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...»LCD manufacturers are screened for price fixing
Here is an example of alleged price fixing that directly affects the prices that consumers pay in the market for their durables. The European Union competition commission are alleging that manufacturers of LCD screens have been engaged in a price fixing cartel in a market thought to be worth an estimated £43bn a year. The industry is dominated by LG Display and Samsung, which together have about half the market for television and computer monitors. Phillips, Sharp and Hitachi are also heavily involved in the market along with Chi Mei from Taiwan.
LCD panels are used in televisions, computer monitors and a range of smaller electronic gadgets including mobile phones and digital music players. The investigation into price fixing has crossed several countries including US, Japan, South Korea and Europe. In theory, fines for breaches of anti-trust laws can be as much as 10 per cent of annual turn-over.
East Coast Rail Line is Nationalised
The profitable East Coast rail line north of Newcastle heading into Northumberland towards Berwick upon Tweed is one of the most glorious on the entire British rail network. There are stunning views looking out to Holy Island, Bamburgh Castle and the delightful village of Alnmouth. And as trains pull out of Durham there is a fantastic panorama featuring Durham Cathedral, a view to take the breath away whatever the weather. Even the most hardened commuter is tempted away from their laptop to soak up the view. It is unlikely that senior executives at National Express will be in the mood to savour these delights since the government is taking the East Coast rail line that runs from London to Edinburgh into public ownership.
read more...»
Mobile Takeovers - Who will gain if five becomes four?
The press is full of coverage about a possible takeover bid by Vodafone for T-Mobile UK which is currently owned by Deutsche Telekom. Nothing is certain yet - but if a takeover goes ahead and is allowed by the competition authorities, Vodafone will have around 40 per cent of the market for mobile phone users in the UK.
The approximate market shares would look something like this:
Vodafone 40%
O2 (owned by Spain’s Telefónica) 27%
Orange (owned by France Telecom) 22%
3 (owned by Hutchison Whampoa) 8%
If Vodafone and T-Mobile become one business there is one obvious cost saving (or synergy) - namely that the merged business would have to run only one mobile network instead of two, for example, so Vodafone could aim to secure significant savings in capital and operating spending. For any would-be purchaser the risk is over-paying for a business, there are plenty of examples of the ‘winners’ curse’ in past takeover bids.
The mobile phone market is a classic case of an oligopoly with just a handful of corporations dominating the market - but you do not always need a large number of operators to create genuine price and non-price competition in the industry. Indeed the UK is the only major European market with five mobile operators, and some analysts claim that the fierce battle for market share has had the effect of cutting profit margins and reducing the profits needed to reinvest in rolling out the next generation of mobile phone technology and improving the speed and reliability of a mobile phone network that needs to cope with an ever-increasing number of data-rich applications.
Having four rather than five major players looks on the surface to be reducing competition, but perhaps all of the remaining businesses will gain from higher profits at a time when the recession has hit the demand for new handsets and mobile phone services. Vodafone is a giant in the industry reporting revenues of £41bn for the year to March 31, 2009 and an operating profit of £11.8bn.
In the mobile phone service provider market there is always a balance to be struck between economic efficiency and welfare. Competition keeps prices down for consumers and helps to make fast mobile connections more affordable to millions. But the businesses themselves must be able to finance investment on enormous networks and generate a sufficient rate of return for their shareholders. It will be interesting to see how the competition authorities respond to the next wave of consolidation in the industry.
A2 Micro: Contestable Markets
William Baumol defined contestable markets as existing where “An entrant has access to all production techniques available to the incumbents, is not prohibited from wooing the incumbent’s customers, and entry decisions can be reversed without cost.”
For a contestable market to exist there must be low barriers to entry and exit so that new suppliers can come into a market to provide fresh competition. For a perfectly contestable market, entry into and exit out must be costless
Revision: Network Economies of Scale
The power of networks is becoming increasingly recognised in the economics of long run costs, revenues and profits. Network economies rarely figure in mainstream AS and A2 economics textbooks but they will have to eventually as the sheer scope of network effects is understood.
read more...»Q&A: Why do cartels often collapse?
