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Monday 31 October 2011

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.

Sunday 30 October 2011

Y12 Economics - Absolute & Comparative Advantage


Click here to access the video on Absolute & Comparative Advantage.

Saturday 29 October 2011

Unit 3: OFT - Manchester United and unfair business practice!

Unit 1 & IGCSE: Is the demand for petrol becoming more elastic?

The price of petrol at the pumps has risen substantially over the past few years. In the UK, according to the AA, the average price between January and June 2011 was 133.13p. In the same period in 2010 it was 116.68p; and in the same period in 2008 it was 109.00p.

Over the first six months of 2011, the amount of petrol sold fell by 5.2 per cent. This was on top of the decline in consumption over the previous four years. Between 2006 and 2010 consumption of petrol fell by 17.4%. The consumption of petrol and diesel are given in the following table.

UK consumption of petrol and diesel (tonnes millions)
           2006 2007  2008  2009   2010

Petrol 18.14 17.59 16.68 15.76 14.99

Diesel 20.15 21.07 20.61 20.06 20.87

Total  38.29 38.66 37.29 35.82 35.86

Source: Digest of United Kingdom energy statistics (DUKES) (Department of Energy and Climate Change)

So what has caused this decline in petrol sales? Are there multiple factors at work here? Have a look at the articles and consider the explanations.

Articles

Cash-strapped drivers cut petrol use by 15 per cent Channel 4 News (5/10/11)

Sales of petrol slump as skint motorists cut costs Daily Record, Jamie Grierson (5/10/11)

Petrol Sales Plunge As Cash Squeeze Tightens Sky News (6/10/11)

Fuel cost rise ‘forcing change in driver habits’ TRL News, Mary Treen (6/10/11)


Questions
1.What factors have caused a fall in consumption of petrol?

2.If you choose to spend a set amount on petrol, what is your price elasticity of demand?

3.What determines the price elasticity of demand for petrol?

4.Why has the consumption of diesel fallen less than that of petrol?

5.Under what circumstances would an increase in tax on road fuel of 3p per litre (as planned for January 2012), result in a decrease in tax revenue?
6.Why is it likely that people’s price elasticity of demand for road fuel will become less elastic the more they have cut back on consumption?

7.Why is the demand for petrol likely to be more elastic with respect to (a) price, and (b) income over the longer term?

8.To what extent is the demand for road fuel a ‘derived demand’?

9.To what extent is the fall in the consumption of petrol a reflection of a movement along the demand curve for petrol or a shift in the demand curve? Explain.

Friday 28 October 2011

IGCSE & Unit 1: Price Elasticity of Demand

From Heart transplants to watermelons - Understanding Price Elasticity of Demand!

Consumers are interesting creatures to study. Economics offers us a unique set of tools for understanding the behavior of consumers in various markets. Elasticity is one of those tools, one which helps us understand how consumers will respond to the change in price of some goods more or less than others. Some of the questions about elasticity and consumer behaviour are:
• Why do governments place such huge taxes on cigarettes?

• Why did Apple cut the price of the new iPhone in half from the original one, despite the fact that it had so many new features?

• Why do movie theaters seem to raise their prices so steadily over the years, rather than doubling the price of tickets each year?

These and other questions can be answered by knowing something about the relative price elasticities of demand for the goods in question.

Price elasticity of demand: How responsiveness consumer demand is to a change in price.

For some goods, even the slightest increase in price will scare consumers away, while for others, price can go up and up and up and the quantity demanded won’t budge!

Here’s just one illustration of a good for which consumers are extremely sensitive to changes in price:

Every autumn, around the city of Shanghai thousands of small farms harvest the Chinese watermelon, a small, green, juicy melon that looks and tastes the same regardless of which farm it came from. The farmers sell their melons to one of the hundreds of melon vendors who drive their big blue trucks into the city of Shanghai during about two weeks in October to sell the watermelons to the city folk who love their refreshing taste.

During the two weeks of the melon harvest, there are hundreds of blue trucks parked two or three per block all over the city. The hundreds of melon vendors sell an identical product, acquired at identical costs from thousands of farms using identical techniques for farming. In other words, the melon market in Shanghai during these two weeks is close to being perfectly competitive.

