OPEC strikes deal to cut output


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OPEC has finally agreed on a deal, in Vienna of course, to cut oil output causing the oil price to immediately surge by 8%. While there is still uncertainty whether the once mighty cartel still has the ability to enforce, the questions whether they will ever again agree on deal seem to be answered.

Look here for a comprehensive treatment in the Wall Street Journal.

Democracy or not?


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This post is not intended as a critical statement about the ultimate outcome of the presidential election last Tuesday. If one believes in democracy paired with the power of an absolute majority and the equality of all people—independent of gender and ethnicity—being the highest goods a free nation has to strive for, one also has to accept the fact that at times the outcome of an election may collide with one’s worldview.

But that’s also the crux of the matter. Irrespective of this week’s popular vote, the American people are not as equal as the famous passage of the constitution suggests. Putting aside the even less transparent discontinuities implied by the block vote of a state’s electoral college (which encourages parties and their candidates to go after the pivotal voter in a non-exhaustive number states rather than the national one), an elector in Texas is represented by approximately 700,000 voters whereas a member of Wyoming’s college is backed by around 180,000. In an overly simplistic way, that means that a Wyoming vote weighs about four times as much as the vote of a Texan.

Even worse, the electoral college goes back in part to James Madison and his three fifth rule, a rule ensuring the ability of the south to prevail in presidential elections by allocating three fifth of the vote of a “free man” to every slave. Far more scandalous than the fact that votes were not equally important, weighed the fact that this three fifth vote did not even allow slaves to express their free will at lower value but effectively endowed their owner with one massive vote.

Now, slavery has long gone, but inexplicably the inequality of votes remained. The American presidential election, as of now, is based on an imbecilic (and non-transparent to its actors) concept partially based on an even worse ancient rule. While Americans are known to be rather mobile when compared to other nations, the high ratio of people living in the state where they were born suggests that the choice of where to settle is far from a free one for many. Thus, essentially the electoral college system discriminates by birth place.

Many voices currently point at the popular vote with frustration and express the need for change. These comments are however identical to what we heard after the 2000 presidential election. Due to the fact that the electoral college favors parties with more support in rural areas, the incentive to switch to a popular vote is one-sided. Thus, do not expect the popular vote to come in the foreseeable future as it would require a wide consensus. In particular, the so-called swing states are unlikely to collaborate as it would significantly diminish their importance.

While we have undoubtedly seen progress since the three fifth rule, there is so much yet to do to eradicate discrimination from our daily lives. The electoral college system, though, will happily guarantee that many living in the self-proclaimed leading country of the free world are discriminated by birth, independent of how much we achieve on other fronts.


Why competing stores always seem to occur next to each other … or why not


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A recent (seemingly unsuccessful) stint hunting for non-academic articles on spatial aggregation of stores produced curious results. Naturally, many people observe at some point that a.) supposed fierce competitors like Exxon/Mobile and Shell or CVS and Walgreen’s surprisingly frequently appear in tandem, that is to say right next to each other and b.) often even bigger groups of competing stores like car dealerships seem to cluster in certain areas.

Eager for knowledge as human beings (ideally) are, the internet provides massive evidence for users on the quest for the roots of the above described phenomena. Now, the curious part are the answers floating around on the world wide web. Surprisingly, there seems to be no popular trusted media outlet which answers the question (I am thankful if proved wrong and pointed towards the desired direction). Among the attempts showing the most hits is a short SAP article published via Forbes’ BrandVoice feature which can be found here. A few seconds suffice to realize that this article is merely an executive summary of a blog post of author Presh Talwalkar which itself can be found here. These two  pieces are (near) perfect representatives of the majority of (non-academic) justifications of the two above scenarios on the internet.

