High taxes stimulate rise in smuggling of cigarettes
One of the unintended consequences of the steep rise in the real price of cigarettes in the UK is the strong incentive to bring contraband cigarettes into the UK from elsewhere in the EU single market.
This Guardian article reports on the expected rise in smuggling as cigarette duties reach fresh highs in 2011. The average price of a pack of 20 cigarettes reached £6.29 in the UK last summer, compared with £2.80 in Spain and £1.57 in Poland.
WTO finds Boeing guilty of using illegal subsidies
This is one of the longest running disputes in trade history. Europe and the US have been fighting for more than six years over each other’s subsidies for large passenger aircraft in the duopolistic battle between Boeing and Airbus. Now the World Trade Organisation has found that Boeing received at least $5bn (£3.1bn) in illegal subsidies and was only able to launch its 787 Dreamliner with such support. Airbus has als been found to be in breach of receiving illegal state aid. Reuters provides useful background here.
Tesco - Time to start a price war!
Here is some pure gold dust for students of competition and strategy in the food retailing industry! A leading analyst (Dave McCarthy at Evolution Securities) has written a lengthy research document building the case for Tesco to launch an aggressive price war - permanently cutting prices on hundreds of different items. Much of the case for the price discounting is reproduced in this Guardian article and key arguments are that Tesco is better able to withstand the hit on group profits from doing it, and that lowering the returns from the sector will help to bring an end to the land grab and building programme that ultimately may not be in anyone’s interests.
Has Tesco lost its way recently? Sainsbury’s was the best performing supermarket over the Christmas period. Its like-for-like sales were up by 3.6%. I have stopped shopping at Tesco partly because the retail experience is so dire (the mega store in Slough is just about the most soulless place on the planet) and also because Sainsbury’s and Waitrose have significantly raised their game in keeping products available on the shelves and in extending their value range. The Waitrose “Essentials” range has been a big success.
A new CEO provides a window of opportunity for a change of direction at Tesco and this analyst believes that Tesco needs to exploit first mover advantage before the rivals become too strong to absorb future price wars.
Read: Analyst advises Tesco to launch a price war to damage the competition
Consumer surplus from the web!
A hat tip to Tim Mercer from Ashcombe School for spotting this resource - an interesting article from this month’s McKinsey quarterly looking at the consumer surplus that currently exists in the world of ‘free’ on the Internet and how companies might seek to ‘monetize’.
Economics Q&A: How might rising food prices affect food retailers and manufacturers in the UK?
Food retailers are service sector businesses selling food products to consumers. The leading retailers in the UK are Tesco, Sainsbury’s, Asda (Walmart) and the Co-Op/Somerfield. Although the food retail industry in the UK is dominated by a handful of national chains, there are many others including thousands of small-scale retailers. And discount retailers that have done well in recent years including Aldi and Lidl.
Food manufacturers process foodstuffs into new products and they rely on buying raw materials from wholesalers. Good examples to use might be Nestle, Heinz and Sara Lee.
The larger retailers manufacture some of their own-label foods although they may choose to out-source this to another manufacturer. And likewise, some food manufacturers have their own chain of retail stores or outlets - for example Gregg’s the Baker or Domino’s Pizza.
read more...»A Motorbiking Triumph
Here is a product from over here that is doing really well over there! It is always positive to read of success stories from the UK manufacturing sector. This article from the Guardian highlights the success of the iconic motor bike bran Triumph in ousting the likes of Honda and Yamaha to rise to the summit of the market share rankings for new bikes sold in the UK. And sales are strong in the United States where Triumph is competing with Harley-Davidson. Students who read through the article ought to be able to glean two or three factors that lie behind Triumph building a competitive advantage in the market. Can they then come up with other ingredients in the mix that apparently makes Triumph competitive in price and non-price terms?
More good background here:
Triumph rides high as UK bestseller takes on Harley-Davidson (Guardian)
Motorcycle Sales Not All Bad News says Motor Cycle Industry Association
Heard the one about the £250,000 fish?
I was browsing some back copies of the Guardian today, and came across a good example of markets in action. Last week a tuna fish fetched over 32 million yen at an auction in Tokyo.
