This year is general election year in the UK. Polls predict a win for the Conservatives, ousting Labour after 13 years in power. But what can game theory tell us about election strategy, and what does selling drinks on the beach have to do with it?
Imagine a stretch of beach with sunbathers evenly spread along it. You are a selling cold drinks, and there is another seller, selling the same drinks at exactly the same price. The only strategic choice left for you is location along the beach because sunbathers will simply walk to the drinks vendor closest to them. You could locate yourself in the middle of one half of the beach i.e. 1/4 of the way along, and hope that the other guy does the same at the other end of the beach. But if you did that the other guy could simply locate himself in the centre of the whole beach and take about 62.5% of the whole market. So you both end up in the centre of the whole beach (and probably end up having to differentiate yourself in some way).
This logic shows why petrol stations end up so close to each other. And it also shows why political parties move inexorably towards the centre as elections near. It doesn’t pay to be off to the left or right. So the real battle of an election is in defining the centre (this is where polling and other research comes in), and arguing why your party is much more representative of the centre than the other party.
So where is the centre? Well recently Gordon Brown made a comment about “the playing fields of Eton” – this was designed to create a perception of the Conservatives as way off centre, promoting the interests of a thin slice of the population at one end of the spectrum. He has since pushed this further, stressing that he is not targeting his core vote (i.e. left of centre), but the middle classes.
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.
—Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Last term in Business Economics we watched a series of videos taped by the FBI of price fixing by multinational chemical companies (fixing the price of lysine, an industrial chemical). [BTW this counts as revision as I am learning about collusion for an exam on Monday] The quotation from Adam Smith has dated a little - law enforcement agencies (at least in the developed world) go out of their way to prevent and break up cartels.
What strikes me from the videos is how brazen they are. Little did they know that one of their number had gone to the FBI and was wired. In fact by coincidence they released a film recently about this called the Informant with Matt Damon.
They (that is, the real life ‘they’ - I don’t know what they did in the film) use a trade association as cover and Mark Whitacre, the informant, convinces the Japanese to meet in Hawaii - I assume this was so the FBI would still have jurisdiction. Whitacre convinces the Japanese guy over the phone by saying how good the golf will be.
There ate two main challenges for an effective cartel: actually agreeing on how to collude, and enorcing that agreement. On the first challenge lysine has many properties that may lead to a successful cartel:
it is a homogenous product.
The market is highly concentrated: the four largest firms control most of the U.S. and world markets, and the four largest buyers purchase less than 30 percent of the total market.
Buyers make infrequent, large purchases.
Entry is difficult because new plants are expensive, take a long time to build, and need skills
Thanks to Jonathan Haskel for the lecture and all the videos, which I uploaded to youtube and show below.
1. The cartel firms felt that they needed all the major firms to participate. {Segment 1 of the lysine movie shows the conspirators discussing and introducing the various firms involved.}
2. They fixed prices and allocated quantities that could be sold to each firm. {The cartel members discuss fixing prices in segment 4 and allocating output in segment 5.}
3. They used their industry organization to collect data and provide cover for their illicit meeting. {See segment 3.}
4. They shared sales data. {See segment 8. Segment 6 shows the largest firm threatening other smaller firms if they do not agree to the cartel and its allocation terms.}
5. They had a punishment scheme in place to prevent firms from exceeding their quotas {See segments 7 and 8.}
It has many properties that may lead to a successful cartel.
a homogenous product.
The market is highly concentrated: the four largest firms control most of the U.S. and world markets. The four largest buyers purchase less than 30 percent of the total market.
Buyers make infrequent, large purchases.
Entry is difficult because new plants are expensive, take a long time to build, and need skills
Still mid exams, trying to learn about various theories of team decision making right now – wrote this a while ago after the actual class, but never got around to posting it…
Had a class about interest rate setting. Was stunned about how interest rates are actually set. When you hear the Bank of England (BoE) have ‘set’ an interest rate, what is actually happening is very diffuse and in the current siutation, prone to failure.
Our lecturer likened it to“shooting at a moving target, while wearing a blindfold, with a bullet that moves very slowly, at unpredictable speeds.” He was hardly exaggerating.
Interest rates are a key lever of monetary policy and the BoE has two ways of influencing them (in common with other developed economies)
Setting the rate at which banks can borrow from the central bank – interestingly this turns out to be quantitatively insignificant. That is until the credit crunch - see this amazing chart from the Federal Reserve Bank of St Louis:
See that huge increase in lending by the central bank! Crazy. (the grey bars denote periods of recession) But it remains that usually the discount rate is usually just a signalling device, particularly in the context of the second main lever:
Open Market operations: the central banks either buy or sell bonds in order to affect liquidity, hoping this will ripple through into the interest rates that banks set for their customer:
If they sell bonds it takes cash out of the system and reserves and the money supply falls (and interest rates rise) .
