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Contestable Markets - Google launches the Nexus One

Wednesday, January 06, 2010

Google has launched the Nexus One a “super phone” designed to challenge the established dominance of smartphones such as the iPhone, Blackberry and Palm Pre. For £330 buyers anxious to own a Nexus One without locking themselves into a lengthy contract with one of the major mobile phone operators can have a phone delivered that can run on any network. 

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Is UK manufacturing turning a corner?

Monday, January 04, 2010

Whisper it quietly but there are signs of a rebound in orders and production in UK manufacturing industry. In recent weeks we have seen a cluster of articles suggesting that some of the industrial production that left the UK during an age of out-sourcing is now starting to return home. Having plunged last year manufacturing output appears to have stabilised and today we heard news from the Chartered Institute of Purchasing & Supply’s purchasing managers’ index that UK manufacturing activity grew at its fastest pace in more than two years in December 2009.

Last week, a survey by the Engineering Employers Federation revealed that one in seven British companies had repatriated manufacturing operations to the UK in the past two years. Keep in mind that manufacturing contributes less than 12% of UK GDP - although many service sector jobs and businesses depend directly on the health of the industrial sector. Manufacturing may be making a comeback because of:

1/ Sterling: The weaker value of sterling against the Euro and the US dollar has given manufacturing industry a competitive boost

2/ Relative costs and supply issues: Higher than expected costs and quality problems have been cited by some businesses that have outsourced some manufacturing - high wage inflation in fast-growing emerging market countries has narrowed some of the unit labour cost gap between the UK and rivals

3/ Oil and transport costs: The high price of oil has increased the cost of shipping goods around the world encouraging producers to focus output closer to the market

4/ Overseas markets: Signs of a recovery in some of the UK’s main export markets - the majority of manufacturing production in the UK is exported, manufacturing industry in Britain is sensitive to the global economic cycle

Sunday Times (3rd Jan) Made in Britain: How manufacturing is returning to the UK

Scotsman: 15% of British firms switching production back to UK

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Assorted Links (31 Dec 2009)

Thursday, December 31, 2009

1/ Firms move production back to UK (BBC news) based on a new report from the Engineering Employers Federation

2/ Japan pledges to end economic spiral (The Times) - The ten-year plan would see Japan shift some of the focus of its giant economy, with new emphasis placed on environmental technology, science, tourism and medical care.

3/ Economics emerges from the rubble in fragile state (Larry Elliot in the Guardian)

4/ Freakonomics meets More or Less (BBC Radio 4) - Tim Harford gets together with Steve Levitt for a special edition of the excellent Radio 4 programme

5/ Counting the cost of high speed trains (BBC Global Business)  - how large are the economic and environmental benefits of investment in new high speed trains?

Complementary demand for virtual goods

Wednesday, December 30, 2009

Many millions of people enjoy playing online games and for social game developers a hugely important source of revenue is from the sale of virtual goods. The trading of virtual goods within games is a global industry worth over $10 billion a year. Here is a good example of complementary demand in markets - regular gamers are happy to purchase seeds, tractors and coins using real money to help them get ahead in their favourite game. This BBC news feature argues that virtual goods are one of the hottest trends in technology and are fuelling huge growth in the social gaming sector. 

There is a fascinating lecture at the RSA early next month - Fun Inc.: Why games are the 21st century’s most serious business - details are here. Tom Chatfield’s new book is available here from Amazon.

Business Growth - Costa Looks East

Friday, December 18, 2009

Here is a really interesting example of external growth through horizontal integration with a highly successful UK drink and leisure business seeing expansion opportunities in Central and Eastern Europe. Costa is paying £36million for Coffee Heaven a business that has 90 coffee shops in Central and Eastern Europe, comprising 62 shops in Poland, 14 in the Czech Republic and 14 across Bulgaria, Hungary and Latvia.

Costa has more than 1,000 stores in the UK and more than 400 internationally and its stores account for around 25 per cent of Whitbread’s total revenues. All its international stores are operated under franchise. Costa is a wholly-owned unit of Whitbread, the U.K.‘s largest hotel and restaurant company operating brands in the budget hotel, restaurant and coffee shop sectors, whose brands include Premier Inn, Beefeater and Brewers Fayre. Premier Inn is the key part of this business - its fortunes essentially drive the company’s share price.

