Class Review

Honestly,at the beginning, I register this class because I don’t have any other options. Deciding to declare another major in statistics at the end of last semester makes me have to take six advanced stat courses in two semesters. After checking all the other econ courses, it turns out Economics of the Organization is the only one fits my schedule. Being not sure about what kind of class it is, I searched rate my professor to get some taste. Your score is 2.3/4.0 and seems to be the lowest in econ department and here are some comments from this website:“Just save your time and do not kill your GPA by taking this class. He means well but the tests are just way too abstract.”;”Arvan did not teach with a text book, and he spent the entire class lecturing on material not on the test. It was virtually impossible to learn the material. If you have another option for Econ 302, go with it.” At that moment, I thought I would be screwed up this semester. However, now I would recommend this class to my friends and give a 3.9/4.0 on rate my professor. I wish I could register this class earlier, at least not in this busy semester, and I can do much better.

The pedagogic approach impressed me a lot at the very beginning, although I am kind of afraid of writing. At the first half of the semester, I usually start thinking about the blog post and the related examples at wednesday and spend an hour and a half  in average to write it in UGL. I do enjoy the time that being alone and writing the blog each week. Besides, the blog post not only encourages me to start thinking and writing but also helps me in my GRE writing test. But in the second half, spending most of my time on improving my verbal section of GRE test and looking for summer intern leaves me fewer time to write the blog and I usually finish it on saturday night. For the Excel sheet, I think you must have spend a lot of time on it to provide us a convenient way to understand the model but sometimes we do need some youtube videos on topics like “Insurance under Asymmetric Information” to get the idea. The topic I enjoyed most is the Transaction Cost, Principal-Agent model and Gift Exchange model. I can relate them to a lot of my previous experiences. Especially the Gift Exchange model, it helps me solve some questions that I kept asking my mentor and did not get a satisfied answer.

At last, I want to give some suggestions on the course structure,  sometimes, I feel the blogging and excel sheet are not that related. Personally, starting from thinking about problems from daily life and then describe and solve it using economics and math is the ideal method for learning. Based on that, maybe writing and discussing  problems leading to the model we are going o learn first and then do the excel sheet could help us understand the model better. But reality could be more complex and you may have other considerations in designing the course. In addition, an optional project announced at the beginning of the semester could be useful for students who want some research experience. It is a pity that I can’t finish the project this semester, again, I wish I could register this class earlier since you treat students and the class much more serious than many other professors. Finally, about the PowerPoints, it seems there are not many PPT after the first midterm. I felt it could be useful in review but the Excel homework did a good job when I was preparing for the exam.

Reputation

Reputation is what we are known for, especially for those who don’t know us well. Personally, I was known for being a not so good soccer coach and a good soccer player. Obviously, I appreciate the latter one much more. I used to be a crazy basketball fan and even skipped classes to play basketball in high school. But an arm injury made me unable to play basketball for an entire year which tortures me a lot. Being unsatisfied to sit beside the basketball court, watching them play, I decided to try soccer. “I have nothing else to do, anyway” I told myself. Once I walk onto the grass, I find myself really have some talent at it. In the first soccer game, I get two goals and an assist which make everyone surprised. “seriously, this is your first game?” I really enjoyed when they asked me like that. After that, many friends who used to play basketball with me join us and day by day, we have more students on the soccer field than the basketball court.

Reputation is not something to be given but something to be earned. With more and more students playing soccer at school, I think it a right time to organize a soccer team to take part in the summer league in our city. After negotiating with our teacher, we are allowed to participate in the league but we have to find a coach. Unlike in US, we usually don’t have an coach except basketball team, having no choice, we have to select someone from us. Without hesitation, I stand out and asked to be the coach. With the support of the teacher and students, we establish a team of 12 players to take part in the summer league. To be best prepared for the coming games, we practiced together twice a week and gathered at 8 am to practice, two weeks before the beginning. I could say that is the best team I have ever been in in my life.

