Unit 3: Duopoly, regulation and market failure!

Setback for Etisalat and du network-sharing plan


 

 
Click here to access an excellent piece from the National, on etisalat and du, our favourite two network providers here in Dubai. You all know that we pay a high price for not a very good service. This is a clear example of how high entry barriers cause market failure and the exploitation of  the consumer.
 
We do have our very own government watchdog here in UAE, the Telecommunications Regulatory Authority (TRA).
 
Questions to consider:
 
What is the market structure of the UAE netwrok providers?
 
How will the fixed line sharing initiative help consumers?
 
Will it, in your opinion, help the producers (as the article suggests)? If so, how?
 
Does the delay of the agreement suggest 'Regulatory Capture'? (What is this?)
 
When the agreement to share lines is eventually complete, how will the producers now compete, discuss one price and one non price strategy!
 
I would like to see some comments to the above questions before the end of the holidays!
 
thanks all

Unit 1: Supply & Demand - Peanut Prices on the Up!

Supply shortages in key growing regions have caused the price of peanuts to surge to record highs. Peanut prices in Europe are 60% higher than a year ago and the cost of peanuts in the USA has more than doubled in the last twelve months. The price spike is the result of lower production from India, Argentina and the United States.

In 2010, American farmers harvested 2.1 million tons of peanuts. This dropped to 1.8 million tons in 2011, a 15 percent drop that caused prices to more than double to about $1,000 a ton


With raw peanut prices jumping sharply higher consumers have found that staple products such as peanut butter, peanut oil, peanut flour and nut-enhanced cereals have become more expensive in some case by more than 30%.

Peanut production in the United States has been hit by drought conditions in states such as Georgia and Texas. And some farmers have switched production away from nuts towards cotton and corn because higher world prices have offered better expected profits. However if peanut prices stay high well into 2012, there are hopes that growers may start planting in states such as Arkansas and Mississippi where there is current ample water to achieve good harvests.




Questions for discussion:

How will peanut-loving consumers react to these higher prices?

What does the data suggest about the elasticity of supply for peanuts?

Will the elasticity of demand for all peanut products be the same?

How might this effect the producers of products that require peanuts as a raw material?

This video will help....

All students - Images from 2011

At this time of year many of the major news organizations put together collections of some of the most vivid images of the year - here is a personal collection of their output - great for discussion and for you guys, a reminder to keep up with current affairs.

Unit 3: Loss Making Oligopolies - BP Leaves the Solar Industry

British Petroleum has decided to exit the solar energy energy industry claiming that the business has become unprofitable because of excess supply and falling prices. In 2011 a number of solar firms have gone out of business including California’s Solyndra and Germany’s Solon. BP will focus instead on investing in other renewable energy sectors including wind power and biofuels.


Whilst the decision by BP to exit the industry appears significant, infact total global investment in solar power continues to rise. MidAmerican Energy Holdings owned by Warren Buffett have agreed to purchase a $2 billion solar project under development in California and a 49 percent stake in a $1.8 billion plant in Arizona.

Google Inc. and KKR & Co have announced a joint venture to pump money in four California solar power plants with total capacity of 88 megawatts. The powerful search engine business uses a huge anount of energy every year and has committed itself to large scale investment in renewable energy supplies to help power their server farms

Questions for discussion:

Is this a contestable market?
Who are the consumers? (Governments or individuals)

Unit 3: Oligopoly and Duopoly in Bus Markets

The UK Competition Commission has published an important report into the market structure of local and regional bus services in the UK, twenty five years after the industry was deregulated and largely privatised. 

Largely as a result of a long-term process of consolidation through merger and acquisition, the UK bus industry is found to be highly concentrated with five businesses dominating the sector even though more than 1,200 businesses provides services.

The five largest operators (Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach) carry 70 per cent of those passengers. The CC also found that head-to-head competition between operators is un-common and that-on average-the largest operator in an urban area runs 69 per cent of local bus services - effectively a monopoly position.

Because of the absence of genuine in competition in many towns and cities, the Competition Commission argued that market power had lead to passengers facing less frequent services and, in some cases, higher fares than where there is some form of rivalry.


The Commission wants to increase the contestability of the market and proposes better ticketing, better customer information, fair access for all operators to bus stations and closer scrutiny of future bus company mergers.

Bus Industry Background

* Passenger volumes: In 2010/11, 2.9 billion passenger journeys were made on local bus services

* Long run decline: The volume of passengers has stabilised after several decades of steep decline

* Concessionary fares: 36 per cent of passenger journeys in 2010/11 were made by concessionary passengers. This is a key feature of the UK bus market. Concessionary passengers do not pay any fares (after 9.30am in England and at all times in Scotland and Wales

* Main operators: The five largest operators are Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach

* Local monopoly/duopoly: Most areas are served by just one or two operators with a significant share of supply

* Low price elastcity of demand - the report found that changes in the fare or service on existing services offered by local bus operators had little effect on passengers’ overall use of the bus. It found that the price elasticity of bus demand, from all individuals in the sample, with respect to bus fares is –0.36 (i.e. inelastic). No significant differences were found for the time of day suggesting little actual difference in Ped between peak and off-peak times

* Business stealing effects: The Commission finds this is a key feature of the market, Most customers board the first bus heading towards their destination rather than compare prices between rival operators. ‘Business-stealing’ effects in local bus services occur relation to frequency. If an operator increases its frequency, the increase in demand for its services will largely be as a result of customers switching from other operators, rather than as a result of an increase in the total market demand for bus services.

* Multi-modal competition: The CC report finds that price elasticity of demand for bus service is always low and nearly always less than -0.5 which provides an opportunity for operators to increase fares and raise profit margins. But the bus operators claim that multi-modal competition provides a constraint on their pricing power even when they have a local monopoly. Higher fares might prompt people to use a car or take local rail and tram services if they are available. Fare rises might also be limited by the risk of creating adverse publicity in local areas

* Rates of return (profit): Bus operators with substantial market power have earned profits that were persistently above the cost of capital on a national basis suggesting some supernormal profits for these busiensses. The overall average rate of return on capital employed (ROCE) for the five-year period investigated was 13.5%

* Profitability at the end of the 5 year investigation period were higher than at the start

* Barriers to entry: Sunk costs of bringing a route to profitability can be substantial as are the risks from an intensity of post-entry competition as incumbent operators react and respond to new bus operators





Unit 3: Barriers to Entry - Patent Wars- A Touchy Subject for Apple

This excellent news piece from Ben Cohen at Channel 4 looks at the increasingly aggressive patent war being fought by the manufacturers of the world’s leading mobile phone and tablet devices - the most profitable products in the digital economy. “Where once the giants (Google and Apple) competed on features, they now compete on patents.”


