Alibaba’s debut in Hong Kong stock market

Alibaba’s secondary listing in Hong Kong is scheduled to take place next Tuesday, 26th November. The market expects Alibaba would be able to raise over 10 billion US dollars via this secondary listing, some news reports suggest Alibaba could raise over 15 billion US dollars. At this moment, no one can be certain how well Alibaba can do through this listing in Hong Kong, the market has lots of faith in this probably the most major financial event in Hong Kong stock market this year.
The share price in the long term will depend on the firm’s performance. However, since the company is listed in two separate market, the investors who are interested in buying Alibaba’s shares may be interested in where they should buy the shares. Technically speaking, it should not have any major difference, but the reality suggests location can affect share price. Sometimes the volatility in the forex market is another factor to create a difference in one company’s share prices in two places; however, since HKD has a strong tie with the USD, such factor could be omitted.
Listing in Hong Kong increases the number of potential investors. Many non-institutional Chinese investors do not have access to foreign stock markets; however, due to Shanghai-Hong Kong Stock Connect, these investors have access to the Hong Kong stock market. The BAT (Baidu, Alibaba and Tencent) have been the three major tech firms in the Chinese market for around a decade; as one of them, Alibaba has incredible influence in the Chinese market and is likely able to attract a substantial amount of interest. When more investors are interested in and get access to one stock, the stock price can be volatile in the beginning, because more speculators enter the market. After a while, the price will become more stable. When more people participate in price adjustment, it is more likely for the price to be closer to its real value, which is a good thing. After more Chinese investors entering the market, since their livings are more affected by Alibaba, they are more likely to be bullish, thus the share price might be pushed higher after these investors entering the market.
However, such change may not occur in the US market, where investors are systematically different from the new entrants who have no access to the US market in the Hong Kong market. If we have bullish investors in one place and bearish investors in another place and they never interact with each other, we will definitely see the prices in two places are significantly different. In reality, the investors in the US and Hong Kong will definitely have interaction with each other, but it does not mean one side will convince the other side or vice versa, then the two markets may have a consistent price gap until some major event brings the two sides together.
Overall, I personally expect if more institutional investors are active in trading the Alibaba shares in Hong Kong, then there won’t be any different performance from it in the US; but if more Chinese retail investors who do not have access to the US market participate, it is possible for us to see a price gap between the prices in the two places, and it is likely for the share price in Hong Kong to be higher than the share price in the US, since a greater proportion of investors in Hong Kong is interested in Alibaba than the proportion in the US.

Are mobile network carriers going to improve their signals?

First, what I am discussing is solely based on a market economy environment, which means there is no government intervention. The market is a naturally oligopoly market, because size does matter that companies have to be large enough to be cost effective. The question that if mobile network carriers are going to improve their signals can be answered by how these companies compete in the market. When considering competitions in the mobile network market, we need to consider two circumstances. One is a stable circumstance when companies choose consistent strategies to maintain their market power and profitability, the other is when the market enters a new era (for example, we are entering the 5G era) and the incumbents need to re-invest in their capitals.

The first circumstance is much more straightforward. Since almost all mobile network carriers have some degree of market power, they want to make profits and avoid a perfectly competitive market where no one is making any profit. They do not have any incentive to enter a brutal price competition which can lead the market to a perfectly competitive market, instead they differentiate the market and take different groups of customers in the market separately. Since different companies target customers with different preferences, the competition between them are very limited. It does not mean there is no competition, some degree of competition still exists at the boundaries where the customers’ preferences may fall into more than one category. However, when the degree of differentiation increases, the number of such customers will decrease, thus the level of competition drops.

The latter circumstance is more complicated. We do not expect many new entrants enter the mobile network market, since incumbents have more decisive advantages than new entrants. When the market enters the 5G era, the mobile carriers must re-invest their capitals. Before investing, they need to make several expectations and decisions. First, they need to decide which types of customers they are targeting. They are very likely to keep targeting their existing customers, since they have better knowledge and lower advertising costs are required to inform their existing customers about the new services. Furthermore, since it is easy to target existing customers, other carriers are expected to do the same, keeping targeting the same group of customers can avoid competition. Then, based on their target customers’ preferences, they need to choose the right capitals to invest, so they need to make expectations about the costs and functionalities of different available capitals. Moreover, their customers’ preferences also determine the timing of their entering the new era. When the customers are much more cost sensitive, it is better for the carrier to enter the new era later when the cost of investment is cheaper. Of course, the cost of investment is an expectation, as the cost can vary across time and experience shocks caused by some heterogeneous factors. The major risk comes from such uncertainty.