2010-11 should see a number of CEEC countries emerge from a turbulent and difficult macroeconomic period. And as per capita incomes rise, the potential for growth of market demand in high street coffee stores in many of the EU’s new member states ought to be high. That said Coffeeheaven has made net losses in each of the last seven years - Costa will be hoping that its greater financial resources and economies of scale will help to bring the business back into profitability. Whitbread has an annual capital spending in excess of £300million, so the £36million paid for Coffee Heaven looks small in comparison.

Cadbury’s share of UK confectionery market melts away

Thursday, December 17, 2009

Embroiled in what looks likely to be a protracted takeover bid from Kraft, Cadbury’s has suffered a blow with the news that its share of the UK confectionery market has dipped below 30 per cent for the first time in a while. The Times reports that Cadbury’s chunk of the chocolate market by value slipped 1.7 per cent to 29.8 per cent last month, the first time that it has fallen below 30 per cent all year. Market share of Mars, its biggest rival, slipped 0.6 per cent in the period. There are signs that aggressive pricing of basic chocolate bars by discount retailers such as Aldi and Lidl is having an effect; so too is the growth of sales for own-brand bars offered by Tesco, Sainsbury’s and the ongoing battle for customers between Waitrose and Marks and Spencer. Some customers have complained about a 75% rise in the price of a 230g bar of Dairy Milk in the last 12 months. High world cocoa prices have explained some of the price hike but Cadbury’s tactic of launching a new 100g bar priced at £1 had led some to claim that their are deliberately trying to anchor their prices at a higher level to raise profit margins as a defence against the takeover bid. The decline in market share suggests that chocoholics are more price sensitive than Cadburys might have forecast.

The steady (but inexorable) decline of a web monopoly

Wednesday, December 16, 2009

This new chart from Barclays Capital shows the steady but sustained decline in the global market share for the internet explorer browser.

For years Microsoft has been in dispute with the European Union competition authorities over alleged abuse of its dominant position in the browser market. From now onwards, it will now offer European users a choice of web browser options like Apple’s Safari, Google’s Chrome, and Opera, in addition to its Internet Explorer (IE). Mozilla’s Firefox now has a quarter of the browser marke and Chrome has made a good start in this increasingly contestable market. Google is positioning Chrome as both a browser and an operating system - a real challenge to the Microsoft model.

Deindustrialisation - 10 US Industries in Jeopardy

Monday, December 14, 2009

A fascinating analysis from Business Insider highlights 10 major industries that have been a core part of the US economy which seem to be in terminal decline.  A great resource to begin a lesson looking at issues of business costs, competitiveness and the impact of globalisation on manufacturing.

It would be interesting for students to prepare a similar list of UK industries which might suffer a similar fate (there must be some crossover)

Mcdonald’s to go…

Monday, December 07, 2009

The effect that the internal macroeconomic environment can have on FDI is seen here as McDonald’s pulled out of Iceland last month, making it one of the few European countries (including Albania and Bosnia and Herzegovina) without a McDonald’s.

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Bordering bankruptcy…

Sunday, December 06, 2009

Almost exactly a year to the day from when Woolworths announced it was going into administration, Borders (UK) last week announced the same. It was only last year, that this tutor2u entry on Borders trying to outcompete Amazon was written. The results have been anything but good (but does provide an interesting case study on contestability, competitive forces and the effect of the Internet on competition).

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Tories plan break up of energy oligopoly

Friday, December 04, 2009

We have been studying oligopoly in our A2 micro and the issue of electricity and gas prices has been headline news for some time. Last week the Conservatives announced plans to break up the highly concentrated domestic energy supply market and inject fresh competition. This is reported here in the Guardian. There is a super paragraph that explains the oligopolistic nature of the industry:

“The industry has since consolidated into EDF, E.ON, RWE npower, Centrica, Scottish Power (owned by Iberdrola) and Scottish and Southern Energy, which control the production and supply of electricity and gas to almost all UK households and businesses. Only a handful of small independent power plant operators and tiny suppliers survive. Energy analysts say the market dominance by the Big Six makes it impossible for anyone else to gain a foothold.”

