Saturday, May 30, 2015

IITians of all, should know the difference between an assumption, axioms and theorems before taking over freedom of speech

Every Tom, Dick and Harry can have their own opinion, as the freedom of speech and expression is guaranteed  by our great constitution. At the same time we also have to remind ourselves about these terms (assumption, axiom and theorem) mean. If not, for reference; let me put it in plain English

An assumption is just a statement we make as a starting point for any argument. An  axiom is a premise so evident as to be accepted as true without controversy. Theorem is a statement that has been proven on the basis of previously established statements, such as other theorems—and generally accepted statements, such as axioms

I first came to know about the unrest at IIT Madras from one of our beloved Professor's facebook comment. Later I found some of my friends at IIT-Madras is posting about the same. When Facebook trends picked up this, I understand the "Butterfly effect" has started and things are getting as chaotic as any other "TOIlet sensation".

To be frank, I pity the students who did this, for they got emotions and irrationality in their head instead of scientific methods to prove their  "assumptions".  I also pity the administration for not handling the things by separating the "emotional" and the scientific part and making the "kids" understand the difference between them. Current way of protests from the students and the suppressions from administration is just bringing disgrace to the institution which paved way to a great set of people who loved what they were doing, in the most scientific way.

Tuesday, May 19, 2015

The perpetual motion machine of online business

Sometime back when I was looking for a mobile, I was checking all kind of deals in e-commerce web sites. One such deal was that I get 3000 INR off for a purchase above 25K. I found a person selling his mobile at 28K. That makes my price 25K. The seller has written, please call before purchasing. When I called, the fact I learned is that he is selling it at 28K, he has to give the web-site roughly 1.5K. 
To summarize the statements
Seller gets 26.5K for his phone
I get my phone for 25K
The e-commerce web site gets 1.5K

Difference: 1.5K is paid by the web site to me.

Suddenly I felt, it is like a perpetual motion machine. I can create two accounts, from one I can sell at 28K, from the other I buy at 25K, I get a margin of 1.5K without selling anything. A bit more research showed that, I hear similar stories from call taxi web sites and many other online services. The taxi driver gets money at the rate he has margin. The customer gets it at cheaper rates. I think the driver can call for his own drive and can still make a marginal amount.

The fundamental economics does not apply here. Somewhere something is wrong. The only possibilities I could think of are
  1. The web site uses investors money to create the market
  2. Part of the revenue from the advertisement and exclusive launches were re-distributed. 
  3. There is additional revenue from selling the data (how many people bought a particular product. What age group bought ipad etc) 
If the first one is applied, it will screw the investors big time. A combination of 2 and 3 are possible. In this case the equilibrium may not be achieved easily.
To understand this situation, let us take the product cost of an imaginary item. If the company is big, the marketing team will spend money on learning the buying pattern, age group, brands people choose and their relative pricing. This will feed to the 3rd point for e-commerce site. The marketing team again uses the information from e-commerce sites for price anchoring and exclusive deals. Then again the sites made money. These two cases, generate money without selling a single product.  The dealer pricing from a company for a product
DP(1400 for an MRP 2000 )= manufacturing cost (200)+ market survey cost (100)+ advertisement cost (400)+ Profit margin (700)

Now the e-commerce web site can sell this product at 1400 and still will not loose money since they already got the revenue from this product.  This is a slightly sustainable model, provided the site offers the discount only for first 100 items or a limited period where they can either collect more data which they can sell (eg: big billion day scam)  or they can use it to generate advertisement revenue from a competing brand

One thing for sure: the equilibrium in e-com business is  pretty much complicated (possibly in the higher orders of an equation) with a lot of uncertain parameters.