The price of melons is established through competition at something very close to the exact cost to the vendor of getting the melons into the city. Consumers know this, and therefore if one vendor tries to sell his melons for more than the equilibrium price, consumers will respond by buying NONE of that vendors melons. Conversely, if a vendor were to lower his price at all, rationally EVERY consumer would want to buy from that vendor, but since the price is already at the cost to the vendor, no vendor is able to lower the price without losing money. The outcome in the market for melons in Shanghai is that demand for melons is close to being perfectly elastic, meaning that consumers are completely sensitive to changes in price of watermelons.

Not all goods are like watermelons. In fact, for some goods demand is close to perfectly inelastic. Study the graph below, showing the relative elasticities of five different products, then answer the questions below in your comment!


Discussion Questions:
1.For which product is demand pefectly inelastic? Perfectly elastic? Unit elastic?

2.What relationship exists between relative slopes of demand curves and elasticity?

3.What are two characteristics of cigarettes that make demand for them inelastic?

4.What are two characteristics of heart transplants that make demand perfectly inelastic?

5.What are the characteristics of a good for which demand is perfectly elastic?

Thursday 27 October 2011

IGCSE & Unit 2: Infaltion explained in video

Lots of video clips here which help explain inflation, how it is measure and what the consequences may be.....

1. How the Bank of England manages inflation!



2. These two clips show the problems of Hyper-inflation in Zimbabwe..





3. This clip highlights one of the consequences of Inflation. Pakistan and the impact on poverty.



4. An excellent cartoon highlighting the 'Costs of Inflation'.

Tuesday 25 October 2011

Unit 1: University fees and elasticity of demand

When teaching price elasticity of demand, here is a good article on the BBC today on the effect of higher university fees on demand for higher education. Good for discussion of how PED will differ with respect to different types of consumer and for different types of universities, as well as the cross price elasticity of demand with foreign universities.


- Institutions have seen the biggest drop in applicants for 30 years because of the tripling of fees to £9,000.

- Of the 26 universities to have released figures, 15 reported a fall – with some seeing numbers down by more than 40%.

- Applications for university courses for 2012 are down 9% compared to those for this year, the admission service for students

- The number of applicants has fallen from 76,612 students at this stage for 2011 to 69,724 for 2012.

- Applications at City University are down by 41.4%, at Goldsmiths 35% and at Brunel 24%.

- There has been a growing interest in apprenticeships and school-leaver recruitment schemes run by professional firms as an alternative to university.

- Teenagers from poorer families appear on the initial evidence to be discouraged by the higher fees.

- More applicants are applying to universities closer to home, to save on other living expenses.

Keep in mind that these figures from UCAS are only a first publication with only part of the annual UCAS application cycle having been completed. The figures may also be affected by changes in the demographic profile of the 18-19 year olds applying this year. There will be fewer 18-year olds leaving school or college in 2012 than in 2011.

And demand for places may adjust once the new system of university fees becomes more widely understood - according to a press release from the Russell Group of leading universities, “With the introduction of English ‘top-up fees’ in 2006, applications decreased by 4.5% but were followed by a 7.1% increase in 2007 and a 10.1% increase in 2009.”

Unit 4: Economic Development - Income Inequality & economic growth

We feel instinctively that societies with huge income gaps are somehow going wrong. Richard Wilkinson charts the hard data on economic inequality, and shows what gets worse when rich and poor are too far apart: real effects on health, lifespan, even such basic values as trust.



Saturday 22 October 2011

Unit 3: Regulation - Ofcom gives stamp of approval for flexible pricing in mail

Click here for video clip on changing mail industry.

Changes are afoot for the UK household mail industry - a sector that is often used by teachers as an example of a near monopoly in the UK. In 2010, 16bn letters were delivered to 28.2m addresses. Royal Mail was responsible for delivering over 99% of these. The total UK household and business mail market comprises around 16bn items and £6bn to £7bn per annum of revenue. Royal Mail has a market share by revenue of over 90%.


Just a few years after deregulation of the sector, the industry regulator Ofcom has produced a consultation document that is likely to give the Royal Mail more freedom in setting the prices of stamps. At present, the Royal Mail loses more than £2 million a week operating its letters business. Increasing competition from new entrants for bulk mail sorting allied to a shift towards email and text have contributed to a 25% decline in postal volumes since 2006. Household spending in Britain on postal services has fallen to just 40p a week. The 2010 Hooper Report on the postal sector, mail volumes are expected to continue to decline globally by between 25% and 40% in the next five years

The Royal Mail is required to maintain a Universal Service Obligation (USO) which means that it must collect and deliver letters six days a week (and packets five days a week) at an affordable and geographically uniform price to every address in the UK. The USO also sets performance standards on Royal Mail: 93% of First Class mail must arrive the next day and 98.5% of Second Class mail must arrive within three days of posting.