However, this does not mean mobile carriers do not compete at all when upgrading to the next generation of technology. As mentioned, there is some degree of competition happening at the boundaries of different types of categories. New technologies can provide more new functions for customers and new functions are never experienced, so customers’ preferences toward mobile network can be changed after they experience new services brought by the upgrade technology and they may reconsider their mobile carrier choices. Competition increases when customers are re-making their choices and mobile carriers need to re-estimate their existing customers’ preferences towards the upgraded mobile services. When they adjust their services according to their existing customers’ preferences, they may also think about if they can grab some of other carriers’ existing customers, as some customers may change their preferences and fall into different categories.

If new functions are not expected to change customers’ preferences dramatically, then the competition will remain limited, because the expected returns from increasing the level of competition does not compensate the expected. However, if customers’ preferences are expected to be changed by new functions significantly and need to be re-categorized, the level of competition in the market will increase significantly, because the carriers want to capture as greater market shares as possible. Then there is a question if mobile carriers expect their customers’ preferences will change dramatically due to the new technology. It is highly unlikely for the mobile carriers to believe their customers’ preferences will change dramatically, because the carriers are risk averse and increasing the level of existing competition brings higher risk for the businesses. Therefore, even carriers may have a chance to expand their market power when they are moving towards the next generation of technology, they tend to stay at their comfortable zones and maintain their original profitability and market share.

Overall, because mobile network carriers have some degree of market power and are making profits, they are risk averse and tend to avoid competitions, especially direct competitions like price competitions to maintain their market positions. A dramatic improvement in signals may signal an increase in competition, which is not desirable for all oligopolistic companies in the market, so no company will tend to improve its signal significantly, the mobile network signal will be improved gradually at a relatively slow pace over time.

Nobel Prize

Let’s talk about Nobel Prize. Those who have won Nobel Prize are definitely the best of the best scholars ; however, I think for most of us, instead of focusing what this person has achieved to win the prize, we should focus on which field of study wins the prize and this is important because usually the field which wins the prize is the field which is most needed at the moment. Nobel chemistry prize this year was rewarded to lithium-ion battery scientists, the Physics prize was rewarded to astrophysicists, the economics prize for this year has not been announced but last year it was rewarded to environmental economists. We can see that these research fields are highly demanded and gain lots of attention now in our society, and the actual work that helped them win the prizes was done years before they won the prizes.

When we are looking at the Nobel Prize, it is not just telling us how much the scientists have achieved, more importantly it also tells which field is highly demanded for further research.

Extremism and Gap in Beliefs

Being extreme is never a good thing, but we are seeing many more extreme activists on streets. What pushes people to become extremists? Extreme activities generally create costs to the society. Due to extreme activities, the society needs to spend more policing, lots of inconvenience is caused and lives can be lost in most extreme cases. I think that it is fair to say, although we think many extremists are not rational, their activities still follow some certain strategies to help them achieve the goals they want. When they are conducting these extreme activities, they have costs as well and the only sensible reason for them to do so is that they believe something that they strongly oppose (or support) has an extraordinary cost (or benefit) to the society, giving up some private costs they put into extreme activities will help the society reduce the cost (or increase the benefit) and they will also gain from their extreme activities by “correcting the wrongdoing”.

Then we have two steps to tackle extremism. The first step is to study whether these extremists hold some reasonable thoughts. Although these extremists are highly likely to overweight their beliefs, it is possible for us to underestimate the importance of some issues to some degree (e.g. environment). If the society generally underestimate the importance, then it is our responsibility to correct our estimation. This may not satisfy the extremists, but it can help to reduce the degree of extremism. The second step is to correct the estimation of extremists. This is very difficult, but this is I think the key to eliminate extremism. 

