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Thursday, 15 November 2018

Regulations (Government Intervention)

Regulations are a form of government intervention in markets - there are many examples we can use:

Examples include:
  • Laws on minimum age for buying cigarettes and alcohol
  • The Competition Act which penalizes businesses found guilty of price fixing cartels
  • Statutory national minimum wage
  • A new law in Scotland banning under-18s from using sun-beds
  • Equal Pay Act and acts preventing other forms of discrimination
  • Changes in the law on cannabis
  • Maximum CO2 emissions for new vehicles, laws which restrict flight times at night
  • Government appointed utility regulators who may impose price controls on privatized monopolists e.g. telecommunications, the water industry
The economy operates with a huge and growing amount of regulation. The government appointed regulators who can impose price controls in most of the main utilities such as telecommunications, electricity, gas and rail transport.
Free market economists criticize the scale of regulation in the economy arguing that it creates an unnecessary burden of costs for businesses – with a huge amount of "red tape" damaging the competitiveness of businesses.
Regulation may be used to introduce fresh competition into a market – for example breaking up the existing monopoly power of a service provider. A good example of this is the attempt to introduce more competition for British Telecom. This is known as market liberalization.
Problems that regulators of markets / industries can face
  1. Hard to find evidence of anti-competitive behaviour:
    • Lack of spoken or written evidence
    • Conflicting or asymmetric information
    • Complex information
    • Conflicting evidence – e.g. it might be markets forces or collusion in an oligopoly
  2. Fear of fines or other control mean that there is strong incentive to conceal collusion
  3. Lack of regulator power and lack of regulator resources

Revision Video: Evaluating Government Intervention in Markets

Carbon Emissions - Evaluating Potential Policies

This is a revision video looking at carbon trading and carbon taxes as policies to cut emissions. Most economists favour carbon taxes but public support for new environmental taxes in many countries is relatively low.

Carbon Trading and Carbon Taxes (Evaluation Skills Video)

In this short revision video we analyse and evaluate three key points relating to this question: "To what extent are tradable permits less effective than taxation in reducing CO2 emissions?"

Core Notes:
A rising price of carbon permits – in theory – gives firms an incentive to invest in new technologies that lower carbon emissions.
Eval: But if the carbon price is too low or volatile from year to year, the risks from investment will be hard to justify to shareholders and fewer firms will commit to this.
Carbon trading helps to cut emissions in the lowest cost way because each permit is worth more to the most carbon-efficient businesses.
Eval: Carbon trading raises less revenue than a carbon tax; this revenue could be used to fund investment in renewables or help finance improvements in human capital.
The UK government has introduced a carbon price floor to make the EU trading scheme more effective in cutting CO2 emissions.
Eval: Carbon price floors make domestic businesses less price competitive overseas. A carbon tax provides just as much certainty for firms.

Wednesday, 14 November 2018

Price discrimination in action - Sainsbury's and valentines day cards!

This is a brilliant story, though it may do Sainsbury's reputation no favours. 
Two cards, looking pretty much identical, one 'For my husband' and one 'For my wife'.
All very cute - but why would the 'For my husband' one cost 25% more than the other?
It's a great question for students to discuss - 

What might cause a difference in the PED of the different market segments?
Why are Sainsbury's doing this?
How can they do this?
Should they be regulated due to customer exploitation?
Does the consumer benefit at all from this pricing strategy?
Draw the diagram showing this example of 3rd degree price discrimination....Oh, OK, I'll do it for you!

Can you see how the price in the combined market is lower than the inelastic market, but higher than in the elastic market.

Oligopoly - 5 Key points

A useful starter when looking at the most important market structure in economics!

