Running head: AWK and ua 1

Microeconomic Analysis of American Water and Under Armour

David S. Spencer
Thomas Edison State College

Author Note
This is the Final Project for the February 2014 term of ECO-112-OL, Microeconomics.
The primary sources for the information in this project are the 2013 annual reports for the
respective firms analyzed in this project. Because of this sourcing, the reports are not cited in the
text but are available in the references section at the conclusion of the project.

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Microeconomic Analysis of American Water and Under Armour
This project will examine two companies whose products are common in everyday
American life. These two companies are American Water and Under Armour. These two
companies are very different in most aspects discussed in this project, and serve as two good
examples of how private firms operate in different market conditions.
American Water Works Company, Inc.
American Water Works Company, Inc. is a provider or water with operations throughout
the United States. American Water Works Company, Inc. is commonly known as American
Water and is traded on the New York Stock Exchange under the symbol AWK The remainder
of this paper will refer to the company as AWK.
Product
This section of the project examines the primary product of AWK. AWKs primary
product is the public supply of water to municipalities across the United States. AWK has a
secondary business in a complementary product to public water in their wastewater operations
business. AWKs water and wastewater products are primarily used by residential customers.
AWKs 2013 customers breakdown to 91% residential, 7% commercial, 0.1% industrial, and 2%
public sector and other customers. These numbers consider the number of customers by class,
not the total consumption by customer class.
Demand Factors
Because of the ubiquity of AWKs product in the markets in which it participates, there
are many factors that influence the demand for its primary product. These demand factors
include, seasonal changes, draught, derivative demand change as an industrial factor of

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production, and derivative demand change as a factor of production for electrical power
generation.
The demand for water adjusts on a seasonal basis. This is easy to comprehend in
everyday life as it is common for a residential water customer to use more water in the spring,
summer, and fall in exterior applications than in the cold of winter conducting such activities
such as lawn and garden watering, power washing, vehicle washing, and filling of pools. Lawn
and garden watering activity increases even more in the heat of the summer when evaporation is
high and plants require more water to survive during the course of a normal summer season.
Conditions of draught can both increase or decrease the demand for AWK water
depending on the severity of the draught and the reaction of government authorities to the
draught conditions. In the early stages of a draught or in draughts where the water supply is not
threatened, the demand for water can actually increase as consumers look to replace water that
they may otherwise acquire from surface water, ground water, or collected rainfall that is reduced
or non-existent during the draught. However, in cases where the draught is severe and threatens
the water supply, government authorities are likely to implement water usage restrictions that
reduce the overall demand for water which reduces the volume of water supplied by AWK in
order to ensure that the affected areas do not run critically short of water.
Water is an important factor of production in many industrial applications. Because of
this importance to industry, the demand for water from industrial firms is subject to the changes
in demand for the product that the industrial water customer produces. Because of this
relationship, AWKs water is said to have derivative demand as a factor of production.
This derivative demand relationship is also true in cases where AWK supplies the water
used as a factor of production of electricity. Electrical producers require more water when they

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produce more electricity. AWK has a very limited customer base of electrical power producers.
This customer set is primarily limited to peak power generation and backup power generation
facilities.
Supply Factors
There are two primary factors of supply for AWKs public water product. They are the
water itself, and the supplies used to treat and transport the water.
Water
For the water itself, there are two primary sources from which AWK extracts its supply.
The two sources are surface water sources, and ground water sources. In addition to the natural
process of the water cycle effecting the productivity of these sources, the level of contamination
and pollution is also important in determining the usability of the water sources and the expense
required to take the raw water through the treatment process so that it can be distributed to the
public.
surface water sources include rivers, streams, lakes, and man-made reservoirs. These
reservoirs are generally created by damming steam systems in natural bowls. Surface water
sources require significant treatment before they can be used as public water by AWK because of
chemical pollution, human and animal waste, and bacteria and viruses living in the bodies of
water.
ground water sources of water come for water contained below the surface of the Earth in
aquifers. Because of the natural filtering effect of sediments, the water contained in aquifers
generally requires much less treatment than surface water sources. However the extraction of
ground water sources requires expensive drilling and the continual pumping of water from
sources that can be hundreds of feet below ground level. When ground water sources become

