Retail industry pricing psychological warfare — Ozalp Ozer

MIT Sloan Visiting Professor Ozalp Ozer

From Fortune China

Have you ever been shopping and found a great jacket with a perfect fit? Then you look at the price tag and pause. Should you buy that perfect item now or wait to see if it’s still available during the inevitable end-of-season sale? What if the store told you that it only had a limited number left, or only had two on the rack in your size?

In a recent study I conducted with Prof. Karen Zheng, we found that as consumers have become more strategic about purchases, behavioral motives like regret and availability misperception are significant factors and should play a key role in pricing strategy.

Regret happens when consumers compare the outcome of a chosen action with that of the unchosen one and realize they would have been better off with the latter. In other words, they may regret buying the jacket now at the higher price if it turns out to be available during the sale for 30% off. Similarly, they may regret not buying it now if their size is gone by the time of the sale.

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The lose-lose tax policy driving away U.S. business — Michelle Hanlon

MIT Sloan Prof. Michelle Hanlon

From The Wall Street Journal 

Apple issued $12 billion of U.S. debt in April, which gave the company a domestic cash infusion that allowed it to keep more earnings overseas. Last month Pfizer PFE attempted to acquire AstraZeneca, a transaction that would have made Pfizer a subsidiary of the U.K.-based company. These were useful examples in the taxation classes I teach at MIT’s business school, but the real-world implications of these decisions are troubling. Even worse, legislators have responded with proposals that seek to prevent companies from escaping the U.S. tax system.

The U.S. corporate statutory tax rate is one of the highest in the world at 35%. In addition, the U.S. has a world-wide tax system under which profits earned abroad face U.S. taxation when brought back to America. The other G-7 countries, however, all have some form of a territorial tax system that imposes little or no tax on repatriated earnings.

To compete with foreign-based companies that have lower tax burdens, U.S. corporations have developed do-it-yourself territorial tax strategies. They accumulate foreign earnings rather than repatriate the earnings and pay the U.S. taxes. This lowers a company’s tax burden, but it imposes other costs.

For example, U.S. corporations hold more than $2 trillion in unremitted foreign earnings, a substantial portion of which is in cash. This is cash that currently can’t be reinvested in the U.S. or given to shareholders. As a consequence, companies are borrowing more in the U.S. to fund domestic operations and pay dividends. Another potential effect is that companies invest the earnings in foreign locations.

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Another reason not to fear inflation — Roberto Rigobon

MIT Sloan Professor Roberto Rigobon

From Bloomberg View

U.S. inflation has been accelerating in recent months, presenting the Federal Reserve with a tricky question as it decides how quickly to remove stimulus from the U.S. economy: Is the rise in prices a precursor of things to come or simply a “catching up” phase as people begin to spend again after a brutal winter?

Recent data from the U.S. Labor Department have led some to suggest that the long run of very low U.S. inflation could be ending. From Dec. 31 through May 31, the consumer price index — not seasonally adjusted — rose a cumulative 2.1 percent. That’s equivalent to an annualized inflation rate of more than 5 percent, far exceeding the Fed’s target of about 2 percent.

If this is more than a temporary phenomenon, the Fed might have to respond by raising interest rates sooner than expected — a move that would restrain economic growth and could trigger sharp declines in stock and bond markets.

Some officials at the Fed, though, reportedly do not believe that the surge in consumer prices represents the beginning of a new inflationary trend. After all, in the period just before the winter, from Sept. 30 to Dec. 31, prices actually fell by a cumulative 0.5 percent. Combine the two periods, one with an increase and one with a small drop, and you get an annualized inflation rate since September of about 2.4 percent.

Read the full post at Bloomberg View

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The economic future of China-Latin America relations — Stuart Krusell

Director of MIT Sloan's Office of International Programs Stuart Krusell

Director of MIT Sloan’s Office of International Programs Stuart Krusell

What do the economies of Latin America and China have in common? They are both extremely interdependent on the other for growth.

China purchases a significant percentage of raw materials from Latin America, which are used in the manufacturing of goods. Many of those goods are then sold back to Latin America. This cycle has increased over the last decade, as China’s trade with the region has surged more than 20-fold since 2000. So while they are competitors, they also are trade partners. It’s a slice of globalization that is representative of the larger world.

China and Latin America’s relationship becomes even more intriguing when you consider the geo-political environments of both regions. What is the impact of Brazil’s elections on its trade partnership? Populist rhetoric to keep jobs local and not to be so dependent on China is appealing to many, but what happens to the region’s economy if trade with China decreases? Further, how do the corruption investigations in China impact trade? If China’s GDP is affected, it could mean the country is buying fewer natural resources from Latin America.

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Job creation to meet population growth a daunting task — S.P. Kothari

MIT Sloan Deputy Dean S.P. Kothari

From MoneyControl.com 

In an exclusive interview with CNBC-TV18’s Malvika Jain on July 02, 2014, SP Kothari, Deputy Dean, MIT Sloan School of Management gave his take on the expectations from Arun Jaitely’s maiden Union Budget and his outlook on the road ahead for the Indian economy.

Below is the verbatim transcript of the interview:

Q: Government is in the process of preparing its first Budget since it took charge. What should be the priority areas where the government should focus?

A: Mr. Jaitley has to recognize and Mr. Modi also has to recognize that changing the furniture around the house is not going to make the house look that much different. It might make it look somewhat different but that is not a game changer and they have to think in terms of policies that dramatically alter if the goal is to increase the per capita income from where it is currently at about 1500 to say about USD 5000 in 10 years. Those game changing policies will have to focus on population growth, they will have to focus on FDI, they’ll have to focus on how our governance is and how our law enforcement is. Just to name a few set of policies that Mr. Jaitley should pay attention to in the maiden budget that he would be presenting on the 10th of July.

Q: Arun Jaitley has indicated that sector specific FDI is something that the government is going to be looking at. Do you think that that is going to be sufficient to spur investment flow into the country?

A: People’s decision to spur investment only partially hinges on what sectors are open for an investment. People’s decision to invest is influenced to a large extent by what kind of climate there is; climate includes what kind of law enforcement there is, what kind of labour supply there is, what kind of tax regime there is, what kind of regulation exists in general and is it easy to do business or not – open new businesses as well as close new businesses. So, the look has to be much more holistic in attracting foreign investment rather than a piecemeal approach by saying that we will open certain sectors for investment and wait for foreign investment to flow. I don’t think that is going to change or make a dramatic improvement in the investment climate.

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