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Here is the sub-heading from the report in today’s Daily Telegraph: “Royal Mail is limiting the number of stamps it supplies to retailers now to ensure it profits from record price rises later this month.” The report goes on “Royal Mail confirmed on Thursday that it had imposed a cap on the number of stamps every shop could buy. Retailers said it was refusing to restock them when they exceeded their allocation.” Ian Murray, the shadow postal affairs minister, says that he will be writing to regulator Ofcom about this rationing of supplies.read more...»
Here is a revision presentation focusing on different entry and exit barriers in imperfectly competitive markets.
* Block potential entrants from making a profit
* Protect the monopoly power of existing firms
* Maintain supernormal profits in the long run
* Barriers to entry make a market less contestable
This is an updated revision presentation on price discrimination in markets designed for A2 micro students.read more...»
Show and explain how a monopolist maximises profit in a marketread more...»
Analyse the equilibrium price and output equilibrium under monopoly and perfect competition. Show and explain the deadweight welfare loss under monopoly and consider when a monopoly might be more productively efficient than a competitive market.read more...»
As the Royal Mail moves towards an initial public offering the business is searching for as many ways as possible of expanding their revenue base to maintain the viability of hundreds of local post offices. One service is the lucrative market for passport and driving licence photos - a product that I suspect has a fairly low price elasticity of demand, I paid £5 for 5 photos in a train station the other week! This Channel 4 news video looks at the battle between the Post Office and independent private sector photo retailers who claim the government is skewing the market against independent shops by giving the Post Office a contract to renew driving licences and threatening to do the same for passports.read more...»
It has been a bit chilly in the UK for the last few days, but nothing compared to the temperatures as low as -35 which have hit parts of central and eastern Europe. Of course, they are used to far colder winters than us, and have different ways of dealing with the weather, but reliance on gas supplies from Russia for the majority of their heating fuel leaves countries including Bulgaria, Serbia and Bosnia vulnerable to disruption in that supply.read more...»
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.read more...»
This excellent news piece from Ben Cohen at Channel 4 looks at the increasingly aggressive patent war being fought by the manufacturers of the world’s leading mobile phone and tablet devices - the most profitable products in the digital economy. “Where once the giants (Google and Apple) competed on features, they now compete on patents.”
The news feature looks in particular at the intellectual property surrounding the slide-screen technology used by millions to unlock a device. Apple claims the IP to this but a video tracked back to twenty years ago suggests that developers were already thinking of something remarkably similar long before the iPhone came into existence. Can the makers of Android defend legal claims from Apple that their IP has been infringed? And who will end up paying for the enormous legal fees and possible extra licencing costs?
A seasonal look at the methods of growth for firms, covering organic growth and the sources of external growth.read more...»
I tweeted earlier on today asking economics teaching colleagues what examples they like to use when teaching the topic of price discrimination under conditions of monopoly / imperfect competition. Thank you to everyone who contributed!
Seth Godin’s Domino Project is an attempt to re-fashion the way in which e-books are published, sold and priced. This blog is particularly interesting for teachers and students who consider different forms of price discrimination. It proposes (at least) three different price tiers:
$1.99 ebooks - a clearing price for the majority of e-books
$5 ebooks. This is the price for bestsellers, hot titles and academic titles required by courses
$10 - $20 ebooks. This is the price you will pay to get the book first, to get it fast, to get it before everyone else
What do you think? How do you see e-book pricing tactics evolving as the market grows? The UK Office of Fair Trading is currently investigating the market for e-books in the UK amid allegations of price fixing / collusion by several leading publishers. You can access the OFT investigation using this link.
Guardian (August 2011): Apple and major publishers face lawsuit over ebook ‘price fixing’
By way of background - new research has found that the average e-book price of front-list e-books across the world was €10.50 net of taxes. The average price of UK frontlist e-books was €10.80, €1.50 more than equivalent US titles, but less than those in Germany, Spain and France.
The scale of the legal battles between different businesses in the mobile industry might just be unprecedented. This nifty graphic from the iDownload blog provides an overview of the complex web of litigation - a lawyer’s dream! But if Samsung succeed in delaying the release of the iPhone5 then what might become of their reputation with millions of consumers worldwide? An Indian Summer hat tip to Graham Carter for flagging up this visual.
The aim of competition policy is promote competition; make markets work better and contribute towards improved efficiency in individual markets and enhanced competitiveness of UK businesses within the European Union single market.read more...»