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polluted, they can remain that way permanently, sometimes reducing productivity and other
times removing that site as a source of water. Ground water sources also have a natural rate of
recharge. When the extraction rate is greater than the recharge rate, then the supply can become
exhausted and unavailable for future exploitation.
Energy and Supplies
Energy is a very important factor of production for the production and distribution of
AWKs primary product. The majority of AWKs operations rely on pumps of one kind or
another. Stable and reliable prime power and standby power is essential to AWKs ability to
move water from its source to endpoint customers through those pump systems. Energy is a
variable cost present in each unit of water produced and distributed to customers.
chemicals are an important factor of supply for AWK. This is especially true for the
production of water that AWK extracts from surface water sources that are contaminated as
described above. The chemicals used for the treatment of water are generally produced by petrochemical firms and their price varies depending on the price of oil and of energy in the region
where the chemical are produced. Besides the energy used in AWKs operations, the cost and
availability of chemicals are the most variable aspect of AWKs supply operations.
The pipes and other materials used to fabricate the infrastructure that moves the water
from the source to the customer sites is the largest fixed cost for AWK. In many cases AWK
purchases or leases this infrastructure from public utility commissions, while in other markets
AWK owns and builds the infrastructure itself. In both cases, AWK is many times responsible
for the maintenance and repair of water mains and other lines.

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Available Substitutes
There are no readily available substitutes for AWKs primary products of public water.
There are some limited cases where there is a ready substitute, but most customers do not have
any other options because of the alternatives cost or because of local laws and regulations. The
first possible alternative to AWKs public water service is the use of privately treated or purified
water that is transported via commercial or private logistics. This could be in the form of bottled
water or through bulk water deliveries. In either case, this method for supplying water is very
inefficient and expensive because of the costs of capital, labor, and fuel involved in the
transportation of potable water privately. Because of this difficulty and expense, these private
water supplies are not considered an available substitute in AWKs market for public water. The
other available substitute for AWKs public water is the use of private ground water wells.
Although the initial cost of drilling and installing a well can be very expensive, there is very low
maintenance costs and the marginal cost of each unit of water is very low. Despite this
affordability, private wells are not considered an available substitute to AWKs public water
product because private wells are not available to most AWK customers because of local
regulation preventing the installation of private wells on many sites. Other customers are unable
to install private wells because their property cannot support a well because of location or access
and purity of the local ground water. Overall there is no substitute available to AWKs water,
and because of the simplicity of the product and purity regulations, there are is no differentiation
between AWKs water and any other suppliers water product.
For most installations in AWKs customer set there are no available alternatives for the
wastewater operations that compliment AWKs public water distribution; however, in some
cases, some customers have the ability or requirement to use private septic systems instead of

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AWKs public sanity sewer and wastewater treatment. Most of these customers are located in
rural or very lightly populated suburban areas. While septic systems are a substitute, they are
generally considered an inferior substitute because of the expense and difficulty of maintaining
septic systems and because of the local ground and groundwater pollution that improperly
installed or maintained septic systems can produce.
Available Complements
As mentioned throughout this section of the project about AWKs products, their two
primary products are compliments to one another. Public water supply is complimented by
sanity sewers and wastewater treatment, while wastewater treatment is useless without a
community water system to carry the waste. In addition to these two compliments available
from AWK, there are other available complements produced and supplied by other firms in the
economy.
The generation of electrical power is a close complement to the public supply of water.
Not counting that water is an input factor to most methods of generating electrical power, an
increase in the consumption of water generally indicates an increase in economic activity or
population that will also require an increase in the consumption of electricity.
Demand Elasticity
AWKs water has high elasticity in the short run because of the seasonal changes in the
water usage by residential customers. This high elasticity continues into the long term as the
price and availability of water do not just determine the demand curve for the customers in a
given market, they can be the determining factor in the population and industrial growth in the
market or community.