Market dominance is reinforced by the highly vertically integrated nature of these energy giants.

“they own power plants and source the gas themselves to supply their own customers. This means they will always be profitable at a group level because their retail businesses subsidise their power plant arms when generating costs are high and vice-versa”

The energy companies have been accused of engaging in implicit price collusion - tor the main product they most actively sell - direct debit for dual fuel, gas and electricity - the price difference between the cheapest and most expensive is £30 a year or around 60 pence per week. The consumer watchdog EnergyWatch has complained that British consumers are being ripped off by a “comfortable oligopoly” of bloated electricity and gas supply companies.

 

 

Evernote - Freemium and the Marginal Cost of Cloud Computing

Thursday, December 03, 2009

Here is a superb blog from Rory Cellan-Jones on some of the financial numbers emerging from Evernote a business that, like Spotify - has opted for a freemium business model as a way of monetising the cloud computing services it offers.

“So it turned out that back in May, Evernote had 900,000 users, of whom just 12,000 were paying $5 a month for a premium subscription. Today, that’s risen to two million users, with 31,000 premium subscribers. Hmmm - so about 1.5% are choosing to pay - that doesn’t sound a very cheerful state of affairs. But Phil Libin came charging back with a series of spreadsheets and graphs telling a more encouraging story….... what really makes Evernote look like a sustainable business is that its costs are so low - nine cents (about 6p) per user per month. I was surprised that it wasn’t much higher, given the cost of running an ever larger data centre.”

It provides a terrific example of the low marginal cost of adding extra users to the site and the revenue and profit opportunities from converting users of the free service to the paid for model.

Interesting video here from Oxford Entrepreneurs who invited the Spotify founder Daniel Ek to speak to their society a few weeks ago.

Super cruisers and economies of scale

Wednesday, December 02, 2009

I regularly use super cruisers as an example when applying economies of scale and the law of increased dimension. This chart of the day from the Economist provides a super graphic to use to reinforce the idea.

How to make a profit from a free good

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If a free good is defined as one which is not scarce and no cost is involved when consuming it, then a Welsh mountain stream must surely fit the bill, particularly after the rain over the last week or two (although I guess that its scarcity will be seasonal). This video report shows how that free resource can be used to create profit for the farmers whose land it happens to flow through – by installation of a turbine that generates power which is fed back into the National Grid. Given the incessant need for more power and desire for low-carbon sources of that power, this looks like an allocatively efficient solution – provided that it has no negative externalities associated with installation of the equipment and re-directing the water to pass through the turbine. It is unlikely to benefit from economies of scale but even so the finances certainly make it look productively efficient, although you might question whether, given the swift payback of the initial investment, a grant is really a necessary incentive to help to fund the investment. But given the recent debate over whether we can afford to eat meat because of the negative externalities that sheep and cattle emissions create, it is good to know that carbon-neutral Welsh lamb can be eaten with a clear conscience.

Price comparison sites…

Sunday, November 29, 2009

An interesting discussion out of a random statement at the dinner table last night…

There’s a firm called BetGenius which provides real-time odds comparison services.

Lots of discussion ensued on the effect of perfect information vs imperfect information. Given the surge in price comparison websites in recent years, one would expect the price of bets (or insurance, electricity) to converge to similar levels, as perfect competition predicts.

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NHS: Govt failure?

The NHS is back at the centre of hot debate again this weekend, as the Dr Foster report findings generate differences of opinions.

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Trusted Brands

Here is an interesting graphic of the most trusted brands among leading UK executives. Tesco has slipped out of the top ten altogether over the last three years, Amazon has gained ground. And note the surge in the respect accorded to the Help for Heroes charity.

OFT pricing investigation

Friday, November 27, 2009

When discussing the role of the OFT to protect the public interest, this announcement may be an interesting discussion point: This week it announced it would investigate various online pricing strategies such as drip pricing; time-limited sales; and reference pricing.

