Chocolate and Gold Coins

Thursday, April 28, 2005

Indian Patents the Burrito

Not really, but it's almost true. The always interesting Sepia Mutiny describes Dosa Plaza and their 104 dosai including the patented Mexican Dosa. A dosa is very similar to a tortilla except the dosa uses rice flour instead of wheat flour. Actually, a chapatti is a tortilla, so maybe an Indian really will patent the burrito. Here is Sepia Mutiny’s take on the Mexican Dosa:

This far-out concept of wrapping a round piece of flattened bread around Mexican ingredients is going to be big. Picture, if you will, a whole chain of hacienda-like eateries with...bells...selling this truly groundbreaking product to all of India’s mostly non-obese citizens. So big, that it should spark unbridled franchising around the world, catering to those starved for affordable Mexican food prepared quickly. Billions upon billions of dollars will be generated. Luckily, Khorwal [owner] has patented this ingenious design, so he won’t have worry about unscrupulous businessmen stealing his idea.

Rahul Bhatia who writes the interesting blog Greenchannel actually visited Dosa Plaza and spoke with the man behind the counter – and decided not to eat their food. Here is his take on Dosa Plaza:

I asked him what the Mexican dosa contains. He said there were mixed vegetables inside the dosa, and cheese was sprinkled on top. Upon further questioning, he said - not sheepishly, mind you - that it was labeled 'Mexican' because of the sprinkled cheese. The Manchurian idli, said the server, was a diced idli dipped in Manchurian gravy. And the Mexican baked dosa was not baked, but fried.

For a country largely paranoid about a foreign hand perverting our culture and all that, we sure do some strange things to ourselves.

My take on Dosa Plaza is simple: they’re idiots. McDonald’s started their restaurant with only 8 items on their menu. Their philosophy: do a few things extremely well, with consistent quality, and keep it simple. That philosophy should be the philosophy of any fast-food start-up. Once you get your core items down you can expand later. But if they have 104 items now - before thousands of people have tried them - many of them must be just awful. The concept of doing careful market testing before launching your product just hasn't gotten to India yet.

Hybrids and the Problem with Subsidies

In a beginning microeconomics class, you would learn that if a product produces a positive externality, then a subsidy would produce a more socially efficient level of output for that product. For example, automobiles pollute but hybrid automobiles pollute less than regular automobiles, so a subsidy should help reduce pollution. This was the thinking behind the decision in 2000 to let hybrid cars use the HOV (high occupancy vehicle) lanes in Northern Virginia. The Virginia legislature decided to see if a one-year exemption for hybrids on the HOV lanes would encourage people to buy these new automobiles. Every year, the legislature has renewed the exemption.

Fast-forward to 2005 and we see that the legislature has inadvertently created a real dilemma for itself. The hybrids are multiplying like rabbits in the HOV lanes and these lanes are becoming congested. In the six months from March 2004 to October 2004, the number of hybrids using the HOV lanes each day has climbed from 480 to 1700. Six months later, and there must be over 3000 of them now.

In July, the hybrid exemption for the HOV lanes is due to expire. Considering the problems that the exemption is causing, it would be madness for the legislature to renew it. However, the legislature cannot so easily slay the monster they created. Thousands of people have bought hybrids at a premium of $4000 or more over regular cars in the hope of buying their way into the HOV lanes. Taking away a goody is hard for legislatures to do. Think about farm subsidies. Once you start subsidizing, you create a natural lobby that will work to perpetuate this subsidy, even when the economic justification is no longer valid.

This Washington Post article explains the situation in Northern Virginia:

According to the Electric Drive Transportation Association, the Washington area ranks with California as the country's leading markets for hybrids.

Several car dealers in Northern Virginia said it's because of the HOV exemption. "I'd say 95 percent of the people who buy a Prius say it's to get into HOV," said Jay Taye, sales manager at Ourisman Fairfax Toyota. "They talk about the tax break and the HOV, and once in a while they say they prefer it for the gas mileage as well."

It isn’t at all clear that the hybrid exemption has really helped air quality in Northern Virginia. Hybrids do pollute less than ordinary automobiles but the exemption has increased the number of single occupancy vehicles. An ordinary car with three occupants pollutes a whole lot less per person than a hybrid with one occupant. Also, if some of the new hybrid drivers were formerly metro riders or bus riders, then the switch to driving a hybrid would increase pollution. Also, the new SUV hybrids are not very fuel efficient; they're the equivalent of a diet soda with your candy bar.

An economist would tell you the optimal way of dealing with the problem of air pollution. Pollution is roughly proportional to the amount of fuel burned. Simply place a tax on gasoline, maybe 20 cents per gallon, and the pollution externality will disappear. Since hybrids burn less gasoline, they receive a subsidy in effect.

