You will probably have come across the concept of consumer sovereignty. In the mythical world of perfect markets, producers are at the beck and call of consumers. Firms that are not responsive to consumer demand go out of business. In other words, in order to survive they have to respond to any shifts in consumer demand. These in turn can be the result of changes in tastes, changes in income, changes in the prices of other goods, and so on.
Of course, the real world is not perfect, but it is still often assumed that consumers are powerful in influencing what firms sell and at what prices. Well, firms would much rather be in a position of manipulating consumer tastes and hence the huge amounts spent on advertising and marketing.
And it doesn’t end there. Firms use many pricing practices which, to put it mildly, try to confuse consumers or lure them into buying things by making them think they are getting something much cheaper than they really are. Take the case of airline tickets. Some budget airlines offer tickets at extremely low prices, such as 99p. But if you select such a flight, by the time you get to the final screen where taxes, charges, supplements, luggage, etc. are added, the price could exceed £100! And ask yourself this, when you buy something with 20% off, or when you buy ‘three for the price of two’ how rational was your decision? Did you really want the product? Was the offer really ‘genuine’?
The Office of Fair Trading has recently completed two investigations into pricing. As it stated 14 months ago when the investigations were launched:
The first, into online targeting of advertising and prices will cover behavioural advertising and customised pricing, where prices are individually tailored using information collected about a consumer’s internet use. It is expected that this study will be completed by spring 2010.
The second, into advertising of prices, will consider various pricing practices which may potentially mislead consumers. The study will look in particular, but not exclusively, at how these practices are used online.
The following articles look at some of the practices that firms use to drive sales – practices that deliberately attempt to manipulate the consumer. The assumption of ‘perfect knowledge’ by consumers may be a long way from the truth.
Articles
Shoppers lose out on ‘billions’ because of ‘deceitful’ marketing The Telegraph, Harry Wallop (2/12/10)
OFT warns retailers about ‘misleading’ price offers BBC News (2/12/10)
OFT cracks down on price gimmicks Guardian, Rebecca Smithers (2/12/10)
We’re all gulled by special offers BBC News blogs: Peston’s Picks, Robert Peston (2/12/10)
OFT publications
OFT warning on misleading pricing practices, OFT Press Release 124/10 (2/12/10)
OFT launches market studies into advertising and pricing practices, OFT Press Release 126/09 (15/10/09)
Advertising of Prices, Office of Fair Trading, OFT1291 (December 2010)
Advertising of Prices, Office of Fair Trading, project page
Advertising of Prices Study Overview, Office of Fair Trading, video
Questions
- Explain each of the different types of pricing practice investigated by the OFT.
- Which of the pricing practices are the most misleading for customers?
- What is meant by ‘invisible price increases’? How can they be used to mislead the consumer?
- Why do certain pricing practices make it hard for the Office for National Statistics to work out the rate of inflation?
- Explain the new framework the OFT is adopting for ‘prioritising enforcement action’.
- If we end up buying something that we didn’t really intend to buy, does this mean that we were being irrational?
- Is advertising generally in or against the interest of consumers? Explain your answer
You might think that small environmentally-friendly companies would be moving into the green energy market: that setting up a wind farm, for example, would be a perfect business opportunity for a small company. In fact, the big companies are taking over this market. As the Der Spiegel article below states:
Europe’s wind energy sector is currently experiencing a major transformation. New massive offshore wind parks are soon expected to crop up off Europe’s coastline. Big companies like Siemens and General Electrics are increasing their stakes in a market worth billions. But experts warn that a new energy oligopoly may soon emerge.
So what is it about the wind energy market that makes it suitable for an oligopoly to develop? The two articles explore this question.
Winds of Change Der Spiegel, Nils-Viktor Sorge (1/11/10)
GE and Siemens Outpacing Wind Pioneers, Becoming Clean Energy’s “New Oligopoly” Fast Company, David Zax (2/11/10)
Questions
- What market failures are there in the wind energy market?
- What barriers to entry are there in the wind energy market?
- What economies of scale are there in this market?
- How are changes in this market affecting the minimum efficient scale of companies?
- Would there be room in the market for enough competitors to prevent collusion?
- How might the authorities prevent (a) open and (b) tacit collusion in the wind energy market?
- Do small wind energy companies have any market advantages?
Competition authorities across the world are in a constant battle against the abuse of monopoly power and the collusion of oligopolists to gang up against the consumer. They are also concerned with mergers where these result in a reduction in competition. The following articles look at market power in Australia and at some high profile cases of oligopolist collusion. Examples include the big four banks in Australia and the two supermarket giants, Coles and Woolworths, which dominate the sector.
The articles also examine the role of the Australian Competition and Consumer Commission, Australia’s equivalent to the UK’s Competition Commission and Office of Fair Trading (soon to be merged).