Super fast food nation

Thursday, November 26, 2009

The Independent yesterday carried an article on the continued rapid growth of fast food businesses in the UK. Across over 700 UK town centres the number of outlets for EAT, Pret A Manger, Dominos, KFC and Subway is expanding whereas Wimpy, Burger King and MacDonald’s have seen a reduction in outlets (partly a strategic refocusing of where to locate). Total market demand seems flat and perhaps declining.

“In the 10 biggest cities, fast-food outlets soared by 8.2 per cent to 1,456 premises, with London, Edinburgh and Glasgow leading the way…according to the consultancy Allegra Strategies, the value of the informal eating-out market in the UK actually shrank by 0.5 per cent to £40.3bn in 2009.”

Here is the link - there is value here for students looking at the fast food industry as a case study of imperfect competition / contestable markets

Structural decline in Russian motoring

Sunday, November 22, 2009

Here are two revealing BBC news videos about the decline in Russian car production and the economic and social challenges that result from it. In the first we visit a town heavily dependent on car manufacturing and one desperately seeking to generate new small businesses as part of a structural change in the local economy. In the second a report on the financial crisis facing loss making vehicle maker Lada and demands for state support to keep open an industry that perhaps should have closed years ago. The video is memorable partly for the continued use of the hammer to put the finishing touches to new cars!  How can a business survive by employing 100,000 people but making only 130,000 cars a year?

Net monopolists

A hat tip to Jim for spotting this interesting piece by John Naughton in today’s Observer exploring the emergence of dominant monopolies in many web 2.0 application markets such as auction houses, social networking and web search engines. I have chosen the article as the basis for my students to post to our weekly forum. Are the likes of Facebook, Google and Amazon natural monopolies? Should we be concerned about dominant monopolies if they exist?

Bottom Line on Business Clusters

Sunday, November 15, 2009

Evan Davis and his guests were on fine form this week in the edition of the Bottom Line on Radio 4. They discussed the development of business clusters in different localties and regions - a topic highly relevant to economic geography and one that links in well to external economies of scale and international competitiveness - two A2 topics. The Open University site is recommended for a range of follow-up resources.

Oyster Cards and Pricing on the Tube

I am hoping that my A2 micro students will be able to apply some of the concepts we have been looking at in recent weeks to this short forum question on pricing on the London Underground. Scratching beneath the surface there is much that can be applied! I will post a selection of answers / thoughts later on in the week.

Easy Coast line becomes state owned

A change of ownership for the much loved London to Edinburgh East Coast Line. East Coast is now operating the service - having taken over from the beleagured National Express. This BBC news report asks whether anything has really changed?

Google and Average Revenue Product of Labour

Friday, November 13, 2009

Google’s headcount quadrupled between 2005 and 2009 but for some years the revenue per employee was in decline. This is now in reverse and income from each worked employed is now at a 3-year high at just over $300,000 a year! I might use this chart as a teaching aid when teaching labour market economics - Google is perhaps the world’s biggest advertising agency and it finds even more ways to monetise its services from month to month - whilst keeping the bulk of core functions free to users.

Gold price brings prospectors to the Highlands

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The high price of gold, reported by Geoff yesterday, is giving a clear signal to a mining company in the Highlands of Scotland that it should start production from a gold mine that was first drilled 20 years ago, but has never been commercially worked because the price of gold did not provide enough incentive to the producers. However with the price of gold now at $1100 per ounce, mining operations could become profitable. Scotgold owns the Coronish mine near Tyndrum, a small village which is en route to Glen Coe, Fort William and Skye. Next month it will apply for planning permission begin mining operations in 2010 and this report from The Guardian says that Cononish is expected to start producing 200kg of gold a year at the mine site when full-scale mining begins in 2011 – enough to produce 30,000 wedding rings a year – and another 500kg each year by sending rocks for processing elsewhere.

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Apple’s cash mountain

Thursday, November 12, 2009

Apple is amassing a huge cash pile - I might use this when teaching opportunity cost - and ask students why cash is important for businesses in a recession, how Apple has managed to accumulate so much, and what they might do with it. This BBC video provides a support.

