Dr.
Michael Sinkinson of the University of Pennsylvania (Wharton School)
Econometric Modeling as a Strategic Weapon
An Assistant Professor of Business Economics and Public Policy at the
University of Pennsylvania, Michael Sinkinson specializes in Applied
Microeconomics and Industrial Organization. He has researched market structure
in the media, technology, and telecommunications industries, publishing work in
leading journals like The American
Economic Review. An outstanding teacher as well as research, Dr. Sinkinson
was listed among the best 40 business school professors in the 2014 Poets & Quants rankings. Dr. Sinkinson
received his Ph.D. in Business Economics from Harvard University.
1. You have conducted several studies of the effects of printed
newspapers on politics. Why does this field of inquiry interest
you? To what other areas have you applied econometric analysis? What areas of
U.S. government policy do you feel could benefit from more extensive and / or
rigorous use of such analysis?
I find
newspapers and the media really interesting because they cut across everything.
Media is about information. With poor
or biased information, no government, firm, or individual can make the right
decision. For this reason, I find that media is central to everything. For
example, some coauthors and I looked at the effect of media on politics. We
looked at how newspapers compete, how they choose the types of viewpoints they
represent in the market. We also looked at the impacts of newspapers on
political outcomes. For example, we actually showed that when more newspapers
are being read in a market, more people are actually participating in the
political process. If you think democracy is a good system, that is a big deal.
Right away, you see that the news media are important because of their
informational value. I think media is
fascinating; it touches everything. That’s one area of interest where I have
done research over time.
I’ve
also looked at other areas. I would describe my research agenda as looking at areas
of non-price competition in the fields of technology, media, and telecom. What
I mean by non-price competition is that I kind of assume that firms get prices
right: the prices that clear the market.
That is going to happen given a set of products. So then the relevant question
is, “What is the set of products that go to market?” Taking the case of
newspapers, they would think about the viewpoint they will represent. What are
they going to choose as the characteristics of their paper?
In
telecom, I conducted a study looking at exclusive contracts. Wireless companies
sign exclusive contracts with different hand-set manufacturers. They choose to
make products available only from certain carriers. This is a form of non-price
competition. Prices will then be set in the market to rationalize that
competition, but why do some manufacturers only use some carriers? For example,
why did Apple not offer their hand set to other carriers? When Apple launched
the iPhone in the U.S., it was available only from AT&T. This same
situation applies in Japan, as well. Softbank was the exclusive provider for a
long time there. This is another form of non-price competition.
A more
recent project is on advertising, another important form of non-price
competition. In the U.S., prescription drugs are advertised on television. Few countries
allow this form of advertising, a very American phenomenon. This is a form of
non-price competition: companies compete
against their rivals by making information available directly to consumers
through TV ads. I wanted to understand the effect of this form of non-price
competition, which is a great area in terms of policy analysis. We are finding
that the ads generate a positive spillover, a positive externality in economic parlance: Consumers who see ads
about drugs go to physicians to consult with their doctors about health
problems. By doing so, they enjoy benefits that were not necessarily intended
by the pharmaceutical company that ran the ads.
In
regard to your question about what areas of policy would benefit from more
economic analysis, I would say that this area of externalities is a big one. What
I mean, specifically, is lots of things firms do create positive spillovers.
Society should encourage companies to do this more. The area is a difficult one
to quantify, but a great opportunity for the application of economic research
to policy. For example, the U.S. government is currently debating whether or
not to extend the research and development tax credit. For a long time, economists
have argued that the credit should be made permanent because we feel that
R&D has a positive spillover on society. This area has a tendency to become
politicized quickly, but the area is one were economists can provide research
on the right level of subsidies to generate desired spillovers.
2. Can you give us an overview you of your research on pricing and
entry incentives with exclusive contracts using data from smart phones? What motivated
the research? To what extent can the results be applied to other industries? To
other countries like Japan?