If they buy bonds it injects cash into the system and the money supply rises (and interest rates fall).
I had no idea it was such a hit and miss affair! At the moment we’re getting information about the current crisis from two directions: our finance lecturer and our macroeconomics lecturer. The dual perspectives are fascinating….
Just had a class on social networks. The lecturer, Jonathan Pinto, gave us his personal tips on networking. His emphasis is not on the strategic, slightly cynical approach typically associated with MBAs. He is about spreading the net wide, getting as much diversity and depth in your networks as possible. He prescribes taking advantage of every situation, whether it be on a tube platform or in more obvious networking locations. It is more about personal fulfilment than getting ahead, but he also argues that from all this networking can come the 1% that will get you ahead. Here are his tips:
Networks power can supplement/complement/substitute for other power
Never turn down an opportunity
Work expands to fill time available
Necessity is the mother of invention
Opportunity-provider may never offer you another
You may never know what it could lead to (butterfly effect, domino effect)
Exploit ‘dead’ time ie waiting in queues, on bus train
Take risks
Try activities you have never tried before e.g. art, theatre, dance, music
Initiate conversations
Listen to / engage with anyone and everyone
High energy / high cheerfulness almost always a big positive
If you make a promise, keep it
Being strategic i.e. schmoozer or working the room could backfire
We had a great speaker visit our final marketing lecture. A semi-retired head of marketing from one of the major US airlines. He now spends his time touring business schools talking about his experiences. The airline industry sounds like a tough place – a startling fact he told us is that since its beginnings, airlines have in total made an overall loss!
However when it came to answering a question about carbon emissions he was a bit disingenuous. He began by saying that we should “separate fact from rhetoric” and asserted that aviation only contributes 1.8% of global CO2 emissions. He then went on to ridicule climate change hypocrites who preach about climate change but keep flying. I’ve been googling to try and find the provenance of the 1.8% figure and can’t find it. I vaguely remember it being the figure used in one of the IPCC reports, or maybe the Stern report. I’d be interested to hear from anyone who can find the origin. I don’t doubt the truth of the figure but much more important is what it represents and what future trends are.
Everything I’ve read about this shows that this is a very complicated issue. Because planes fly so high, calculating the simple emissions may not be useful as at that altitude climate change emissions have a much bigger impact.
It is estimated that flying is responsible for about 13% of climate change emissions from the UK. Also flying accounts for a very high proportion of the typical Imperial student’s climate change contribution. I’m guessing that as a group we fly more than most – I just calculated that a return trip to New York, and a couple of trips in europe (to Rome and Madrid) come to about three tonnes of CO2. That’s about a third of the average UK emissions per person in 2005. So by this speaker’s logic, no one else in the world should be allowed to fly, to allow the ones who fly now to continue.
So the problem with flying is that they account for a very large proportion of our CO2 emissions and over the next 30 years will account for a similar proportion of the rest of the world’s carbon footprint; flying is increasing massively with development; and there doesn’t seem to be any prospect of major technological methods of reducing the climate change impact.
The speaker ridiculed the Bishop of London who said a while ago that flying should be considered a sin. I think that was a bit ostrich-like on the part of the speaker. There are billions of people around the world who have never flown and if they are ever going to get the chance to fly, then per capita flying needs to go down. It’s simple arithmetic. The Bishop of London may have been using dramatic language, couched in his own world view, but the fact remains that flying and climate change is going to be one of the big issues over the next few decades at least.
I’ve been trying to cut my flights down to only those necessary – for me that means weddings. We’ve taken a few overland holidays over the past couple of years where we would have previously flown. Using ChooseClimate I calculated the total warming effect of the flights I’ve taken since I graduated in June 2000. It’s the only carbon calculator I’ve found that takes into the extra effect of altitude:
Sorry about the resolution – wordpress doesn’t like me today. The table below shows the numbers and the actual holidays this involved (I’ve excluded my one and only work flight!)
I went to Morocco a lot! Five of these flights were for weddings. As you can see we have reduced our flying quite considerably – but we have the massive advantage of living near our immediate families. But even then we have had to make special efforts to miss out on all sorts of nice trips. Please, somebody, come up with a clean fuel for flying!
Doing an MBA naturally exposes me to lots of cringey business speak – leveraging this and integrating that. I came across a great line about how using peers to persuade people rather than higher ranking people can be more effective:
“Stated simply, influence is often best exerted horizontally rather than vertically”. Ha! “Stated Simply”! Having said that, I do get what he means, and although business is very jargony I would say most of the jargon is useful either for getting a point across more clearly or more efficiently.