New Regulatory Agencies Begin Work Today

Tuesday, November 10, 2009

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? !!

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Price Discrimination - Teacher Presentation

Sunday, November 08, 2009

Fancy watching the Michael Jackson film “This is It” at your local cinema? Demand is strong and box office receipts are booming. As you pay for your ticket keep in mind that your local cinema will be engaging in a number of different forms of price discrimination to convert your hard earned cash into revenue and profit.

Take the admission charges for a showing this coming Tuesday - the 10th of November mid afternoon at three Vue Cinemas across the UK.

For a standard adult ticket there is a £1.95 price variation for these cinemas.

Doncaster (3pm) £4.75
Staines (4pm) £5.95
Greenwich O2 (4pm) £6.45
Fulham Broadway (4.30pm) £6.90

The later showing at Greenwich which restricts customers to Only 18s only will cost an adult £8.75 for a ticket.

We’ve updated our revision presentation on Price Discrimination which is available below:

Launch interactive revision presentation on Price Discrimination

Download pdf of slide handouts

Great examples of near pure monopolies

Saturday, November 07, 2009

A big hat tip to one of my students Arno Albici for spotting a superb article in the Economist about a cluster of mid-sized Japanese manufacturers who continue to enjoy near pure-monopoly power in highly specific, high value-added businesses. decades of industry expertise and reinvesting profit to fund high levels of research and innovation continue to give these companies a remarkable competitive strength in the market. The barriers to entry for rival manufacturers are very high and this helps to explain the limited contestability in the global marketplace.

For example:

Shimano earns around $1.5 billion a year by supplying 60-70% of the world’s bicycle gears and brakes
YKK makes around half the world’s zip fasteners by value,
75% of motors for hard-disk drives in computers come from a firm called Nidec
90% of the micro-motors used to adjust the rear-view mirror in every car are made by Mabuchi

“Many technology products have become commodities, but certain components have not, since they require continual innovation. So entry barriers to the business of making them remain high, and although the margins on the final goods have deteriorated, the margins on specialised, high-end components are still juicy.: Much more here

Cash is the enemy of creativity!

Friday, November 06, 2009

The Founder and CEO of King of Shaves, Will King gave an engaging and dynamic presentation to a large audience of economics and business students at our Entrepreneurship Society last night. The UK sales figures for the new Azor razors are quite remarkable and are testimony to the impact that this challenger brand is having on a monopolistic/duopolistic market. In the past four weeks in the UK KoS has sold 107,000+ Azor system razor handles and 602,000+ Azor Endurium cartridges.

Conventional MBA theory would suggest that the barriers to entry are just too high for a new firm to dislocate and disrupt the cosy market power of Gillette and Wilkinson Sword. The razor remains of the most patent protected products in the world and the billions of blades sold each year (at profit margin of over 90 per cent) represent an enormous cash cow for the US shaving giants. But easy cash can often stifle genuine creativity. The momentum of passionate and persistent challenger brands who truly understand the web and who talk to customers in a different way can make a big difference. The big Mo is with King of Shaves and it is easy to see why!

Will reports on his visit here

Our next meeting (Thursday 12th November) focuses on global economics and is with Paul Donovan, Chief Economist of UBS.

Caffeinated stimulus to demand

Coffee shops seem - by and large - to be surviving the recession and, in many cases thriving. The number of independent coffee stores has grown by more than 7% in the last year. Across the country hundreds of new stores have opened. This doesn’t make coffee an inferior good - whose demand rises as real income falls. Instead there are stronger forces at work, for example the rise of the nomadic entrepreneur who prefers to work away from expensive offices. Hugh Pym provides an overview of the strength of retail coffee demand in this piece from BBC news. London has the highest concentration of coffee stores in the UK followed by Edinburgh.

Not every brand is enjoying the same performance. Costa Coffe which has 974 stores in the UK has reported like-for-like sales growth yesterday of 2.5 per cent in the six months to the end of August.
Caffè Nero, which has almost 400 UK outlets, is believed to be trading at a similar level to Costa, although Starbucks has like-for-like sales down by an estimated 4.5 per cent to 5 per cent in recent months. Brand fatigue in action.