The news feature looks in particular at the intellectual property surrounding the slide-screen technology used by millions to unlock a device. Apple claims the IP to this but a video tracked back to twenty years ago suggests that developers were already thinking of something remarkably similar long before the iPhone came into existence. Can the makers of Android defend legal claims from Apple that their IP has been infringed? And who will end up paying for the enormous legal fees and possible extra licencing costs?

Unit 3: Consequences & Examples of Price Discrimination

Who gains and who loses out from persistent and pervasive price targeting by businesses? To what extent does price discrimination help to achieve an efficient allocation of resources? There are many arguments on both sides of the coin – indeed the impact of price discrimination on welfare seems bound to be ambiguous.


Impact on consumer welfare


Consumer surplus is reduced in most cases - representing a loss of welfare. For the majority of buyers, the price charged is well above the marginal cost of supply.

However some consumers who can now buy the product at a lower price may benefit. Lower-income consumers may be “priced into the market” if the supplier is willing and able to charge them less. Good examples might include legal and medical services where charges are dependent on income levels.

Greater access to these services may yield external benefits (positive externalities) that then affect social welfare and equity. Drugs companies might justify selling their products at inflated prices in countries where incomes are higher because they can then sell the same drugs to patients in poorer countries.

Producer surplus and the use of profit

Price discrimination benefits businesses through higher profits. A discriminating monopoly is extracting consumer surplus and turning it into supernormal profit. Price discrimination also might be used as a predatory pricing tactic to harm competition at the supplier’s level and increase a firm’s market power.

A counter argument to this is that price discrimination might be a way of making a market more contestable. For example, the low cost airlines have been hugely successful by using price discrimination to fill their planes.

Profits made in one market may allow firms to cross-subsidise loss-making activities/services that have important social benefits. For example money made on commuter rail or bus services may allow transport companies to support loss-making rural or night-time services. Without the ability to price discriminate, these services may have to be withdrawn and jobs might suffer.

In many cases, aggressive price discrimination is a means of business survival during a recession. An increase in total output resulting from selling extra units at a lower price might help a monopoly to exploit economies of scale thereby reducing long run average costs.

Price discrimination occurs when a business charges a different price to different groups of consumers for the same good or service, for reasons not associated with costs.


Examples of price discrimination

Perfect Price Discrimination – or charging whatever the market will bear

Sometimes known as optimal pricing, with perfect price discrimination, the firm separates the market into each individual consumer and charges them the price they are willing and able to pay. If successful, the firm can extract the entire consumer surplus that lies underneath the demand curve and turn it into extra revenue or producer surplus. This is hard to achieve unless a business has full information on every consumer’s individual preferences and willingness to pay. The transactions costs involved in finding out through market research what each buyer is prepared to pay is the main barrier to a businesses engaging in this form of price discrimination.

If the monopolist can perfectly segment the market, then the average revenue curve becomes the marginal revenue curve for the firm. The monopolist will continue to sell extra units as long as the extra revenue exceeds the marginal cost of production.

In reality, most suppliers and consumers prefer to work with price lists and menus from which trade can take place rather than having to negotiate a price for each unit bought and sold.

Second Degree Price Discrimination

This involves businesses selling off packages or blocks of a product deemed to be surplus capacity at lower prices than the previously published or advertised price. Price tends to fall as the quantity bought increases.

Examples of this can be found in the hotel industry where spare rooms are sold on a last minute standby basis. In these types of industry, the fixed costs of production are high. At the same time the marginal or variable costs are small and predictable. If there are unsold rooms, it is often in the hotel’s best interest to offload any spare capacity at a discount prices, providing that the cheaper price that adds to revenue at least covers the marginal cost of each unit.

There is nearly always some supplementary profit to be made from this strategy. Firms may be quite happy to accept a smaller profit margin if it means that they manage to steal an advantage on their rival firms.

Early-bird discounts – extra cash flow

Customers booking early with carriers such as EasyJet or RyanAir will normally find lower prices if they are prepared to book early. This gives the airline the advantage of knowing how full their flights are likely to be and is a source of cash flow prior to the flight taking off. Closer to the time of the scheduled service the price rises, on the justification that consumer’s demand for a flight becomes inelastic. People who book late often regard travel to their intended destination as a necessity and they are likely to be willing and able to pay a much higher price.

Peak and Off-Peak Pricing

Peak and off-peak pricing and is common in the telecommunications industry, leisure retailing and in the travel sector. For example, telephone and electricity companies separate markets by time: There are three rates for telephone calls: a daytime peak rate, and an off peak evening rate and a cheaper weekend rate. Electricity suppliers also offer cheaper off-peak electricity during the night.

At off-peak times, there is plenty of spare capacity and marginal costs of production are low (the supply curve is elastic) whereas at peak times when demand is high, short run supply becomes relatively inelastic as the supplier reaches capacity constraints. A combination of higher demand and rising costs forces up the profit maximising price.

The internet and price discrimination

The rapid expansion of e-commerce using the internet is giving manufacturers unprecedented opportunities to experiment with different forms of price discrimination. Consumers on the net often provide suppliers with a huge amount of information about themselves and their buying habits that then give sellers scope for discriminatory pricing. For example Dell Computer charges different prices for the same computer on its web pages, depending on whether the buyer is a state or local government, or a small business.

Two Part Pricing Tariffs

Another pricing policy is to set a two-part tariff for consumers. A fixed fee is charged and then a supplementary “variable” charge based on the number of units consumed. There are plenty of examples of this including taxi fares, amusement park entrance charges and the fixed charges set by the utilities (gas, water and electricity). Price discrimination can come from varying the fixed charge to different segments of the market and in varying the charges on marginal units consumed (e.g. discrimination by time).

Product-line pricing

Product line pricing occurs when there are many closely connected complementary products that consumers may be enticed to buy. It is frequently observed that a producer may manufacture many related products. They may choose to charge one low price for the core product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin.

Good examples include manufacturers of cars, cameras, razors and games consoles. Indeed discriminatory pricing techniques may take the form of offering the core product as a “loss-leader” (i.e. priced below average cost) to induce consumers to then buy the complementary products once they have been “captured”. Consider the cost of computer games consoles or Mach3 Razors contrasted with the prices of the games software and the replacement blades!

Unit 3: Multiple choice questions (new ones!)

Unit 3: Multiple Choice Questions

View more documents from mattbentley34.

Unit 3: The Divorce between Ownership & Control

Ownership and control


The owners of a private sector company normally elect a board of directors to control the business’s resources for them. However, when the owner of a company sells shares, or takes out a loan or bond to raise finance, they may sacrifice some of their control. Other shareholders can exercise their voting rights, and providers of loans often have some control (security) over the assets of the business. This may lead to conflict between them as these different stakeholders may have different objectives. The flow chart below attempts to show the possible divorce between ownership and control.