It has become obvious that meeting these targets whilst staying financially viable is becoming nigh on impossible. Royal Mail is strapped for cash not just because of their operating losses on household mail services but also because it has had to pay in hundreds of millions of pounds to cover deficits on pension schemes for former employees. Royal Mail reduced employee numbers by around 20,000 to 155,000 between 2007 and 2011 in a bid to control costs and raise labour productivity. It has also invested more than £2 billion in recent years in new capital equipment and sorting technology.
The Ofcom consultation document proposes to give Royal Mail freedom to set its own prices for the majority of its products although there will be a a price cap of between 45p and 55p on Second Class stamps for standard letters to protect vulnerable customers. In effect Ofcom is saying that the previous regime of RPI-X price controls on the mail industry has failed because it threatens the long-term viability of what is regarded as a socially important universal service obligation - something that no other utility industry is required to meet.

Their consultative document usefully summarises two modes of competition in the mail industry:

1/ Access competition – where a post operator receives mail from customers, and then accesses Royal Mail’s network for the letter to be delivered to the final recipient - this has been the big shift in the UK market in recent years, in 2011 nearly 40% of mail volumes are carried by access providers (but delivered by Royal Mail who charge a wholesale price for accessing their delivery network)

2/ End-to-end competition - where a post operator not only receives the letter from the customer but then delivers it to the recipient, by-passing Royal Mail’s network entirely. According to Ofcom, end-to-end competition does not currently have a significant presence in the UK, although it is the predominant form of competition in other European countries, such as Germany and the Netherlands

Thursday 20 October 2011

Unit 3: June 11 Question Paper

IGCSE/Unit 2: Economic Growth & Living Standards

Life expectancy in the United Kingdom continues to improve. But one important aspect of the deep and structural divide in incomes, economic activity and status and health across different groups in Britain is the marked variation in average life expectancy for men and women. The UK Statistics Commission has just published new data on this covering the period 2004-2010 and finds that:


Life expectancy was highest in Kensington and Chelsea:

Male life expectancy here rose from 83.0 years in 2004–06 to 85.1 years in 2008–10. Female life expectancy improved by 2.7 years from 87.1 years to 89.8 years.

Life expectancy was lowest in Glasgow City:

In 2010, male life expectancy in this area was 71.6 years, female life expectancy in Glasgow City was 78.0 years in 2008–10. According to the Guardian, the figures for Glasgow are on a par with life expectancy in Albania and Palestine

For the UK as a whole, average life expectancy at birth now stands at 78.2 years for men and 82.3 years for women

You can find some animated charts on the changes in life expectancy by clicking on this link

The data itself would make for a lively discussion in the classroom about why such a wide gap exists and persists within a rich advanced economy.

To what extent are the figures influenced by
* Health behaviour (for example, alcohol consumption and smoking)

* Unemployment rates

* Relative poverty and deprivation

* Access to public services

* The different age-profile of a locality or region

* The effects on the figures of high rates of labour mobility

Tuesday 18 October 2011

Unit 3 Micro: Tesco Behaving Badly - Price Anchoring

On paper, it sounds like a totally reasonable price strategy from the market leader in an oligopolistic market - after announcing their worst sales figures in nearly 20 years, Tesco’s came out with a price cut promotion “The Big Price Drop”. The supermarket – which has pledged to spend £500 million on the high-profile promotion – has promised customers that it would reduce the price of 3,000 essential products across its stores.


But it is actually an interesting case study in imperfect information and the use of anchoring price expectations… since research by the Times found that actually Tesco is not playing fair - it increased the price of its products over August… to then “cut” them in October, but still at levels higher than they were before the August hike…

But the phrase “Big Price Drop” probably will anchor people’s price expectations and work as a stimulus for sales, given the imperfect information problem that most consumers will face.

In one example, Tesco 750g Fruit and Nut Museli went from £1.28 on August 16 to £1.89 on August 23 - before ‘dropping’ to £1.75 on September 26.