GlaxoSmithKline and Pfizer choose to collaborate on HIV drugs

Tuesday, November 03, 2009

Here is an excellent highly relevant article on cooperative behaviour between oligopolistic giants. Two of the world’s biggest drugs companies GlaxoSmithKline and Pfizer have announced a plan to merge their HIV treatments in a joint venture. ViiV Healthcare is an attempt for both companies to limit the risks of costly races to find new profitable treatments for HIV/aids and give them an opportunity to counter the loss of the revenues as these companies lose patent protection and are open to competition from generic drug makers. It is a strong reminder of the very high fixed costs of research into new drugs; the long lead times between new drug development, testing and finally getting it to the market. And also the impact of the entry of generic drugs into markets once patent protection runs out. The new company has a 19% share of the global drugs market, in comparison to the Californian company Gilead’s 31%.

Drug firms’ collaboration pools HIV treatments (Independent)

IPO of HIV business is ‘up to shareholders’ (Telegraph)

RBS Lloyds sell-off

The UK market has fewer bank brands than most other countries and choice has fallen in recent years after the Spanish bank, Santander bought up Abbey, Alliance & Leicester and Bradford & Bingley, and Lloyds has taken over all of HBOS’s brands. However, as per a ruling from the European Commission, RBS will sell 318 branches while Lloyds will dispose of more than 600 branches over the next four years.

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Super cruisers and the law of increased dimensions

Monday, November 02, 2009

Graphically illustrated in this short piece from the Telegraph!

OFWAT plans to turn the tap on water company prices

The Times today has an interesting article on the power battle between the water industry regulator OFWAT and the regional monopoly providers such as Thames Water. It appears that a much tougher pricing regime is planned for the utilities leading to cuts in the real price of water supplies for consumers.

“Every five years, Ofwat sets limits on prices that water companies in England and Wales can charge. For 2010-15, it has proposed that, before taking inflation into account, bills should be reduced for many customers, bringing the average annual water and sewerage bill down by 4 per cent from £344 to £330 by 2015. The water companies had wanted a £28 rise to fund their business plans.”

OFWAT wants the utilities to invest more in in improving drinking water quality, cutting leakage levels and raise the number of metered households from 36 per cent to 50 per cent (in a bid to control water usage). But will imposing real price cuts help achieve this objective? The aim is to have a pricing regime that forces the utilities to raise productivity and cut out as many inefficiencies as possible.

Water is a good example of where a strong regulator is needed because of the absence of competition - after all consumers can’t switch supplier if they are given a poor service.

Monopoly and Entry Barriers - Teacher Presentation

Sunday, November 01, 2009

This updated presentation provides an overview of the role of barriers to entry in protecting the position of a monopolist.

Launch interactive version of presentation

Download pdf slide handouts

Warning - Businesses at Risk from Economic Recovery

Monday, October 26, 2009

An excellent recent article in the ACCA magazine examines an interesting phenomenon - more businesses collapse at the beginning of a recovery than during the depths of a recession. Its all to do with working capital

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Lessons from an Ad Man - Superb microeconomics!

Sunday, October 25, 2009

The wonderful Rory Sutherland wows the audience at the TED conference in Oxford with a superb sixteen minute talk on advertising and aspects of behavioural economics. It is an immensely watchable video that will allow you to discuss with your students concepts such as perceived value, symbolic value,intangible value, hedonic opportunity cost and some ideas for nudging personal behaviour in socially beneficial ways. We learn of the extraordinary value of placebos, the rebranding of the potato in Prussian Germany. That all value is subjective and that persuasion is better than compulsion. Some super examples too of Veblen Goods, price discrimination and how the framing of the Italian penalty points system for drivers in Italy has a different impact than for motorists in the UK.

