Price elasticity of demand for stamps
The BBC reports that PostComm - the postal service industry regulator has given initial backing for Royal Mail to increase the cost of a standard first-class stamp by three pence. This would take the price up to 42p. At the same time, standard second-class stamps may rise by 2p to 32p. How will consumers respond to the price change? For many the price hike will have little effect - most of the stamps that I buy can be reclaimed as stationery expenses. But many smaller businesses spend heavily on mailshots as a part of their marketing. A rise in mail costs may cause them to consider making more effective use of their customer databases so that - for example - a 3000 mail shot volume is better targeted than before. Do you think that the price elasticity of demand for stamps is price inelastic - at least in the short term?
The Royal Mail is subject to a price cap agreed with their industry regulator. Since the Royal Mail‟s current price control was agreed in 2006, the Royal Mail has lost 9% of its mail volumes over the three year period to April 2009, largely through shrinkage of the total market including 20% of stamped mail. The Royal Mail has also had to face up to increased competition as the postal market has been fully opened up to competition.
Shrinking mail volumes has the effect of reducing capacity utilisation of their collection, sorting and delivery capacity and leads to a rise in the unit costs of the business. The Royal Mail is required by law to operate a universal service across the UK; it is a business that requires substantial economies of scale to remain profitable.
Passing the burden - Sainsbury’s and their suppliers
AS micro students grappling with their revision on government intervention will come across the issue of who ends up paying for an indirect tax. The conventional view is that a supplier faced with an excise duty or other tax can consider passing it on by raising the final price to the consumer. Price elasticity of demand and supply come into play in deciding who eventually bears the burden of an indirect tax.
Here is a slight twist. Sainsbury’s has written an email to their suppliers of alcholic refreshment more or less insisting that they aborb the recent hike in duty announced in Darling’s budget. According to a report in the Daily Telegraph:
“Duty – April 2009” sent to its beer and cider suppliers prior to the Budget, J Sainsbury said that it would be “replacing” any lines on June 1 “that we cannot maintain margin on” following the announcement of an increase.”
In effect - they are telling them to aborb the tax or risk being delisted by the supermarket. Given Sainsbury’s monopsony power it is clear where the balance of influence lies in the relationship. Is Sainsbury’s decision asymmetric? Did they pass on the 2,5% decrease in VAT to their drinks department customers last Autumn?
Waterford Wedgwood potters towards the brink
Another day and yet another venerable institution falls. The Waterford Wedgwood (WW) group had been in talks with US private equity groups for some time before those talks collapsed last Friday, and the Bank of America decided it could not extend its credit deadlines to the company any longer. In October WW reported losses of 63 million Euros, with debts of 450 million Euros, and it had been struggling since May 2005 to restructure the company, cut costs and shift to more capital intensive production, in order to survive a growing lack of demand for these high prestige crystal and china products.
read more...»Inconspicuous Discounting
I was browsing in a well-known North East department store this week when I spotted a winter coat that I have had my eye on for some time. Having decided to splash the cash, I was surprised to find a 20 per cent discount applied at the till - a welcome surprise! But there were none of the usual “sale” signs obvious within a store that was busy without being buzzing.
I took the discount without blinking but an article in the Financial Times today reminded me that the inconspicuous sales are becoming more frequent especially among niche retailers towards the higher-end of the retail market. Luxury shops are making greater use of private invitation-only evenings where valued customers can be wined and nudged gently into pre-ordering new products or persuaded to buy up some of the excess stock.
Here is the link to Sarah O’Connor’s piece on discreet discounts.
Just a few months ago sales of luxury products were thought to be immune from the ravages of the credit crunch. But the collapse of investment banks, a steep decline in city bonuses and thousands of job losses in financial services have contributed to a sharp fall in demand for high-value luxuries. The income elasticity of demand for such goods ought to be strongly linked to the economic cycle - we are seeing growing evidence of this now.
But for retailers selling top-end brands who have rarely had to use deep price discounting to shift modest amounts of stock, these are unchartered waters. The danger is that if they cut prices too far their customers may begin to anchor downwards the prices that they regard as a fair reflection of the quality of the products they are buying, and perhaps devaluing the excitement of buying a specific brand?
Price anchoring is an important feature of the behavioural patterns of consumers - I wrote about it in June with a blog about the pricing of the iPhone. - for products such as jewellry, designer clothing, the best seats for the theatre, perfumery and bespoke furniture (there are many other examples) the first price you experience for a product when you enter the market can act as an anchor for what you might be prepared to spend the next time around. The luxury retailers will want to avoid a situation where an eventual economic recovery might start with consumers having lowered significantly their price expectations for discretionary purchases.