I think mainstream academic disciplines are much worse. I read an article for organisational behaviour that is rooted in sociology and psychology, and found this humdinger:
“In general, the degree of dependence of s2(a) on O, following O’s influence, can be defined as equal to the amount of retrogression following the removal of O from the life space of P: Degree of dependence of s2(a) on O = s2(a) – s3(a).
The whole article read like that. In plain English:
“When person A is exerting some kind of power over person B, the effect that power has can be measured by the change in behaviour of Person B when Person A stops exerting the power, whether directly or indirectly.”
Now my version is not that ‘plain’ it must be said but it’s not that simple an idea. The article was trying to get something relatively complicated across, and the author thought that using some scientific sounding terminology would help – they were wrong. They may also have been trying to signal the importance and novelty of their proposed conceptual framework. They didn’t need to. Message to all article writers out there: Please try to make the best use of the language as it exists already, unless of course you’re aiming for comedy value. Then and only then, develop your own terminology.
We’ve been learning a lot in both strategy and marketing classes about how adjusting your perspective can yield insights into how you can market products in new ways. Product centred business mentality – where products are designed with the producers’ tastes or perceptions in mind – hardly ever yields great returns. I’ve posted below about the dangers of marketing, but in an example of great marketing thinking, customer focus and diligent research could help get electric cars ‘off the ground’.
Had a session on the causes of the credit crunch in finance. Very good though I’d worked most of it out myself from things like this: the great sub prime primer:
I thoroughly recommend you look at it for comedy value alone.
The lecturer pointed out that the british public seemed to get much more distressed about the recent MPs’ expenses ‘scandal’ than the greatest financial crisis since the thirties. I think that’s because the effects are so diffuse and because so many people share the blame: mortgage brokers; loan defaulters; investment banks; credit rating agencies; insurers; regulators; politicians etc.
The lecturer said he was mystified by the fact that people got so angry with the hedge funds when they began ‘shorting’ banks after the government stuck loads of money in. I think the answer is related to frustration with a dose of resentment. The HFs were essentially undermining a hugely expensive policy intervention – they speeded up the fall in the banks share value which meant there was less time for the policy to work. At the time they said they were just doing their job: exposing risk in the markets. But that is disingenuous to say the least. Everyone knew some of the banks were sitting on massive toxic debt – the HFs were making a quick buck while they could, with no regard for the wider good. They didn’t need to expose the risk by doing what they did!
Not to say that a lot of hedge funds haven’t gone to the wall (compared to only a few banks) but I can’t say I’m that sympathetic – their job was to take on risk, which they did and had to pay the downside to that. Unlike the investment banks – who have got away with it!
When I was fifteen I did two weeks work experience at my local branch of RBS. A nice guy who worked there sat me down and explained how banking works. Not long after I completely forgot his explanation and have only now had it explained to me again (and the rest of the MBA class) in a recent macroeconomics class.
Banking enables a roughly ten-fold increase in the amount of money in circulation! To explain how it does this I’ll go through the example we were shown in class:
Suppose someone deposits £1000 in a bank account. Because banks hold a large number of deposits and expect that most of those deposits won’t be withdrawn at the same time, it can lend out 90% of that money – £900.
The person who borrows that money borrows it for a reason i.e. to spend it on something. Therefore that £900 ends up in the bank account of the person he spent it with. Then that bank lends out 90% of that too – £810.
The person it lends it to then spends it on something, and it ends up in another bank account. And so on, so it ends up like this:
This is called fractional reserve banking. Now obviously this is a simplified example. It doesn’t take into account the costs of the process or the interest payments the bank receives but you get the picture. This process also acts to decrease interest rates by increasing the money supply and therefore the availability of capital for lending – which in turn stimulates growth.
When you see the amount of money ‘created’ I begin to appreciate what all the pundits are actually talking about when they say banking crisis - if this amount of money dropped out of circulation the economy would seize up.
I (re)learn something new every day. Actually I learn lots of things every day – most of them a lot harder to understand than this.
We talked about how this sort of banking appears to be a utility – like a water company that pools water in a reservoir and channels it off to people who need it. It’s not that complicated (obviously it is really, but then so is supplying water – probably more than banking).
Sounds like using Apple software is going to get even more annoying:
Apple’s filed a patent on a design for a device that won’t let its owner use it unless that person demonstrates that she has complied with an advertiser’s demands by paying attention to an ad and taking some action indicating her dutiful attention.
When there are more details we’ll know for sure but it sounds to me like Apple is flexing its muscles a bit too far this time. I hope this isn’t a sign of things to come – it sounds like a dystopian nightmare.