In my opinion, the extremism is caused by the gap between the society belief and the extremists’ belief, once we are able to close this gap, we are able to eliminate extremism.

Pay for time

People always face time constraints; for example, when they are make purchases on Amazon, after a certain number of searches, they stop searching and make their purchase decisions. Although search may not have a monetary cost, the time spent on searching is another type of cost and time can be valued by money. How much money you are willing to receive in order to give up a given period of time is the money value you give to this particular period of time. Moreover, we can also measure the monetary value of time by how much money you are willing to pay for stopping waiting or getting a holiday.
Sometimes we voluntarily pay for an agent to help us to do something which is time consuming. For example, we sometimes choose to pay extra money to get our orders prioritised because we may need the order urgently (such as flying business class for a urgent business meeting, or paying for Amazon Prime). However, sometimes we are forced into a situation where we have to choose between time and money. It may be caused by accident.  For example, an unexpected disruption in train service may force us to choose more expensive travel option. However, sometimes it is caused by intentional behaviour. For example, London underground strike is powerful because it makes the people living in London very inconvenient and people (represented by the government) are forced to choose between spending more time on road and pay more to the underground workers.
 for time
People always face time constraints; for example, when they are make purchases on Amazon, after a certain number of searches, they stop searching and make their purchase decisions. Although search may not have a monetary cost, the time spent on searching is another type of cost and time can be valued by money. How much money you are willing to receive in order to give up a given period of time is the money value you give to this particular period of time. Moreover, we can also measure the monetary value of time by how much money you are willing to pay for stopping waiting or getting a holiday.
Sometimes we voluntarily pay for an agent to help us to do something which is time consuming. For example, we sometimes choose to pay extra money to get our orders prioritised because we may need the order urgently (such as flying business class for a urgent business meeting, or paying for Amazon Prime). However, sometimes we are forced into a situation where we have to choose between time and money. It may be caused by accident.  For example, an unexpected disruption in train service may force us to choose more expensive travel option. However, sometimes it is caused by intentional behaviour. For example, London underground strike is powerful because it makes the people living in London very inconvenient and people (represented by the government) are forced to choose between spending more time on road and pay more to the underground workers.

Notes: Digital Economics (Goldfarb & Tucker, 2019)

This is a literature review paper covering lots of information about digital economics and I would like to recommend anyone who is interested in digital businesses to read this paper. It is a literature review paper, so it is not packed with theoretical and statistical models and the language is very friendly to understand. Moreover, it just got published this year, so its content is very up-to-day.

Among the literature it covers, there are two topics which are the most interesting to me. One is how digital companies sell their products profitably and the other is why privacy is so important. How do digital companies sell their products profitably? This question is closely correlated to the issue of piracy and can be transferred into how digital companies fight piracy. The existing literature points out that bundling many products together can help to fight piracy and it can boost revenues, especially given customers have different prospects about products’ prices. And bundling thousands of products is only possible for large companies, and this significantly reduces competition. Relating to bundling, music subscription is an example of digital bundling. Although music subscription reduces piracy and boosts sales, it increases legal music consumption balance and eventually the firms providing music subscription service like Spotify do not generate huge profits.

The other answer is why people are valuing their privacy more and more. This is answered by the existing literature. When the market is not very competitive, firms can use the information collected from customers to exploit their customers, so customers tend to hide their information from firms. Therefore, we are valuing our privacy more and more shows some tech companies are gaining enormous market power which enables them to use the information collected from us to exploit us. This provides a solution for tech companies’ mishandling our private information, which is to increase the market competition.

Overall, this literature review paper includes lots of interesting topics studied by the existing literature about digital economics. It is a great paper that provides a picture about how the existing literature explores digital economics so far in the simplest and clearest way.

