Unit 3 Micro: Oligopoly and Duopoly in Bus Markets
The UK Competition Commission has published an important report into the market structure of local and regional bus services in the UK, twenty five years after the industry was deregulated and largely privatised. Coverage of the report can be found here (BBC news).
Largely as a result of a long-term process of consolidation through merger and acquisition, the UK bus industry is found to be highly concentrated with five businesses dominating the sector even though more than 1,200 businesses provides services.
The five largest operators (Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach) carry 70 per cent of those passengers. The CC also found that head-to-head competition between operators is un-common and that-on average-the largest operator in an urban area runs 69 per cent of local bus services - effectively a monopoly position.
Competition Plan for Universities
So the Universities White Paper has been published. Words like “Competition” on news feeds instantly make me sit up and take notice. As my Year 12s embark on their odyssey into market structures and ever more close encounters with efficiency, I think this might just be the case study of the moment. After all its subject matter is foremost in many of their minds.
read more...»A2 Micro: Market Structure, Conduct & Performance
This updated revision presentation is designed to help students preparing for markets-related topics on A2 economics specifications.
Market Structure Conduct & Performance - revision presentation
Download printable (pdf) slide handout
read more...»A2 Micro: Competition and Efficiency
Are highly competitive markets most likely to lead to outcomes that achieve economic efficiency? The common characteristics of markets that are considered to be “competitive” are:
read more...»Soap powder cartel leaves stain on colluders
The EU Competition Commission got into a LATHER about alleged price fixing by a number of multinational soap and washing powder producers and in a ruling today they have imposed fines on Unilever and Procter & Gamble €315.2m ($456m) for fixing washing powder prices in eight countries within the single market. An investigation was prompted by whistle-blowing from Henkel, a German competitor (manufacturer of Persil) and so the investigation CYCLE began. Unilever was fined €104m and Procter & Gamble was fined €211.2m. Henkel was not WHITER THAN WHITE but under EU cartel rules, it avoided a hefty fine because of alerting the authorities to the price fixing scheme.
read more...»A2 Micro: Updates on Competition Issues
Here are some links to recent news stories on competition and monopoly issues in the UK and the EU Single Market
read more...»Regulation and the banking industry: reflections from Davos
If, like my school, you haven’t entered students for Unit 3 in January but are teaching both A2 units side-by-side for June examination, you might be looking for examples of competition policy and regulation to offer your students in the coming weeks. The report of the Independent Commission on Banking and the focus on regulation at last week’s Davos meeting are very well timed; this report filed today by Tim Weber of the BBC gives a neat summary of the time leading up to Lehman’s collapse, and offers a rather chilling conclusion from informal dinner-table discussions with the world’s top bankers that it is unlikely that regulators can, in practice, untangle the systemic risks in the financial system that make it imperative for government’s to step in and support failing banks.
If you would like to follow this up as an example with students, you might try some of the following links. There are numerous articles assessing the report of the ICB - just a couple are given here.
read more...»Yet another airline cartel story…..
Just in case you wanted one more example of price fixing, cartels, collusion and whistle blowing, here it is. The EU has boosted its revenue for the year by fining 11 airlines almost 800m euros for fixing cargo prices between 1999 and 2006. AirFrance-KLM are hit the hardest, at 340m, followed by BA at 104m - but Lufthansa, who blew the whistle on the other airlines involved, are not fined at all.
read more...»OFT limits ASDA’s expansion plans
An ideal and up-to-the-minute example of the UK’s competition policy in action as the OFT decides on Asda’s proposed takeover of 194 stores from discount retailer Netto. A great example for A2 microeconomics.
read more...»Behavioural economics and competition policy
Here is a link to a recent research report from the Office of Fair Trading. It provides a very readable introduction to what behavioural economics is and then asks whether this emerging area of economic thinking can have useful applications in the shaping and handling of competition policy. Great for teachers who want to introduce some behavioural aspects into their teaching of competition policy issues in the UK and in other countries.
Groceries adjucator checks in
The BBC business news site reports on the set up of a new body to police supermarket code of practice for suppliers - catchily called the Groceries Code Adjudicator that will sit within the Office of Fair Trading (OFT).
For many years there has been a long running saga about the buying power (monopsony power) of the major supermarkets when purchasing from farmers. Dairy producers have complained that the supermarkets have squeezed prices to such an extent that they can no longer make money - many have left the industry. The supermarkets respond that many of the complaints come from lobby groups that have no day-to-day experience of the farming/retail relationship. They claim it is simply not in their own interest for commercial relationships with the farmers to threaten the economic viability of the farming industry. The long running row over whether supermarkets abuse their dominant relationship with some farmers and food suppliers will rumble on.