The Principal Agent Problem


How do the owners of a large business know that the managers they have employed and who are making the key day-to-day decisions operate with the aim of maximising shareholder value in both the short term and the long run?

This lack of information is known as the principal-agent problem. In other words, one person, the principal, employs an agent (e.g. a sales or finance manager) to perform tasks on his behalf but he or she cannot ensure that the agent always performs them in precisely the way the principal would like. The decisions and the performance of the agent are both impossible and expensive to monitor and the incentives of the agent may differ from those of the principal. The principal agent problem is illustrated in the flow chart above.

Examples of the principal-agent problem that have hit the headlines recently in the UK include the mis-management of financial assets on behalf of investors (e.g. the case surrounding Equitable Life) and the management of companies on behalf of shareholders (e.g. during the turbulent years experienced by Marks and Spencer and Shell). The classic case in the United States is of course the Enron fraud and debacle. Follow this BBC news link for more background on the Enron case.

Incentives Matter! - Employee Share Ownership Schemes

There are various strategies available for coping with the principle- agent problem. One is the rapid expansion of employee share-ownership schemes and share-options programmes. The government has encouraged the wider use of share-ownership schemes through a series of tax incentives. But the use and occasional misuse of share options schemes has been controversial for several years. A recent example involved the US computer giant Apple.

The growth of "shareholder activism"

Many commentators are now questioning the assumption that shareholders play little direct role in influencing corporate strategy in modern corporations. There are plenty of examples in recent times when both institutional and individual shareholders have exercised their voting rights to express views on the direction that a company is taking or its performance. Typically they are critical of a perceived failure of a business to maximise shareholder value measured in terms of share price, the flow of dividend incomes etc.

An activist shareholder uses an equity stake in a business to put public pressure on its management. The rapid expansion of hedge funds who take equity stakes in many businesses has cemented the idea of shareholder activism. Many hedge funds take minority equity stakes and then try to get the existing management to divest poorly performing or unprofitable parts of a business and focus instead on core activities.

That said it remains the case that the general pattern of ownership and control within British industry is relatively dispersed. Typically the largest shareholder in any large business listed on the stock market is likely to own a voting minority of the shares. Majority ownership by a single shareholder is unusual. The usual presumption from this is that only the very largest shareholders have any incentive to participate in corporate decision making and few shareholders have any real voting power.

Examples of recent shareholder activism

Sainsbury's: In 2004, a third of J Sainsbury's shareholders voted against the supermarket's pay policy, objecting to its decision to give a £2.3m bonus to ousted chairman Sir Peter Davis. Sainsbury's subsequently decided to cancel the controversial pay award. Sir Peter Davis quit Sainsbury's after a group of major institutional shareholders demanded management changes. He was replaced by Justin King.

Disney: In 2004, Michael Eisner, the chairman and chief executive of Disney, resigned after 43% of Disney shareholders voted against his re-election.

Euro Tunnel: In 2004, the management board of EuroTunnel was ousted at the company's AGM. Private French shareholders were encouraged to protest by share tipster Nicolas Miguet and French campaign group, ADACTE because of the huge loss of share value and the assertion that the company could be turned around by a new board. EuroTunnel has continued to experience heavy losses and in July 2006 it filed for bankruptcy protection.

Vodafone: In May of 2006, Vodafone announced the biggest loss in British corporate history (£14.9 billion). Vodafone reported one-off costs of £23.5 billion due to the revaluation of their Mannesmann subsidiary. In July 2006, the CEO of Vodafone Arun Sarin came under huge pressure from a group of shareholders unhappy about the performance of the struggling telecoms company.

Corporate Social Responsibility and Business Ethics

Business ethics is concerned with the social responsibility of management towards the firm’s major stakeholders, the environment and society in general. There is a growing belief that ethical and ‘green’ business are linked to improved business performance over time because of increased public concern for human rights and the world environment. Many businesses are now trumpeting their progress in making their activities carbon neutral for example by offsetting the impact of their production activities on their environment through offset activities. Businesses such as Carbon Clear provide a means by which organisations can find ways to offset their carbon emissions.

Business ethics extends to treating all stakeholders ‘fairly’; hence the growing emphasis on health and safety issues, good working practices and the like in business decision-making.

For more reading on this try this link to the Institute for Business Ethics. The Times 100 Case Studies includes one on Cadbury’s and corporate social responsibility. Click here for BBC news articles on carbon neutrality.

Unit 4: UK alone as EU agrees fiscal deal

The European Union has decided to deepen its ties to hopefully sort out the mess that is the Eurozone. This clip and article help explain the fiscal issues that the EU faces. This could be a typical question in any unit 4 exam (and a Unit 4 Politics question, but that's for another day). (See points for discussion below)

Questions for discussion:

1. How will a common fiscal policy help the European Union?
2. What are the consequences of a toughter fiscal stance in the EU? (Think short term / long term)
3. What does the New York Times mean by a 'Two Speed Europe'?

European leaders say 26 out of 27 EU member states have backed a tax and budget pact to tackle the eurozone debt crisis.

 

Only the UK has said it will not join. Prime Minister David Cameron said he had to protect key British interests, including its financial markets.

 

The 17 countries that use the euro have all agreed to the deal.

 

Nine other countries have said they will sign up, some pending consultations with their parliaments.

 

Hungary originally said it would also remain outside the deal but has now changed its stance.

 

'Stable euro'

 

The UK effectively used its veto to block an attempt, led by the French and Germans, to get all 27 EU states to support changes to the union's treaties.

 

This was a night of political drama, and the long-term implications of what happened will be debated for months to come.

 

But there is a more immediate issue, which will be of primary interest to the financial markets. Will the European Central Bank (ECB) judge that enough has been agreed in Brussels to allow the ECB to do any more to help protect countries which are struggling to pay their debts?

 

That will not mean becoming a lender of last resort - a commitment to the unlimited buying of bonds. But the ECB could still do more, if it chose, to help bring down the cost of borrowing for countries like Italy and Spain.

 

Sovereign debt woes in several member states are still at the heart of this crisis, and if further action is not taken to resolve them, there may not be much of a eurozone left to haggle over.

 

Euro deal means less sovereignty

 

Instead, eurozone members and others will adopt an accord with penalties for breaking deficit rules. It will be backed by a treaty between governments, not an EU treaty.

 

"In fact, 26 leaders are in favour of joining this effort. They recognise the euro is a common good," said European Council President Herman Van Rompuy.

 

Mr Cameron said he had done "the right thing" by not signing up to the deal, as it was not in Britain's interests.

 

"We were offered a treaty that didn't have proper safeguards for Britain, and I decided it was not right to sign that treaty," he told the BBC.

 

"We're still in the single market. That is the best safeguard of keeping markets open," he said.