Software and hardware

The word “tech” has become a magic word that all kinds of businesses want to associate themselves with this word. To be a “tech”, many companies try to add more features to their products. Moreover, some companies also want their customers and investors to see them more innovative than their competitors, so they try to achieve higher frequencies of upgrading their products than their competitors. There are two approaches of upgrade, one is hardware upgrade, the other is software upgrade.
Both types of upgrade have their constraints. Hardware upgrade faces constraints from nature of materials. Hardware developers and researchers are not god’s, they cannot adjust the properties of materials given by the nature; therefore, after reaching some certain level, developers and researchers have to look for new materials to achieve better performance, and such process is cost and time consuming. On the other hand, software faces constraints from hardware. There is always an upper boundary created by hardware for what software is capable of. However, different industries may find one approach may be easier than the other. For example, how does Tesla makes itself distinguished from other  automakers? The answer is its software. Cars from other brands also have radars and cameras, but Tesla cars use their radars and cameras to enable the autopilot capability.
The importance of software is becoming more significant, especially when the development of hardware is slowing down. Software determines how we experience a product. Hardware determines the limit of a product; however, this limit may not be as limited as we including its maker believe due to our imagination. Better software can dig more potentials out of the hardware. For example, iPhone does not have the largest battery among smartphones, but it uses its operating system to achieve a longer battery life than many other smartphones with larger batteries.
Overall, when the development of hardware is slowing, it does not mean the rate of exploring what we can achieve by technology is slowing. The development in software is pushing hardware and exploring the hardware's capability that we never thought of.

Future and Decision

We are constantly making decisions relating to our future. Often we find it easier to make decisions to help ourselves to achieve something in the future than to make decisions to prepare ourselves for the future. Why is this the case? It is because once we have a clear goal for our future, we tend to know several ways to increase our chance of succeeding, at least we tend to believe we have several ways to increase our winning chance, although we cannot guarantee a 100% success rate. Under such circumstance, we are making the future, this is an active behaviour. However, on the other hand, when we are preparing ourselves for the future, it is a passive behaviour. Before we are making any decision or move, we have to figure what the future is like. It is impossible to be 100% certain about the prediction, so we are more likely to be indecisive and have divisive opinions.

Preparing oneself for the future is not only difficult for ordinary people, but also difficult for the experts. People with expertise may be able to get closer to the truth, but no one can be absolutely certain about their results. Moreover, future is uncertain by itself, lots of factors are influencing the outcome of the future. Maybe the outcome of the future involves one’s wrong prediction; in other words, if he or she makes the “right” prediction and makes the “right” move, the outcome of the future may change and his or her prediction and move are still wrong eventually. Therefore, we should not be any surprised to see government or institute is internally divisive when making a crucial decision for future.

An excellent price discrimination given by the smartphone industry

September is a busy month for the smartphone industry since many smartphone makers including those big names like Samsung, Apple and Samsung, unveil their latest products in

September. Most companies have several product lines, even Apple has created several iPhone categories, given it has a history of only releasing one model each year. Why do smartphone companies release various product lines? The answer is simple that they are doing this to discriminate prices in order to capture more consumers and gain more profits.

Consumers have different needs and aspects for smartphones, so the prices they can accept vary. Some people may be willing to pay awful a lot to get a new smartphone as long as the smartphone is equipped with the most cutting-edge technologies. Some people may be only willing to pay a significantly lower price for a new smartphone due to various reasons. A smartphone maker can certainly put all of their available cutting-edge technologies into one product and set a very high margin for this product’s price, the first group of consumers will be very likely to pay for this product willingly. However, the smartphone company does not want miss out the latter group of consumers who are not ready to pay high premiums for new smartphones, so the company provides this specific group of consumers with a relatively cheap smartphone with moderate specifications which they are much more likely to buy. By providing these two types of smartphones, the smartphone maker can capture those tech enthusiasts as well as ordinary consumers. In addition, some smartphone makers do not just stop over there, they are providing more than two product lines to capture an even wider range of consumers in the market. More levels of price discriminations these smartphone makers can create, more profits they can earn.

Of course, there are far more industries using price discrimination to gain greater profits; but the smartphone industry gives us an observable and classic example of price discrimination.

Better deals in larger countries

When I am surfing on the Internet in the UK, I occasionally get some information about discounts and deals happening in other countries, including the US, China and many other countries. It seems the deals and discounts in the US and China are much nicer than these in the UK. Here I am not talking about prices, since it is much more straightforward to understand why different countries have different price tags for same products and services. Of course, we can see discounts as another form of price tag, so it shares the reasons making prices different in different countries; however, I notice that it is easier to get better deals in larger countries than in smaller countries, why?

