two or three smaller companies, others have argued, would force Microsoft to compete on a more level playing field with other software companies. Moreover, they argue, with competition, the quality of software would improve and prices would probably drop.
High demand for Microsoft’s products is a major factor contributing to the high prices of the products.
With more software companies and greater competition, the demand for software will become more price elastic, leading to a drop in prices to increase total revenue. However, firms will carry out R&D to produce better quality software so as to differentiate their products from others, making their demand more price inelastic. Higher prices may then be set to increase total revenue, but it is likely that this price will still be lower than the price set by a monopoly, given a contestable market.
The AT&T case is similar to the Microsoft case in one very important respect. The early Antitrust laws in the United States were motivated by consumer protection. Recent applications of the law, however, have been more focused on providing opportunities for other businesses and corporations to compete with large monopolistic companies such as AT&T and Microsoft. In the AT&T case, and in the Microsoft case, potential competitors have played the leading role in legal challenges, with consumers as the supporting cast.
Primary reason for application of anti-trust laws is to encourage new firms to enter the industry while consumer welfare has become secondary.
As a matter of legal and economic fact, Microsoft is at least "monopolistic." It has such a commanding share of the operating systems market that it can, in many respects, behave like a monopoly. But is that necessarily bad for consumers? It is manifestly bad for Microsoft's competitors, just as AT&T's dominance was bad for its competition. After AT&T was broken up, companies like MCI and Sprint emerged as major competitors in the long-distance telephone service market.
Arguably, consumers have benefited as well from the breakup of AT&T with long-distance rates well under ten cents a minute. While potential competitors would most likely benefit from a breakup of Microsoft, it is not entirely clear that significant benefits would be immediately realized by consumers. If recent stock market reactions to initial rulings in the Microsoft case are any indication of what would happen if Microsoft were broken up, the short term results for consumers (and the economy) might be very negative. As in every instance that the government decides to intervene in the economy, a good deal of caution and care is in order.
http://www.thisnation.com/question/027.html
Yanjun :)
HP plans $13.9 billion 'reverse merger' with EDS
By Michelle Kessler, USA TODAY
Hewlett-Packard (HPQ) on Tuesday said it will buy consulting firm Electronic Data Systems (EDS)
Horizontal integration—both HP and EDS are global consulting and technology services companies in the Information Technology industry, which are at the same stage of production
for $13.9 billion, including debt, an acquisition that will allow the computer giant to better compete with rival IBM.
Such a horizontal integration would allow substantial economies of scale to be reaped, lowering unit cost of production and hence make the firm more competitive.
Merger would mean a larger size of firm. Bigger firms have revenue advantages in terms of
-Pricing power (greater market share, demand more price inelastic.)
-Non-price Competition (advertising to create brand loyalty and make product more price inelastic)
And cost advantages in reaping substantial internal economies of scale.
The deal is a "reverse merger" that keeps EDS largely intact, says Shane Robison, HP's chief strategy officer.
HP's consulting unit, which has about 70,000 employees, will be rolled into EDS, which has about 140,000 employees. The combined entity will be known as "EDS — an HP company."
The large size of the merged firm can also be seen by the large number of employees, 210 000.
EDS CEO Ronald Rittenmeyer will run the new division. It will be based at EDS' Plano, Texas, headquarters, about 1,700 miles from HP's main office in Palo Alto, Calif. Layoffs are expected. "We're looking to streamline our overhead," Robison says.
One negative impact of mergers is the inevitable retrenchment and ‘layoffs’. However, rationalization has to occur. Reorganisation and restructuring of production have to take place to reduce duplication of managerial roles to increase productivity and reduce unit cost. The unit administration cost per output also decreases as it is spread over a larger output.
The new EDS will have about $38 billion in revenue and 5% of the fractured consulting services market, says researcher Gartner. IBM's legendary consulting division has about 7% of the market. "IBM is a formidable competitor, but the industry desperately wants a credible No. 2," Robison says.