Arrogance is the most ignored output of reputation. Being the new one in the league, we are not paid much attention to, when chatting with other coaches in the preparing meeting, I could tell the indifference from their ‘warm welcome’. But I try to talk with all of them to get as much information as I could. Being not surprised, the first game is an easy, cozy 2:0 and we are unstoppable in the rest until the final. Sometimes, keeping winning is building up your reputation and destroying it at the same time and the difference is I was the one being arrogant this time. Most of us start playing soccer only a few months ago, we are not good at controlling the ball. The reason that we are unstoppable before is that most teams are not familiar with us and we can make the most of our advantage in basketball, running fast and jumping high. Unfortunately, our competitor in the final is the champion of last year’s summer league, famous for their technique on controlling the ball and they have a real coach. The first half is like a daily practice for them, though they only score one, anyone can tell that they are in control of the game and ready to hunt in the second half. In the break before the second half, one of benches told me we should change our midfield player and try to take the control of ball back. Although knowing our problem and why we are losing, I lost my mind to bluster back:” I am the coach, not you, we will speed up and win !” The second half is a slaughter.

They say losing reputation is a good start to listen to others. I admitted my mistake and said sorry to my teammate after the game. In the next term, we get a real coach and instead of being the one controlling the team, I try my best to be the one connects everyone together on the field.

Principal-Agent Model

The principal-agent model in reality is more like a triangle relationship, in which the agent has two principals. The problem usually occurs when two principals are looking for two different goals. In that case, it is agent’s responsibility to balance between the benefits of the two and find out the best solution to satisfy both principals. This happened to me when I am doing the internship I mentioned in the previous blogs, a program manager of an education company called genius education. I found the key is not to be driven blindly by the requirement from neither the boss nor from clients but to understand the bottom line of two principals and come with an eclectic solution.

Because I had been working for the pre-design of the Model United Nations program for a whole semester and knowing the every detail of this program, I attended the first conference with a local high school to introduce our program. During the first contact, the principal is quite satisfied with our program and assign the further discussion to the vice principal of international education department. Just as usual, the further discussion is about the key of every business, the price. My boss, Mr Li’ target price is 3000 thousand dollars each student while the vice principal insisted on the a discount of 500 dollars discount for each student. No surprise, the first meeting did not end up with an agreement. Have to go for promoting the program in another city, Mr Li asked me to keep in touch with the vice principal and told me the final price must be 3000 dollars each student.

Obviously, I was the agent who stayed between two principals and was expected to figure out what to do. After the first meeting, I realized the vice principal did like our program but not satisfied with our price,so I thought maybe we can offer some extra service to negotiate for the same price. Agreed by Mr. Li, I went to meet with the vice principal to further discuss on the deal. Completely different from what I had anticipated, the vice principal was not interested in our offer that we can offer a free training course on MUN once a week for a month as well as applying visa for students for free. Instead, he told me that the school has two major concerns,one is the safety of students and the other is the fair price for students.

After giving the feedback and asking for if there is any room for price cut, I was told the price has to stay the same since it has to stay the same for all the twenty school (some school has already agreed on the price). Refused by both sides, I was on my own again. I decided to ask my colleagues in Nanjing for help, they gave similar feedbacks to me as well. Since the southeastern part of China is stronger than the northern part in economy, the teachers have more experience and alternatives to negotiate with education companies like us, making the program run well on the northern part and not so well on the south. Having achieved conclusion with my colleagues that we should  focus on the long-term cooperation with those high schools which have more target students to take part in this program. We went to meet with Mr. Li in shanghai and talked about the compromise plan. He agreed with our idea and gave us the changed plan which keeps the price at 3000 dollars but covered the fee for a teacher chosen by school to look after students.

It turned out to solve the problem immediately, most schools are satisfied with the changed plan which assured the safety of students would be under the protection of the chosen teacher and lowered the price in total ( not for students ironically). What I learnt in this case is that for agent, it is important to understand both the boss and the school want as much profit as possible and if we have to make any compromise, make it to those who make the decision( the school not students ).

Conflicts between partners : The end of a start-up company

Although conflicts between group members could be the most common thing for a company, it does require democracy policies, the wisdom of solving problems and understanding built during the long term working experience. If not handled properly, the situation could get worse which would affect the productivity and the future development of the group and the company. During my first internship, I witnessed a start-up company collapsed because of the conflict between partners.