Articles
Get out of monopoly free cards can’t be left to the roll of the dice Sydney Morning Herald, Jessica Irvine (27/10/10)
Australia watchdog adds voice to criticism of banks Reuters (22/10/10)
Major banks to beat wage rise The Australian, Blair Speedy (6/10/10)
Analysis: Australian firms forced into deals abroad Reuters, Michael Smith and Sonali Paul (21/10/10)
Hockey outlines plan for banking reform Business Spectator (25/10/10)
Banks are laughing all the way to… the bank Sydney Morning Herald, Josh Gordon (24/10/10)
Xenophon: ACCC Allows Woolworths & Lowes to Hurt Consumers & Competition Mathaba (27/10/10)
Woolies still the target of Coles firepower Sydney Morning Herald, Michael Baker (27/10/10)
Competition authority in Australia
Australian Competition and Consumer Commission
Questions
- In what ways can competition authorities bring about greater competition in oligopolistic industries?
- Explain the distinction between a demand-side and a supply-side approach to competition policy.
- Why do Australian airlines find it more difficult than Australian banks to pass on cost increases to consumers?
- Are highly competitive markets always better for consumers than oligopolistic ones? Explain.
As part of its drive to reduce the number of ‘quangos’ (quasi-autonomous, non-governmental organisations), the government has decided to merger the two main competition authorities: the Competition Commission and the Office of Fair Trading. The aim is to streamline the investigation of mergers, restrictive practices and the abuse of monopoly power, thereby saving costs and reducing the time taken before a decision is made. At present an initial OFT investigation can take many months before a reference is then made to the Competition Commission, which then starts the process of investigation from the beginning again.
Business leaders have welcomed the announcement, seeing the merger as a means of simplifying and speeding up investigations. But will the proposal be more effective in preventing the abuse of market power and encouraging competition? The following articles look at some of the issues.
OFT merger to shake up competition regime in UK Belfast Telegraph (15/10/10)
Competition lawyers gear up for merger of OFT and Competition Commission Legal Week, Friederike Heine (14/10/10)
Labour’s antitrust system dismantled Financial Times, Michael Peel (13/10/10)
Watchdog merger that merits review Financial Times (14/10/10)
Merged competition agency divides opinion Financial Times, Michael Peel (14/10/10)
Office of Fair Trading and Competition Commission to merge Guardian, Julia Kollewe (14/10/10)
Concerns at merger of OFT and Competition Commission Telegraph, Alistair Osborne (15/10/10)
Questions
- What are the current roles and responsibilities of the OFT and the Competition Commission?
- What types of market abuse are the two agencies designed to reduce or prevent? What instruments do they have at their disposal for enforcing their findings?
- What are the arguments in favour of the merger of the two agencies?
- What are the dangers of the merger?
- How will consumer protection be provided under the new regime?
August is usually a quiet month for mergers and acquisitions. But not this August! As the linked Independent article below states:
Korea National Oil Corporation’s £1.87bn hostile bid for Dana Petroleum yesterday was just the latest in a surge of activity taking merger and acquisition (M&A) levels to a nine-month high.
Despite edgy economic data from the US, global deal-making has already topped $197bn (£127bn) so far this month, and is on course to beat the August record of $260bn set in 2006, according to Thomson Reuters. This week’s $89.8bn total is the highest weekly total since early November.
During the global recession of 2008/9, M&A activity slumped. In 2007, global M&As were worth $4162bn. In 2009 they were worth only $2059bn. Not only were companies cautious of acquiring other companies in a period of great economic uncertainty, but finance for deals was hard to obtain. Now, with many companies having cut costs and having much healthier balance sheets, they are in a position to bid for other companies. And banks too are much more able and willing to provide the finance to support takeovers.
So does this signify a continuing surge in M&A activity? Or are the August figures likely to be a ‘blip’, with fears of a double-dip recession dampening any renewed takeover fever? The articles below look at the recent cases and at the factors influencing current M&A activity.
Articles
Stock markets catch deal fever as M&A booms again Independent, Sarah Arnott (21/8/10)
BHP, Intel, RSA shatter usual August M&A lull Reuters, Quentin Webb (20/8/10)
Global M&A volume could be highest in August International Business Times, Surojit Chatterjee (21/8/10)
Mergers and acquisitions mania disrupts bankers’ summer breaks Guardian, Elena Moya (21/8/10)
Merger mania predicted as cash-rich firms stalk takeover targets Observer, Richard Wachman (22/8/10)
M&A Signal Higher Stock Prices Ahead Minyanville, Terry Woo (20/8/10)
From slowest to busiest TodayOnline (21/8/10)
Data and Reports
International
The era of globalized M&A: Winds of change Thomson Retuers and J.P.Morgan (June 2009)
Preliminary M&A Financial Press Release 2Q10 Thomson Reuters (25/6/10)
World Investment Report 2010: Annex Tables United Nations Conference on Trade and Development (UNCTAD) (see tables 9–16)
UK data
Mergers and Acquisitions involving UK companies Office for National Statistics
Mergers & Acquisitions data Office for National Statistics
Mergers and acquisitions involving UK companies: 1st Quarter 2010 Office for National Statistics (2/6/10)
Mergers and Acquisitions Tables Office for National Statistics
Questions
- Identify the reasons why firms want to take over other firms.
- Why does M&A activity tend to increase during a period of economic boom and decline during a recession?
- What is likely to happen to M&A activity over the coming months?
- Exmamine two recent mergers or acquistions and explain why the acquiring company was keen to take over the other company, or why the two companies were keen to merge. Were there any economies of scale to be gained? Would the merger increase the acquiring company’s market power?
