Relevant and even prescient commentary on news, politics and the economy.

And Here I Thought Corporations were Rational

Ken Houghton lowers the level of discourse at AB by discussing the career of a porn star other than Adam West.

One of the primary tenets of economic theory is that corporations believe in nothing other than profits. Well, it’s not quite that stark—we use phrases such as “utility maximization,” “cost minimization,” and the like—but the basic idea is that corporations, even more than individuals (silly humans!), have as their sole target maximizing profits.

So I’m a bit confused by the Vancouver Sun’s poorly-edited* obituary for Marilyn Chambers.

Let’s put the timeline together:

  1. Chambers “began her onscreen career as an Ivory Snow detergent model.”
  2. Chambers made Behind the Green Door, released in 1972.
  3. The movie “prompted a run on boxes of Ivory Snow, which featured a photo of Chambers.”

    So far I follow this: actress tries a different role, reaches a whole new audience, and sales of her previous works soar. (Think Kristin Chenoweth going from Broadway to television. Or maybe not.) What I don’t understand is the reaction:

  4. [T]he scandal produced “a Marilyn Chambers clause in all modeling contracts, saying that you can never have posed topless or nude or been in any kind of adult film or Playboy or anything like that.”

Let’s review. MKarilyn Chambers (h/t Tony C.) causes a major spike in sales of Ivory Snow detergent. Better yet, some of those people probably aren’t even going to open the box, so they’re going to have to buy another detergent as well—and, even time they have to go shopping, they’re going to see that Ivory Snow detergent and, if they need detergent, they’ll have an identification with it.

UPDATE: Robert, in comments, notes that this may be a rational act, if we assume normal market segmentation and a lack of loyalty on the part of the spurt of buying.

I believe this is what economists refer to as a “win-win” situation.

So why would the result be a “business decision” specifically banning the possibility of developing such cross-marketing potential in the future?

*I say poorly edited because on things such as that the last sentence of paragraph three is “The L.A. County coroner is examining the cause of death, but a spokesman said foul play is not suspected.” and the closing of paragraph four is “The cause of death is under investigation but foul play was not suspected and an autopsy is pending,” which strikes as the equivalent of giving the reader a sense of deja vu through stereotomy glasses.

I Was Wondering When This Would Come Down

Tom Bozzo

A fund of fund(s) that funneled money into the Madoff scam is in Big Trouble:

Massachusetts regulators have sued the Fairfield Greenwich Group, one of the earliest of these so-called feeder fund managers, for fraud, saying it had repeatedly misled investors about how diligently it checked out Mr. Madoff’s operations over the years.

“Fairfield’s complete disregard of its fiduciary duties to its investors and its flagrant and recurring misrepresentations to its investors rises to the level of fraud,” [said the complaint].

Henry Blodget had nicely ripped Fairfield Greenwich’s marketing claims a while back (Fairfield Greenwich also apparently forgets that the Internets remember all). If the rap can be beaten with a claim that those were mere puffery rather than outright fraud, then the law surely is an ass: performing rigorous analysis of investment managers’ strategies is one of the (few) ways a fund-of-funds can justify its fees-on-fees [*]. An interesting question is why this is being handled as a state matter; maybe now that the Ted Stevens debacle is over, some Justice Department resources can be liberated.

One thing this points to is that the “accredited investor” concept — the “safe harbor” that allows hedge funds to escape much regulation by limiting their services to high-income, high-net-worth investors — deserves a place (however minor) on John Quiggin’s growing rubbish heap of refuted ideas. Merely being rich (or at least upper-middle class) didn’t make the Madoff suckers and suckers-of-suckers sophisticated (in U.S. securities regulation, sophisticated investors is a more restrictive category such that few funds apparently use it), and there’s really little more (if not much less) reason to think they can evaluate complicated investment strategies than that they can reliably complete their own taxes. Ultimately there’s a reliance, possibly at a couple degrees of separation (part of the fraud that I leave to the sociologists), on actual expertise.

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[*] That is, substantively justify, as opposed to charging what convention and apparent market failure allows the market to bear.

Fuel Price Hedging for Cars

Chrysler LLC has stood out among the Detroit Three in being able to sell neither its trucks nor its cars in the slumping auto market. Cue the latest in marketing innovations! Via AutoWeek, Chrysler’s latest sales promo offers buyers three years of (currently) subvented gas (at $2.99 for regular, $3.29 for premium). The deal’s revenue-leakage-limiting limitations make this something on the order of $1,000 on the hood at today’s gas prices. That’s not an earthshaking amount by the standards of Domestic Three incentives, though it does go to show that if you’re not constrained by the public good, or not doing stupid things like subsidizing gas for everyone, and have some tolerance for going broke, you can do more than a few pennies a gallon.

Were this another blog, I might call this a Markets in More Things story, since it effectively extends to the consumer market hedging techniques that large fuel users such as airlines have deployed for years. For instance, the NYT notes this morning that Southwest managed to arrange for 70 percent of its 2008 fuel bill at $51/barrel. (Are the counterparties on suicide watch?) Here, Chrysler is acting as a fleet buyer for its customers, working with a startup that has a bunch of business-method patent applications pending on a system of at-the-pump fixed pricing for fleets.

Even the diminished Chrysler’s monthly sales would make for a pretty big fleet, so I’m curious as to how the risk is divided up here, and for that matter to what extent Chrysler is hedged. Until the Energy Independence and Security Act of 2007 raised future fuel economy standards, the Domestic Three’s product planning looked like they thought high oil prices were a fad, so who knows. I probably wouldn’t want to bet against Cerberus’s recent anti-Midas touch, though.