The company I worked before is called Genius Education, just as indicated in its name, it is a educational company which is devoted to a worldwide student activity known as MUN( Model United Nations). The most famous program  of Genius Education is called “Traveling and Learning in USA” which packages the MUN meeting held by the big name university such as Harvard and Yale with the traveling around USA  together. Since the worldwide popularity of MUN and the big name university convinced most parents that taking part in this program will help their children applying for american university, it was a great success at beginning. However, the surprising amount of cash in hand made the partners think different way of the development of the company in the future. Two of them think they should split the money even and sell the company to those who are interested such as New Orient( a famous Chinese education company, the stock quote is EDU). However, Mr. Li, who I was working for insists on keeps the company and use the money earned to reinvest. Because Mr. Li is always like the big brother of the three, the other two obeyed him at first. But the ugliest thing happened two months later, when Mr.Li taking his students to Harvard to attend Harvard MUN meeting, the other two took all the money in the company’s account, fired all the employees, emptied the office and left to HongKong. Obviously, it is too late when Mr.Li realized what happened and went back to Beijing.

Technically, there is no conflict at all but only the disagreement between three “brothers” who started the company together. Mr.Li was not even given the opportunity to argue for his opinion before the end of the story. But he did analyze why he failed to us who were still working for him in his new company. According to him, the reason why the company ended like that is due to how he managed the relationship between them. Before, he is always the man who speaks of the three, almost in every meeting he is the one in front of the PPT screen, summarizing the work and describing the future of the company. In his plan,he should be the one to control the direction of the company,and under his lead, as long as the other two can finished the work assigned, the company will be as successful as New Orient. Besides, he is a type A person while the other two are not, so after all the hard work and sacrifice they made, they just want to liquidate the company rather than moving forward. So what made the other two ended the company so ugly is the lack of communication space and strategy since based on the past experience, they believed there is no chance that Mr.Li  would change his mind. In addition, Mr.Li relied too much on the relationship built on before between them before and gave so much power to the other two that they can made the final decision without the agreement of Mr.Li.

He said what lead to the tragedy is he did not understand what the idea of company really is and how the company should work. For me, the biggest mistake he made is that company should work on agreed rules rather than personal relationships , although it is quite difficult to change the what they think of the company personally, it seems that one possible way to solve the problem is to come out with a exit strategy for those who does not want to work for the company any more  at the beginning.

Team Production and Gift Exchange

The article ‘How to get the rich to share the Marbles’ on The New York Times in 2012 describes an interesting experiment about two children pulling roles to marbles with quite different results on three different versions. In the first one, children come out with fair split because of the game is designed to be a collaborate work. In the second version, due to the unequal initial wealth, though still being collaborate work, unfairness takes place of equal split. The third condition is even more interesting which indicates under solo work condition, split equally seems to be the last option. What this experiment illuminates the author is that to achieve equity consistently, what matters more is to ensure the procedural fairness rather than the distributive fairness. The design of the first game is similar to the gift exchange model we talked about in class, in which case workers are paid the same level salary for the same work they do (though results may vary from one another). The next two kinds of stories describe how this may not work (starting with unequal initial wealth) and an opposite model (individual production model).

It reminds me of my summer internship in SPD Bank. I was working in a team responsible for issuing new bond and before asking my mentor, I was convinced that they are paid on the essential salary plus some certain percentage of how much bond they issued every year, which is the amalgam of team production and individual production. However, what I was told is completely different from what I assumed. Their payment policy is the pure gift exchange model we talked in class. They are paid almost the same amount of salary and the only difference is that they are offered a bonus together if they can achieve certain issuing number at the end of the year. Two reasons could be mainly used to explain that. What comes first is how much bond they issued heavily depends on the power of the bank and government policy,not their individual impact. Although they are responsible for issuing bonds, the clients are based on the networking of senior managers and what they do is only about producing the product, not looking for potential clients. Even they do find some target clients on their own, it will be concluded on the power of the bank not individual efforts. Besides, I was told that in 2013, Chinese government restrict bonds issued from the banking system so tight that many banks ended with no successful issued bond at the end of the year. The second reason is more important: how much bond they issued heavily depends on the area they are assigned. There are four areas in many hometown and each of them differs in economics conditions which means the number of qualified firms are quite different. But when negotiating with target firms, what clients care about is how much bonds they issued before in total and the ranking in terms of all banks. In another words, efforts of everyone count. It is just like what described in the article, although Child A and child B get different numbers of marbles, what they get finally depends on their collaborate work. They do not have to compete with each other and instead, they are competing as a whole with teams from other banks. Under this condition, the gift exchange model is a preferred rewarding system. This also explains why many companies use this model since the aim of the company is about to choose the best of employees not to beat competitors as a whole.

However, Gift Exchange model is not the panacea to all problems may occur in management. There are always problems like free-riders and opportunism requiring solutions such as monitoring which means pretty high transaction cost. This is one of the reasons that corporations sometimes prefer individual production model.

