Pepsi and Vertical Integration
Here is a great example for the revision notes on business growth. PepsiCo which also includes the Tropicana and Gatorade brands within its business has made a $6bn cash and stock offer for the Pepsi Bottling Group and PepsiAmericas. Pepsi already owns sizeable equity stakes in both of these huge bottling businesses - but it has taken advantage of the low stock market and a handy cash mountain to make a takeover bid. It is a classic case of backward vertical integration and a report in the Financial Times says that PepsiCo expects the integration to cut costs by about $200m annually. Britvic is PepsiCo’s bottler in the UK. Keep an eye out for Britvic making a move on smaller bottling companies elsewhere in the European Union.
You Tube’s Losses
Is there a better daily source of insight and cracker-jack examples to use in the classroom than the Lex column in the Financial Times? One of today’s pieces focused on Google - described as a one-trick pony - and also the loss-making You Tube. You can dominate a market and be regarded as a huge success - but make eye wateringly large losses at the same time.
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...»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...»Q&A: In what type of market does the iPod operate in?
Q&A: iPod and Market Structure: In what type of market does the iPod operate in?
In this answer I will assume that we are discussing the market for personal digital audio and video media players. Keep in mind that music can be downloaded (legally and illegally) in numerous ways such as the iPod, smart phones and standard laptops.
read more...»Requiem for DRM
Most people who by default use iTunes are unaware that it is about to change, in a big way. At Macworld, the most important technological conference for Apple consumers (which ironically will no longer feature an appearance of Apple from now on), Phil Schiller (Apple’s vice president of product marketing) has announced that two major changes were going to be made with the most used music download program in the world. Firstly there would no longer be any DRM, and secondly there would be a new three-tier pricing system. Of course all Apple aficionados who were present at the conference rejoiced, but that is a something that can be ignored since they would have done so no matter what the Apple representative on stage would have said (yes, they’re that devout to the company…).
read more...»SPEW
A hat tip to a fellow presenter on our revision workshops in London whose acronym to remember some of the effects of monopoly power in markets struck a chord with me
SPEW
Service - does the lack of competition affect the quality of service to consumers?
Prices - how high are prices compared to competitive / contestable market
Efficiency - productive, allocative and dynamic
Welfare - what are the overall welfare outcomes? Is there a net loss of welfare in markets dominated by businesses with monopoly power?
Are there anymore useful revision acronyms out there that you use? Please share them via the blog!
Barriers to Entry
In business there are often important barriers to entry which act to limit the ability of businesses to break into new markets. The Bottom Line on Radio 4 this week considered the existence of these barriers. Leading the discussion was Will King, the founder and CEO of KMI King of Shaves, the innovative UK-based personal grooming business that has successfully broken into the shaving product markets and whose new four bladed razor is now number three in handle sales to Gillette. King mentioned that there were over 20,000 patents in the razor and personal grooming industry including mechanical hinges on the construction of razors which requires new entrants to design their way around the patents.
The panelists on the programme discussed a number of other entry barriers - among them:
1. Intellectual patents and ownership of technology - but patents are needed to provide an incentive to invest
2. Expertise and reputation of the incumbent - intangibles
3. Licences are important such as professional qualifications
4. Inherent suspicion among consumers about new ideas - behavioural economics tells us that many people are quite happy with their default choices - it may take a while for any change in preferences to occur.
5. Regulations and legislation involving employing people - a major barrier for fast-growing smaller businesses many of whom are highly innovative
The Bottom Line is always worth a listen - the podcast is available for free from iTunes. And this weeks programme also considered which kinds of sectors will weather the storm and do well in a recession? The different nature of a recession this time around may well give us a clue to the likely winners from the downturn especially with credit so hard to find.
It was thought that successful businesses during the current downturn would tend to be:
1. Agile and entrepreneurial, customer centric
2. Businesses with low debts and those who are cash rich - cash flow management is becoming critical - cash flow forecasts will come under increasing scrutiny.
3. High energy businesses that swim against the tide
4. Knowledge building companies
The Bottom Line
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.
BAA faces break up after Competition probe
Michael O’Leary, CEO of Ryanair has called it the ‘best decision in the history of aviation ever.’ Colin Matthews, Chief Executive of BAA has slammed it as ‘flawed’. The Competition Commission has delivered a report which suggests that BAA should see three of its UK airports including two in London and one at either Edinburgh or Glasgow.
read more...»Get me to pay day - ok - but it will cost you 1500%
Quick cash, cash rush, same-day-money, get me to pay-day, pay-day express - the brand names of the pay-day loan market which claims to provide an essential service for cash-strapped people who need an injection of liquidity to cover unforessen spending and avoid high charges on unauthorised overdrafts. Whatever the social value of providing such cash funds to those in desperation the rates of interest charged on the loans are incendiary to say the least and it is little wonder that the Office of Fair Trading is expected to investigate this segment of the home finance industry.
read more...»A2 Economics revision - The Great Energy Rip-Off?
Are power companies ripping off UK consumers?
Writing in last week’s Times on May 21st, Robin Pagnamenta explores whether there is evidence that UK energy companies are engaged in tacit collusion.
read more...»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...»Revision: Natural Monopolies
This revision note is aimed at A2 economics students and those studying for the International Bacc. It looks at the idea of a natural monopoly and considers examples of industries with characteristics of natural monpoly in Britain and how competition policy has sought to oversee efficiency and welfare for producers and consumers.
Revision note:
Revision_Natural_Monopoly.pdf
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...»