When EDS merges with HP, it will have increased revenue and a larger market share, only 2% less than leader IBM. In this case leading firms in the IT industry seem to have a relatively small market share.
Possible market structure: monopolistic competition. Unlike in perfect competition, monopolistically competitive firms have products that are not perfect substitutes. Consumers have clearly defined preferences and sellers attempt to differentiate their products from those of their competitors, the goods and services are heterogeneous. For example, IBM and HP sell differentiated IT products with different features, yet neither controls a very large share of the market like in monopolies.
HP will pay $25 for each EDS share, stock option and restricted stock unit. HP will also assume about $3.3 billion in debt, while obtaining some cash and minority interests. (These amounts are included in the $13.9 billion purchase price.) The deal is expected to close in the second half of the year.
The news sent EDS shares up 1% Tuesday to close at $24.34. They jumped 28% Monday after HP revealed the negotiations. HP shares dropped 5.5% Tuesday to $44.27.
"It certainly makes sense," says Gartner tech analyst Allie Young. HP reaches thousands of business customers with its hardware and software products. EDS has greater expertise in business services.
Greater scope of specialization after merger since each firm can concentrate on what it does best. (Internal EOS) Specialisation will increase productivity and lower average cost of production
Together, "They could sell more services deals," she says. Economies of scale could also help cut costs. That's a concern for EDS, which has had accounting and profitability problems in the past. One of the biggest issues: a multibillion-dollar contract with the U.S. military that became a big money-loser.
Hint that EDS is earning subnormal profit (Total revenue < total cost) Merger with HP would allow for greater capital assets, sales revenue and market share. It will also reap internal economies of scale because fixed cost in such a capital intensive IT industry with high start up cost will be spread over larger outputs. This will lower unit cost of production, thus increasing profits. The LRAC of the merged company will fall over large outputs with a high MES. EDS may then be able to earn normal or even supernormal profits.
Robison says HP has spent more than 10,000 hours digging through EDS' financials. "We're very comfortable with the work they've done in the past two years to improve their cost structure," he says.
The acquisition is HP's largest since Compaq Computer in 2002. The "size looks daunting," American Technology Research equity analyst Shaw Wu said in a research note. HP's skill at combining the two companies will determine whether the deal is a success, Young says. Also Tuesday, HP released preliminary results for its second fiscal quarter. Revenue was $28.3 billion, up 11% from a year ago, thanks to "solid performance across HP's business segments," the company said. Earnings rose to 80 cents a share from 65 cents a year ago.
In the current quarter, HP expects revenue of $27.3 billion to $27.4 billion. HP had planned to announce results Thursday but released them to coincide with the EDS news.
http://www.usatoday.com/money/industries/technology/2008-05-13-hp-eds-purchase_N.htm
there are many useful, easy to understand videos on youtube on drawing graphs for revision, here's one on first degree price discrimination, it can be linked to many more (:
here's a interesting song on elasticity of demand.
yuxi
Hewlett-Packard (HPQ) on Tuesday said it will buy consulting firm Electronic Data Systems (EDS)
Horizontal integration—both HP and EDS are global consulting and technology services companies in the Information Technology industry, which are at the same stage of production
for $13.9 billion, including debt, an acquisition that will allow the computer giant to better compete with rival IBM.
Such a horizontal integration would allow substantial economies of scale to be reaped, lowering unit cost of production and hence make the firm more competitive.
Merger would mean a larger size of firm. Bigger firms have revenue advantages in terms of
-Pricing power (greater market share, demand more price inelastic.)
-Non-price Competition (advertising to create brand loyalty and make product more price inelastic)
And cost advantages in reaping substantial internal economies of scale.
The deal is a "reverse merger" that keeps EDS largely intact, says Shane Robison, HP's chief strategy officer.
HP's consulting unit, which has about 70,000 employees, will be rolled into EDS, which has about 140,000 employees. The combined entity will be known as "EDS — an HP company."