Manage my future risk

As a senior student, it will not be long before I need to consider how to manage my income risk. This post will mainly focus on two different parts and the first one is how I try to minimize the risk in choosing my major as well as my experience in student organization. In the second part I want to talk about what I’ve learnt from my mentor of my summer intern.

For me, university life has three major components: study, student organization and internships. In terms of study, the very first thing is choosing my major. I used to be a finance major student in China because my parents think that will help me get a good job with decent salary. It turns out I did like my parents’ suggestions as well. However, when I was preparing for transferring to U of I, my consultant told me that based on his experience, it is difficult to transfer into business school directly and you are very likely to graduate late. Instead of applying for finance I chose Econ as my major in U of I. But I find being an Econ student is actually not my first but right choice after being here for more than one year. I like learning economics and I think it will help me development my analysis skills on different events ,not only on stock market. What is even better is that most of my credits are transferred here, I could pick up another major I am interested in like statistics without delaying my graduation. Compared to many of my friends who have to study for one more year to finish their finance major, I can finish my study on finance in my master program. I think learning both statistics and economics enables me to think both analytically and technically, which is quite helpful for my future study and career on finance. Choosing Econ as my major in U of I minimizes the risk of graduating late and provides me with a better opportunity to learn things I am interested in.

Taking part in the student organization is also a very important part of my university life. Back to China, I was a vice president of Model United Nations Club and I was responsible for contacting with members of different schools. After participating in this activity for two years , I have been to 12 different universities and 10 different cities in China, communicating with students with different backgrounds and majors. Many of friends I made in this activity have graduated and worked for top law firms, consulting companies and finance institutions in Shanghai, Beijing and Hongkong. It was an amazing experience I got an internship opportunity because of my experience in this event. I worked as a program management of MUN study abroad plan and sent students to University of Chicago to take part in the model united nations there. Taking part in student organization not only practices my communication skills but also  provides me with some future resources.

This summer, I went back to China and found an internship as a client manager of an investment bank and it is the first time I have the chance to experience my dream job. My mentor, who is a former employee of Pwc Shanghai is really nice and helpful to me in the two-month internship. He graduated in 2007 when the economy is about to collapse and he told me that even in the worst situation, you should keep your mind clear and stick to your dream. In the next seven years, his career path is just like what he has planned, not because he is lucky but because he always works hard and sticks to his dream. ” On this road, many people will tell you that you can’t do it but don’t be afraid, just do what you think is right.” He was rejected by SPD bank (a famous bank in China) seven years ago and the HR told him that he didn’t have the acumen for investment. After working in Pwc for four years, analyzing hundreads of companies’ balance sheets and income statements, he went to England and achieved his master degree of finance, in 2013 he became the manager of investment department of SPD bank. What I learnt from him is not to give up easily and always stick to my dream and believe in what you’ve done will pay off someday.

 

 

Transfer pricing and illini bucks

As mentioned in the assignment, University of Illinois basically allocates its resources to students based on two criteria, first come first serve and some priorities. The key idea of this system is to ensure the equity for the resources allocation. We pay a similar amount of tuition for  U of I and whoever comes first deserves the first serve and for most engineering students and business students, they enjoy certain priorities since they pay more for them. In my opinion, the appearance of illini bucks will ruin the equity of the system. During the analysis of the effect of illini bucks, we can focus on its usage on registering courses ( it could be the most popular one ) and then expends the analysis to a variety of priorities it can buy.

Someone may argues that we pay the same tuition but senior students enjoy the benefit of choosing class first, so it is not fair at the first time. But in my opinion, I does not break the idea of equity since it can be seen as the extra benefit for keeping paying for a long time and after all everyone has the opportunity to enjoy this welfare. So why students would want to pay for the right of registering earlier? It is important for students to register their favorite classes successfully because getting good quality education is the main reason of coming to this university and taking preferred classes with preferred professors will affect the willingness of students to study. Before illini bucks, the system is relatively fair to all students since James Scholar Program (students who is in this program can register courses early) is available for most students. Supposing university gave each students the same amount of illini bucks which can be used for moving to the first line of registering classes, it is not difficult to predict that if the university sets the price too low, most students will use their illini bucks to maximum their utility on this. As a result, although efficiency is seemingly achieved because whoever wants to learn gets the chance, those who deserve the priority will be sacrificed. Senior students will face the risk that can not register the class needed to finish the program and their graduation plan may get delayed. If the university sets the price too high, especially when it is higher than the amount allocated to each one, there will be a even worse scenery in which only those who are rich can enjoy the priority. Once the illini bucks charged for the right exceeds students’ utility for this right, they tend to give up opportunity and since there is always someone who is rich enough and willing to pay for others’ illini bucks, the exchange will occur. If we consider all the priorities illini bucks could buy, it is a obviously valuable asset and in the end, the individual amount of illini bucks may could not pay for any service.