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Capital and Labor Intensity
AWK is very capital intensive but requires very little labor to operate.
AWKs production of public water is very capital intensive because AWK must build and
maintain water extraction, treatment, and distribution facilities that are designed to last decades.
Many of the facilities currently in use are at, or nearing, their end of life. This means that AWK
or partner agencies and firms will need to invest significant capital to rebuild or refurbish public
water infrastructure. Rebuilding assets that last decades is very expensive and requires charging
rates that cover AWKs operating cost and the cost of investment in the infrastructure.
Despite the high capital intensity, AWK is not labor intensive. AWK has only ~6600
employees while they serve a customer base of approximately three million households and
firms
Technology
Technology, and the investment in new technology, is not important in AWKs core
business of producing the public supply of water. This is because AWK is operating in a highly
regulated market where in many cases AWK operates infrastructure that is owned by a public
body or government. In addition the process of supplying water through a municipal system has
remained constant for decades.
Despite this lack of need for new technology in the core business, technology may play a
greater part in the future of AWKs operations as new technology for remote water quality
monitoring and the smart distribution of water through the distribution network is built into new
or refurbished water systems to reduce waste in the distribution system. AWK is already using
some new technology on a limited basis in some of its markets with smart meter that track the
volume of usage over time to determine when there is the greatest demand for water.

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Technology and technology investment may not be vitally important in the production of
AWKs product, but in AWKs annual report from 2013 expressed concern about water supply
availability in some of its markets. New technology, such as recycling waste water into potable
water, may be essential in the future for AWK and for draught-prone and arid communities in
which AWK serves.
Market Structure
AWK operates as a monopoly. In most of the markets this is a government permitted
monopoly providing services as a regulated utility. In the terms of the four market structures,
AWK operates as a monopoly because it is the only competitor in its market and there are no
available cost substitutes to its product.
Under Armour
Under Armour, Inc. is a producer, marketer, and distributor of branded athletic apparel
headquartered in the United States with operations in North America, South America, Europe,
and East Asia. Under Armour is publicly traded on the New York Stock Exchange under the
symbol UA - The remainder of this paper will refer to the company as UA.
Product
UA produces branded athletic apparel manufactured from moisture-wicking fabrications
in designs and styles engineered for a wide variety of climates and activities. UA produces
products for climates from hot to sub-freezing and for activities ranging from walking and golf to
running and high intensity team and individual sports.

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Demand Factors
UA makes a majority of its sales through wholesale channels meaning that UA sells to
retailers that then distribute UA apparel products to their retail outlets. The performance of these
retail outlets affects the demand for UA products sold in those outlets.
UA product demand is affected by seasonality. UA products are in much higher demand
in the fall and winter as consumers demand UA apparel during the fall clothing shopping season
and then continue to demand UA apparel as gifts during Christmas.
UA product demand is affected by UAs ability to develop new designs, products, and
materials. Demand for branded UA products declines over time as other producers produce
comparable products and particular designs and styles go out of fashion.
UA product demand is also affected by general consumer discretional spending. During
downturns in consumer spending, UA demand will decline as UA products are not considered
necessities to most consumers.
Supply Factors
The two primary supply factors for UA are the availability of specialty materials used in
UA products and the availability and performance of third-party firms UA contracts to
manufacture UA products.
UA products are manufactured from specialty fabrics and other technically advanced raw
materials that are developed by third parties. In the short run, these advanced and specialty
materials are only available from a limited number of suppliers. Approximately half of the
materials used by UA in 2013 came from just six firms. The price of these materials is further
subject to price fluctuations with the fluctuation of commodity prices in petroleum and cotton.

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The availability of these materials is also subject to shortages because of the limited market for
these specialty materials.
The supply of UA apparel products is also determined by the availability and
performance of its unaffiliated manufacturing firms UA uses to produce its products. In 2013,
UA produced approximately 65% of its products in unaffiliated manufacturing firms at 26 sites
in 19 different countries. UA attempts to distribute the manufacturing of single products to
different sites in order to avoid a product outage because of a problem at one of its partner
facilities.
By using third-party firms for the manufacturing of its products, UA avoids the additional
complexity in the factors of supply that large in-house manufacturing operations would present.
Available Substitutes
The athletic apparel market is a highly competitive market in which UA faces a great
variety of available close substitutes. While no other firm can produce a branded UA athletic
apparel product, hundreds of regional and global firms produce products that are close substitutes
to UA athletic apparel. These include other firms producing branded athletic apparel from
specialty materials such as Nike and adidas; other manufacturing firms specializing in outdoor
apparel that has similar characteristics and usage as UA athletic apparel; and private label
products offered by some of the retailers distributing UA products.
Available Complements
UA athletic apparel has a variety of available complement products available. UA
athletic apparel substitutes include athletic footwear, athletic accessories, fitness software, and
athletic electronics and electronic accessory sensors.