Barriers to entry are designed to block potential entrants from entering a market profitably. They seek to protect the power of existing firms and maintain supernormal profits and increase producer surplus. These barriers have the effect of making a market less contestable - they are also important because they determine the extent to which well-established firms can price above marginal and average cost in the long run.
Profit measures the return to risk when committing scarce resources to a market or industry. Entrepreneurs take risks for which they require an adequate rate of return. The higher the market risk and the longer they expect to have to wait to earn a positive return, the greater will be the minimum required return that an entrepreneur is likely to demand. Economists distinguish between different types of profit – explained below:read more...»
This updated revision presentation is designed to help students preparing for markets-related topics on A2 economics specifications.read more...»
Who gains and who loses out from persistent and pervasive price targeting by businesses? To what extent does price discrimination help to achieve an efficient allocation of resources? There are many arguments on both sides of the coin – indeed the impact of price discrimination on welfare seems bound to be ambiguous.read more...»
Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs.read more...»
This revision note looks at the growth of businesses - we will be adding fresh links at the foot of this blog to recent blog entries on business growth articles and news storiesread more...»
Here is a selection of this week’s TV (and a bit of radio) that seems to have some good economics content and might provide a welcome, yet useful, break from revision.
Sunday 15th May: BBC4 8pm, ‘The Secret Life of the National Grid’ - could be worth a look in terms of economies of scale, network externalities, economic growth and the importance of infrastructure
Sunday 15th May: Radio 4 8pm, ‘The Bankers and the Bottom Billion’ - possibly some useful bits in terms of development economics
Monday 16th May: BBC1 8.30pm, ‘Panorama’ - this week’s investigative documentary looks at the illegal trade in waste electronic products following the introduction of regulations governing how we can dispose of such things - probably very good in terms of analysing a type of government failure
Monday 16th May: BBC1 9pm, ‘The Street That Cut Everything’ - looks rather entertaining as well as providing a bit of an insight into topics such as government spending on public goods and goods that generate positive externalities
Monday 16th May: BBC4 9pm, ‘The Golden Age of Canals’ - whilst at first glance this may not seem too appealing, I suspect there are some interesting nuggets in terms of networks and infrastructure spending, as well as a look at why canals fell into obsolence due to the invention of the combustion engine (some creative destruction here!)
Tuesday 17th May: BBC3 9pm, ‘Secrets of the Superbrands: Technology’ - a good look at how monopolies put up strategic barriers to entry in terms of branding and smart use of technology to achieve consumer loyalty
Thursday 19th May: ITV1 7.30pm, ‘The True Cost of a Car’ - a look at the impact on motorists of rising fuel prices and insurance premiums, which will bring in cross-elasticity of demand in a roundabout way
Thursday 19th May: Radio 4, 8pm, ‘The Report’ - a closer look at the operation of supermarkets and why there is opposition to their expansion (useful for looking at the impact of rising market power)
Friday 20th May: BBC2 7pm, ‘Wind Farm Wars’ - probably very useful for those sitting AS Unit 1 this summer in terms of negative and positive externalities of production, and the ins and outs of cost-benefit analysis
Hopefully there’s some light relief in there for everyone! All of the BBC programmes will be available on iPlayer for several days after they’ve been broadcast.
Here is a revision idea. Take a broad topic - in this case the economics of monopoly - and get students to enter items for an A to Z on that topic. Here is an A-Z relating to monopoly, I am sure we have missed out lots of ideas, can you add some in? If so please leave a comment!read more...»
A revision note on aspects of industries in which there is strong market power among one or a few businesses. Most markets are competitive with a number of suppliers (producers) competing for the demand of consumers. Some are more competitive than others. At AS level it is important to understand some of the factors that lead to market (monopoly) power and to evaluate the costs and benefits of markets where monopoly power exists together with the effects of different types of government intervention. The revision note is available to download here: Revision_Market_Power.doc
Here are some links to recent news stories on competition and monopoly issues in the UK and the EU Single Marketread more...»
Has the growth and development of the European Union single market and the Euro accelerated a process of price convergence within the EU? Price convergence means that the gap in prices for the same good or service has come down and in theory, having one currency and an open market ought to bring down the extent of price variations. Our Timetric chart below tracks what has been happening to the price convergence indicator. A fall in the measure indicates a coming-together of average prices.read more...»
Designed by and designed for women, L. is among the first woman-run condom enterprise that sells all natural male condoms for women. Inspired by work in Africa where nine out of 10 African countries goes without condom supplies for more than two months here is an interesting example of an attempt to break into the dominant monopoly of the major condom manufacturers such as Durex.