Economics Q&A: What economic factors affect the demand for new cars?
The motor industry is one of the sectors whose fortunes seems to permeate nearly every part of the economy. Most of us know someone who works in the motor trade and changes in demand and production have sizeable effects not just on the industry itself but on many supply-chain businesses and economic activity in areas where car production is concentrated.
In 2010 just over two million new cars were registered in the UK - a rise of 1.8% on the 2009 figure. The biggest single course of rising demand came from the fleet market which rose by over 10% in 2010, but demand for and spending on privately bought cars slipped following the end of the Car Scrappage Incentive Scheme. Crucially for the year ahead, the new car market is forecast to decline by 5% in 2011 to 1.93 million units - according to the Society of Motor Manufacturers and Traders “difficult market conditions continue.”
So what are the main factors that affect the market demand for new cars?
read more...»Firefox overtakes IE in the EU Browser Market
The Telegraph reports here that Mozilla’s Firefox has overtaken Internet Explorer as the preferred browser for internet users in Europe. And Google’s Chrome is fast gaining a strong foothold in this intensely competitive market. The market share data suggests an oligopoly but we know that despite the dominance of a small number of web browsers, the reality is that competition is fierce and millions of web users have their own quite strong preferences!
Source: StatCounter Global Stats - Browser Market Share
Lots to think about here in terms of economic efficiency - not least dynamic efficiency and innovation in the market.
And also the impact of competition policy in action .... as the article says at the end
“Since early 2010, Microsoft has offered millions of European customers that use its Windows software the option of using 12 different internet browsers. This followed an agreement in December 2009, when European Union regulators accepted Microsoft’s pledge to give consumers better access to rival browsers, ending a long antit-trust dispute.”
A hat tip to Ian Goff for spotting the article. If you want to keep an eye on what is happening to market share on a daily basis this is the link to the StatCounter site
Pricing tricks and behavioural economics
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...»Movie Rental on a USB Stick!
Reading this piece gave me flashbacks to the mid 1980s when I would trek in excited fashion to my local petrol station who did a brisk trade in renting out VCR tapes to customers wanting to watch a move over the weekend.
A generation later and the movie rental industry has gone through several transformations. Content has migrated online and high street movie rental businesses are thin on the ground for good reason! Here is a new kid on the block attempting to challenge movie streaming businesses and the likes of Love Film. A US business Flix on Stix Kiosks allow you to download movies onto a USB 3.0 stick loaded with proprietary anti-piracy software. You choose how many movies or games to download and the rental period - the files are self deleting. It is an interesting business model that cuts out the cost of returning DVDs through the mail or in person. And rented movies can presumably be played on any device you choose within the rental period. Dynamic efficiency in action? More information here How long before this business model arrives in the UK?
On the first day of Christmas -
There are lots of aspects of economics in this little story from the Independent on Wednesday 1st December. The final section of the report into the effects of the early snow falls is about Christmas tree shortages, and links to this BBC story about Nordmann fir trees, and the two together contain several references to the A level syllabus:
read more...»Orange, iPads and the Lock In effect
A really good example of pricing and contract lock-ins here from the BBC’s Rory Cellan Jones who tweeted this afternoon that Orange sells iPads at £199. Then £27 per month for 2 years . So total cost=£847. Compared with £769 for full-price ipad +£10per month pay as you go. A super pricing example to use when looking at oligopolistic markets
Growth and Strategy at Domino’s Pizza
Despite or perhaps because of difficult economic times, the pizza delivery company Dominos UK & Ireland has enjoyed rapid growth over the last couple of years. The company, which owns the Master Franchise to the Domino’s brand in the UK and Ireland, now operates through over 130 franchisees with an average of 4.5 stores each. And their long-term strategy contains the target of rolling out at least one new Dominos store per week in each of the next ten years, growing the business into a billion pound brand in the UK – almost double the current size.
read more...»Boris’s Bikes - Gearing up for Success?
Over one million bike rides have been taken using the new bicycle hire system introduced by Boris Johnson and Transport for London (supported by Barclays). Perhaps this is a good example of how getting the pricing right and other related incentives and disincentives provides the right choice architecture for a successful scheme and a change in commuter behaviour?
