Cross elasticity: Demand for Airline Movie Systems
The increase in the price of aviation fuel is causing airlines across the world to think about how they can control costs and the obvious solution is to reduce the weight on flights to increase fuel economy even if only by a slender amount. US airways has announced that it plans to remove the in-flight entertainment systems from many of its flights in an effort to cut down on the amount of fuel - the 500lb movie systems will be discarded from domestic flights from November onwards - the decisions affects around 200 aircraft and is estimated to save around $10 million a year. It will keep movies in its widebody aircraft for international flights and trips to Hawaii (a different type of consumer demand?)
The decision is possibly bad news for Hollywood movie producers whose revenues from selling the rights for airlines to show movies might take a hit. But much depends on whether other airlines follow suit. Demand for the next generation of super-light back of seat entertainment systems is likely to grow in the coming months.
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
Cross elasticity: High speed rail and oil prices
Forget a third runway at Heathrow, we need another Terminal at St Pancras! That is the message from Carl Mortished in his world business briefing in the Times this week. Demand for hi-speed rail services is soaring as people desert short-haul flights in response to the fuel surcharges and hassle of getting through security. Traffic growth on Eurostar has increased by over a fifth in the first quarter of 2008 and revenues are up by more than 25%. Consumers are realising the advantages of travelling by hi-speed rail for cities 600 miles or less apart. His article is here:
High-speed trains seize short-haul market as fuel cost cripples the airlines
Whistles and signs of a downturn
John Moylan presented this excellent piece on the BBC news tonight reflecting on the BCC survey but also looking at two businesses Acme Whistles in Birmingham and a removals firm in the west midlands for signs of the descent into a recession. An excellent av to show perhaps at the start of next term.
The BBC website provides a handy guide to the meaning of a recession.
Starbucks and AMT
York Station this morning ...... and I just had enough time before jumping on a train bound for London KX to grab a coffee and a bar of chocolate from AMT coffee - the first national coffee chain in the UK to be 100% fairtrade. It was a great coffee at a fraction of the price I would have paid on the train itself or at Starbucks. AMT will become my default choice on future train and airline journeys. I recommend AMT to you all.
Today’s Big Question in the Independent is about the fading charm of Starbucks and one of the sections alerts us to the mystery of the short cappuccino which Tim Harford and others have written about in the past. There is a really good graphic that could be used in a classworksheet on competition in the retail coffee industry.
Starbucks on the slide
Here is a really interesting story for business economics students to follow in the weeks and months going forward. Starbucks has announced that it plans to close one store in 20 across its US branch network - meaning the loss of around 600 stores.
read more...»Commodity prices and vertical integration
“Suddenly, it is not the customer who matters; it is the supplier. The stuff that arrives at the factory loading bay is now expensive; shortages and logistical logjams are playing havoc and the company that sells you a vital commodity is digging in its heels, refusing to renew a long-term contract without a big price increase. It is time to start thinking about vertical integration. Owning every segment of the production process from metal mine to packaging plant is an unfashionable idea, but in some industries it is coming back with a vengeance.”
A really good piece here from Carl Mortished on the increasing importance to companies of having a great degree of control over their supply chains through vertical integration. There is another feature here in Forbes magazine about the shift towards vertical integration in the steel industry, and one here about Google and vertical integration.
Businesses hold the key to the next stage of the cycle
These are turbluent times for the economy - but the macroeconomic numbers of output, investment, jobs and pay are simply the aggegate of many thousands of decisions taken by individual businesses across the length nd breadth of the economy. How the UK economy emerges in the current downturn will depend crucially on the strategies adopted by the busines sector. It is a huge challenge - to make money and protect margins in a time when cost pressures are enormous, when demand might be slipping away and productivity growth is slowing down as capacity utilisation drops.
read more...»Oxbridge E&M - Management Blogs
Students wanting to keep right up to date and strengthen their application for degrees such as economics and management have plenty of online resources available to help them. My advice to sixth formers is to stay well clear of management textbooks and the sort of “Ten favourite bedtime habits of successful entrepreneurs” that litter airport book shelves! Here are a few suggestions.
read more...»Price anchoring
There is a really good article on price anchoring and the iPhone in the Washington Post today.
read more...»Will your grand-children fly?