They, correctly, link scenario a.) above to the basic Hotelling model. Hotelling explains in a simple model why strategic reasoning leads two competing stores to choose an identical location in a local duopoly. In order to stress the old example once more, consider a (linear) beach served by two ice cream stands. Assume the beach to be busy, such that potential customers are distributed uniformly over its entire length. Further assume, for simplicity, that the stands offer the same flavors and quality of ice cream at identical prices and competition is purely executed via location. Since walking over hot sand is uncomfortable, every customer opts to buy ice cream as close as possible to her towel spot. Game theory predicts that both ice cream vendors end up in the middle back to back. Why is that? Suppose one of the vendors to position his stand anywhere north (south) of the middle. Its competitor could swiftly just move an inch south (north) of it to ensure himself more than half of the customers. As a consequence, both stands right next to each other in the middle constitutes the unique Nash equilibrium of the outlined game since in any other scenario at least one of the vendors can make himself better off by unilaterally moving his stand. This is a “strict” Nash equilibrium in the sense that every unilateral deviation causes a vendor to be worse off.

While this simplistic model does not capture the entirety of location choice in duopolies in reality, it is a perfectly reasonable approach to explain why CVS and Walgreen’s can be frequently found across the street of each other, or, as in this special case in Edina, Minnesota, in such close proximity to each other that drive through clerks can wave to each other. In fact, numerous academic articles have claimed that the simple Hotelling approach is a powerful predicition tool in local duopolies. It is, however, crucial to understand that this behavior is nothing specific to representatives of national or global chains as some articles on the internet want us to believe. The simple Hotelling duopoly model applies to strategic competition of national giants CVS and Walgreens in downtown Chicago or San Francisco as much as it does to family operated pharmacies in a rural village in Maine (as long as the village is sufficiently populous to have two pharmacies operate profitably).

The more striking claim to be found in the above referenced articles and the set of pieces they represent is, however, that this logic generalizes to clusters of competing stores like car dealerships. It is straightforward to falsify this claim. Reconsider the above discussed ice cream vendors and bring a third one into play. If this entrant positions himself right in the middle of the beach next to the two incumbents he can expect to serve approximately a third of the beach population drooling over ice cream. Moving slightly north or south of the middle, however, ensures him nearly half the customers. As a result, the basic Hotelling model does not explain why you typically drive by car dealerships for minutes once you passed the first. The logic of the Hotelling model does simply not extend to a scenario featuring a number of competitors in excess of two. Analogously, the same reasoning explains why in a two party system winning the median voter is key, whereas in a multi party system we witness parties positioning significantly to the left or right of each other.

Clustering of car dealerships, furniture stores, etc. is much more likely to be caused by a common effort to reduce customers’ search costs combined with zoning restrictions set by municipalities. Simplified, as car dealerships (to stick to one story) are typically located on the outer fringes of urban areas, it would be mighty costly for a potential customer to drive all over town to compare and test drive vehicles of multiple brands. Thus, she is likely to pre-select a smaller number of manufacturers to visit in the first place. This, in turn, would result in a lower average number of potential customers to enter a car dealership every given day. This reasoning is also consistent with the fact that it has been observed that brands which are closer substitutes to each other are more likely to be found in clusters. Chicago’s northern suburbians for instance may find Subaru, Volkswagen, Mazda, Nissan and Fiat in the Evanston/Skokie area whereas Mercedes, BMW, Infiniti, Volvo and Land Rover are located on the same road in Glencoe.

In the case of dealerships selling bulky and expensive items which require huge parking lots, loading and storing capacity or direct access to roads in the case of cars, regulations passed and incentives provided by local governments seem to further foster clusters. In order to raise their attractiveness to potential customers and residents alike, municipalities might restrict potential storefront locations via zoning or grant tax reliefs to induce the birth of shopping parks. While such factors might also come into play regarding clustering of pharmacies or gas stations, they seem to be less likely the driving forces behind the location coupling of competitors. On the other hand, central strategic positioning predicted in the Hotelling duopoly does not account for suburban clusters of car dealerships as exemplified with three ice cream vendors above.


Brexit and why it is worse than you might think



It seems quite certain to this hour that the people of the United Kingdom opted to leave the European Union. While the pound has started plummeting and experts have been quite robustly forecasting a drop in GDP exceeding one percent, the common Britain will most likely not face any severe personal consequences from those developments. Most likely, he is even more than willing to trade these minor caveats against some (fictitious) increase in sovereignty, the convenience of continued debate about professional athletes’ weight in stones and the triumph of the pint over half a liter of ale.