 

Broadband and economic development

Saturday, October 24, 2009

Access to and the speed and reliability of broadband infrastructure is one of the key institutional factors that impact on economic development. The lack of an affordable and cost-effective broadband network can be a huge barrier to economic growth especially in an age where companies in many rich countries are looking to outsource their back office and call centre services to countries where operating costs are lowest. The 2009 UNCTAD Information Economy Report provides a wealth of background information on the global digital divide.

According to the latest report, businesses and consumers are 200 times more likely to have access to broadband in developed countries than in the poorest Least Developed Countries (LDCs). And the monthly cost of broadband access varies to an incredible degree - from over $1,300 a month in Burkina Faso, the Central African Republic to less than $13 in Egypt.

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Walmart and Amazon Price War - Hyper Efficiency and the Consumer

Friday, October 23, 2009

A well publicised price war has broken out in the United States between Walmart and Amazon. Wal-Mart’s $10 promotion applies to the top 10 books coming out in November but the company is also selling 200 best-sellers for 50% of their list price. In a move that has sent shock-waves through the book industry, Wal-Mart has announced it will be selling 10 forthcoming books for just $10 each including Sarah Palin’s autobiography. As is often the case when an aggressive price war breaks out in an oligopolistic market, online bookseller Amazon matched the price cut within hours causing Wal-Mart to cut again to $9. Amazon returned the favour and Walmart has sinced shaved one cent to $8.99! The FT reports that Walmart’s website, the second busiest in the US after Amazon, has also cut prices by 50 per cent on 200 best-sellers.

The battle comes at a time when both Walmart and Amazon are under pressure from Google who are rolling out an online site capable of delivering e-books to any device with a Web browser, with an initial library of about half a million titles.

How long the price war will last is open to question. The October-December season is a hugely important time for all booksellers - the festive period is the peak time for sales and the intense battle for market share comes at a time of great change in the industry - not least the rapid growth of e-readers and online libraries. Some book publishers fear a price anchoring effect on their industry - namely that Walmart slashing prices and rivals following suit will lead book-buyers to expect new titles to cost $10, a low prices that would force the publishing industry to re-scale its entire business, including the advances paid to writers and ultimately affect the range of titles on offer.

For the giants of the book retailing industry, the economies of scale and drive for hyper efficiency in getting products to the market are simply a way of reinforcing their market dominance.

But what about the impact on smaller independent booksellers most of whom can never hope to compete on price but who provide light and shade in the book selling industry.

It is a reminder that there are different types of efficiency. Allocative, productive, dynamic and social. The latter two may be damaged if the price war escalates and many smaller booksellers go under. This BBC world service news interview focuses on some of the cultural issues of the rise of the giant retailers. Chris Doeblin from the independent Book Culture shop in New York City accepts that supermarkets will bring the price of books down - as they have with food prices - but at a (social) cost to many of us.

Guardian: US bookshops urge regulator to investigate online price war

Monopsony Power - Supermarket Bullies?

Thursday, October 22, 2009

Many thanks to Janis Thompson at Bristol GS for suggesting this terrific 3-minute video on the battle between supermarkets and their hard-pressed suppliers.  A great range of business and economics topics in here, including an obvious starting point for discussing the ethical issues raised in the clip

Launch BBC video

Download student worksheet (including video link)

Market Concentration Illustrated - Banking Brands after the Crunch

Wednesday, October 21, 2009

A terrific illustration here of how the global banking market has changed in terms of its market shares and concentration ratio recently.

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UK broadband in the slow lane

Tuesday, October 20, 2009

The relatively slow speed of the average broadband connections for most UK businesses and households will act as a contsraint on future competitiveness and growth. This report from BBC news finds that a study of the global state of broadband has put the UK 25th out of 66 countries in terms of the quality and reach of its networks. Rory Cellan Jones follows up the report with his own observations

“Britain has done well in the first broadband wave, using a pretty efficient copper network and DSL technology to get homes across most of the country connected. But other countries are moving forward more rapidly to build next generation networks using cable and fibre-optics.”

Investment in broadband can have significant demand and supply-side effects - the real consequences of under-investment will become more painful and obvious as time goes on - but who should pay for the extra capital spending needed? Will the new broadband tax make any noticeable difference?