 

German Chancellor Angela Merkel said the UK was the only country to have expressed reservations, but that Mr Cameron had recognised that a stable euro was in Britain's interest.

 

Of the nine other EU countries outside the euro, Hungary, the Czech Republic and Sweden have said they must consult their parliaments. Six others - including Denmark, Poland and Latvia - have agreed to join the new deal.

 

However, some countries - such as the Republic of Ireland, which is in the eurozone - have a constitutional requirement to hold a referendum on any major transfer of powers to the EU.

 

The Irish Minister for European Affairs, Lucinda Creighton, told the Reuters news agency the probability of a referendum was "50-50 and we will be looking at the detail over the next couple of weeks".

 

EU leaders aim to have the pact - known as a "fiscal compact" - ready to take effect by March.

 

Its main provisions include:

 

a cap of 0.5% of GDP on countries' annual structural deficits

 

"automatic consequences" for countries whose public deficit exceeds 3% of GDP

 

the tighter rules to be enshrined in countries' constitutions

 

the EU's permanent bailout facility, the European Stability Mechanism (ESM), to be accelerated and brought into force in July 2012

 

the adequacy of 500bn-euro (£427bn; $666bn) limit for the ESM to be reassessed

 

eurozone and other EU countries to provide up to 200bn euros to the International Monetary Fund (IMF) to help debt-stricken eurozone members

 

Continue reading the main story Euro agreement - from the papersThe Guardian says Britain is "facing isolation in Europe" after David Cameron vetoed a revision of the Lisbon treaty.

 

In the Economist, the Charlemagne's notebook blog describes the agreement - and Britain's non-participation - as Europe's "great divorce".

 

The Financial Times says EU leaders are "struggling to cope" with what it describes as "a profound split".

 

The New York Times describes the agreement as "not a perfect solution," because it could be seen as institutionalizing a two-speed Europe - but it says the pact could be ratified much more quickly than a full treaty amendment.

 

   

Year 13: Latest test results

Guys,

Much better, but still room for improvement...


Grade boundaries are as follows:

A* = 28

A = 25

B = 22

C = 19

Georgia = 22

Larissa =  25

Michael =  30

Elizaveta = 31

Sami = 26

Ramez = 25

Ruardri =  23

Unit 1: Maldives 'Rubbish Island' is 'overwhelmed' by garbage

The government of the Maldives has temporarily banned the depositing of rubbish from its hotels onto an island used almost entirely as a garbage dump.

Thilafushi, an artificial island 7km (four miles) from the capital, is nicknamed Rubbish Island.

The accumulation of garbage there has become so acute that it has begun spilling into its lagoon.

An emergency clearing operation has begun to remove "hills of rubbish" mostly collected from luxury hotels.

Rubbish Island is a far cry from the Maldives' famous turquoise waters and white sands.

Those who have been there describe vast piles of rubbish and perpetual smog and smoke.

The routine is for mainly Bangladeshi workers to sift through the trash to look for materials their employers can sell.

Waste from the whole country is taken there to the island be buried, burnt or - for some plastic and metal - recycled.

Much of the rubbish comes from the luxury resorts which, reportedly, do not follow the rules on crushing their waste.

The boats that bring rubbish to Thilafushi have recently started dumping it into the lagoon, many boatmen impatient at having to wait up to seven hours to unload it.

The head of the Maldives' Environment Protection Agency, Ibrahim Naeem, says that delays in dealing with rubbish are caused by technical problems with the unloading of trucks.

He stressed that Thilafushi was not full up and that work was under way to improve waste disposal and ban open incineration.

Mr Naeem said the jetty for rubbish from outlying islands will be closed until the lagoon is cleaned up - although a separate quay for the capital, Male, remains open.

Criticising the waste management on Thilafushi, local environmental campaigner Ahmed Ikram said that years of promises to create a biofuel facility on the island to generate more power had come to nothing.

Mr Ikram's Bluepeace organisation has highlighted the problem of toxins from poisonous waste seeping into the sea.

Thilafushi was reclaimed from a coral reef 20 years ago. There are other industries there, including boat repairers.

Questions for discussion:

How could the Maldives government reduce this clear example of market failure?

Unit 4: Impact of Austerity on Economies

Several countries have recently implemented 'austerity packages' - attempts to reduce government spending and increase taxes, in an effort to reduce their budget deficit. It was hoped, these austerity packages would 'restore confidence', improve countries fiscal position and enable long-term recovery.

Austerity in the 1930s

Main Impact of Austerity

Lower Demand.
A cut in government spending and higher taxes will lead to lower aggregate demand and lower economic growth. If there is a fall in output, firms will employ less workers leading to higher unemployment. Also, government spending cuts may involve making public sector workers redundant. In addition, media coverage of 'austerity measures' tend to reduce consumer and business confidence. Fears over job losses and expectations of lower growth will encourage consumers to save rather than spend . This will be a further drag on consumer spending and economic growth (paradox of thrift). As a result of austerity measures in 2011, the OECD now forecast negative growth of -0.8% for the Eurozone in 2012.

Lower inflation.
Spending cuts will tend to lead to lower inflation. Firstly, the fall in aggregate demand (AD) will lead to lower inflationary pressures in the economy. Also, if the government limits public sector wages, this will put downward pressure on wages. Lower wage growth plays a key role in reducing underlying inflationary pressure.

Competitiveness.
It is hoped that austerity measures will help create greater pressure to reduce costs. These lower costs can help improve competitiveness. This is important for countries in the Euro, such as Ireland, Greece and Spain. In the boom years, they became uncompetitive leading to lower export demand and a current account deficit. Measures to deflate the economy should make exports more competitive. Ireland has been relatively successful in improving competitiveness, this is reflected in their move from a trade deficit to trade surplus in recent months. However, this attempt to improve competitiveness through lower inflation may take several years, and involve a high cost of lower growth and unemployment.

Irish GNP

Ireland has been one of more 'successful' countries which has embarked on austerity, but this shows GNP is still significantly below pre-crisis levels (when real GNP was growing at an average rate of close to 5% a year)

Budget Deficit.
Higher taxes and lower spending will lead to an improvement in the government's budget deficit. This will help improve public finances in the long term.

However, if austerity measures cause lower economic growth, the government will also see a fall in cyclical tax revenues. e.g. increasing tax rates, should increase revenue. But, if higher taxes cause a recession, there will be less people working and so income tax revenue may actually fall. Also, if austerity measures cause unemployment, it will require higher government spending on benefits.

For example, the UK's budget deficit fell slower than expected. This was partly because growth forecasts proved overly-optimistic. The austerity measures led to a slowdown in growth.

What Determines the Impact of Austerity?