What is even worse is that the university is the only source of illini bucks. What will happen if only one dealer controls the demand of meth? He will definitely keep increasing the price until nothing more could be milked. It is not hard to imagine that in the end, the original amount of illini bucks assigned to students can not be used to buy any single service anymore which indicates that the equity of the system is completely destroyed. And what will happen if most students find they did not get the service and education they paid for ? They would seek a better education environment and service out of the former institution which means transferring to other universities or colleges. So in conclusion, the appearance of illini bucks could cause the imbalanced allocation inside the university and may finally force students to look for outside resources as an alternative.

From unsuccessful to successful

Back to the time I was studying at Soochow University in China, I was the co-founder and  vice-president of a student organization call Model United Nations ( I think there is one in U of I as well ). As freshmen, being exciting and ambitious about our university life, two of my friends ( Mingrui and Xuxin) and I started this new student organization. We all had some experience with Model United Nations at high school and based on that we work out the basic structure of our MUN club. At the beginning, we all agree on the basic idea of this club is to encourage students to take part in MUN and improve themselves during the participation of this activity. In order to achieve that goal, we decided not to set boundaries between different departments of our club( just like a combination of One-Boss Arrangement and All-Channel Network),hoping with quicker information flows, they can work better and learn from the best of others. In addition, we thought, as a new club, this organization structure will help members know each other more quickly.

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However, things did not work out as we anticipated. Instead of cooperating with each other closely, most members are totally lost of what they should do. As planned, Secretary department is supposed to focus on the internal communication and managing our budget; Operation department should build connections with MUN clubs of different universities and look for sponsors of our activities; Operation department should work on the operation details of our activities. With this mixed structure, many students find they are more suitable for the jobs of other departments and their assigned works remained undone.Moreover , being no experience in student organization, most of them did not know how to coordinate the work of them other and have to come for us for instructions. Even worse, as commission members, we also did not figure put our roles. We still sticked to the scheme that meet together and work out what should do next together, which leads to the inefficiency since we could only meet when the timetable suits all of us well.

Aware of the drawbacks of our organization structure, we decided to make some changes to make it clear to everyone what to do next; what they should do; who is to look for help and how to cooperate with other members. Instead of asking members

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of different departments  to contact with each other directly, we encourage them to communicate with us first. Because, each one of us is responsible for a certain department, we can coordinate the work of two by the communication between us. In addition, we also reallocate the members to the department they find suitable as well.

By doing this rearrangement, we clarify our club’s character and who is responsible for what job. Students are also working at the position most suitable for them and it does release their energy and creativity. As commission members, we also understand who is in charge in what specific field. And this guides our members to ask the right person for help and order. What happened next proved we are right on this decision, in our first important activity: MUN Forum of Jiangsu Province, we did quite well as a team.

In the later analysis of our successful transformation, we found it relies on three points. First, in the first unsuccessful trial, most of members find their suitable positions and committed to it. Second, the privity between us ensures the communication quick and fluent. Third, the previous structure did make most members more familiar with each other and did give them some hints of how to cooperate with each other.

Opportunism

Twelve years ago, my uncle starts his first car wash company which has ten branches and worth 30 million RMB now. However, back to that time, he was just a ordinary worker at his mid-thirties. Without enough money to invest on this car wash company , he started selling his idea to all relatives, my father included. Although having many positive responses, my father was the only one who said ‘OK, I am  in’. Not knowing too much about the business, he invested 10 thousand RMB and  asked  30% of the total profit every year for return. The business was not quite good at the beginning because not many people could afford a car. Things started to change in two years. With the development of economy, the number of car owners started to propping up and all of a sudden, my uncle’s car wash company became a bank-note printer. In the next two years, the profit my father got exceeds the amount he invested.  Then, just like other stories, problems occurred at the acme.

