Spence on, what else , jobs

There were the usual questions like "Why do we act as though globalization is inevitable?" and "Do we tell young people that we need engineers rather than psychologists?" from the largely undergraduate student audience at "A Conversation with Nobel Laureate Prof. Michael Spence & The Economist's Matthew Bishop" an event at the Stern School of Business of New York University. And what were the answers from Spence and Bishop? Both agreed that protective tariffs don't help but Spence was the more convincing especially when he pulled out the statistic that cars in Canada used to cost 87% more than international prices under a now abandoned tariff regime. On the need for psychologists Bishop made a huge faux pas suggesting that theater majors were redundant, spoken here at NYU the place to study theater! Spence was diplomatic and thought that the market would sort that out, or at least that seemed to be thrust of what he said.

Spence started off the conversation with the observation that in the US employment growth in the tradeable sector of the economy was almost zero over the last 20 years while there was good growth in the non-tradeable sector and of-course this could not be sustained over the long run. So, the question was how to increase employment opportunities in the tradeable sector. Opening up trade in services, changes in education to develop broad capabilities needed in a rapidly changing technology environment and skill development for those moving out of previously tradeable sectors. Bishop was more general in his observations and out of the blue chose to display the colonial baggage he still carries by saying that India had no world class universities, a non-sequitur if there was one.

There was of-course the urgency to the conversation that comes with the on-going jobless recovery here in the US. One of the issues that came up was potential social consequences of the adjustments in the labor market, particularly the gross inequality in returns to skills in the tradeable sector due to globalization. The skills of an auto worker face continuing downward shift in returns while the skills of a computer programmer may see the opposite. Spence made the point that Germany seems to have avoided the decline of the tradeable sector by paying the price of lower incomes. There was some talk of philanthro-capitalism from Bishop but the most important point that was made related to the American dream. As Spence put it hard work was sufficient guarantee of good returns in a world of unlimited opportunities but in a globalized world opportunity may less universal here in the US. He did not say this but I think it illustrates the point: the best place to be for a top basketball player now is the US but in a globalizing world of sports that may change. The bigger consequence in my mind is the idea of hope. I think that in a poor country like India where most will have an OK life there is still the widely-felt hope that you can accomplish something if you really want to, and that is what keeps the young people going. And there is ample evidence for it in the neighborhood. This is also what the American dream is about, and I think as the recession recedes it will return.

Can't end without a question hinting at politics. "Will low corporate taxes really create jobs?" Both panelists agreed that the corporate tax rate is high in the US but also there are too many loopholes and so on. But they also felt that whether relaxing EPA rules will increase jobs does not find an unequivocal answer. Nice evening, and a lively conversation enjoyed by all who could make it to there.

NETFLIX: dual branding or pricing problem?

Qwikster is for movies on DVD and Netflix is for streaming video content. This is quite different from Toyota and Lexus or Honda and Accura. It is more like Walmart and Sam's warehouse club. When Toyota decided to have the Lexus brand, the customers for each brand were different and the two brands prevented any confusion in the segmented market. Walmart and Sam's often serve the same customer on different occasions or different types of shopping trips. But at the heart to of this segmentation strategy is the fact that on any one occasion the customer visits only one store and so both assortment and pricing can be different at the stores.

Now let us turn to Netflix. The customer orders DVDs and streaming content on the internet and prefers a single website with a single sign in. She may even order both at the same time. The real problem for Netflix has been the flat price strategy. Adding streaming content to DVD's without rethinking pricing has landed the company in trouble. And what is more, it has lost control of its value proposition. Ideally, each time a person goes in for the streaming they should be charged a variable price. Or like the cell phone companies there could be tiered pricing with various options. There really does not seem to be any need for two brands. Netflix should learn from i-tunes which used to have a 99 cent a song pricing strategy and then changed it, for good and for better. A couple of years ago I discussed a paper at the QME conference and the question of uniform price for all songs was the topic. Of-course such a strategy is not a good one.

Why grocery stores worldwide are dropping double coupons

Tesco in the United Kingdom joins by discontinuing double points on their Club Card. Back in April Kroger stopped doubling and tripling manufacturer coupons at its Houston area stores. What is going on? One reason manufacturers drop copons is so they can charge lower price to price sensitive customers. Retailers have been piggybacking on this instead of incurring the cost of dropping their own store coupons. They identify price sensitive customers and attract them to their stores by doubling and tripling coupons.

But now they seem to be having second thoughts. Why? It is because of the recession. During a recession, especially one as long and severe as the current one, there are too many price sensitive customers. A better strategy is to lower price to ALL customers then. That is what is going on now. And it has the advantage of not yielding control over pricing to manufacturers. This is a problem that is well known as my research with Krishnan demonstrated in the nineties.