“But isn’t there already a 20 cent per gallon gasoline tax?” Yes

“So why do we need another subsidy for hybrids?”

I have no idea.


The Virginia Department of Transportation announce that it would build High Occupancy or Toll (HOT) lanes along the Beltway (I-495) between Georgetown Pike and Springfield. I comment about it here.

Tuesday, April 26, 2005

Busting Up OPEC

I have read several recent articles at Tech Central Station and elsewhere explaining the folly of trying to create a policy that will rid the U.S. of dependency on foreign oil. You can read these articles here, here, and here. In short, these articles explain why it is a waste of time and money to try to rid ourselves of middle-east oil dependence and to subsidize alternative energy.

I don’t disagree that it would be foolish to try to shift from buying middle east oil and instead buy other oil because oil is oil. And conserving energy is only efficient if people do it voluntarily as a reaction to the high price of energy. However, there is something missing in these articles. Oil is highly priced today largely because of OPEC the oil cartel. Those who love free markets should understand that the efficiency of free trade depends on destroying the cartels. We should explore ways of busting up OPEC.

There are two myths about cartels promoted by those who support laissez-faire economic policy. The first myth is that competitive pressure tends to tear apart the cohesiveness of the cartel over time. If this were so, OPEC would be long gone by now. But there are only a dozen players in OPEC and they are playing a repeated game. Each nation knows that it is very much in its individual interest to cooperate. And they have succeeded in keeping the price of oil about the cost of production by a factor of 5 to 10 for more than 30 years.

The second myth is that the high price set by the cartel will soon encourage the creation of new technologies that will use alternative fuels. This is partly true, but not as true as you might think. Any producer who risks $10 billion in a new technology (like hybrids) assuming that the price of oil will stay high while they go ahead and eat OPEC’s market is delusional. If anyone does produce a technology that seriously erodes the market for oil, OPEC can easily drop the price of oil down low enough to destroy the market for that new technology. Toyota and Honda might yet rue the decision to pour so much money into their hybrid technology.

How do we break up OPEC? The answer is to fight fire with fire. We need cooperation from all of the non-OPEC nations to place economic sanctions on OPEC. Getting cooperation from so many nations will be difficult, so we will probably have to threaten sanctions on any nation that fails to cooperate. Really, this is essentially the way the WTO works; you cooperate or you see your goods taxed to death.

Imagine what would happen if all the non-OPEC nations agreed to place a $10 a barrel tariff on oil from any OPEC nation but no tariff on oil from any non-OPEC nation. The price of oil would soon rise to $60 a barrel and countries such as Canada and the UK would get a windfall profit because they produce oil and do not belong to OPEC. But Venezuela would see their oil drop a bit in price because their oil would be taxed. Now the pressure to quit OPEC becomes very hard to resist.

Here is an interesting question: if Venezuela claims that they have quit OPEC, how would we know that they are not secretly supporting them? The answer is in the method that OPEC uses to set prices. They set quotas for each member of OPEC. We simply insist that each nation exceed its quota by 20% (for example) to be considered a non-OPEC nation.

My prediction is that this kind of economic sanction program would bust up OPEC with five years and the price of oil would drop to $25 a barrel. And all of the people who praised the beauty of the marketplace when the price of oil was $50 a barrel will still praise the beauty of the marketplace when the price is is $25 ─ except other people will then see what they mean.

Wednesday, April 20, 2005

The Value of Quick Thinking

Often times I only think of the perfect response to a question hours later, when it does me no good. But occasionally it comes to me right away.

Yesterday, my little boy was practicing his piano lessons. He wanted to quit and do something else but I wanted him to practice the last tune one last time: “Tomorrow is your piano class. Practice that tune again. You want to show your piano teacher that you can play it perfectly.” I only meant “perfect” in the sense that he should be able the play it with obvious errors, not that I expected him to be Mozart.

My wife took offense to that statement. She angrily whispered: “ What do you mean ‘perfect?’ Don’t put pressure on him. What do you do that is ‘perfect?’”

I was in the doghouse now. I needed to think quickly – and I did!

“I married the perfect wife.”

My wife considered that answer for a brief moment as if she might have appreciated that reply.

“Name one other thing you can do perfectly."

“I gave the perfect response to the previous question.”

“Ha, ha. Very funny.”

But then she let the subject drop. I breathed a sigh of relief.

Thursday, April 14, 2005

Magic in the Marketplace

Here is a link to the Forbes top 400 Americans. Here is a trick someone just taught me: just right click on the link and choose the “open in a new window” option. Now make the window small enough so you can continue reading this. Isn’t that cool, I’m glad I learn this.

