Money talks. Chocolate sings!
QUESTION from a READER on Pricing and Economies of Scale
I was reading the PDF and I had a question about the early discussion related to pricing below competitor's costs with a brand that demands a premium in the market. There was a suggestion that the premium brand is not able to arbitrarily price higher above the shared costs of the industry and earn outsize profits because this would invite competition, whereas when they lower prices closer to competitor costs, they're still able to be profitable due to marketplace premium while denying competitors (potential and actual) the profitability they'd need to be incentivized to enter and compete. How has Warren Buffett been able to raise prices continuously on See's candy? His competitors aren't continually raising prices on their candy, are they? Why don't these price increases become self-defeating and invite competitors? You can see all comments on this post here: http://csinvesting.org/2012/01/24/study-on-economies-of-scale/#comments
My Reply: Good question. In the example you mentioned, the same logic would apply to Sees Candy. I have extensive notes on Sees but trapped on a dead laptop. The notes below have an analysis on Sees pricing. Read the PDF on Sees, and we can discuss further.
I rarely suggest investment books, but here is a thoroughly revised edition of a book that Joel Greenblatt recommends in his MBA classes: Contrarian Investment Strategies: The Psychological Edge by David Dreman.
I have read about a third of the book, and certainly any Contrarians out there should read the book. For example, on page 179 there is a table of Analysts’ and Economists’ earnings growth estimates for the S&P 500, 1988-2006 (18 years)
Analysts Economists Actual
Average 21% 18% 12%
Percentage Error 81% 53% —
Even a cynical observer of Wall Street like me can’t believe my eyes. How can analysts estimate on average 21% earnings growth? The odds of any company growing in excess of 15% per year for 10 years is almost infinitesimal. Take common sense so we add an optimistic GDP growth rate of 4 percent a year plus nominal inflation rate of 6% and we have 10% earnings growth, How can analysts even think of 20% EPS growth?
Too big NOT to fail: http://www.youtube.com/watch?v=lAxKAzpGmVA&feature=player_embedded
That leads us to David Stockman’s interview with Bill Moyers on CRONY CAPITALISM or Welcome to the USA today. http://billmoyers.com/segment/david-stockman-on-crony-capitalism/
The Blow-up Artist. Victor Neiderhoffer interview on being wrong. http://www.scribd.com/doc/79358509/Niederhoffer-Discusses-Being-Wrong