An oligopoly is a market dominated by a few producers. An oligopoly is an industry where there is a high level of market concentration. Examples of markets that can be described as oligopolies include the markets for petrol in the UK, soft drinks producers and the major high street banks. Another example is the global market for sports footwear – 60% of which is held by Nike and Adidas. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market.
The concentration ratio measures the extent to which a market or industry is dominated by a few leading firms. A rule of thumb is that an oligopoly exists when the top five firms in the market account for more than 60% of total market sales.
Characteristics of an oligopoly
There is no single theory of price and output under conditions of oligopoly. If a price war breaks out, oligopolists may choose produce and price much as a highly competitive industry would; whereas at other times they act like a pure monopoly.
An oligopoly usually exhibits the following features:
1. Product branding: Each firm in the market is selling a branded product.
2. Entry barriers: Entry barriers maintain supernormal profits for the dominant firms. It is possible for many smaller firms to operate on the periphery of an oligopolistic market, but none of them is large enough to have any significant effect on prices and output
3. Inter-dependent decision-making: Inter-dependence means that firms must take into account the likely reactions of their rivals to any change in price, output or forms of non-price competition.
4. Non-price competition: Non-price competition is a consistent feature of the competitive strategies of oligopolistic firms.
Duopoly is a form of oligopoly. In its purest form two firms control all of the market, but in reality the term duopoly is used to describe any market where two firms dominate with a significant market share. There are many examples of duopoly; including Coca-Cola and Pepsi (soft drinks), Unilever and Proctor & Gamble (detergents), Bloomberg and Reuters (Financial information services), Sotheby’s and Christie’s (auctioneers of antiques/paintings), Standard and Poor’s and Moody’s (credit rating agencies), BSkyB and ESPN (live Premiership football), and Airbus and Boeing (aircraft manufacturers). 
In these markets entry barriers are high although there are usually smaller players in the market surviving successfully.
The high entry barriers in duopolies are usually based on one or more of the following: brand loyalty, product differentiation and huge research economies of scale.
The importance of non-price competition under oligopoly
Non-price competition assumes increased importance in oligopolistic markets. This involves advertising and marketing strategies to increase demand and develop brand loyalty among consumers. Businesses will use other policies to increase market share:
o Better quality of service including guaranteed delivery times for consumers and low-cost servicing agreements.
o Longer opening hours for retailers, 24 hour online customer support.
o Discounts on product upgrades when they become available in the market.
o Contractual relationships with suppliers - for example the system of tied houses for pubs and contractual agreements with franchises (offering exclusive distribution agreements). For example, Apple has signed exclusive distribution agreements with T-Mobile of Germany, Orange in France and O2 in the UK for the iPhone. The agreements give Apple 10 percent of sales from phone calls and data transfers made over the devices.
Advertising spending runs in millions of pounds for many firms. Some simply apply a profit maximising rule to their marketing strategies. A promotional campaign is profitable if the marginal revenue from any extra sales exceeds the cost of the advertising campaign and marginal costs of producing an increase in output. However, it is not always easy to measure accurately the incremental sales arising from a specific advertising campaign. Other businesses see advertising simply as a way of increasing sales revenue. If persuasive advertising leads to an outward shift in demand, consumers are willing to pay more for each unit consumed. This increases the potential consumer surplus that a business might extract.
High spending on marketing is important for new business start-ups and for firms trying to break into an existing market where there is consumer or brand loyalty to the existing products

Monday, 12 November 2018

Behavioural economics in action - Black Friday, now singles day!!!

Internet giant Alibaba has set new sales records on Sunday for its biggest shopping day, the annual Singles Day. The Chinese company hit a record $1bn (£774m; €883m) in sales in 85 seconds, and then just shy of $10bn in the first hour of the 24-hour spree.   

Click here to access the article.

What areas of behavioural economics could this identify with?

Sunday, 11 November 2018

Monopsony power in action! Tanzania Cashew crisis

Click here to access an article discussing the crisis over cashew farming in Tanzania. About 20 houses have been burnt down in riots by cashew nut farmers and other protesters in southern Tanzania, the local MP has told the BBC.
Faith Mitambo said two buildings at her home in Liwale town had been set alight and that other houses targeted belonged to members of the ruling CCM party.

The trouble began after payouts being made to farmers for their crop were less than the price agreed last year.
Topics of relevance are monopsony power, supply & demand, government intervention. Excellent real world economics.