Perhaps that is one reason for the invitation-only events for regular customers. The luxury shops are happy in the current climate to offer a generous discount but they want to keep it under wraps reserved for people who they know will return when demand and prices are back to normal levels.
Luxury yachts - holed below the waterline?
This is one of the ultimate ‘big red ticket items’!
Is the luxury yacht market showing signs of being holed below the waterline? The Daily Telegraph reports on fire-sales of some of the most expensive yachts that money can buy - the owner of the 164ft Alibella – is offering a €9.5m (£8.1m) discount to a buyer prepared to complete a deal within the next 30 days - a reflection of a dramatic switch in the balance of power in the market from seller to buyer. A broker at Edmiston reflects that there is now a surplus of yachts on the international market and many owners, desperate for cash (perhaps to meet margin calls on their stock market investments) are offering deep discounts on prices in a bid to find a prospective buyer. Something approaching forty of the larger yachts are now said to be available for sale. Demand from wealthy Russian billionaires and from middle-eastern investors seems to have floated away.
A hat tip to colleague Mo Tanweer for alerting me to this story.
When it comes to income elasticity of demand, surely these highly expensive yachts must count as an ultra luxury product for the vast bulk of consumers - but to their owners they may not be a luxury at all. The private marginal benefit of a long weekend sailing a huge yacht is likely to be sizeable but not one that owners will give up lightly if their financial circumstances change. There are some who argue that the hefty price discount for an early sale is simply a marketing gimmick - the owner may have no intention of selling and just wants people to admire their yacht!
Will price discounting help restaurants survive the crunch?
If eating in is the new going out, life is going to get really tough for hundreds of mid-market restaurants in the months ahead.
Hard-pressed consumers hit by a potent combination of falling property and share prices, declining real incomes, a slump in confidence and fears of huge job losses, are cutting back on non-essential items in their monthly budgets. They are eating out less or perhaps switching to lower-priced chains that – on the plate at least – seem to offer better value for money.
How can restaurants respond to the threat posed by a fall in discretionary spending?
Will sales of lottery tickets fall during the recession?
A loyal blog reader asked me an innocuous question the other day - will sales of National Lottery tickets fall during the recession?
The reader herself has not bought a ticket for at least three years and I cannot even remember the last time I entered the main draw, it was probably at least a decade ago.
Indeed the whole issue of why people continue to fork out large sums on lottery tickets when the odds of winning are so low will always be of interest to behavioural economists keen to understand more of the weaknesses that people have when assessing probability and risk.
The odds on winning the Lotto jackpot are 13,983,815 to one; there is a 51 to one chance of winning any of the prizes.
As Henry Fielding said in 1792 “"A lottery is a Taxation Upon all the Fools in creation”
Creating value and jobs in the eureka state!
Creative industries provide the key to strengthening Britain’s economic competitiveness and generating hundreds of thousands of new jobs. This was the message from Rupert Gavin, CEO of Odeon-UCI cinemas in an address to a well-supported meeting of the Keynes Society last night.
The Economics of Hotel Deals
e-break deals from the likes of Marriott Hotels regularly end up in the junk-mail bin. But this advert prompted a lively classroom discussion....
read more...»Supplying the rising demand for wind power
This really is an excellent BBC news interview with the Chief Executive of Vestas one of the leading manufacturers of wind turbines in Europe. With rising demand for renewable energy supplies driven in part by persistently high oil prices - the pressure is on companies such as Vestas to deliver sufficient wind turbines to meet demand. The lead times between ordering a wind turbine and it becoming operational are long - including testing for wind strength and design of the wind farm site - a good example to use when considering elasticity of supply.
The Vestas web site provides a mine of good background information. The company claims to have close on 25% of the market share in wind turbines and has produced 35,500 of them in recent years. Vestas faces cost pressures of its own including the rising price of steel on world markets and increased transportation costs. Bottlenecks in the supply of key components also affects their ability to deliver orders on time. Vestas is committed to organic growth and is investing in a new blade technology factory in the Isle of Wight although only a few days ago the company announced the closure of a wind turbine tower factory in Campbeltown in Scotland.
New-generation wind farms inevitably create political controversy in the areas in which investment in wind farms is targeted - this scheme in Cornwall in no exception.
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