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These products are complements because increased demand for UA athletic apparel will
correspond to an increase in the demand for these products that are used in complement to UA
athletic apparel products in recreational, intermural, and professional individual and team athletic
activities.
Demand Elasticity
Demand for UA athletic apparel products is highly elastic in the short run and in the long
run. The short run for UA is seasonal. As stated above in the factors of demand, the demand for
UA athletic apparel varies season to season. From year to year, the intensity of each season can
have a substantial affect on the demand depending on that years weather severity.
In the long run, UA athletic apparel remains demand remains elastic as consumers can
easily reduce or eliminate their consumption of UA athletic apparel products in favor of one of
the other many available substitutes in the athletic apparel and outdoor apparel markets.
Capital and Labor Intensity
UAs production is more labor-intensive than capital-intensive. UA began as a startup
with only capital raised from the founding teams families and friends. The production of UAs
products is very labor-intensive like most apparel operations; however, UA does not conduct
manufacturing in-house. Instead UA uses partner firms to operate widely distributed
manufacturing operations across 19 countries.
If considering the eternal manufacture of UAs products outside the firms production,
then UAs athletic apparel operation becomes relatively much more capital intensive. This is
because of the seasonality of UA athletic apparel demand. That seasonality means that UAs
revenue is inconsistent through the year. That inconsistency requires that UA hold cash in

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reserve throughout the year to prepare for the capital intensive run up to the fall season on high
consumer demand for UA athletic apparel products.
Technology
In UAs highly competitive market of rapidly changing materials, fabrication methods,
and designs, technology is extremely important in producing a branded product that can remain
competitive with hundreds of competitors. Because of this importance, UA owns a limited
number of fabric and process patents to protect some of the technological advantages UA
products have over competition of branded and non-branded close substitute athletic apparel
products. Without a technological advantage over other products, UAs brand would lose value
and UA would lose the price power over their branded athletic apparel products.
Market Structure
UA operates in a monopolistically competitive market for branded athletic apparel. UA
operates in a monopolistic and not perfect competitive market in part because there is
differentiation between each firms products as a function of the difference in the material and
process used in the fabrication of the products. In addition, UA is the only firm in the market hat
has the right to produce its branded apparel, giving it a monopoly over those products and that
brand. Because of this monopoly, UA has pricing power over its products to the degree that UA
branded products can compete in the athletic apparel market. UA exists in a competitive market
with hundreds of producers and thousands of retailers providing supply close substitutes.
Because of this duality of branded monopoly and high competition between close substitutes,
UA operates in a prototypical examine of a monopolistically competitive market.

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Prospectus and Conclusion
When putting the analysis of these two very different companies together, it shows how
private firms can operate to create economic wellbeing and value in vastly different market
conditions. Below, this project concludes with the long term prospectus for the primary product
of the two firms examined.
American Water
AWKs public water is essential to the economy and society in general. Because AWKs
product is a necessity for all economic activity, the prospects for AWKs water are bright as long
as the population and economic activity in AWKs markets continue to grow. Even if population
and economic growth are taken as a given, there is the possibility of difficulty for the growth of
AWKs water distribution. As noted in AWKs 2013 Annual Report, there is the possibility of
future difficulty and disruption to AWKs ability to supply water to its monopoly markets
because of the effects of drought, governmental restrictions, overuse of sources of water, the
protection of threatened species or habitats, or other factors that may limit the availability of
ground and surface water. Despite these concerns, the long term prospects for public water are
very good as increased efficiency and technological advancements in production and distribution
will ultimately provide the supply needed to satisfy growing demand in an ever more productive
and populated society.
Under Armour
The prospects for UAs products are much more complicated in the long term than those
of AWKs product. This complexity is due in part to the highly competitive market in which UA
competes. Determining the prospects fro UAs athletic apparel products is also complicated by
the importance of technology and branding in the long term success of UA products. If UA is

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able to continue to consistently create new branded products that are technologically superior to
UA products close substitutes, then UA products will have a high probability of continued
demand growth and penetration into new geographic markets into the future.

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References
American Water. (2013). 2013 Annual Report.
Under Armour. (2013). 2013 Annual Report.