Now looking at the list and seeing the many Waltons, Coxes, and Mars, it is clear that choosing your parents wisely is still the easiest way to become super-wealthy. Consider the Walton Family. Collectively they are worth nearly $100 billion – twice as wealthy as the Gates Family or the Buffet Family. Their wealth comes from Sam Walton, founder of Wal-Mart. Wal-Mart is a perfect example of what I call business magic: somehow they take the same workers and buy from the same wholesalers as other retailers, but their prices are lower. Like a magician’s trick, you see it happen but you can’t figure out how they did it.

The key to wealth is having a magic technology. Technology, in the sense that I’m using the word, is any means that you might use to take inputs (labor, capital) and turn it into a finished product or service that customers will buy. McDonald’s might be considered low-tech, but in reality that have sophisticated technology since it isn’t so easy to take high-school students and transform them into a force that produces a consistent quality product. Likewise, Wal-Mart is a very sophisticated technology. There are lots of people who would like to know how they do it.

Technology comes in two types: clone-able and magic. Clone-able technology can be duplicated by anyone simply be observing the end product. A chocolate-dipped frozen banana is clone-able. A really big paper clip is a clone-able. You don’t make any money from going into business by trying to create a new market with a clone-able technology. If you want to make money, you must have a magic technology – a technology that no one can figure out how you are doing it.

Looking at the list of wealthy Americans again, it is interesting to note who made the big money making computers: Michael Dell of Dell Computer. In the early 1980’s, you would have thought that IBM and Apple would make the big money. Well, they did okay for a while, but Dell, which wasn’t even around in the early 1980’s, took over in the late 1990s. I remember seeing one of the first Dell computers displayed in the late 1980’s in Austin Texas and thinking this computer is a piece of junk and the company will go under soon. I wish I had thought, “This guy is brilliant, I’ve got to buy Dell stock!”

What makes Dell special is nothing you can observe by looking at their product. Their “magic” is the ability to take your order, manufacture the computer to your specifications, and deliver it to your door in a week. That’s magic. It isn’t easy to clone that.

The IBM computer was the ultimate example the problem of having clone-able technology. Once the clones came in the market, it was all over for IBM. They thought their magic was their name, their network of service technicians, and a patent. Well, computers become obsolete before the break down, and as is often the case, the patent only proved to be a temporary obstacle. As for the name: “IBM compatible” worked wonders for Compaq and Dell.

The biggest mistake an entrepreneur can make is to try to open a new market with a technology that is clone-able. You do all the hard work (and use up a lot of money) doing market research for somebody else. You need to wonder, “Why did no one think of doing this before?” Maybe someone did, but they did not think there was a good market for the product, or if there were, then 10 other competitors would jump in a steal the market away. Think of the Sunshine Biscuit Company that invented the classic cream-filled cookie we call the “Oreo” cookie. You guessed it: Nabisco stole its cookie recipe and made a fortune off of someone else’s hard earned market research.

I read about a lady who lost a lot of money trying to market an oversized paperclip that had several patents on it. It was made of special steel so it wouldn’t deform. But it was too easy to clone. The patent didn’t help because the clone was made out of ordinary steel and did deform, but was made in China for one-twentieth the cost.

I saw on television once about a man who tried to market chocolate-covered frozen banana pieces. He did a lot of work trying to market his product. Then he tried to sell his company to a major company. He showed them all of the nice data he had collected showing how there was a profitable market for his product. In the category of “You need to have a good lawyer when you negotiate with a big company,” the company did not buy his company but just put it out of business by cloning his product.

There are some products that look extremely clone-able but haven’t been (yet). One example is Turbo-Tax. How can Intuit sell that for $50 apiece when all it does is calculate taxes? They cannot have a patent on that. Couldn’t any software company produce a clone for one or two million dollars and sell millions of copies for $2 apiece?

On the other hand, there are several products that haven’t been developed that many people want but manufactures are not brave enough to try to market. A good example is the self-cleaning toilet. There is definitely a market for it. Definitely, many companies could produce a workable prototype of a self-cleaning toilet. But if there is no magic associated with the technology, everyone will sit back, wait for the first entrant to do the hard marketing work of creating a market, and then a dozen clones will swoop in to take over the market.

Is there a market failure here? I am somewhat conflicted about this. It is clear the market prefers firms to cut costs than to create new products because cost savings go directly to the owners of the firm but new product releases create benefits to competitors who learn about the new market for free. On the other hand, if the entrepreneur is clever, he can often tie a clone-able technology with a magic technology and avoid being destroyed by the clones. For example, everyone thought Barnes and Noble would destroy Amazon when the on-line bookseller business took off. Selling books on-line looked very clone-able. But Amazon invented the best technology for processing credit card purchases. And they were able to develop software that magically knows what books you might like to buy from seeing your previous purchases. The moral of the story is that is can be really good to be the first to the market if able to spot opportunities to create some magic.

