Archive for July 29th, 2008
The Cuil Hype
If you spend any time on the Internet, it’s hard to have missed all the hype over Cuil, a new search site. But I generally have to agree with the NY Times article on the company and their website.
For any competitor to break into an existing market with established players, they have to bring a revolutionary proposition to the table which upsets the existing order. In this case, Cuil would have to be so thoroughly superior to Google, and every other search engine, that it makes little sense for people to use anything else.
Even if Cuil lived up to all the hype, I don’t see how they offer anything more than a pretty interface. Having more links is of no practical use to anyone when Google and others already list hundreds and thousands of links with every search. Most people will rarely look past the first two pages of listings before they give up. Cuil would need to list better hits in those first pages than Google for people to take notice, not give you a few hundred more pages of hits. It doesn’t sound like that is what they are promising.
If that is the case, Cuil does not offer any practical advantages to the user. As the Times article points out, what they really offer is a potential business advantage, in that they can do things more efficiently and cheaply. That’s something other search businesses might want to buy, not something you can sell to users. And when Google has more money than God, Cuil would have to be several order of magnitude more efficient to overcome Google’s ability to buy more capacity to match Cuil’s advantage.
Of course, the founders may have simply been hoping to inflate the sales price of the company and technology after a hyped-up launch. If that is the case, they apparently have some more work to do.
Cash for clunker – good idea?
This little editorial is a very accessible and thorough introduction to the concept of governments taking old cars off the road. In addition to the local schemes mentioned in the article, I think either the French or the Japanese government had something similar years ago, but the purpose was purely as an economic stimulus for the automotive industry. If I recall correctly, the effects on the economy were marginal at best.
The proposal by Prof. Blinder appears to be better informed and actually thought through, but with a notable weakness. As usual with oversights in such analyses, it involves an externality.
In this case, it involves the price of cars. First, with the government willing to pay a premium for clunkers, the market price of these cars is likely to rise. For example, let’s say we have a clunker with a Kelley Blue Book value of $500. If the government is paying a 20% premium, a qualifying owner could sell the vehicle to the government for $600. Then a qualifying individual has an incentive to purchase the clunker for less than $600 and then resell it to the government for profit.
When a ready market of potential purchasers with an incentive to pay more than $500 (but less than $600) for the vehicle exists, that is likely to result in an increase in the overall market price of the vehicle. (We are assuming zero transaction costs for simplicity of calculations only. In reality, especially with vehicles with very low values, the transaction costs may make this point moot.)
The other point is what happens once the vehicle is sold. The poor families and individuals who qualify under such a scheme probably need and use the vehicle. If they cannot purchase an equally or more attractive alternative transportation, these people will not sell their clunkers. That means that they have to be able to buy another car or there must be attractive public transportation alternatives available. Unfortunately, in most U.S. cities, public transportation is not a viable alternative to having a car. Either the service is too spotty to be a practical alternative, or it is too expensive or too inconvenient to be attractive. But a 20% premium should be enough to buy a better car, right? Not necessarily.
The proposed scheme is limited to cars valued up to $5,000 with a 20% premium. That means that for a qualifying owner, a $5,000 vehicle is worth $6,000. This is likely to result in an increase in the value of vehicles priced at more than $5,000, not just those valued at $5,000 or less. As all cars below $5,000 rise in price, that is likely to push up prices of cars priced $5,000 or more as well. Additionally, as owners of cars $5,000 or less sell their current vehicles, they will need replacement vehicles, resulting in increased demand for cars priced $6,000 or less. This increase in demand will also raise car prices.
None of these mean that the scheme would not work. But it is likely to greatly increase the cost of the scheme, thereby diminishing at least the effect of taking these clunkers off the road.