In 2009, on the second day of Chinese New Year, my uncle came to visit us and gave the 30% profit of last year to my father. For me, it seems a yearly routine between them but  the sound of arguing I heard in the study room made it a little bit different. My uncle thought it was his effort that made the business successful and he wanted to buy my father’s shares back at current price. Knowing the growth rate of the business and believing it will worth a lot more in the future, we would support him if he decided not to give up the opportunity. After thinking it the whole holiday, my father finally sold his shares back to my uncle. He told my uncle that he always put his family at the first place and he believed the car wash company would be even more successful in days to come.

I think it is a good example of not acting opportunistically around me. My father actually consulted his lawyer about the ownership and indeed he could insist on keeping his shares. If he did so, he could have the 30% of the 30 million RMB today. However, instead, he gave up because he treated family as his priority in his life. For him, earning more money can not compensate the breakup of brotherhood. With the view of economics, it is easy to analyze my dad’s decision. Based on his joint utility function which consist of family and money, the marginal utility function of money shows low marginal utility while that of family has a steep upward slope. And this slope is decided by the education he took as well as his personal experience. However, the slope is not that stable and is somehow related to some psychology variables. This may explains why he needs thinking about this decision for the whole holiday time. On the other hand, the reason why the marginal utility of money is comparatively small is because he has his own company as well. Without taking advantage of that opportunity, he also did not need to worry about money. But it really depends as well, many people do enjoy keeping adding zeros before the dollar sign.

In addition, the expectation also plays an important role when he struggled. My father treated it as kindness and support from family rather than the serious investment. So at the beginning, the expected value of the business is quite low or approximately equal to zero and what happened next is more like lottery winnings for him. Low expectation; not desperate for money and values on family explain why my father did not act opportunistically when he got the chance. I can not judge his decision, but as his son, I am proud to have a father who always put his family at first.

My experience with organizations and Transaction Cost

Organization Structure

I have some experience with many organizations and my favorite one is TEDx. It is a sub organization of TED which is quite famous all over world now. Just like TED, the idea of TEDx is to encourage the spread of brilliant thoughts of different areas concerning the development of our society. However, TEDx is especially designed to help communities, organizations and individuals to spark conversation and connection through local TED-like experiences. In other words, it focuses more on people around us and this inspires us to hold our own TEDx event.

The structure of our organization(TEDxSuzhou) is quite simple. There are four departments: Management Commission, Project Operation, Secretary Department and Public Relations. The Commission is the core of our organization, the board members usually consist of those who have working experiences, social connections and should be good at networking. They are responsible for contacting and giving feedbacks to TED; selecting and training speakers; setting our schedules and holding weekly meetings.  Project Operation, Secretary Department and Public Relations are operators of the work assigned by the Commission. Project Operation focuses on executing detailed plans for the event, including choosing sites,renting equipments and so on. Public Relations is responsible for promoting our events on social media and searching for potential speakers. In contrast, Secretary Department deals with internal business such as budget control and some HR works. We both work separately and closely. During the meeting on every Monday evening, we sit down together to check our schedules and listen to different departments’ concerns. After that, we will stick to the plan worked out at the meeting and do our jobs separately.

A Case on Transaction Cost

In China, there used to be no private high schools and all parents hope their children could go to famous public high schools. Established at 2000 , my alma mater is one of the first modern private high schools in my home town. Back to the first year, there were only eighty five students at school, because most parents are not comfortable with the teaching quality of a new school without history and more important, the tuition is much higher. Although, our principal spent lots of money on ideas like substantial scholars; small-class teaching style and high quality english class to attract students, things did not change in the next two years. In 2002, the year I went to middle school, our principal made a big decision: to establish a middle school department. What happened later proved he is right. Since there is not so much pressure on preparing for the college administration exam, many parents are attracted by the idea of substantial scholars; small-class teaching style and high quality english class. one year later, convinced by the teaching quality, most parents choose our high school department as well. I think it is a very good example of eliminating unnecessary transaction cost by taking advantage of that. Assuming high school is a company looking for potential consumers: parents to buy its products: high school eduction. All the strategies used to convince consumers are transaction cost. What our principal did is to avoid the barriers of entrance to product A  and create the demand for it by selling its complementary product B. As a result, my alma mater is the best high school and middle school now and it has much more donations from alumni than any others. In fact we also have primary school department and kindergarten department now. It creates an closed-loop educational system just like what Apple did with their electronic devices.