Jim Paice - UK farming minister argues that “The new adjudicator will help to strike the right balance between farmers and food producers getting a fair deal, and supermarkets ensuring their customers can get the high-quality British food they want at a price they can afford.” Critics argue that an adjucator is not needed and it will become another costly quango and a cause of government failure.
EC on IBM
The European Commission has launched two competition inquiries to study whether IBM has abused its dominant position in mainframe computers. The study will examine whether IBM has put obstacles in place that prevent competitors from operating freely. The other inquiry, launched by the Commission itself, will look at IBM’s relations with maintenance suppliers.
Economics of Gambling
Earlier this month, the Economist did an in-depth special report on gambling with lots of good ideas for discussion:
- is gambling chance or luck?
- game theory and poker - can it be solved?
- The effect of the recession on casinos: When the chips are down
- growth of Asia’s gambling
- Government policy and the Internet - the effects on the gambling industry.
A2 Economics Revision - Efficiency and Price Intervention in Markets
In 2007 the European Union Competition Commission introduced maximum prices for the roaming charges made by mobile phone service providers. These are the rates charged by one operator to another to enable its customers to make calls while visiting another country. Evaluate the view that a policy of price capping for European Union mobile phone operators will lead to an improvement in consumer and producer welfare (25 marks)
read more...»A2 Economics Revision - Changing Pattern of Global Trade & Investment
This new streamed revision presentation guides students through some key evaluation points on the changing patterns in global trade & investment. Ideal for A2 revision.
Revision Presentation on the Changing Pattern of Global Trade & Investment
Record fines for tobacco price-fixing as cartel goes up in smoke
Today the Office of Fair Trading (OFT) has given out the largest ever total fine in a case under the UK Competition Act 1998.
A huge fine has been imposed on two two tobacco manufacturers and ten retailers engaged in illegal price fixing for tobacco products in the UK.This is a good example of the financial risks that companies face when found guilty of anti-competitive behaviour. The tobacco manufacturers involved are Imperial Tobacco and Gallaher, and the retailers are Asda, The Co-operative Group, First Quench, Morrisons, One Stop Stores (formerly T&S Stores), Safeway, Sainsbury’s, Shell, Somerfield and TM Retail.
Imperial Tobacco was fined £112m and Co-op and Asda were penalised by £14m each
read more...»Ofcom bares its teeth
The telecoms regulator OFCOM has had a busy pre-Easter week with two notable competition policy decisions that will impact directly on consumers
1/ Ofcom orders BSkyB to make a 23.4% cut in the (wholesale) price of Sky Sports 1 and 2 to rivals such as Virgin Media and BT. Little surprise that Sky has responded that it will challenge the ruling.
2/ Ofcom orders mobile phone companies to cut the cost of termination charges - levied when people phone different networks from 4.5p to 0.5p by 2015. Mobile termination rates are the wholesale charges that operators make to connect calls to each others’ networks.
These are two excellent examples to use in any essay on price capping in markets where there is monopolistic power. But will consumers reap the benefits in the long term? Or is the cap on Sky’s prices for live sport and movies merely a hidden subsidy for couch potatoes?
OFT report finds welfare gains from liberalising pharmacies
The OFT has produced a new report looking at some of the welfare and efficiency effects of the decision to liberalise the retail pharmacy industry in the UK. The report finds that “Partial liberalisation of the pharmacies market has brought significant benefits for consumers, including shorter waiting times, a greater choice of pharmacies and extended opening hours….the number of pharmacies operating in England has risen by nearly nine percent. Fears that enabling easier entry would lead to large numbers closing have so far proven unfounded.”
The wider availability of supermarket pharmacies on spending by consumers on over the counter medicines has led to conservatively estimated annual savings of around £5m. In the UK retailers have been free to set their own price since resale price maintenance (RPM) on branded OTCs such as pain killers and flu relief tablets was abolished in 2001.
The largest share of any one company is now that of Boots (18.3 per cent), following the merger with Alliance Unichem (owner of Moss Pharmacies) to form Alliance Boots in 2006. In-store supermarket pharmacies – account for almost 7 per cent of the total.
Microsoft finally promotes choice!
Its been a long time coming, but finally, after years of wrangling with the EU Commission, Microsoft today has begun to offer the consumer choice as to which internet browser they wish to use. After accused of abusing its monopoly position by bundling its own Internet Explorer browser with its operating system, as discussed in this article, it is now offering a pop-up window to prompt people to choose and install one of 12 different browsers or let them stick with Microsoft’s Internet Explorer; although no doubt there will be inertia and a status quo bias. There is also now the fear that the browser choice system will confuse people. There’s no pleasing some people…
Google is the new Microsoft
With an 80-90% market share in online search, Google is increasingly becoming the new Microsoft in the world of anti-trust legislators. It has again come under scrutiny, as discussed here in the FT, this time accused that its search algorithm discriminates against certain competitors.
read more...»OFT on Orange T-Mobile
In September last year, this entry discussed the Orange-T Mobile merger; and as expected, the UK’s Office of Fair Trading have today requested an official investigation into it.
