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To: Geoff Nunn who wrote (46723)	6/8/1998 5:05:00 PM
From: Chuzzlewit	Respond to of 176388

Yes Geoff, I agree with your analysis. I guess the point that I'm making is that in the real world (as opposed to strict economic theory) all costs aren't variable, so with increasing demand capital must be invested (certainly with the expectation of a profit) which is a purely financial decision, but logistics and infrastructure are strained. It is these strains that can cause the greatest headaches. I am not suggesting that they will, but there is the possibility that they might. Let me give you a barebones case study. A few years ago I did consulting work for a wholesaler/distributer who had one location. Business was brisk, so he felt justified in expanding his operation to a second location. So he had two problems: first raising the cash to buy a new building (capital strain), and secondly to ensure that operations at the second location would be properly integrated with operations at the first site (logistical strains). This second problem consisted of myriad components such as properly designed and installed computer networks, hiring additional managers, inegrating the phone systems and working out kinks in deliveries from suppliers. As you can well imagine, this was by far the more difficult to overcome (which he did, but it took some doing!). You said that falling ASPs are a consequence of increasing capital investment. I have difficulty with that statement because it neglects the reality of a multiplayer marketplace. For example, if some manufacturers have significant overcapacity and choose to drop prices to stimulate demand it will result in decreasing ASP for the industry as a whole. That requires the rest of the industry to react, and the reality is that they cannot do that by raising prices to mitigate the results of new costs. TTFN, CTC