Membership of the scheme is affordable (£45 per year + £3 for each key) and journeys under thirty minutes are free at any time. There are stiff penalties for late and non-return of the bikes as well as for damaged bikes. The network of docking stations is substantial and TFL appear to becoming more proficient in getting round London and re-balancing supply with demand for bikes at key times during the day.
I was chatting to a couple of students at the LSE the other day who make daily use of the bikes to and from lectures.
To judge from the heavy demand for bikes at the Waterloo and South Bank docking stations as I have been walking past in recent weeks, there is already firm evidence that the scheme has bedded in well. The number of stolen bikes is far lower than in Paris and the volume of bike rides taken is set to grow strongly as new docking stations are opened and the stock of bikes grows. There is still plenty to do - many users complain of logistics problems that leave docking stations empty and also the limited choice of gears - but the early signs are promising indeed.
The Guardian writes in praise of the scheme here.
Demand for Chilean Wine
Is it the result of a move down the demand curve or a shift in the conditions of demand? Either way sales of Chilean wine in the UK have jumped sharply higher in recent days. Several supermarkets have reported a big hike in sales as the world’s watched the life-affirming rescue of the 33 miners from deep underground.
The rise in demand hint at one aspect of behavioural economics - namely the impact on demand that emotional impulses can have as well as the heightened saliency of the issue in people’s minds when they go shopping. The wave of goodwill towards Chile for the rescue may extend to a wider range of their consumer exports! The increase in demand reflects both a change in consumer preferences (perhaps short term only) and also some clever marketing and pricing by supermarkets. Many chose to introduce 25% discounts last week and emailed their customers with the news.
Lifting the cap on tuition fees - a question of price elasticity?
The latest review of university funding has recommended that the cap on tuition fees be lifted giving universities more freedom to raise annual tuition costs well above the current level of £3,290 a year.
To what extent will a rise in the private cost of studying for a degree lead to a substantial fall in market demand from UK-based students? This BBC news feature makes for interesting reading and links in well to the concept of price elasticity of demand - the responsiveness of demand to a change in the market price. There is little doubt that the cost of taking a university education will rise substantially in the years ahead and this raises hugely important questions about the impact on demand and the effect on students from poorer backgrounds who might be priced out of a degree.
It seems that Business Secretary Vince Cable has already come out against introducing a Graduate Tax - one of the main alternatives to raising tuition fees. The issue is debated here in this discussion on the Radio 4 Today programme. There is more background on the university funding issue here.
Further articles on the economics of a graduate tax can be found here.
University course fee increases ‘could deter students’ (BBC news)
Next Generation Laptops - An Inferior Good
Rory Cellan-Jones, the BBC’s Technology Correspondent, does a pretty spectacular demolition job on an attempt by clothing retailer Next to break into the fast-growing market for tablet devices. A very funny piece to camera that manages to highlight when cheap truly means awful! A lovely clip to show when discussing the nature of inferior products in a given market space.
Substitute goods, scarcity & the recession - Toshiba’s OLED TVs
According to Reuters (article here), Toshiba have frozen their plan for mass production of next-generation OLED TV panels, citing cost pressures from the recession and an increase in demand for the existing, competing LCD panels.
A nice little case study for teaching substitute goods, opportunity cost or the impact of the recession on what is clearly a luxury good.
Income elasticity of demand - London’s luxury hotels
The BBC’s Joe Lynam (who tweets here) considers the prospects for a new and recently renovated cluster of luxury hotels due to open in London in the coming months. Some hotel industry insiders feel that London risks creating too much room capacity in the capital but others point to the fact that room occupancy rates have by and large avoided the worst effects of the recession. Sneak a view of one of the two £10,000 per night suites at the Savoy!
read more...»The Social Cost of Dementia
If dementia were a country it would be the world’s 18th largest economy - this is the estimated annual cost of coping with dementia according to a new World Alzheimer Report available here and reported here on the BBC news web site. The analysis highlights some of the economic and social consequences of the illness which itself is becoming more prevalent as average life expectancy rises year on year. Lost earnings incurred by people taking time off work to care for a loved one accounts for the bulk of dementia’s costs - and naturally this figure is much higher in richer nations than in countries with lower to middle incomes.