Here is a fantastic piece from John Cassidy - author of Why Markets Fail - a simply terrific investigation of the different ways that we can measure the rate of return for different business activities. Apple employees earn a lot less than Goldmans’, despite generating a much higher return.
Martin Hickman’s Consuming Issues column in the Independent this weekend has a piece on some of the tactics used by retailers to take commercial advantage of many of our behavioural biases.
These pricing tactics include:read more...»
The European Commission has launched an investigation into Google after other search engines complained that the firm had abused its dominant position.
The EC will examine whether the world’s largest search engine penalised competing services in its results…
Obviously, Facebook is not a monopoly in the pure sense - there are, of course, other websites on the internet! However, students studying A2 Economics will be well aware that the working definition of a monopoly, as used by the Competition Commission, is a firm with more than 25% market share.
Imagine my surprise, then, when I read this short article from the Boy Genius forum. According to a recent report filed by Experian’s Hitwise group regarding internet usage in the US during the week ending 13th November, one of every four page views took place on facebook.com.
This could spark an interesting discussion on whether the 25% definition is necessarily a useful benchmark in all markets. Does Facebook have any degree of control over the internet?
There is a fascinating piece here from the World Street Journal Blog on the inexorable rise of a new breed of internet monopolist - businesses with dominant positions in their industry space that millions of people cannot do without from day to day and where the effective barriers to genuine competition are pretty fierce. The article emphasises the importance of first mover advantages and also network economies of scale - a demand-side economy of size that normal economics textbooks are slow to introduce into their coverage.
“It’s hard to avoid the conclusion that we are living in an age of large information monopolies. Could it be that the free market on the Internet actually tends toward monopolies?.....Internet industries develop pretty much like any other industry that depends on a network: A single firm can dominate the market if the product becomes more valuable to each user as the number of users rises. Such networks have a natural tendency to grow, and that growth leads to dominance.”
More here “In the Grip of the New Monopolists”
In a related article Edmund Conway (now based in Washington) discusses the power of disruptive technologies and the huge take up of the Apple iPad among people many of whom have never bought a laptop before. A hat tip to my colleague Tom Allen for spotting this one.
Time Magazine has listed the iPad as one of its top fifty innovations of 2010 - more here
I have started using Google docs as a tool for collaborative work between my students. It is early days yet but my aim is to set a discussion question once a week for each group to contribute to, I will credit students for the input they have having reflected on the edit history for the document. Here is our first attempt.
The expansion of Google and the economics behind their growth strategy offers interesting avenues for study as part of your A2 micro course. This document asks a simple question “Which industry is Google in?” The answer(s) will reveal much about the nature and ambition of Google as a business and the economics of contestable markets and monopolistic markets. The full document can be downloaded below as a pdf file.read more...»
The Telegragh today has a piece on our good friend Will King from King of Shaves. KoS have entered into a joint venture with Spectrum Brands Holdings, Inc., owner of Remington branded electrical shaving, grooming and styling products (remember Victor Kiam’s famous ads?) in a bid to establish a stronger foothold in North American markets that have been dominated for decades by Gillette and Wilkinson Sword.
The article is a timely reminder of the entry barriers that exist when seeking to enter overseas markets. From previous experience, Will King has learned that the market dynamics of the USA are decidedly different. To win orders from retail giants Walmart and Target you need scale, heavy marketing spend and reach. It will be fascinating to see how the KoS brand does in the months ahead.
Since Will King created the Original Shaving Oil in 1993, King of Shaves has grown to become the number two ‘shaving software’ brand in the UK, and is the fastest growing brand in its market place. A King of Shaves product is sold every seven secondsread more...»
The retail market for the latest TVs, gaming consoles, electronics and other gadgets has just become more contestable!
Best Buy the giant US electrical retailer has announced that it is planning to launch an entry into the retail market for electrical appliances in a move that will potentially shake up the consumer electronics market which has been populated and dominated for many years by high street regulars such as Currys and Dixons, more recently by Amazon and Play.com. Best Buy’s huge economies of scale have made it relatively easy to enter the UK market. They bought a 50 per cent stake in Carphone Warehouse last year and they have already opened five new “bricks and mortar” stores in Essex, Birmingham, Southampton and Liverpool in the past few months.
Their next move is to establish an online presence in the UK and it seems this will be up and running in time for the lucrative Christmas buying period. More here in this article from the Independent.