Recent business history both here in the UK and in international markets is littered with examples of cartel-behaviour by businesses that seem to have come unstuck. Just type price-fixing into Google news and see what comes up! Even on the day I am writing this blog answer, the FT reports that three cargo airlines have agreed to pay fines totalling $214m for their roles in a global conspiracy to fix prices for air freight. Bloomberg reports that a former sales executive at Hitachi Displays Ltd. has been charged with participating in a global conspiracy to fix prices for liquid crystal displays sold to Dell Inc. And in Ireland, a former director of a Dublin car company has been given a 15-month suspended prison sentence and fined €160,000 after pleading guilty to charges of price-fixing.
read more...»Green Solutions to the Global Slowdown
There is an excellent article in The Guardian today that considers the possible ‘green’ economic policies that may pull the global economy out of recession. There are some excellent evaluative points contained in the piece for students sitting the OCR 2888 European paper this summer.
read more...»Airports for Sale - Any Bidders
The confirmation from the Competition Commission that Ferrovial will be required to sell three of their UK airports represents one of the most important competition rulings of recent years.
read more...»Negative mulitplier effects of a brutal outlook for carmakers
There seems to have been grim news from the car industry every day for the last week or so. Nissan and Jaguar are shedding jobs. In November Honda said they would shut down production for February and March, and today said they will extend that to cover April and May as well.
read more...»Airline mergers and competition policy
Today we heard of another instance of consolidation in the European Union aviation industry. Lufthansa has agreed with Michael Bishop, founder of BMI to up their stake in the UK airline from 30 per cent to 80 per cent by buying out Sir Michael’s own equity stake in the business.
Having acquired Swiss Airlines a while back Lufthansa continues to build a broader base for its operations, and in buying BMI it gains a well established mainly short-haul operator which has a significant number of scarce and hugely valuable landing slots from Heathrow. Lufthansa will emerge as the second-biggest carrier behind British Airways at Heathrow. Virgin has 3 percent of slots at Heathrow, the main airport for London; bmi has 12 percent and British Airways more than 40 percent. These land slots represent an important barrier to entry for airlines wanting the green light to expand their operations at chosen airports.
Just as a few weeks back, when the government nudged Lloyds TSB into mating with embattled bank HBoS, at times of great economic and financial uncertainty, many mergers and takeovers are born of necessity rather than excessive optimism.
And this creates a possible headache for the Competition Policy authorities who must make a judgement about whether to allow the integration to proceed without intervention or insist that the newly enlarged business divests some of their operations to ensure that the markets remain competitive.
When the survival of a business is at stake and with it thousands of jobs, are the competition authorities more inclined to turn a blind eye? The answer is probably YES and there will be many more mergers in the airline industry before the current economic crisis is over.
Tobacco price fixing
John Fingleton’s tenure at the competition watchdog the Office of Fair Trading has coincided with some huge fines for price collusion within oligopolistics markets and yesterday came one of the biggest with a tobacco manufacturer and five retailers agreeing to pay the biggest collective penalty yet imposed for price-rigging after admitting their role in efforts to boost the cost of cigarettes.The six companies agreed to pay £132m to settle the charges with Gallaher, one of two tobacco manufacturers involved in the case, shouldering the lion’s share of the burden after agreeing to pay £93m.The Times reports that “The six companies fined made prompt admissions of illicit competition practices in return for lenient fines.” - another example of game theory and the prisoners dilemma in action!
Coverage here
BBC news: Six firms fined in tobacco probe
The Telegraph: OFT’s hefty fines for tobacco price fixing
The Times: Supermarkets and tobacco firm are fined £173m for price fixing
Office of Fair Trading press release
There is a recent profile of John Fingleton here in the Times
Organic growth for Costa
It is early days yet, but the new Costa Coffee store on my local high street seems to be bedding in nicely. The passing trade has been boosted by providing free wifi access in store (I am sat here now enjoying a small latte writing this blog article) and there is a really nice open patio area behind the building for coffee-lovers to sit watching the Thames go by. The Starbucks over Windsir Bridge is fast becoming a distant memory.
Whitbread, the owners of Costa Coffee and Premier Travel Inn has announced plans today for a very large organic growth of their business - the number of Costa stores worldwide is set to double and the room capacity of their budget hotel business may grow by 50% over the next five years. How recession-proof are these businesses? Despite the increasingly congested markets for retail coffee sales (McDonald’s is making a strong pitch for some of the action) I reckon they are a decent bet providing Whitbread can keep their costs under tight control and limit price rises on the high street. With a weakening pound against the Euro, many more people are likely to holiday at home this year and next boosting the demand for good value budget hotel accommodation en route or at chosen destinations.