After the price drop campaign launched it was revealed that a basket of 33 staple items from Tesco now costs £58.37 – up by £1.34 since the campaign began.

IGCSE: Non-price Determinants of Demand [Advertising]

This clip highlights how advertising can cause shifts in demand curves.




The Churned have been around a few months now. Here is an earlier music video from 2010: the Yeo Valley Rap




How will the above affect demand for Yeo Valley?

Unit 3: Contestable Markets

Monday 17 October 2011

IGCSE/All A Level Units - Food inflation!

Here is one of the short information videos launched by the World Bank on the occasion of World Food Day - excellent as an introduction to the economics of high and volatile world food prices. Every night, 1 billion people go to bed hungry because food is too expensive.




An excellent clip, highlighting one of the consequences of inflation!

Here are some other articles you may find interesting....

BBC news: India’s rural poor battle with price rises


BBC Scotland news video: Families forced to ration food

Sunday 16 October 2011

Unit 3 - June 08 Mark Scheme

IGCSE, Unit 2/4: UK Inflation Data Oct 2011

Lots of data here in Chart form. It will help us understand why we have inflation in the UK and therefore, how we can solve the problem!


Saturday 15 October 2011

IGCSE, Unit 2/4: UK Unemployment in October 2011


There were some desperately disappointing unemployment and employment numbers published for the UK economy today. Even taking due note of the need not to focus too much on one set of data the UK labour market looks to be weakening as fast as the autumn leaves are falling. The human and social cost of the high jobless figures is enormous and the macroeconomic effect of fewer people in work and paying taxes will dent further hopes of a solid recovery.



In summary:


The number of people without a job on the ILO measure jumped by 114,000 in the three months to August to 2.57 million, the highest total since October 1994.

The LFS jobless rate hit 8.1 percent, the highest since 1996.

Youth unemployment rose to 991,000, its highest since records began in 1992

The jobless rate among eligible 16- to 24-year-olds has grown to 21.3 percent - in some areas it is much higher than this - as Hugh Pym reports on the BBC news tonight (Click Here)

Employment is down - the number of people in work dropped 178,000 in the 3 months covering June - August

There is a sharp fall in employment among older workers - the FT reports that over-65s accounted for 74,000 of a drop of 178,000 in employment to 29.1m in the quarter – the biggest fall in that age group since records began in 1992

This 5 minute video from the ONS provides an overview of the UK labour market in October 2011 and commentary on the last unemployment statistics:

Unit 3: Luck Vs Skill in Poker - Game theory

Poker & Game Theory - 'Know when to fold em'!



IN THE New York Times on October 9th, Chad Hills, a gambling analyst for Focus on the Family—a position roughly comparable to monitoring Satanic churches for the Vatican—was quoted disparaging the argument that poker is a game of skill rather than chance, because nobody “can tell you what the next card flipped over is going to be”. The outcome of a single poker game can indeed be determined by the flip of a card—just like the outcome of a single baseball game can be determined by a bad hop, the results of a horse race (legal to wager on in the United States, thanks to a generous legal carve-out) by the condition of the track, or indeed the price of a company’s shares by adverse weather, say, striking a manufacturing plant. Time and chance happeneth to them all, as the preacher said.


But poker players do not play just one game. A good player knows how to minimise his losses during a bad streak and maximise his winnings during a good one. Skilled poker players, to use David Sklansky’s memorable phrase, are “at war with luck”. The relevant question is not whether luck has any role at all, but whether poker itself is principally a game of luck or skill. Common-sense would seem to settle that question: there are numerous professional poker players, and they make a living because they are better at the game than the average weekend kitchen-table player (I am a pretty good kitchen-table player; every time I have sat down with professionals I have been skinned alive, swiftly and mercilessly). I know of no professional roulette or slots players, for instance, and about the pamphlets at my corner bodega that purport to reveal “secrets of the lottery” the less said the better. But why rely just on common sense?