First, it can definitely be caused by my lack of access to all information. We generally gain more information about large countries than small countries, so I do not have enough evidence to say that larger countries have better deals. But I still think it is reasonable to have better deals in large countries than in small countries. Secondly, large countries have large sizes of population, so quantity may be much more important than margin when it comes to generating greater profits in large countries. And vice versa, margin may be more important than quantity in small countries, so it is reasonable to see better deals in large countries than in small countries. Thirdly, large countries may have more competitive markets, since in some small countries, some large companies may be capable of supplying one entire country productively under economies of scale and face very limited competitions. This can also explain why small countries do not have as good discounts as large countries have.

Overall, I do not have sufficient evidence to support my point and my observation, but I am not surprised if it is true for people living in large countries to have better deals than those living in small countries.

The fall of London

Since the Brexit referendum in 2013, people have been talking about how London will lose its significant position in the financial world. This year, London has slipped even further behind New York; however, we also need to notice that before New York took over London as the world top financial centre according to the global financial centres index compiled by consultancy Z/Yen, London was the world financial capital for five straight years despite the Brexit referendum in 2013. Why did London start falling recently rather than earlier?
First, many “leave" campaign politicians promised a bright future for Britain leaving the European Union. These promises could maintain some degree of market confidence and mitigate the shock brought by the referendum result. Secondly, shortly after people learning the referendum result, people expected a talk and a deal between the UK and the EU and the prime minister at the time, Theresa May, promised the British population a satisfactory deal between the EU and the UK. Right now, it seems that the probability of a no-deal Brexit is increasing as approaching the 31st of October, since both the split between the UK and the EU and the split within the Parliament seem widening even after a new prime minister took the office. Thirdly, it seems we are approaching the date of Britain leaving the EU for real this time. Companies including financial firms and institutions are more anxious to make a response to the changing outside environment than previously.
Overall, if there is a fall of London, the troubling handling of the Brexit could be the most significant factor in this, since London remained as the world financial capital after the Brexit referendum.

How do consumers build up their habits?

Today I am going to discuss consumers’ habit, especially how consumers build up their habits. Before answering this question, I think we need to talk about why people have habits. Having a habit means people doing something repeatedly without too much thinking, this can help people save time and efforts and give themselves the results they can at least accept. Habits are usually built based on people’s experiences, so they can have good predictions about the outcomes from following their habits. People may have some bad habits, but even bad habits give people some short-term pleasure (these bad habits can be drinking, smoking and etc.).

Because they have habits to make their life easier and less risky, these habits are generally built based on positive previous experiences. Once they have some good experiences with a certain product or service, they start to stick to this particular product or service without considering other alternatives. Of course, to build up a habit requires repeated practices, each successful practice accumulates consumers’ confidence, and a habit is successfully built up when confidence is accumulated to a certain level where people believe their purchase decisions do not have much risk. Of course, there are other factors which help people build up their habits faster. For example, first impression may help people like or dislike something easier, thus building up their habits faster (continuously avoiding something can also be seen as a habit). Any factor which help people to build up knowledge about a particular thing that interests them is helpful for building up habits.

Overall, from people building up habits, we may be able to conclude that people build up habits to mitigate the complexity of facing too many options.

Are consumers changing back and forth?