The immediate consequences of “Brexit” to the UK economy, no matter how often eloquently repeated by experts and self-proclaimed ones, represent, however, a rather minor part of the big picture. The influx of refugees from the middle East, the resurgence of terrorism in Europe and financial turmoil combine to a prolific breeding ground for nationalism and myopia.

A continent (to a large extent) disproportionately spoiled by peace and prosperity struggles to come to terms with modern reality. Uncertainty and fear augment the words of Gerd Wilders, Heinz-Christian Strache, Viktor Orban, the Le Pen clan and their equals.

Brexit might instill the belief in their minds that their long term goals of sovereignty and social austerity have never been as realizable as in this moment. While the phalanx of conservatives and social democrats in the leading economies of Europe appear to be too powerful (yet), this is far from fact for many smaller European countries and, sadly, historical evidence does not draw a too rosy picture of “a Europe” in lack of cohesion and solidarity.

Birth rates in Amazonia



To my students:

Consider the following scenario:

In the country of Amazonia boys are valued but girls are worshipped. No mother, however, wants to give birth to multiple girls in order to avoid succession struggles related to the leadership of the family. Thus, every mother gives birth to children precisely until a daughter is born to her.

a) If the probability of giving birth to a son is .5, what ratio of newborns in Amazonia are girls?

b) If the probability of giving birth to a son is 0<s<1, what ratio of newborns in Amazonia are girls?

Why luck matters more than you might think


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My (in the not so far) future colleague Robert H. Frank, Professor of Economics at the Samuel P. Curtis Johnson Graduate School of Management at Cornell University, has recently published his new book “Success and Luck“.

While not denouncing the views of those who attribute unexpected turns of their lives and ventures to divine intervention or plain fate, he shares his beliefs about the ubiquity of chance as a determinant of success in both our private and business lives and indicates why many among us simply underestimate, or, alternatively put stronger, under appreciate the consequences of mere random processes. Bob convincingly argues, however, that chance does not only influence our well-being in a consequential manner but deeply affects many of our actively taken decisions.

Due to the fact that chance features prominently as a determinant of entrepreneurial success in my current work on team building, acquisition of inputs and entrepreneurship, I have admit to be naturally biased towards his chain of argumentation.

Nevertheless, I highly recommend every (in fact also non-) academic and student to read his book as it stresses a perspective of our ventures typically under represented in our ex ante analyses and ex post evaluations of actions. While featuring interesting and partially provocative content, it presents itself also easy too read due to him being a very accomplished writer (Bob Frank was a NY Times columnist for more than a decade). A synopsis of his work can be found in this recent piece of the Atlantic. A taste of the book itself is provided by Princeton University Press.


Goodbye Keith Murnighan

Keith Murninghan, professor at the department of Organization & Behavior at the Kellogg School of Management, Northwestern University lost his fight against cancer last Friday. While increasing vertical specialization of PhD programs leads us typically not to know most professors of other departments (while physically close there are academically enormous distances), I was lucky enough to meet Keith several times during my executive MBA teaching stints at the Evanston and Miami campuses of Kellogg. Certainly not being an expert in his research field, I am, however, aware that Keith has been a major contributor to the literature of conflict resolution, in particular opposing group and individual behavior.

More importantly though, from my subjective perspective, he was a special person treating every MBA and PhD student with the utmost respect, always showing genuine interest in one’s work. I had the opportunity to get to know him a little during social events at executive MBA teaching weekends. Not only did he possess an extraordinary interdisciplinary interested mind, but he was also one of the kindest persons I have met during my time at Kellogg. Thus it did not come as a surprise to me that I met him at multiple private graduation events of Kellogg students.


Here you can find the official Kellogg notification.

The prisoner’s dilemma in the republican primaries


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Kevin Quealy (@KevinQ) wrote a nice piece in last week’s NY Times analyzing the race for the Republican nomination from a game theory perspective. While I was slightly irritated by Rubio’s classification as a mainstream candidate, it’s an interesting application of basic game theory principles worth reading.