The report says that after age 65, the likelihood of developing dementia roughly doubles every five years.Alzheimer’s Disease International estimated that there are 35.6 million people living with dementia worldwide in 2010, increasing to 65.7 million by 2030 and 115.4 million by 2050. Nearly two-thirds live in low and middle income countries.
My AS Economics students are researching an assignment on the economics of health care - there is a supporting presentation here - and I am hoping that they will consider some of the steep costs of providing care for the elderly as part of their answer. It is a growing burden on the economy and one who global size is now considerable.
Smartphones and Apps - Complementary Demand
Smartphones and Apps - a good example of two products in joint demand - and this BBC news video from India looks at the commercial opportunities for online apps retailers as market demand surges in emerging markets. I will be using this short video when teaching complementary demand.
Toll roads not the solution for congestion
According to a report out today, the UK’s only private motorway toll, the M6 Toll, has not significantly cut congestion.
Video clip here and article here.
AS Micro: Effective demand for after school activities
Demand is simply the desire to have or own a good or service, and the amount that individuals, companies or governments are able or willing to buy. But for demand to be effective it must be backed up by genuine purchasing power. consumers must have sufficient income to be able to afford to purchase something.
This news article from BBC news focuses on the charges made for parents looking for after-school clubs for their children. A poll for Save the Children finds that many parents are struggling to meet the cost of such activities, many of which are thought to have long-lasting benefits for the children concerned.
Potash - a battle for grey dust that has become gold dust
The market for a particularly lucrative gray dust has been thrust into the spotlight this summer with news of a $38.5bn (£25bn) hostile takeover bid from Australian mining giant BHP Billiton for Potash Corp of Saskatchewan in Canada a business coined by some as the “Saudi Arabia of Potash”!
read more...»Typical 2689% APR…Eh??
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...»Drug rationing - the role of NICE
The National Institute for Clinical Excellence (NICE) was created in 1999 and given the task of making decisions about which types of drugs ought to be made available through the National Health Service. One of their main aims is to ensure a standardised level of medical care throughout the country and minimise the risk of postcode prescriptions - where healthcare seems to be determined by where someone lives rather than their clinical need.
read more...»Broker spends $520m in a drunken stupor and moves the global oil price
Not an example you would find in a standard textbook - but a fun one to use nonetheless!
The Times Pay Wall
The Times and Sunday Times today launches their pay wall for users of their online edition. News International know that they will lose a substantial amount of traffic by introducing a subscription system for their news and comment pages. The background to the decision can be found here.
I have an online subscription to the Financial Times and have also paid for the Wall Street Journal online edition in the past. But there is no way I will pay for the regular edition of the Times, there simply isn’t enough genuine value added and I suspect thousands of others will think the same. From a blogging viewpoint I will no longer link to any articles from the Times web site. There are few things more annoying for blog readers than to be redirected to a pay-wall site where an interesting story is blocked by annoying registration pages.
AS Economics Revision - Stocks and Prices
In many AQA AS microeconomics exams, the focus of the stimulus materials is on a market or inter-related markets where prices have changed and which raise interesting questions about the causes of price volatility and arguments for and against some form of intervention.
One aspect for students to consider is the relationship between stocks of a product and the direction of changes in market prices.
Stocks (also known as inventories) are products ready for sale but not yet purchased. They might include finished output 9such as new cars) or inventories of components, work in progress and raw materials.
Movements in inventories can trigger price changes. In our two examples we focus on the market for copper and for crude oil. In both cases look to see how prices move when there is a noticeable reduction in stock levels, perhaps reflecting a rise in market demand set against an inelastic short-run supply. When stocks are low, prices are bidded up not least in commodities markets where speculators look to make speculative purchases when they feel that the balance of power in a market is tilting in favour of the seller (i.e there is excess demand and stocks are declining).
A market where inventories are high is one where, ceteris paribus, there is downward pressure on equilibrium prices.