This questions was one of many posed in the documentary film “A Crude Awakening” which I showed to my Year 13 students last week as part of our post-AS stupor! It is a well made film - winner of a prize at the Zurich Film Festival - which focuses on the peak oil theory and whether technology can come to the rescue of countries that remain fixed on crude oil and its by-products.
read more...»Newbies on Google’s horizon
Google might seem to have an unpenetrable domination of the internet search market with a string of competitors such as AltaVista, Magellan, Infoseek now apparently lying in the dust. But perhaps the search engine market is more contestable than we might assume?
read more...»Education (AQA), Education (Edexcel), Education (OCR)
After finishing my A levels in Edexcel French, OCR Economics and OCR Further Maths yesterday, I had a discussion with a friend (thanks Ben!) about why it was that our particular qualification is getting an increasingly bad name for itself. The common consensus is that the International Baccalaureate, with its six subjects and an extended essay, is a much more rigorous and challenging qualification. September 2008 sees the launch of the Cambridge Pre-U, another qualification that aims to compete against the already tainted brand of the traditional A level (bet that’s the first time you’ve heard that phrase without Labour being in the sentence… 
Oh wait.), and Imperial has just announced its plans to set its own entrance exams, its rector Sir Richard Sykes claiming that “We can’t rely on A levels any more.” In this article I’d like to explore how competition between A level exam boards breeds not excellence, but mediocrity, and I’m going to point the finger at a lesser-blamed culprit: you.
Borders v Amazon
Borders has broken away from Amazon after seven years to launch its own standalone website - the UK version is still in beta testing mode and you can sign up to be a tester ahead of the full roll-out.
According to Publishers Weekly
“Borders.com will have a total of 2 million books/DVDs/music in its inventory. In addition, in an agreement with Alibris, Borders will now offer about 60 million used books for sale. The site also features a link to its cobranded e-bookstore with Sony and has the ability to download digital audio either in DRM or DRM-free formats.”
What chance do you think that Borders has of breaking the stranglehold of Amazon in UK online book buying? Are the barriers to entry likely to prove insurmountable?
Festival Fatigue?
Hands up, how many of you have already penciled in a visit to a live arts festival this summer?
read more...»Price discrimination for Big Macs
Is the Big Mac about to be the test bed for a fresh example of price discrimination?
read more...»The new milk bag
I am off to my local Sainsbury’s later on this afternoon in search of one of the innovative milk bags developed as a response to demands from consumers for less plastic packaging in the weekly shop. Has anyone out there either bought one of these or made it work? We would love to hear from you! I will report back on the experience when I find a store with one in stock. For the moment, here is Rory Cellan-Jones, the BBC’s technology reporter making a bit of a mess of his first go with the milk bag!
Table for 6,014, please…
A new 6014 seater restaurant has opened in Syria. According to the BBC,
During the busy summer months up to 1,800 staff are employed in the 54,000 sq-m dining area and 2,500 sq-m kitchen.
Pricing the new iPhone
“Apple’s next-generation iPhone could be available in Britain for about £100 next month, as the computer company adjusts its strategy to boost sales.”
The new iPhone offering 3G internet connection and much faster download speeds is probably only a couple of months away from hitting the UK retail market. Today’s Times carries a super short article on the increased flexbility that is likely to be given to mobile phone operators when deciding how much to charge for the handset. It looks like a classic case of the mobile service providers being willing to part-subsidise the price in a bid to lock-in customers to lengthy contracts. As always, what matters is the size of the installed base from which extra revenues can flow in the months and years ahead. This piece is well worth reading.
Another Northern Rock?