Yes sir, yes sir, 20,000 bags full.
They’d be in Milan too. Following on from the Terminal 5 fiasco, the Competition Commission has been triggered to publish a damning “emerging thinking” report on the (in)competence of BAA’s airport monopoly. It criticises them for “failing airlines and customers” and may eventually lead to the forced sale of several airports.
read more...»Learning Lessons from: Cento Veljanovski
On Wednesday, Cento Veljanovski spoke at the Institute of Economic Affairs on the topic of “Catching Cartels”. Dr. Veljanovski is the Managing Director of Case Associates and an IEA Fellow in Law & Economics. He has been selected as one of the “most highly regarded” competition economists globally and one of the top five in Europe by the 2006 Global Competition Review survey.
read more...»The Costs of Red Tape
The British Chambers of Commerce’s burdens barometer, published annually, shows Labour is not meeting its pledge to reduce the bureaucratic burden on business. While there have been tiny reductions in minor areas, this is balanced by the rising tide of regulation in others.
read more...»Supermarket Sweep
The long awaited Competition Commission report on the market power of the major supermarkets is published today. There is loads and loads of coverage of this .... so this blog will try to keep track of it and provide a gateway to some of the resources and comment available on the web
read more...»Clearing a merger - Game and Game Station
It was a close run thing but on the casting vote of the chairman of the investigation, the Competition Commission has cleared the merger between Game Group plc and Game Station the two largest specialist retailers of new and pre-owned video games (including new PC games), video games consoles and related accessories in the UK.
It seems that the willingness of computer games buyers to spend time looking for the best deal was the decisive factor behind the decision to allow the horizontal integration of these two businesses to go ahead.
The Enterprise Act 2002 empowers the Office of Fair Trading (OFT) to refer to the Competition Commission any completed or proposed mergers for investigation which create or enhance a 25 per cent share of supply in the UK or where the UK turnover associated with the enterprise being acquired is over £70 million.
read more...»Europe’s cartelbusters get tough
Europe’s cartel busters get tough
“Over the past three years I have made a priority of the fight against cartels. Cartels artificially increase prices of products at the expense of the European consumer, whether as direct purchasers or because companies in the middle of the supply chain have to increase their prices to pay for unfair price rises further up the chain. That’s not just illegal, it’s also deeply unfair.” (Neelie Kroes)
From condom manufacturers to producers of car windscreen-wipers, the European Union Competition Commission has been spreading its net widely in a bid to unearth and punish businesses guilty of anti-competitive behaviour within the single market. Last year alone the competition authorities levied fines on cartels of several billion Euro, the money goes into the general pot of finance available to fund EU spending.
Peter Day’s In Business programme this week interviews Neelie Kroes, the Dutch-born Competition Commissioner. It is well worth listening to. It was interesting to hear Neelie Kroes spell out very clearly how they made a conscious decision to increase the scale of the fines on firms guilty of cartel behaviour in order to change the incentives for businesses – they wanted to tip the balance between the rewards from price-fixing (higher profits during the duration of a producer cartel) set against the cost of being found out and exposed. Businesses can be fined up to 10 per cent of their annual turnover (in the USA there is also the risk of imprisonment for executives caught up in individual cases) and there is also the risk of a loss of business reputation and goodwill from being flagged up as guilty of price collusion to the detriment of the consumer.
The programme can be listened to here: http://www.bbc.co.uk/radio4/news/inbusiness/archive.shtml
EU Competition Commission
http://ec.europa.eu/comm/competition/index_en.html
Rubber firms fined over condoms
http://news.bbc.co.uk/1/hi/business/7129480.stm
BBC Radio 4 In Business
http://www.bbc.co.uk/radio4/news/inbusiness/inbusiness.shtml
Cartels in the News
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An interesting day for students and teachers of A2 microeconomics!
There were three examples today of alleged producer cartels working in different sectors of the economy. This BBC news online article reports that ‘Four of the world's biggest glass manufacturers have been fined a total of 486.9m euros (£348.2m) for illegally co-ordinating price rises.’ The colluders included Pilkington Glass based in the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />
Across the water in