In
2007, when Apple launched the iPhone in the U.S., AT&T was the exclusive
provider. I wanted an iPhone, but Verizon was my service provider. To get an
iPhone, I had to switch carriers. Because AT&T had terrible service, I
could not receive phone calls in my office. The quality was terrible, too. I
began to think, “This makes no sense? A, Why would Apple make the iPhone
available only through one carrier, and B, why would they choose a carrier that
did not even provide a reliable signal?” My iPhone had become an expensive
answering machine. It did nothing but collect messages. This frustration
prompted me to reflect on the theory behind why Apple would sign an exclusive
contract with AT&T, leading to a piece of research that shows something
interesting. If all carriers offered hand-sets from all manufacturers, the only
differentiation would be the service carriers offer. That would be good for
consumers because you get perfect competition. If you have an exclusive
contract, you can obviously charge a bit more; you are not competing against a bundle
from another carrier with the same handset. Not only can I raise the price of
an iPhone that is exclusive, but as a second-level effect, all other carriers can
raise the prices on their handsets—even the Blackberries. The whole industry
benefits. My research showed that this effect could be very large. I collected
data from wireless carriers to show just how large.
Along
the way, I made an additional discovery. I learned which provider would be
willing to pay the most for exclusivity. Why did AT&T, and not Verizon, the
largest carrier, pay more? When you work out the theory, you realize that the
second-best or biggest in the industry can has a lot more to lose if the
leading competitor lands the exclusive contract. In the U.S., Verizon has a
very strong network. They were not going to lose much if they did not get the
iPhone. Because AT&T had a weaker network, they would have been really hurt
had Verizon offered the iPhone. For this reason, AT&T was willing to pay a
lot.
Analogizing
to Japan, NTT Docomo was the largest carrier. Softbank purchased Vodafone’s
wireless network. In some sense, Softbank was the insurgent. If the iPhone had
been exclusive to NTT, Softbank would have been in trouble. They would have had
no way to compete. So Softbank was willing to pay a lot to have an exclusive
iPhone contract. It gave them a way to differentiate their product from NTT. If
you survey world markets, you realize that Apple used a similar strategy in
just about all of them. In China, Apple launched with the second largest
carrier, and in other countries too, they launched with the second-best rival
because those companies were willing to pay the most.
I
studied this effect in the context of telecom, but other economists are studying
the effect in other industries. The same problem applies to video game systems.
There, the problem is more complicated because you might purchase ten different
games when you buy an X-Box. The ratio changes in this case. It is no longer
one-to-one as in the case of handsets and wireless carriers. Researchers have
looked at exclusive video games for different platforms. If you think about
what Netflix, Hulu, and Amazon are doing right now with exclusive content, the
idea is the same. Netflix is trying to differentiate itself from rivals by
featuring exclusive content. This move really changes the dynamic of the
market.
3. As I am sure you know, the Japanese Prime Minister Shinzo Abe has
introduced major macroeconomic reforms under the rubric of Abenomics. Based on
your expertise in microeconomics, can you make recommendations to specific
industries like mobile telecom and consumer electronics for increasing their
global competitiveness, thereby intensifying the effect of macroeconomic
reforms already in place?
I need
to caveat that international trade and macroeconomics are not my forte. The
policy gave incentives to companies to modernize, to invest. I think this is a
good thing. Realistically, with industries like consumer electronics and
telecom, the market is global. In the end, the winners are going to be the most
efficient, highest-quality producers. I think one of your other questions relates
to protectionist policies, bailouts, and the like. Firms need to be
competitive. Creating incentives to invest in equipment are effective in the
long run, so I do think the policies will be good for firms. Firms need to be
given the correct incentives to ensure that they will survive the shakeout and
still be around in ten or twenty years.
4. As internet technologies evolve and improve, more traditional newspaper and magazine publishing companies are
having difficulties surviving. Even the Washington
Post has been acquired by
Amazon founder Jeff Bezos, as I am sure you know. What are your suggestions for helping
print-media companies survive in the current era of technology-driven
turbulence?
The
reality is that these companies may not survive in their current form. Historically,
printed media had geographic protections. In general, you were isolated in your
own market. If you were a newspaper in Cleveland, Ohio, you were exposed to
competition from other newspapers in the area. The first hint that the climate
was changing was the cable news channels. All of a sudden, the papers and television stations
in Cleveland catering to local tastes had to compete with cable news channels
broadcasting news from all over the country. Local viewers began switching to
channels and stations that offered content better tailored to their interests.