Labour market flexibility.
If labour markets are flexible, it may be easier to cut wages, and labour costs. This may make it easier to restore competitiveness and restore economic growth. However, if there is great resistance to lower labour costs, it will be much harder to restore competitiveness.

What Spending is Cut?
If a government cuts spending by raising the retirement age to 70, then this will not lead to lower growth. In fact it could help increase labour supply and increase productivity. However, if the government cut spending on current infrastructure investment, this will have a much greater impact on reducing domestic demand and lead to lower economic growth.

Monetary policy.
Austerity involves lower domestic demand. However, if monetary policy can be loosened (e.g. lower interest rates or increased money supply) then the deflationary effects of spending cuts can be offset. For example, in the Euro, countries like Greece have fiscal austerity, but there is no corresponding loosening of monetary policy (e.g. the ECB increased interest rates in early 2011 and didn't pursue any quantitative easing). By contrast, the UK has more flexibility because the Bank of England pursued quantitative easing.

Exchange Rate.
Austerity is not as damaging if a country can devalue the exchange rate. This devaluation helps to restore competitiveness much quicker than relying on internal devaluation. The depreciation helps boost export demand. Countries in the Euro, can't devalue and so have to rely solely on internal devaluation to restore competitiveness.

Global Growth.
Austerity is not as damaging if the rest of the world economy is doing well. If global growth is strong, export demand will be strong. However, if all countries are experiencing a recession, then deflationary fiscal policy will have a greater impact in reducing domestic demand.

Central Bank Intervention.
Countries in the Euro, without a lender of last resort, are having to cut spending much quicker than countries outside the Euro. This is because bond yields on Euro debt has risen very quickly because markets fear liquidity shortages.

Unit 1: Market Failure Vs Government Failure

One of the most prominent economists of the 20th century was the late Milton Friedman, an ardent free market supporter who remained skeptical of government’s ability to correct market failures through interventionist policies.


I found the talk below interesting. Friedman offers several examples of market failures that have been pointed to as a justification for government intervention, and argues that in fact, government often does not truly know what the right outcome is in most cases. He believes that government failure should be just as much a concern as market failure; and that therefore societal welfare would be best met by finding market-based solutions to the misallocation of resources that sometimes arises under conditions in which externalities exist.

As you watch the video, consider Friedman’s claims regarding the role of government, then post your response to one of the discussion questions below.



Discussion Questions:


1.Is government better able to know the “optimal” quantity of output of different goods and services than private individuals are?

2.Under what conditions would the free market be best able to achieve solutions to market failures such as those described by Friedman?

3.What do you think should be of greater to concern to society, market failure or government failure?

Unit 4: How close to the 1%-ers are you?

Type your yearly income (in US$) into the calculator below and click here to see where you fit in as far as percentile of income relative to everyone else. So, for example if you earn the equivalent of $30,000 (a little under £20,000) you are in the 37th percentile or in other words, 63% of other income earners are paid more than you!

“An annual salary above $506,000 puts you in the top 1%, while you need to make less than $2,500 a year to be in the bottom 1%. Where do you stand?”

 
This is a real eye opener re income distribution in the US. Unfortunately, (or fortunately depending on your point of view) this widening of the income distribution spread is common place in the developed world.
 
Q's - Why is this a problem?

Unit 3: How do small firms survive?

Hope Bikes - A Commitment to Excellence

Are you into your cycling? The huge expansion of interest in cycling in the UK from road racing through to BMX and mountain-biking has gone hand in hand with the fantastic success of British cyclists on the international stage. 2012 promises to be another strong year for the industry despite difficult economic conditions.


Check out this brief documentary on Hope Bikes - a British brand that has a remarkable commitment to design excellence, constant innovation, trial and error, and precision engineering.

Watching this ten minute video is a compelling and beautiful study in the concept of value added and the potential of small businesses to develop durable and successful brands despite competition from huge multi national companies.

Year 13 - Recent test results!!!!!

Guys,

I have decided to publish these results as they do not make for great reading!!
As a group you should all be getting at least 'A' grade in the multiple choice (more than 29) as it is likely your score on the data question will not be as good.

Grade boundaries are as follows:
 
A* = 32
A = 29
B = 25
C = 22
 
Charlotte = 32
Georgia = 24
Larissa = 25
Michael = 33
Elizaveta = 29
Sami = 24
Ramez = 28
Ruardri = 29
 
We will be having a two tests every week up to the examination. This could be a data Q or a multi choice.
 
Please make sure you complete both data questions and set up a blog. If you can write the second question on the blog (the chocolate Q) that would be helpful.

Unit 3: Past Paper & Mark Scheme (June 05)

June 05 Unit 3 Past Paper

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June 05 Unit 3 Mark Scheme

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University: Some practice interview questions for Economists

Don't worry if you have no clue....but I suggest you revise.....

Some Practice Interview Questions

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Oxbridge Candidates + any others who may have an interview

It's the week before Oxbridge interviews so I thought I would leave the syllabus for one minute and post instead a great piece from RSA animate (one in a tremendous series) on the divided brain. It is a thrilling animation and one that repays a second or a third look. It is challenging for sixth form students but that is one of the main purposes! And the Prisoners’ Dilemma makes a brief appearance near the end too! Do have a look....enjoy!

Unit 3: Case Study Question - Waterstones, the book seller

See below for a question on Waterstones....we will discuss in class and you will complete for homework.

Unit 3 Case Study: Waterstones pricing strategy failure!

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Unit 3: Brand Loyalty in Mobile Phones

Brand loyalty is hugely important in all kinds of industries and markets. The costs of acquiring a new customer vastly outweigh the expense of selling more to existing buyers and most of the mobile phone suppliers in this oligopolistic industry focus an enormous effort in building brand identity and brand loyalty to reduce the rate of customer churn (people who switch brands).

 

According to a new report, over eight in ten iPhone users said they would pick iPhone again when they replace their mobile, while 60 per cent of consumers who use smartphones running Google’s Android said they would stick with phones using the same software. Blackberry users have notably less attachment to their mobiles - and I speak as a Blackberry use of several years standing!

 

When brand loyalty is strong, the cross-price elasticity of demand for price changes between two substitutes weakens, fewer consumers will switch their demand when there is a change in relative prices in the market. Robust brand loyalty makes it easier to charge premium prices and enjoy supernormal profits in the long run because loyalty is a barrier to entry.

 

When we become strongly attached to a brand, our purchasing decisions are more likely to stay in default mode and we may no longer even consider rival products.

Questions:

1. Just how contestable is the mobile phone market?
2. What price & non-price strategies could they use to increase their market share?

  

 

Unit 3: Tacit Collusion in the Supermarket

UK supermarkets are currently involved in 'price matching' and 'big price drop' schemes


On the surface the brand price match scheme shown in the picture below looks like a good deal for consumers in this time of financial hardship and distress.