“The OFT’s initial view, following consultation, is that the joint venture threatens significantly to affect competition in mobile telecommunications in the U.K.,”
Intel sued by FTC
At the end of December, the US Federal Trade Commission decided to sue Intel for anti-competitive behaviour, accusing the world’s biggest chipmaker of abusing its dominant market position over the past decade. “Intel has engaged in a deliberate campaign to hamstring competitive threats to its monopoly,” said Richard Feinstein, director of the FTC’s Bureau of Competition. This is an excellent case study of the potential anti-competitive behaviour by monopolies in the market place.
read more...»New Regulatory Agencies Begin Work Today
In A2 micro today we were discussing price-capping by industry regulators as a way of overcoming some of the welfare losses created by monopoly. The new much-expanded regime of regulatory agencies charged with monitoring prices and setting caps when appropriate is available here - can colleagues suggest some more? !!
read more...»Ticketmaster-Live Nation merger provisionally blocked by the CC
This morning, the Competition Commission announced that it has provisionally moved to block the merger between Ticketmaster (the world’s largest ticketing firm) and Live Nation (the world’s biggest concert promoter).
read more...»Price elasticity of demand for stamps
The BBC reports that PostComm - the postal service industry regulator has given initial backing for Royal Mail to increase the cost of a standard first-class stamp by three pence. This would take the price up to 42p. At the same time, standard second-class stamps may rise by 2p to 32p. How will consumers respond to the price change? For many the price hike will have little effect - most of the stamps that I buy can be reclaimed as stationery expenses. But many smaller businesses spend heavily on mailshots as a part of their marketing. A rise in mail costs may cause them to consider making more effective use of their customer databases so that - for example - a 3000 mail shot volume is better targeted than before. Do you think that the price elasticity of demand for stamps is price inelastic - at least in the short term?
The Royal Mail is subject to a price cap agreed with their industry regulator. Since the Royal Mail?s current price control was agreed in 2006, the Royal Mail has lost 9% of its mail volumes over the three year period to April 2009, largely through shrinkage of the total market including 20% of stamped mail. The Royal Mail has also had to face up to increased competition as the postal market has been fully opened up to competition.
Shrinking mail volumes has the effect of reducing capacity utilisation of their collection, sorting and delivery capacity and leads to a rise in the unit costs of the business. The Royal Mail is required by law to operate a universal service across the UK; it is a business that requires substantial economies of scale to remain profitable.
World Trade Organisation
Whilst unlikely to be fully resolved any time soon, the WTO has got around to producing its (unhelpfully, confidential!) ruling on whether European government loans to Airbus for aircraft development are illegal subsidies or not.
read more...»Oracle-Sun merger
Despite getting clearance from the U.S Department of Justice, earlier this month, Europe’s top competition regulator today opened a full, in-depth inquiry into the proposed $7.4bn acquisition of Sun Microsystems by Oracle, citing concerns about the potential for anti-competitive effects if the merger went ahead unconditionally.
read more...»Browser Wars!
Over the summer, it seems that the browser wars have intensified, and Microsoft’s Internet Explorer’s virtual monopoly has its days numbered. Earlier this year, Google brought out its Chrome browser, to rival Microsoft’s Internet Explorer, and today it was announced that Google have signed a deal to get it in to Sony PCs.
read more...»Microsoft to offer users a choice of browsers
The battle between Microsoft and the EU competition commission seems to have gone on for an age. In the latest move Microsoft has agreed to contact European users of its Windows software to a choice of Web browsers. The browsers featured in the ballot would be determined by market share; the five with the highest—at the moment, Internet Explorer, Firefox, Apple Inc.‘s Safari, Opera and Chrome—are almost certain to be displayed. What is critical is the number of web users who then decide to switch to an alternative browser and click on an option for Microsoft IE to be removed as the default web browser. My default choice is now Firefox from Mozilla. Windows 7 is due for release on the 22nd of October.
OFWAT wants cuts in the real cost of water bills
The water regulator OFWAT has published their latest five-year price capping proposals for the UK water industry. They want household bills to fall in real terms for water customers in England and Wales - positive news for people struggling to pay their utility bills but not so for shareholders in the water companies who have become renowned for their generous dividends on the back of price increases over and above inflation in past years.
read more...»