Here, for instance, is a paper from Steven Levitt and Thomas Miles, that analysed play during the 2010 World Series of Poker and found that skilled players made an average return on investment of over 30%, compared with -15% for others (profits that most investors would kill for, especially today). Cigital, a software consultancy, analysed 103m hands of Texas Hold ’Em played at Pokerstars.com, and found that 76% of them ended before a showdown: that is, before opposing players reveal their cards and the strength of their openly compared hands determines the winner. Victory, in other words, was determined not by Mr Hills’s feared flip of a card, but by players’ in-game decisions. It further found that in a showdown only slightly more than half the hands were won by the table’s best possible five-card hand. In 49.7% of the cases the player who could have made the best possible hand folded before the showdown: another outcome determined not by chance but by player decisions. Finally, consider losing rather than winning. Can you deliberately lose a hand of poker if you tried? Of course: bet badly, fold with winning cards, and so on. Can you deliberately lose a game of baccarat or roulette? No: to play you have to bet on an outcome that might happen, regardless of what you do.

Unit 3: The Gas industry - Natural Monopoly, Regulation and Profit

The profit margin for energy companies has risen to £125 per customer per year, from £15 in June, regulator Ofgem said as it confirmed it will force suppliers to simplify tariffs as part of a drive to push down prices.




Is this an example if 'Natural Monopolies' exploiting customers?

Or is it an example of good business practice coming on the back of efficiency gains?

I know what I think!!!!!!!!!

IGCSE/Unit 2: Unemployment - Positive and Negative Multiplier Effects

An initial change in aggregate demand can have a much greater final impact on equilibrium national income. This is known as the multiplier effect. It comes about because injections of new demand for goods and services into the circular flow of income can stimulate further rounds of spending – in other words “one person’s spending is another’s income”. Put another way, spending becomes someone else’s income. This can lead to a bigger eventual effect on output and employment.


Here are three recent news videos covering aspects of the multiplier effect at work:

Irish economy seeks foreign direct investment to sustain their economic recovery

This piece on jobs lost at Bombardier in Derby is particularly good about the wider knock-on economic effects: Bombardier trains: Loss of contract felt across UK

On a positive note here is the opposite effect...a positive multiplier....,Mostyn port deal over windfarm creates 100 new jobs

Wednesday 12 October 2011

Unit 3: Contestable Markets - Lucozade takes on Coca Cola

1.7 billion litres of cola drank were drunk globally in 2010 & now Lucozade (owned by GlaxoSmithKline) wants a slice of the action! with the launch of Lucozade Energy Cola. They already have a well-established position in the energy drinks market. Can they overcome possible consumer resistance to this product and brand extension?


Marketing Week reports something revealing about their point of sale strategy. Lucozade Energy Cola has already reached retailers ahead of the launch apparently with written guidelines for shopkeeprs asking for it to be stocked in the “energy drink section on the chiller”, but placed “next to the coke selection where possible.!

Maybe the new product will find a way into the secret stashes of this Manchester schoolboy entrepreneur? Click here for clip!

Good examples here, including characeristics of 'Contestable Markets' - Hit and Run, New Entry, similar products, little or no sunk costs and I'm sure there are others.

Possible questions for discussion:

How contestable is the market for Cola?
How contestable is the market for Retail Chocolate outlets?

Sunday 9 October 2011

Unit 3: Collusion in the Classroom - the Prisoners Dilemma

We have discussed Collusion at length in class. However, we now need to focus on 'Game Theory' to understand why it is beneficual for firms to share ideas and marketing decisions.

We will discuss the following theory to help explain the benefits of collusion:



This article comes with a few clips demonstrating how aspects of game theory can be applied to different events:


The decision game in ‘The Dark Knight’

The bar scene from ‘A Beautiful Mind’

A final scene from The Good the Bad and The Ugly (demonstrating if you have better information you can make the ‘correct’ decision – pupils may need the background of why Clint makes the decision to shoot ‘Angel Eyes’ first)



A final game from ‘Goldenballs’. What would you do?

Saturday 8 October 2011

Unit 3: Oligopoly - Concentration Ratio for the US Smartphone Market

The two graphics below look at how the US market for smartphone operating systems is split between the major firms and also how global market share for mobiles as well as smartphones is split.

Take a close look at the two graphics so we can discuss how they may compete. Essential material for unit 3.




Friday 7 October 2011

IGCSE & Unit 1: Market Failure - A 'Fat Tax'!

Just as we were talking about a tax on merit goods in class this week, Denmark have announced exactly such a tax on some of its foods! Read more here.