Probably not but the travails of Bradford and Bingley are worth following closely. Britain’s eight biggest bank and the largest player in the increasingly fragile buy-to-let market is under severe pressure following yet another profits warning, the early departure of its CEO and the announcement of the sale of 23% of their equity to a private equity investor Texas Pacific Group. The BBC web site will be carrying plenty on this story over the coming days. Declan Curry has been reporting on this as the news came through and Robert Peston continues to break the stories ahead of the rest of the pack with his superb blog - he writes:
“A regulator also told me that, unlike Northern Rock last September, B&B’s is not suffering from a shortage of liquid funds that would imperil its future. He added that its balance sheet was not particularly weak, even without the injection of new capital.”
Bradford and Bingley’s exposed position in the buy to let market seems to be one of its key weaknesses at the moment. But the regulators will be in there swarming like wasps to make sure that the financial stavbility of the bank is better than when they failed in their regulatory duty with Northern Rock. This is little comfort for B&B shareholders asked to stump up for a rights issue and who have seen the price of B&B shares collapse since the middle of last year.
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...»Caravan of love
An unintended consqeuence of the credit crunch and the sharp depreciation in the value of sterling against the Euro is a rise in demand for fixed caravans in holiday parks across the UK and a jump in demand for motorhomes.
read more...»Revision: Market Power
This revision note is designed for AS economists - and covers aspects of market power and regulation.
read more...»Revision: Profit Max and Revenue Max
A one page revision note on the difference between profit maximisation and revenue maximisation
Revision note:
Revision_Profit_Maximisation_Revenue_Maximisation.doc
Canny pricing in a slowdown
There is a super feature on pricing strategies from Adam Jones’s management blog on the Financial Times web site - available here
Canny businesses are willing and able to adjust their pricing strategies to suit ever changing business consumers. The key seems to be in having good market intelligence about which consumers have a demand that is sensitive to price and those who spending on goods and services is affected more by changes in real take-home income. Deep discounting is often observed in an economic slowdown or outright recession as businesses look to shift unsold stock, maintain sales volumes and generate extra cash to tide them through the tough times. But as the FT blog points out, offering discounts to consumers can risk unleashing an unwelcome price war (which damages profit margins) and overly-aggressive discounting can ultimately damage the brand.
There is a bit more on pricing do’s and don’ts in a recession here
A cluster of profit warnings
Rarely a day goes by without one or more household names in the world of business, finance and commerce releasing a profit warning to the city. Listed companies are required to do so - releasing information that might materially affect the market value of their business - but the rash of profit warnings from different sectors of the economy is a reflection of the demand and cost pressures facing private sector companies. The squeeze is on and it will be interesting to see how corporate Britain reacts and responds to these challenging times.
Parcel problems ruffle Rentokil
Starbucks reports falling profits
Bovis sets out new profits warning
Downturn sparks Electrolux loss
Has competition in postal services delivered?
Two years on from the liberalisation of the postal services industry, has this supply-side policy to make the market more contestable made any noticeable difference to the quality of service, prices and investment in delivery? A new report casts doubt on the changes to the industry since the market opened up to competition at the start of 2006 to businesses such as UK Mail. Robert Peston reports for the BBC in this video clip. His feature asks whether the universal service provision is a millstone round the neck of the Royal Mail which remains in deep financial trouble.
read more...»Farewell Microhoo, we never knew you…
After three months of tight negotiations, it has finally been announced that Microsoft will walk away from its bid for Yahoo because the two cannot agree on an acceptable sale price. The whole world has been watching this proposed merger intently, as it may have been the deal to change the plate tectonics of the technology age.
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.
Haulier closes down
This ninety second video clip from BBC news is a short but powerful clip to show when discussing the effects of rising fuel prices on the profitability of a business - no bells and whistles, just a face to face interview with the owner of a haulage firm who has decided to quite because of the cost of diesel and his inability to pass on costs to consumers, the result, 21 redundancies and a firesale of the assets of the business.