The
internet has taken this trend to the limit. Now, every view point is
accessible. Regardless of your tastes or interests, you can find a blog or other
information sources that cater to you. Catering to a local market is now difficult
to do as a result. Different people in Cleveland want different content in
their news. Blogs or other online media that cater to a particular taste are
going to scoop up readers sharing that taste in all local markets. These media
will cobble together a base, leavening most of the print media out in the cold.
The few papers like The New York Times
and Wall Street Journal that have
become successful achieve this success by A, becoming national to solve the
geography problem and B, offering very high quality. They are able to attract
high-end readers willing to pay a premium for a high-quality product. This
strategy is not useful for a local paper in Cleveland, Ohio.
If you
look at what is happening right now, there are a few choices. Some papers are
becoming online outlets. The Seattle Post-Intelligencer
has shut down print operations to
become an online news outlet. Sounds good, but they had to cut down their
newsroom considerably, as well. When you do that, you become a fundamentally
different publication, something that could be bad for consumers. Because
journalists provide a public good, exposing scandals, for example, this
progression is not necessarily a good one. But in terms of a business model, it
is one of only a few choices. The old business model just does not work
anymore. Going forward, a lot of traditional newspapers may not survive.
The
only other option to going online is to become ultra-local, something the San
Diego newspaper is trying to do. They are sending journalists into
neighborhoods to report on everything. Ultra-local content is another strategy.
The San Diego paper is trying it out, but I do not know if they are sure that
it will work. We are definitely going to see new business models emerge because
even ones from ten years ago are no longer viable.
5. You once quipped, "If I weren't a B-school professor, I would
be an entrepreneur." What attracts you to entrepreneurship? Have you done
research in this field? What did you learn about entrepreneurship from your
part-time work as a bartender during graduate school?
Let me
start with your question about why I am attracted to entrepreneurship. What I
like about it and academic work as a professor is the freedom to pursue your
interests. For better and worse, you are your own boss. Like your failures,
your successes are your own. I like that personal freedom and responsibility to
pursue whatever I like to do. Academia is ideal for people like me. If I think
a question is interesting, like why I can not get an iPhone from Verizon, I can
explore the question, research it. This attribute that attracts me to academia
also applies to entrepreneurship. In this sense, I think the two fields are
actually related. In academia, you are an entrepreneur: You have kind of your own brand, and you are
judged by your own work. If you do not perform well, you will not be tenured. Academia
is like being an entrepreneur with a bit more of a safety net. This similarity
to academia is the reason why I think I would be drawn to entrepreneurship.
To
answer your question about what I learned as a bartender, one, being on the
front lines, I gained a lot of direct experiences with the problems and
challenges of the business. It was a great way to understand the market and
industry and an opportunity to learn how to solve problems. As I bartender, I
saw all kinds of problems. Because owners and managers may not see them, you
have to be the problem solver all of the time. If you really want to make money
as an entrepreneur, you should find a problem that no one has solved, and solve
it. This is one lesson I learned from being a bartender. I also learned that I
did not want to be a bartender for the rest of my life. The experience
motivated me to work hard to further my education so I did not have to be a
bartender forever.
6. Students have noted that you have never been asked a question that
you have been unable to answer in considerable detail. How did you acquire this
extensive knowledge at such a young age? What are your suggestions for young
scholars and business professionals on dealing with information overload and
increasing their retention of useful knowledge?
People
who have a strong curiosity about the world tend to be drawn to academia and
teaching. They love learning. For these people, it is a life-long pursuit. I am
glad that students feel that I possess this curiosity, because it is an
aspiration.
Retaining
information is a challenge. I sometimes have difficulty getting work done due
to information overload. I am constantly being bombarded with emails. For me,
the answer was the decision to block off days. I do not hold meetings, I do not
respond to emails on these days or check emails frequently, either. I just
focus on my research. I go to a white board, and I focus. For some people, the
act of putting down their phone seems unnatural. But I think that it is
important to do so, especially if you want to solve difficult or complex
problems. You cannot be distracted every five to ten minutes.