Thursday 6 October 2011

Unit 1: De-Merit goods: Ali G Clip

When discussing demerit goods, it is always good to be able to show a few examples. In these youtube clips, Ali G interviews a police superintendent about offensive weapons and a US federal agent about illegal drugs.


Not surprisingly, Ali G has a suspicious amount of knowledge about their use and for what price they might be procured for on the black market!

Plenty of scope for discussing why these goods are not just taxed to make their price higher and / or restricted to purchase only by adults!



Tuesday 4 October 2011

Unit 3 Micro: Monopsony Workers?? Tube Drivers set to earn £50,000 a year

In these times of austerity, job insecurity and falling real incomes, tube drivers in London appear to have on the table a relatively generous-looking offer from their employers London Underground. A four year pay deal will be put to union members that could take the gross pay of Tube drivers, currently around £46,000, to over £50,000, while some staff could receive a £10,000 pay rise over the four years.


Union density has been falling for a long period in the British economy as a whole but remains high for drivers most of whom are members of Rail Maritime and Transport union under their media savvy leader Bob Crow. The tube drivers would appear to have genuine clout in their collective bargaining negotiations especially with the London 2012 Olympics less than a year away. The authorities will be desperate to avoid or at least minimise the risk of industrial action as the Games come into focus and the eyes of the world are on the capital.

In return for agreeing to temporary changes to existing working arrangements during the Games, all train drivers employed by LU will receive a one-off payment of £500.

Gross annual earnings of £50,000 will include overtime and un-social hours payments and would take senior drivers comfortably into the higher echelons of the wage and earnings distribution in the UK. Indeed using the excellent IFS income distribution calculator “Where do you fit in?” this would place the highest-paid tube drivers comfortably in the top ten per cent of income earners in Britain.

Monday 3 October 2011

IGCSE & Unit 1: Determinants of Demand - Shifts Vs Movements Along the curve

The following clip distinguishes between the law of demand, illustrated as a movement along a demand curve resulting from a price change, and a shift in the demand curve, resulting from a change in one of the non-price determinants of demand. Below are several blog posts from illustrating these concepts:





Is bicycle transportation an “inferior good”?

The magical recession proof bunny

Luxury goods: the biggest rip off in the world or the “must have items” for any self-respecting European?

It’s all about DEMAND

“Living” evidence of a determinant of demand at work in the deserts of Northern India

Sunday 2 October 2011

Unit 3: Competition and Contestable Markets

Amazon launches the Kindle Fire


In the increasingly competitive and contestable market for tablet devices, leading online retailer Amazon has launched the Kindle Fire. Click here for the article


The device is expected to be priced at £130 in the UK and the seven-inch display will run a modified version of Google’s Android operating system. Amazon claims that it gives access to 100 million TV and movie shows, millions of books, full-colour magazines together with free storage using Amazon’s cloud. Watching the launch video with Amazon CEO Jeff Bezos one is struck by the emphasis given on leading-edge innovation especially wireless, invisible synchronisation of files and (from a useability point) the ability for the device to pick up immediately from where you might have stopped reading a book or watching a show.

This fast-moving technology sector provides a rich vein of concepts to apply for unit 3 economists:

1/ Different pricing strategies - especially for devices entering a crowded market space - penetration pricing in action perhaps? - the Kindle Fire is launched with a retail price less than half that of Apple’s best-selling device

2/ Product differentiation - entry-level, premium products, non-touchscreen Kindle at a basic price

3/ The benefits from economies of scale as production is ramped up

4/ The ongoing battle between bricks and mortar and online businesses and the impact of electronic devices on traditional publishing sectors (not always negative!)

5/ The crucial importance of innovation as a driver of dynamic efficiency

6/ The significance of brand value and brand reputation - Amazon is seeking to leverage the success of three generations of Kindle devices
7/ Product bundling - Kindle Fire comes with a 30-day free trial of Amazon Prime

The pace of developments in the tablet and e-reader markets is breath-taking. Apple is said to have an 80 per cent share of tablet devices sold in North America and Amazon dominates the e-reader market with around a 50% share. Here is an industry almost guaranteed as a fruitful prompt for discussion when looking at Schumpeter’s concept of “creative destruction”!

Saturday 1 October 2011

IGCSE & Unit 1: Supply & Demand Rap!

Check out the clip below. A student-produced rap exploring the idea of equilibrium price.....does it help???