Thursday, September 06, 2007

Industrial Profitability

As I am preparing for my entrance into BGI’s sustainable MBA program, we are studying basic economics and accounting. I attended my first online class last night, and though I am suspect of the quality of online learning, I found the format and experience better than I thought. It’s interesting to have disjointed voices coming through my headphones and text and graphics appearing on the screen in front of me. All we need now is web video; then we can challenge our auditory, tactile, and optical faculties at the same time. I found value listening to the instructor’s comments to reinforce my reading and problem set work and my fellow student’s commentary, questions, and discussion. I wonder what CO2 emissions savings can be squeezed out of technologies like this? Of course, this assumes that the CO2 that went into the manufacture of the headphones, servers, routers, and computers is less than what would otherwise be emitted in face-to-face meetings.

We talked about industry “normal” and “economic” profits, and the tendency for an industry to achieve normal profits. There is a constant downward pressure on profits from the entry of firms into markets that are exhibiting higher than normal profits. Investors’ search for the lowest opportunity costs, hence placing some of their capital in an industry exhibiting higher profit potential. Additional competitors shift the supply curve to the right, increasing the quantity sold at any given price and therefore reducing profitability (assuming the long run costs to the industry participants are constant). One can see the imperative for companies to decrease costs to remain profitable in the face of profit pressure, especially in capital intensive industries. This also helps explain the “race to the bottom” associated with reducing costs by searching for the absolute lowest cost factors of production.

I suppose this is a good example of the first mover advantage; the one getting into a lucrative market first has the ability to set prices and serve the market unilaterally. This can only last for so long. If companies are not attentive, competitors entering the market aggressively can take share at such a rate as to drive the initial market leader out of the industry. Am I correct in assuming that this is what happened to IBM, resulting in the eventual sale of their PC business to Lenovo? The same downward pressure was illustrated graphically in flat panel televisions, driving many initial leaders out of the industry.

Is the same thing happening in wind and solar? I am wagering that these industries are not experiencing record profitability as they are dependent upon subsidies and compete with established lower cost producers, but could they?

What happens to these classical economic assumptions when we start to integrate the externalities that many of us interested in preserving natural capital would like to be internalized?

One final note, would the ad revenue of local Boston radio station WZLX increase or decrease if another local station decided September would be “Zeptember”? Thank goodness the demand for Led Zeppelin is STRONG!

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