Power Nodes - Using Economics to Make profit

Friday, October 16, 2009

Here is a fascinating article in the Times with Philip Thornton from Clarity Economics interviewing Mia de Kuijper an economist who can help companies to master the dynamics that govern their chances of success. Would be excellent for A2 students wanting some fresh ideas on management in an age of rapid technological change and a world of near perfect information. Her new book Profit Power Economics is due for imminent release.

Wall Street Partnerships and Principal Agent Problem

Monday, October 12, 2009

John Gapper has a super blog over at the FT in which he discusses the benefits that might flow from reforming bankers’ pay and restoring the partnership approach to renumeration

“Mr Thain correctly pointed out during the session that the old partnership structure of Wall Street firms, under which partners’ capital was at risk until they retired, produced better incentives in terms of risk management than bonuses based on short-term performance…This is not a bad idea but it might be extended. Why not truly replicate the partnership structure by applying those conditions to everyone who reached “partner” level - senior managing director or the equivalent at a large investment bank?”

This ties in with the idea of changing the behaviour of senior management so that they give great weight to the risks of particular investment and lending strategies and tries to avoid the myopic decision making that has proved so costly before the financial crisis.

The partnership model has applied particularly successfully in the UK with the continued success of the John Lewis Partnership.  In March 2009 despite the effects of the retail recession, John Lewis announced that The company it would pay out total bonuses of £125.5m. That is the equivalent to about 13% of salary, or seven weeks’ pay.

Nobel Prize in Economics: A different take on the Tragedy of the Commons

Elinor Ostrom and Oliver Williamson shared the 2009 Nobel prize for economics (and the accompanying $1.4m) on Monday for their work on how economic transactions operate outside markets in common spaces and within companies.

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Kindlenomics

Sunday, October 11, 2009

Amazon has announced that it will start shipping the Kindle e-reader in the next few days. Leander McCormick-Goodhart is doubtful about whether this spells the end of books. The Kindle device is part of an increasingly contestable market space whose size is set to rise sharply in the months and years to come. I have added a few links to Leander’s blog post. According to Chris Nuttall in an FT blog last month “there are now more than 45 e-reader models available worldwide, according to E Ink, the dominant technology provider for their displays.”

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Ticketmaster-Live Nation merger provisionally blocked by the CC

Thursday, October 08, 2009

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).

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Swine flu vaccines and elasticity of supply

Wednesday, October 07, 2009

The scale of the ordering of swine flu vaccinations by governments across the world is eye-wateringly large! GlaxoSmithKline plc - one of the world’s biggest pharma companies has reported that governments around the world have so far ordered 440 million doses of its pandemic swine-flu vaccine Pandemrix. GlaxoSmithKline has been engaged in a tense race to get new swine flu vaccines onto the market fighting the likes of Sanofi-Aventis, Novartis AG and AstraZeneca to win contracts for public health programmes. For students of the price mechanism it is a fascinating example of many supply and demand concepts at work:

The challenge of scaling up production to meet huge levels of demand - this has involved out-sourcing
The relative importance of fixed and variable costs in developing and manufacturing/distributing a new drug
The elasticity of supply of vaccines to meet short term health requirements
The oligopolistic race to win and protect market share
Economies of scale in production
The balance of power between the major buyers and the multinational drug suppliers
Price discrimination tactics

The Guardian reports that:

“The company makes the vaccine in Dresden and Quebec but the demand is so great – about 60% higher than for usual seasonal vaccines – that it is also outsourcing production to third-party manufacturers.”

According to the Wall Street Journal

“Glaxo hasn’t released information on cost per dose of the vaccine. However, Chief Executive Andrew Witty said in July that Glaxo was charging wealthy nations $10.26 per H1N1 vaccine shot and developing countries less. The drug maker is also donating 50 million doses to the World Health Organization.”

The Independent reports that

“The United States has begun a massive campaign aiming to vaccinate 250 million people against the illness by year’s end.”

And the Times reports that “total booked orders for the drug are worth about £2.2 billion — a significant sales and profit windfall as a result of the swine flu epidemic”

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