But what if this ‘parallel pricing’ serves merely as a form of tacit collusion with prices on a range of products actually higher than they might be without the illusion of price comparisons and discount voucher compensation?

IGCSE: Monetary Policy Notes and an interactive game....

Monetary Policy

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Click here to access the Bank of England Balloon game......more difficult than it looks!

Click here to access a game in which you try and control the Eurozone economy...something which the current lot are struggling with!!

Quantititave easing made simple..

IGCSE June 11 Past Paper

Y10 IGCSE Homework - Please complete questions 1 (iv), 2, i, ii & iii

IGCSE Past Paper - June 11

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Unit 3: Pricing Strategies - Cut price cup cake deal goes wrong…...

‘Need a Cake’ is a small business in Reading owned by Rachel Brown, who has been in the baking business for 25 years and simply loves making and decorating cakes. Her website says “I can never remember a time, even as a child, when I did not enjoy creating innovative cakes.” The business employs eight people, and normal production is around 100 cakes a month. Mrs Brown thought she would like to try expanding a little, and decided to offer online vouchers for a discount deal in order to drum up some new customers - with disastrous results.


Need a Cake offered a deal of 12 cupcakes with a choice of flavours and designs for £6.50, which would normally cost £26 - a discount of 75%. The offer was posted via Groupon - a US based group-buying website. The Groupon offer is a ‘deal-a-day’ subscription website used by companies that offer deals in the hope of gaining new customers, or using the offer as a loss leader to attract customers who will then spend more on other goods during their visit. It offers discount coupons to subscribers which give discount deals on anything from restaurant meals to spa treatments. It uses collective buying power to achieve lower prices and the deals it offers are available only if a minimum number of people sign up.

Mrs Brown’s offer on the website invited customers to ‘construct their ideal cupcake, choosing from sponge flavour, icing and decoration options’. It proved far more tempting than she imagined - with 8,500 orders for a total of 102,000 cakes.

The company had to bring in less skilled agency staff to try to meet the upsurge in demand, and for a business which takes pride in making cakes of exceptional quality that caused real worries about maintaining the usual standards. Potentially worse though, was the effect on the finances: after spending an extra £12,500 on staff and distribution, Mrs Brown made a loss of £2.50 per order. She had not calculated the effect of the discount on her breakeven level of output, and had no idea that the effect of the discount offer would wipe out her profit for the year. She has not gone bust, but says “Without doubt, it was my worst ever business decision.”

Some help from an AS Economicss student would have helped here - application of the formulae for Price Elasticity of Demand and Breakeven level of Output could have been added to some awareness of the risks for small businesses using open offers on the internet and might have helped to analyse the decision for her.

Questions for discussion:

What type of pricing strategy was this?

Why was it not successful?

Unit 3: Analysis and evaluation - do monopolies always make supernormal profits?

This is another great example highlighting the difference between analysis and evaluation.


The theory states that the existence of strong barriers to entry generally allow for monopolies to make long-run supernormal profits. An example or two plus a well-drawn diagram will be the icing on the cake in terms of analysis. But is it always true?

One example to show how it is not always true is the postal service. In many countries, the postal service has been (or still is) a statutory monopoly. However, it is not immune to the impact of technology and the advent of email and social media has led to a significant decrease in demand.

Students may be surprised to know that 15 years ago most people sent birthday cards through the post. Nowadays, a quick message on facebook seems to suffice. This changing behaviour is having a significant impact on the US Postal Service, which delivered 3 billion pieces less in the 2011 fiscal year than the year before it. All up this led to a loss of $5.1 billion and calls for help from the US government.
The power of innovation and technology is also a game changer. Ten years ago, Microsoft was public enemy # 1 in terms of being a powerful monopoly and stifling competition. Much smaller companies like Apple were simply unable to compete….....well that was then and this is now.

By producing products that consumers want, Apple has forged ahead and is now a larger company (by market capitalisation). And there are not too many calls for Apple to be regulated or split up!

Unit 4: A must watch - EU debt explained by comedians.....

Brilliant sketch by Clarke & Dawe, which does help explain the EU debt crisis......Economics is crazy!



On a more serious note, Click here to access a great infographic on EU debt. It is interesting to see that despite being skint itsself, America is owed lots of money from various EU countries!

No wonder Obama is worried about the EU!

IGCSE/Unit 2: Evaluating Macroeconomic Policies

I came across this article on the BBC website that looks at the majority of policy options facing the UK.

It provides an excellent overview of macroeconomic policy, outlining the advantages and disadvanatges and thus providing some useful evaluation for students in year 11 and 12.

Unit 2/4: Cartoon on inequality - perfect for explaining analysis and evaluation!

This cartoon is something that you are sure to have an opinion on and can be used to clearly explain the difference between analysis and providing evaluative comment.

The analysis comes under the heading about why the cartoon is often true and the evaluation comes from considering whether it is always true.

Try and make some comments under each of the headings. If you do this, you should have analysed and evaluated!

IGCSE & Unit 2: Video Clips on Unemployment

Here are some updated charts on unemployment for the UK and a range of other countries.

Unemployment Charts November 2011

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In addition, here are some short video news clips on aspects of unemployment. These clips provide a window on the human and social cost of high rates of unemployment and are especially useful in reinforcing the causes of unemployment and evaluation of policies likely to be most effective in bringing jobless rates down over time.




BBC Scotland: (Oct 2011) ‘Lost generation’ fear for youth - this video actually mentions hysteresis effects - superb!


BBC News (Oct 2011) Unemployment in the UK reaches a 17-year high

BBC London: (Oct 2011) One in Ten is unemployed in London

BBC news: (Oct 2011) Youth unemployment in UK expected to reach 1m

Guardian Interactive: UK unemployment since 1984

IGCSE & Unit 2/4: Economics data from EU

The Economist has published an updated interactive graphic which is a 5* must-use resource for students grappling with Europe. The full article and infographic can be accessed here

Unit 1: Government Failure - Is the Sun Dipping on Solar Subsidies?

To promote the expansion of renewable energy sources, many governments have introduced subsidies for consumers who install solar panels.


In April 2010, the Labour government introduced generous feed-in tariffs to encourage households to install solar photovoltaic systems. Anyone spending £13,000 up front to fit a system to their home was paid 41.3p per kilowatt hour (kWh) generated – enough to earn them a typical annual income of £900 a year in payments, on top of a £140-a-year saving in reduced electricity bills. The big six energy companies are required by law to pay householders who generate their own energy.

It looks like the days of generous subsidies for solar panels are coming to an end and there is a rush on to install them before the feed-in-tariff system is changed.