I am
also a morning person. During the semester when I am teaching, I usually awake
at 5:30 am. Because I teach my first class at 9 am, I have a few hours. Due to
the early time, no one is emailing me or knocking on my door. No one is calling
me, either. My office is quiet, allowing me to concentrate. I can ensure that
my lectures are well prepared. These morning hours when no one is trying to
contact me are the best time to work. I need time during the day and the week
when I am not being bombarded to think and solve some problems.
7. In the review written about you in Poets & Quants, where you are listed as one of the best 40 best
business-school professors under 40, you explained that teaching has been a
life-long interest. What aspects of teaching do you enjoy? What have you
learned from your students? What aspects of teaching do you find tedious or
displeasurable?
I
enjoy interacting with highly engaged, intelligent students. At Wharton, I
teach three classes a year to roughly 200 students. All sharp, they do not let
me get away with anything. To really teach a topic, you must first master it
completely. Hearkening back to your previous question about my detailed knowledge
of a broad range of topics, I enjoy learning a subject in detail so that even
when intelligent people challenge me, I know the answer. I know that I am
right. And I can explain the answer perfectly. Mastering
a topic at the level is a thrill for me. I love it. The students here hold me
to task. They are paying customers who want a good product. They push me to know
the topics I teach cold.
I
learn lots from my students. Hearing them talk about the problems they face in
the real world, in their work environment, is useful, especially since the
students are so diverse. Some have been in the military, others in industry—all
sorts of industries. We have students who are or have been professional
athletes. They are involved in all sorts of different activities. Listening to
them apply economic principles to their experiences is fantastic. I often
receive emails from students discussing these applications: “I saw a great
soccer game showing what you explained about game theory. Here you go.” Their
experiences benefit future classes because those experiences become examples I
use in future classes. I view the whole educational process as a virtuous cycle: I learn from the students who learn from me.
Because
the students are from diverse backgrounds, teaching them is also challenging.
Some students majored in economics as undergraduates. Others have never
previously studied the subject. Yet I have to craft lectures that are
interesting and engaging for students across this continuum. This requirement
challenges me, and sometimes worries me, in part because students have
different preferences. Some want only global examples whereas others prefer U.S.
ones. Some students want heavy theory and mathematics; others would prefer
none. Designing interesting, engaging lecturers balancing these different needs
and preferences is challenging.
8. Many scholars write books to share their research results and ideas
with broader readership. Do you plan to pen a book in the
not-too-distant future? If so, please tell us about it.
To be perfectly honest, I have a ten-year research
agenda ahead of me that I need to complete first. At this point in my career,
starting a book does not make any sense. I might also add that I would only
write one if I had something I felt were important enough to write about, ideas
that would have an impact on government and industries. I have seen people rush
to write books, but I would only do so if I felt I could make a contribution,
helping governments set better policies. Publishing a book is not high on my
list of current priorities, but if you ask me again in ten years, I might
respond differently.
9. How would you evaluate
behavioral economics? To what extent are you interested in incorporating
psychological theories into your own research?
Behavioral economics has been popular for the last ten
years or so, and there have been a variety of advances. I think behavioral
economics is interesting as a field. The challenge lies in the lack of a model.
We do not yet have a good model, a comprehensive theory of all the individual
differences. The lack of a model makes it frustrating for me to work with
behavioral economics from a research perspective. I often joke that this is the
reason I like to study firms: They tend
to be more rational. For this reason, doing research on them is easier than on
people.
However, behavioral economic issues are relevant for
managers. My students often make comments like, “I may not be perfectly
rational, so why would I make that choice?” However, I have only done about
half a lecture on this still-young field for my students because I spend most
of the time discussing the rational economic behavior of firms. I think
behavioral economics is important, useful, and interesting, but it’s not my
area. I am hoping that other sharp researchers develop a unified theory of
behavior economics soon. It would become a great toolbox for future research. Currently,
the conclusion of behavioral economics seems to be “we are not all rational.”
This is my recent Kindle book with colleague Dr. Yuzo Sugimoto. It presents real English dialogues introducing American culture with supplemental usage problems for standardized test preparation.