Nevertheless, I don’t think anyone will come out with a self-cleaning toilet in the next 10 years. A patent won’t protect anybody and there is little magic to be found in a toilet. Here’s one way to create the magic: we hold a contest for the best design for a self-cleaning toilet. The winner gets exclusive right to market self-cleaning toilets of any kind in the U.S. for 17 years. It probably won’t be the best technology after 17 years but, as it stands now, the only technology we will otherwise have is the do-it-yourself variety.

Sunday, April 10, 2005

The Tipping Game

The always-interesting blog Marginal Revolution points to an interesting article on Tipping in Financial Times. The article poses this question:

Few people aspire to pay more than is strictly necessary for goods and services, yet in tipping they do so, often quite voluntarily. So, what accounts for this largesse?

I think this question is easy to answer: tips are expected and people generally do what they are expected to do. It is traditional for people to give a tip to the waiter/waitress after the meal. Since we all know this is case, we would feel bad about not doing what we are expected to do.

I think tipping is a simple example of the problem with non-cooperative game theory. Non-cooperative game theory might do well enough to explain the behavior of firms because firms are so motivated by profits that they are not motivated by what others expect them to do. But individuals would rarely behave in the manner that non-cooperative game theory would suggest is rational behavior, because individual are programmed instinctually to cooperate. We tend to do what we are expected to do.

The tipping game is like a two-stage prisoners’ dilemma game. First the server either cooperates (good service) or not-cooperates (poor service). The customer observes the service and then either cooperates (gives a tip) or not-cooperates (gives no tip). Both would be better off cooperating than both not cooperating but the customer would have more money in his pocket if he doesn’t tip even when he receives good service. But people are hard-wired not to behave that way.

I think the prisoners’ dilemma game came up frequently in humanity’s early history. Warfare is classic example. The day that my tribe goes to war with the neighboring tribe might be a good day to have a severe stomach ailment. But a tribe where most people think that way risked losing to the other tribe and being wiped out. People evolved an instinct for cooperating in situations that are similar in nature to the prisoners’ dilemma. Today we vote in elections even though we know that our vote isn’t likely to make any difference. But instinctively, we know that we should not think about it that way. People will stand in lines for hours to cast a ballot. Economists wonder why we would bother. I don’t understand why some people don’t vote when it is so easy to do and people expect you to do it. Maybe they had bad parents or they have become bad people themselves.

In general, I hate tipping in situations where I do not know what is expected. It really bothers me. I know what is expected at the restaurant. But what does the porter expect? (15% of what?). I will walk a mile dragging a 100-pound load behind me to avoid such a situation. I just don’t like having something expected of me and not knowing what it is.

Friday, April 08, 2005

Go Start a Blog or Something

I love reading India Uncut each day. Amit Varma, the great blogger of India is so entertaining. I have to say, however, it is not a good idea to read India Uncut before meals because some posts might turn your stomach. But most of his post are just interesting.

There was one post he made about traditional sari embroiderers losing their jobs due to cheap embroidery machines imported from China that I found interesting. At the end of post he said:

And if you're a hand embroiderer, well, no one owes you a living. Go start a blog or something.

I have to admit that I loved that last line in part because it sounded so cold. I wrote to him: "I have to say that if Marie Antoinette were alive today, she couldn't have said it better herself." A little context is needed here. I had earlier written to him to ask about whether he thought anybody blogging today was thinking perhaps that it would lead to fortune someday (because nobody could make a living doing a blog today).

Of course, it would be silly for India to protect the jobs of sari embroiderers. They are going to be the principle beneficiaries of the new opportunities created by the new global economy. They need to leave traditional jobs to take advantage of the new jobs be created. Some have already taken the carrot, and the rest will get the stick, but change is inevitable. And we should not, for a moment, lament the loss of the old way of life. Without change, we would still be living in caves.

Anyway, Amit took my comment as a criticism and he wrote a long rebuttal, (and he linked to me, thanks Amit). As for the sari embroiderers, I am certain that they will find much better ways of making a living than starting blogs. Of course, some of them might get rich starting a web-based business, it could happen.

Saturday, April 02, 2005

1000 Visitors

I have had more than 1000 visitors to Chocolate and Gold Coins. Most of these visitors are really me and my parents. My wife never reads my blog: too boring. If I continue having 10 visitors a day, I will have 100,000 visitors by 2040!