The number of installations of solar panels has risen due to incentives available from feed-in tariffs (FITs) and because of the rise in the cost of standard household energy. Since 2004 the average annual bill for a dual-fuel energy customer has risen by 117 per cent, to £1,293. The price of solar panels has come down as manufacturers have exploited economies of scale and the importation of cheap solar panels from China. The average cost of installation has dropped from an average £13,000 to £9,000 for the technology

For some economists, solar subsidies are inefficient with expensive opportunity costs. They argue that the millions of pounds allocated to the feed-in-tariff scheme is better spent encouraging innovation in marine energy, reliable offshore wind technology, organic solar cells and carbon capture and storage. The UK Treasury points to examples of mis-selling and inappropriate placing of solar panels as evidence that subsidies are being misused.

The money to pay for feed-in-tariffs comes from increasing everyone’s energy bills many of whom cannot even think of affording to install their own equipment.

In October 2011 the Coalition government announced that all homes with new solar electricity panels must meet minimum energy efficiency standards in order to benefit from subsidies

The British government has pledged to produce 20% of our electricity from renewable resources by 2020. With big-scale wind turbines running into planning difficulties, solar panels have an important part to play. But should the government continue to use generous feed-in-tariffs as the main incentive for this source of renewable energy? Can the sector survive without direct government intervention?

Check out these video links:

BBC news video: Rush to beat solar power deadline in Nottingham

BBC news video: Somerset solar farm build is under way in Puriton

BBC news video: Lower solar tariffs cost firm £1m
BBC News video: Thousands of council tenants offered free solar panels

Unit 3: Jan 11 - Examiners Report

Jan 11 - Examiners Report

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Unit 3 Micro: Time of Use Pricing for Energy

When is electricity demand highest in the UK? The answer comes at the end of the blog!

 

The UK government is committed to the rolling out of smart energy meters between now and the end of 2020. Millions of homes will have smart meters installed which track how much electricity you use and when you use it - the installation cost is approximately £350 per unit although this may come down with the utilisation of economies of scale.

Meters will give consumers and the monopolistic utility firms minute-by-minute information about energy consumption and this could fast-forward the launch of time of use pricing tariffs for us all in the years ahead. It will mark a move away from flat-rate tariffs towards fully-fledged peak and off-peak pricing.

 

At the moment around one in ten households are on Economy 7 tariffs which offers lower prices for electricity used during off-peaking times in the late evenings and early mornings. Economy 7 seems to have been around for as long as CEEFAX and if you understand that you are giving your age away!

 

This is a clear example of price discrimnation - as usual, there re advantages and disadvantages:-

Advantages

There are several economic arguments for time of use pricing providing that consumers are properly aware of what the pricing tariffs are and how they might be able to benefit from them.

 

• It makes sense for prices to be lower during the night when the UK electricity generating network is operating with spare capacity. Savvy households will be able to re-organise the timing of using their major appliances and save money.  
• Fewer people will leave their appliances on standby (a deadweight loss of scarce energy) if they know what the financial cost is.
• Advances in technology in power storage heaters and immersion heaters ought to mean for example that water heated up at night at lower prices can be utilised effectively during the day without the need for re-heating.

Disadvantages

 

• On the other hand, critics claim that large working families do not have such flexibility and might end up paying higher average tariffs when their washing machines and hot water boilers are working flat out to meet the heavy demands of a growing family.
• They are also concerned about the amount of private data that can be stored on these meters and they doubt whether electricity supply companies will necessarily pass on savings to consumers in the form of lower prices.

Time of use pricing is common in many other countries, the example I give below comes from Ontario in Canada.

Ontario Pricing Example:

 

Current smart meter time-of-use rates for summer:

 

1/ Weekends & Holidays - All Day - 5.9 ¢/kWh

 

2/ Summer Weekdays (May 1 to October 31)

 

7 am to 11 am - 8.9 ¢/kWh

 

11 am to 5 pm - 10.7 ¢/kWh

 

5 pm to 7 pm - 8.9 ¢/kWh

 

7 pm to 7 am - 5.9 ¢/kWh

 

It may not be too long before it becomes routine to set the timer switches on all of our washing machines, tumble dryers, dishwashers and immersion heaters so that they switch on only when the rate is lower.

Questions for discussion:-

Is the approach of charging more to boil a kettle for a cup of tea when everyone else is doing so (for example at half time in the football or during a break in Coronation Street) equitable?

Will greater use of the price mechanism be a sufficient incentive for consumers to alter their behaviour in ways that enhance sustainability?

 

Or will it just bring even greater confusion in the market place and risk hitting vulnerable groups with older appliances who have little choice about when their consumer durables are switched on and off?

 

The answer to the question: When is electricity demand highest in the UK? Answer: between 5pm and 7pm on weekday nights!

 

BBC news video: The smart way to consume energy?

 

BBC news: Smart meters ‘must not deter switching’

 

 

 

IGCSE: Price

IGCSE: Fish & Chips - Movement along the demand curve

1,200 people queued to get their hands on a fish and chip takeaway meal for just £1. Fosters Fish and Chips shop in Didsbury, Manchester, was offering the special promotion to celebrate its first birthday.


And the £4.75 savings on the usual price appeared to be reason enough for 1,200 customers to wait hours in line.
 

The staff opened the shop early in preparation for the expected rush and made sure they stocked extra fish and chips to meet demand. However they had to stop serving at 10pm when their stocks ran out.


A great exampleof a price fall causing a movements along the demand curve.

Unit 3 - Competition Policy, Regulation, the OFT and CC

Competition Policy


Competition policy covers the different ways in which the competition authorities of national governments and also the European Union seeks to make markets work better and achieve a higher level of economic efficiency and economic welfare.

The Main Aims of Competition Policy

The aim of competition policy is promote competition; make markets work better and contribute towards increased efficiency and competitiveness of the UK economy within the European Union single market.

Competition policy aims to ensure:

• Wider consumer choice in markets for goods and services.

• Technological innovation which promotes gains in dynamic efficiency.

• Effective price competition between suppliers.

• Investigating allegations of anti-competitive behaviour within markets which might have a negative effect on consumer welfare.

There are four pillars of competition policy in the UK and in the European Union:

• Antitrust & cartels: This involves the elimination of agreements which seek to restrict competition (e.g. price-fixing agreements, or cartels) and of abuses by firms who hold a dominant position in a market.

• Market liberalisation: Liberalisation involves introducing fresh competition in previously monopolistic sectors e.g. energy supply, telecommunications, air transport and postal services together with new arrangements for car retailers inside the single market.

• State aid control: Competition policy analyses examples of state aid measures by Member State governments to ensure that such measures do not artificially distort competition in the Single Market (e.g. the prohibition of a state grant designed to keep a loss-making firm in business even though it has no prospect of long-term recovery).

• Merger control: This involves the investigation of mergers and take-overs between firms (e.g. a merger between two large groups which would result in their dominating the market).