The large size of the merged firm can also be seen by the large number of employees, 210 000.
EDS CEO Ronald Rittenmeyer will run the new division. It will be based at EDS' Plano, Texas, headquarters, about 1,700 miles from HP's main office in Palo Alto, Calif. Layoffs are expected. "We're looking to streamline our overhead," Robison says.
One negative impact of mergers is the inevitable retrenchment and ‘layoffs’. However, rationalization has to occur. Reorganisation and restructuring of production have to take place to reduce duplication of managerial roles to increase productivity and reduce unit cost. The unit administration cost per output also decreases as it is spread over a larger output.
The new EDS will have about $38 billion in revenue and 5% of the fractured consulting services market, says researcher Gartner. IBM's legendary consulting division has about 7% of the market. "IBM is a formidable competitor, but the industry desperately wants a credible No. 2," Robison says.
When EDS merges with HP, it will have increased revenue and a larger market share, only 2% less than leader IBM. In this case leading firms in the IT industry seem to have a relatively small market share.
Possible market structure: monopolistic competition. Unlike in perfect competition, monopolistically competitive firms have products that are not perfect substitutes. Consumers have clearly defined preferences and sellers attempt to differentiate their products from those of their competitors, the goods and services are heterogeneous. For example, IBM and HP sell differentiated IT products with different features, yet neither controls a very large share of the market like in monopolies.
HP will pay $25 for each EDS share, stock option and restricted stock unit. HP will also assume about $3.3 billion in debt, while obtaining some cash and minority interests. (These amounts are included in the $13.9 billion purchase price.) The deal is expected to close in the second half of the year.
The news sent EDS shares up 1% Tuesday to close at $24.34. They jumped 28% Monday after HP revealed the negotiations. HP shares dropped 5.5% Tuesday to $44.27.
"It certainly makes sense," says Gartner tech analyst Allie Young. HP reaches thousands of business customers with its hardware and software products. EDS has greater expertise in business services.
Greater scope of specialization after merger since each firm can concentrate on what it does best. (Internal EOS) Specialisation will increase productivity and lower average cost of production
Together, "They could sell more services deals," she says. Economies of scale could also help cut costs. That's a concern for EDS, which has had accounting and profitability problems in the past. One of the biggest issues: a multibillion-dollar contract with the U.S. military that became a big money-loser.
Hint that EDS is earning subnormal profit (Total revenue < total cost) Merger with HP would allow for greater capital assets, sales revenue and market share. It will also reap internal economies of scale because fixed cost in such a capital intensive IT industry with high start up cost will be spread over larger outputs. This will lower unit cost of production, thus increasing profits. The LRAC of the merged company will fall over large outputs with a high MES. EDS may then be able to earn normal or even supernormal profits.
Robison says HP has spent more than 10,000 hours digging through EDS' financials. "We're very comfortable with the work they've done in the past two years to improve their cost structure," he says.
The acquisition is HP's largest since Compaq Computer in 2002. The "size looks daunting," American Technology Research equity analyst Shaw Wu said in a research note. HP's skill at combining the two companies will determine whether the deal is a success, Young says. Also Tuesday, HP released preliminary results for its second fiscal quarter. Revenue was $28.3 billion, up 11% from a year ago, thanks to "solid performance across HP's business segments," the company said. Earnings rose to 80 cents a share from 65 cents a year ago.
Issuing shares to the public is an cheaper alternative way to raise funds since there is no interest, as compared to borrowing from banks
In the current quarter, HP expects revenue of $27.3 billion to $27.4 billion. HP had planned to announce results Thursday but released them to coincide with the EDS news.
http://www.usatoday.com/money/industries/technology/2008-05-13-hp-eds-purchase_N.htm
there are many useful, easy to understand videos on youtube on drawing graphs for revision, here's one on first degree price discrimination, it can be linked to many more (:
here's a interesting song on elasticity of demand.
yuxi
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