Just Giving has become the market leader in web sites offering charities a platform for raising money online. By some estimates they take over eighty per cent of total charitable giving done online. But there are complaints that Just Giving is abusing their dominant position by charging higher fees that other comparable sites for taking donations - they claim 5pence in every £1. Nigel Cassidy provides this brief video report. A hat tip to Gareth Williams for spotting it. Gareth writes on his Twitter account “Just Giving, an example of abuse of market power or do the consumers benefit from extra dynamic efficiency of a monopoly?”
Our revised presentation on monopoly price and output is available in three formatsread more...»
It is already common knowledge that Google is by far the biggest player in the internet search market (with an 83% share globally at last count). In fact, their search is one of the few products that are so ubiquitous that its name has become a verb. Think about it - would you naturally say “search for it” or “Google it”? Surely, this is the ultimate form of monopoly power.
However, many will be less aware of the web giant’s rapid growth in other markets, namely those for internet browsers and smartphone operating systems. Here are links to two articles from the blog Engadget which show how Google’s innovation and rapid product development have made them increasingly competitive in markets that until recently were dominated by other large firms. This could be good as a starter or mid lesson stimulus for a lesson on competition, barriers to entry or even growth strategies of firms.
Incidentally, I am one of the many who have bought into the Google franchise and use both the Chrome browser and an Android phone. I have found both excellent so far!
Whenever you are studying or teaching the external growth of a business, head over to Wikipedia and check out the list of corporate acquisitions that cash-rich Google has made in recent times. It is an enormous list and one that extends with every passing year. Business Insider focuses on Google in their daily chart
This supporting article considers some of the motives behind the boom in acquisitions - not least the desire to attract experts into markets where Google has no substantial track record.
A further article here takes you through the details of each acquisition - trying to work out where each investment fits into Google’s growth strategy
Cross posting from the Business Studies Blog
If you ever need to point students to some real-life examples of technological innovation in action, use this new list produced by the Guardian. Some great case studies here of how technology can be used to identify new value-added services for consumers & businesses, as well as challenge the existing business models of market leaders.
The underlying theme seems to be that technology is enabling these businesses to overcome barriers to entry in a market and quickly become quite disruptive to the established operators. Not all of these businesses will survive and thrive, but some (e.g. Spotify) are already household names and others may soon achieve that status.
Google has 65% of the global web search market and a dominating presence across wide acres of the internet. Last week they launched Google Instant which produces web search results as you type and claims to lower the average time spent searching for a specific site or resource. Rory Cellen-Jones provides some of the commercial background behind this innovation in a BBC News 24 interview - he makes the point that search is the only activity that actually makes Google much money so they simply have to keep expanding what is possible to refine and speed up their search engine technologies. This is a good example of an improvement in dynamic efficiency in the market - to the wider benefit of millions of web users.
Joseph Schumpeter would be proud. The creative side of his destruction is still going strong - Samsung have released a “tab” to rival Apple’s iPad - but is it any good or is it just wasteful expenditure recreating the same? On “paper” it seems better with more capabilities than the iPad… but brand loyalty can be a big attractor…
See the video clip comparison here.
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.
When a friend’s Facebook status mentioned a website offering loans for a TV at 2689% APR, I was intrigued. It sounds astronomically high, doesn’t it? – The answer, as always in Economics, is that “...well it depends…”
Firstly, APR stands for annual percentage rate and is the interest payable on the amount borrowed and other charges expressed as an annual rate of charge.
Secondly, the website in question is called Wonga.com - “Wonga provides small and super-flexible loans around the clock. We’re here to help solve urgent and short term cash flow problems.
Wonga’s business model is based on lending money (maximum £400) for short durations (maximum 30 days).read more...»
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.
Yesterday, it was announced that valued by market capitalisation, Apple has now surpassed Microsoft to become the biggest tech company in the world with a value of $222 bn. Schumpeter would be pleased to know his creative destruction is still in full flow!
This video would make a good starter for revising growth of firms.read more...»
In recent times 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...»
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 eachread more...»
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.
The Times has an article on alleged price discrimination tactics by Tesco using it’s One Stop branches.read more...»
A hat tip to Kevin Hinde at Durham for spotting this article in Free Exchange at the Economist
“Wal-Mart clearly has market power, which it occasionally uses abusively, if not necessarily illegally. But sometimes, it uses its market power to accomplish things government entities are unwilling or unable to accomplish—pressing environmental standards on its suppliers, for instance, or reining in abusive lenders.”
A good example to use when evaluating the economic and social welfare aspects of monopoly power