Anti-Trust Policy - Abuses of a Dominant Market Position

A firm holds a dominant position if its economic power enables it to operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers.

In appraising a firm's economic power in the marketplace, the EU Commission considers its market share and other factors such as whether there are credible competitors, whether the firm has ownership and control of its own distribution network and whether it has favourable access to raw materials. Note here that market share is not the sole determinant of economic power in an industry

Holding a dominant position is not wrong in itself if it is the result of the firm's own effectiveness and competitiveness against other businesses. But if the firm exploits this power to stifle competition, this is deemed to be an anti-competitive practice.

A recent example of this has been the long investigation and legal battle by the EU Commission into the alleged abuse of market power by Microsoft. Microsoft was accused of continuing to abuse its monopoly in the software market. The investigators alleged that Microsoft bundled Media Player with Windows, unfairly damaging rival programs such as Real Networks’ RealPlayer and Apple Computer’s QuickTime. The investigation and fall-out has now lasted more than eight years. In March 2004 the EU fine Microsoft €497m levied in March 2004 for its alleged abuse of its dominant position in the operating software and server software market.

Anti-Competitive Practices:

Anti-competitive practices are best defined as strategies designed deliberately to limit the degree of competition inside a market. Such actions can be taken by one firm in isolation or a number of firms engaged in explicit or implicit collusion. Since 1998 there have been numerous investigations in industries such as chemicals, banks, pharmaceuticals, airlines, beer, and paper, plasterboard, food preservatives and computer games!

Examples of anti-competitive practices

Predatory pricing financed through cross-subsidization (not all price discrimination is anti competitive though – much of it is simply a genuine attempt to remain competitive in a market). An example of an allegation of predatory pricing came in 2005 when Wal-Mart was accused of using this strategy as it tried to break into the German food retail market. Wal-Mart faced accusations that it was using short-term predatory pricing to put small shopkeepers out of business. In July 2006, it was announced that Wal-Mart was pulling out of Germany having sold its stores to another business.

Vertical restraint in the market:

Exclusive dealing: This occurs when a retailer undertakes to sell only one manufacturer's product and not the output of a rival firm. These may be supported with long-term contracts that bind or “lock-in” a retailer to a supplier and can only be terminated by the retailer at high financial cost. Distribution agreements may seek to prevent instances of parallel trade between EU countries (e.g. from lower-priced to higher priced countries)

• Territorial exclusivity: This exists when a particular retailer is given the sole rights to sell the products of a manufacturer in a specified area

• Quantity discounts: Where retailers receive progressively larger price discounts the more of a given manufacturer's product they sell - this gives them an incentive to push one manufacturer's products at the expense of another's in order to widen their own profit margins

• A refusal to supply: Where a retailer is forced to stock the complete range of a manufacturer's products or else he receives none at all, or where supply may be delayed to the disadvantage of a retailer

• Creation of artificial barriers to entry: Through advertising and marketing and brand proliferation which increase the costs of a new firm successfully entering a market

• Collusive practices: These might include agreements on market sharing, price fixing and agreements on the types of goods to be produced.

Price Fixing – The Office of Fair Trading

UK competition law now explicitly prohibits almost any attempt to fix prices - for example, you cannot:

• Agree prices with your competitors, e.g. you can't agree to work from a shared minimum price list

• Share markets or limit production to raise prices

• Impose minimum prices on different distributors such as shops

• Agree with your competitors what purchase price you will offer your suppliers

• Cut prices below cost in order to force a smaller or weaker competitor out of the market

The law doesn't just cover formal agreements. It also includes other activities with a price-fixing effect. For example, you shouldn't discuss your pricing plans with your competitors. If you then all "happen" to raise your prices, you are fixing prices.

Cartels and the law in the UK

Cartels are a particularly damaging form of anti-competitive behaviour - taking action against them is one of the OFT's priorities. Any business found to be a member of a cartel could be fined up to 10 per cent of its worldwide turnover. In addition, the Enterprise Act 2002 makes it a criminal offence for individuals to dishonestly take part in the most serious types of cartels. Anyone convicted of the offence could receive a maximum of five years imprisonment and/or an unlimited fine.

There have been many examples of allegations of and investigations in price fixing and other forms of collusive behaviour in UK and European markets in recent years. They all provide interesting evidence of how the competition authorities both in the UK and in the European Union are using their enhanced powers under new competition laws to investigate possible instances of price fixing or anti-competitive behaviour.

House of Fraser and Oakley – price fixing for sunglasses

The House of Fraser department store group is facing accusations that it colluded with Oakley to fix the price of its sunglasses, which sell for between £50 and £200 a pair. Following a two year investigation, the Office of Fair Trading (OFT) has published a provisional report claiming that both House of Fraser and Oakley have breached the 2002 Competition Act. Both companies now have the opportunity to make submissions to the OFT in defence of their position.

The OFT believes that between November 2001 and March 2004, Oakley supplied House of Fraser with sunglasses on the condition that the department store sold them at no lower than the Oakley suggested minimum selling price. The investigation was instigated after complaints from rival retailers and complaints from some customers. If the findings are confirmed, the OFT has the power to fine a firm up to ten per cent of its turnover.

Dual pricing – Sony versus the internet retailers

The UK Office of Fair Trading is investigating accusations of possible illegal price discrimination by the global electronics giant Sony. Some online retailers have complained that Sony is discriminating against them by offering cheaper (discounted) prices to established high street retailers and making the online retailers pay more for their supplies of many of Sony's top selling products.

The complaint came from the Interactive Media in Retail Group (IMRG) and their claim was that dual pricing acts as an anti-competitive strategy which is damaging to consumer welfare. Dual Pricing is a mechanism recently introduced by electrical consumer goods manufacturers whereby their dealers pay more for goods if sold online.

The IMRG claimed that there is no economic justification for dual pricing and that the defence that it costs more to run a "bricks and mortar" retail business compared to an online business is both irrelevant and open to dispute. In a press release they claim that

Sony have been exposed in the newspapers as one of the manufacturers being looked at but others including Panasonic, Sharp, Phillips and Hitachi may also have their dual-pricing tactics considered.

Price fixing in the dairy industry

The Office of Fair Trading is investigating claims that some of the UK's top dairy processing businesses have been involved in a price fixing agreement. Dairy Crest and Robert Wiseman, two of the UK's top three dairy processors are under the microscope and Arla Foods may also be part of the broader scope of the investigation which centers on a decision by the dairy processors to jointly increase the price paid to milk farmers in the UK. But this investigation is coming under quite fierce criticism from supporters of the farming industry who believe that unless effective steps are taken to raise the prices and incomes flowing to milk producers, the industry itself may collapse with the loss of thousands of jobs.