I have forgotten what exactly Steve Jobs said about consumers’ preferences (maybe it is just a rumour), the quote is like a company does not need its consumers to tell what they like, instead the company should tell what its consumers like and need. Apple has successfully guided its consumers’ preferences, even have guided how other smartphone makers make their phones. In 2017, Apple launched its first iPhone with FaceID. Immediately after the product release, many people saw the notch as a very ugly feature, even Samsung made a video to mock Apple for the notch. However, shortly afterwards, many other smartphone makers also produced their phones with different forms of notches, because of Apple’s successful sales of its iPhone.
Then why do consumers still buy products which they complain about? First, we cannot ignore the power of Apple’s brand. Apple is a very influential company that although some people may not like Apple’s new design, they still want to try Apple’s new products. Moreover, some people merely want to own an iPhone, since they think that owning the latest iPhone can show they are having a comfortable lifestyle. Secondly, people purchase the products they do not like, not because they change their preferences or opinions, but because other factors overcome the features they do not like. This happens to all our daily purchases, we do not like paying money, so anything with a price has something we do not like, we make our purchases once other benefits overcome the price. Thirdly, as Steve Jobs said before, customers do not know what exactly they want until they are offered. Looking does not give a consumer a full experience, a consumer can gain a full experience by actually using the product. The experience from just looking or reading keynotes can be seen as a subset of the full experience, this experience may not effectively reflect the full experience.
The above three factors could make people behave differently from what they say; however, there is still one important missing factor, habit. Habit, in my opinion, is much more interesting than the mentioned factors are, and worth a much more detailed discussion.

The US federal government deficit

According to US Treasury data released on Thursday, the US federal government budget deficit reached $1tn. This number is very likely to keep climbing up in my opinion. In his previous election campaign, the current US president, Donald Trump, said that the US budget deficit could go down under his tax cut policy, because although the tax cut will reduce the tax income from individual parties, the economic growth boosted by the policy will not only compensate the losses but also increase the overall tax income. So far, his claim seems to be false that although the economic growth during the Trump presidency is comparatively strong, the economic growth boosted by the expansionary fiscal policy fails to reduce the budget deficit.

Now, some economists predict an economic slowdown ahead of the US economy as well as the global economy. With the 2020 presidential election ahead, Donald Trump is under pressure to keep the economy growing. This means that the expansionary fiscal policy. Furthermore, the ongoing trade war between the US and China has also added some downward pressure on the US economy, this makes the economic stimulus more needed. The US president has pressured the Federal Reserve chairman to lower the base rate and choose expansionary monetary policy.

Under such circumstance, there is not much hope that the US federal government budget deficit will fall anytime soon.

Why do people get addicted to gambling?

Gambling is not a good habit and many people get themselves bankrupt because of gambling. Why do some people get so addicted to gambling? To answer this question, I would like to exclude one factor from this issue, the joy gained from gambling, the activity itself. I think in the key to this problem is prospect theory. People tend to overestimate small probabilities, this means people can overestimate their chances of winning in gambling. This could increase people’s incentives to participate in gambling.But this is not the whole story, since this only explains why people start their first gambling but does not explain the addiction to gambling.
When people suffer a loss, why do some of them still keep gambling? People are generally loss aversive, so if there is a way to overturn their losses, they will consider it. Of course, there is a way to overturn their losses, which is to keep gambling. So people will consider this choice. They  may still overestimate the probability of winning. More importantly, some people do not see each bet they place as an independent event, but rather see the entire gambling as one event. In this case, they believe although the chance of winning one bet is low, the chance of losing the entire gamble is low if they place a significantly large number of bets. Because of such belief, they increase their money put into gambling after each round, then at most time, their losing rate is increasing over time.
Overall, there are two main reasons for some people getting addicted to gambling, one is these people tend to overestimate their winning probability, the other is they fail to see each bet they place as an independent bet from other bets they place.

What is humiliation? Why do we get angry?

According to Collins Dictionary, the definition of humiliation is the embarrassment and shame you feel when someone makes you appear stupid, or when you make a mistake in public. When we are humiliated by others, especially in public, we are very likely to get angry and want to get a revenge. Why do we get angry, especially when we are humiliation in public? If we assume that we always behave rationally and even our emotions behave rationally, then we rationally get angry for a reason when we are humiliated.

If we are humiliated but do not get angry or try to revenge, then we are afraid that we are likely to be exploited more in the future. In order to avoid such circumstance, people find getting angry and trying to revenge a more effective way to protect them from being humiliated and/or exploited in the future. Therefore, it is rational for us to get angry and try to revenge when we are humiliated. Moreover, when we are publicly humiliated, it means if we do not fight back, more people will see the chance of exploiting us and a higher risk lies in front of us, then we should fight back even harder especially when we are publicly humiliated to protect ourselves.

(Inspired by the work by Eyal Winter)