Re: nike mystery

["Chris Barrett" <BARRETT@xxxxxxxxxxxxxxxxxx>]

I concur with Michael Perelman's assessment.  Nike's profits, the
obscene retail price-to-labor cost ratio, and athletic shoe industry
conduct follow directly from high sunk costs attributable to
extensive advertising for product differentiation and proliferation
(two distinct concepts -- track down Dick SChmalensee's work on the
Kellogg's cereal cases for more info).  Note that the issue is sunk
costs, not just fixed costs.  John Sutton has a relatively recent
book on the importance of sunk costs on industry structure, pricing
and profitability (entitled Sunk Costs) that fits the Nike case
perfectly.

The other important point here -- and this is where I part with
Michael (but echo someone else who already made the point, but, alas,
I cannot recall who) -- is that Nike is a marketing firm not a
manufacturing firm.  The high costs are sunk costs in relationships
and advertising.  Nike buys on short-term contract with suppliers
around the world.  Gary Gereffi at Duke has done some interesting
work on the internationalization of manufacturing operations and the
emergence of purely white collar consumer goods firms like Nike.

Chris Barrett
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Christopher B. Barrett                  Phone: (608) 262-9491
Depts. of Agricultural Economics        Fax:   (608) 262-4376
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