Following a 38% increase in profit margins made by energy companies towards the end of 2010, Ofgem (the energy and gas regulator) began an investigation into the activities of energy companies. The review by Ofgem was aimed at determining whether or not consumers should be better protected from the powerful energy companies, many of whom had previously raised prices, forcing some consumers to pay an extra £138 per year. At the time, it was believed that Ofgem might request support from the Competition Commission, but it seems as though the big size energy companies have had a lucky escape. They will not be referred to the Competition Commission, even though critics, in particular First Utility – Britain’s largest independent energy supplier – suggest that Ofgem’s proposals are unlikely to be effective. It seems that the big six have shown sufficient co-operation with Ofgem.
A key reform that Ofgem hope to implement will try to reduce the power of this oligopoly by making it easier for new entrants to gain market share. One such proposal would see the big six auctioning off up to a fifth of the electricity they generate. As the owners of Britain’s power stations, new companies cannot buy gas and electricity on the open market and this reform aims to change that. However, there are concerns that this will be ineffective, as the big six may simply outbid the smaller companies or even just buy and sell electricity from each other, thereby keeping their dominant positions in the market. Although the big six have received constant criticism from all sides, the lack of government support for a Competition Commission inquiry may be related to the need for these companies to invest £200bn in Britain by 2020 to help create and build new energy sources, including wind farms and nuclear power. Without this investment, Britain’s energy supply could be in jeopardy. The following articles consider this energetic debate.
Articles
Ofgem may be blown away by the power of the ‘Big Six’ energy companies Telegraph, Rowena Mason (23/6/11)
Ofgem pledges to get tough with ‘big six’ energy companies Guardian, Miles Brignall (22/6/11)
Scottish power investigated over ‘misleading’ marketing campaign Independent, Sarah Arnott (23/6/11)
Ofgem and ‘Big Six’ need to put some energy into cleaning up their acts Telegraph, Richard Fletcher (23/6/11)
In search of a coherent energy policy Independent, David Prosser (23/6/11)
UK suppliers face tough power auction reforms Reuters (22/6/11)
Ofgem: ‘We are watching energy companies closely’ BBC News (22/6/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- What is the role of Ofgem? How does it relate to the Competition Commission?
- What factors have contributed to the investigation by Ofgem into the ‘big six’ energy companies?
- How much power does Ofgem actually have to implement reforms?
- What are the characteristics of an oligopoly? To what extent does the energy market fit into this market structure?
- What are the main barriers to entry that prevent new companies from competing with the ‘big six’? Are the reforms likely to help them?
- What other proposals have been suggested by parties other than Ofgem in bid to help new competitors and customers? Are any likely to be more effective than those proposed by Ofgem?
Nokia and Microsoft have announced that they are to form a strategic alliance. This will see Nokia using Windows Phone as the software platform for its smartphones. This follows problems with Nokia’s own Symbian software and the success of Apple’s iPhone and Google’s Android software.
Recognising the depth of Nokia’s problems, its new boss, Stephen Elop, sent a memo to staff with apocalyptic warnings. He likened Nokia’s position to one of standing on a burning oil platform about to be engulfed with flames.
So is the alliance with Microsoft the way out of Nokia’s problems? Will it bring problems of its own? The following articles look at the issues.
Nokia to Use Microsoft Software in Smartphones New York Times, Kevin J. O’Brien (11/2/11)
Nokia, Microsoft to Join Forces to Challenge Apple Dominance Bloomberg, Diana ben-Aaron (11/2/11)
Nokia: ELOP’s challenge Bloomberg, Martin Garner (11/2/11)
Nokia falls into the arms of Microsoft The Economist: Newsbook blog (11/2/11)
Nokia and Microsoft sign strategic tie-up Guardian, Graeme Wearden (11/2/11)
Nokia and Microsoft form partnership BBC News (11/2/11)
Is the Nokia/Microsoft horse a stallion or a tired nag? BBC News blogs: Peston’s Picks, Robert Peston (11/2/11)
Microsoft and Nokia announce my dream partnership so why aren’t you all happy? ZDNet (CBS), Matthew Miller (11/2/11)
Questions
- What is meant by a strategic alliance? What forms can a strategic alliance take?
- For what reasons are Microsoft and Nokia forming a strategic alliance?
- How does Nokia hope to benefit from the alliance?
- How does Microsoft hope to benefit from the alliance?
- Why is Nokia’s share of world profits in the mobile handset market much less than its share of total handset sales (see The Economist article above)? Conversely, why has Apple such a large share of world profits in the handset market (just over 50%) and yet only a tiny market share?
Demand and supply determine prices, but when it comes to factors of production, such as labour, their ‘price’ is largely influenced by their productivity. This helps to explain why doctors are paid more than cleaners and Premiership footballers more than amateurs. But, can it really explain a £50 million transfer price for Fernando Torres, as he moves from Liverpool to Chelsea? Undoubtedly he’s a good footballer, but are his skills worth the price paid? The same question can be asked about David Luiz – a price of £25 million; Andy Carroll – a price of £36 million and a bargain price for Luis Suarez – a mere £23 million! How can teams, such as Chelsea afford to spend so much money, despite making a loss of £70.9 million in the year to June 2010? How much would they have lost had they not won the Premier league and the FA cup?
With the country facing the possibility of returning to recession and the trouble that Portsmouth FC found itself in last season, UEFA’s ‘financial fair play’ rules seemed like a good idea. But, they appear to have been thrown out the window. £200 million was spent on a handful of footballers, as libraries across the UK are shut down due to a lack of funds. The Premier League in the UK generated a higher income than any other, equal to £2.3 billion. However, 14 of our clubs made substantial losses. The amount owed to banks or the owners backing these clubs came in at a mere £3 billion. As the big clubs in the UK push up the prices, more and more ‘small’ clubs are being competed out of the market.
Torres makes record move from Liverpool to ChelseaBBC Sport(31/1/11)
Chelsea and Liverpool drive astonishing £134 million manic Monday Telegraph, Jason Burt (1/2/11)
Champions Chelsea report £70.9 million loss BBC News (31/1/11)
Chelsea announces 70.9 million pound annual loss despite winning Premier League and FA Cup The Canadian Press, Stuart Condie (1/2/11)
Financial restraint goes out of the window when the big clubs struggle Guardian, David Conn (1/2/11)
Questions
- How are the prices of footballers determined? Use a diagram to illustrate your answer.
- What factors explain why Premier League footballers are paid so much more than those in the Conference?
- What type of market structure is the UK football league?
- As prices are bid upwards, is there an argument that smaller clubs are being competed out of the transfer market? What type of market structure is football becoming?
- How is that Chelsea can make £70 million loss but still have the finance to spend £50 million on new players?
- What policies could be used to ensure lower prices are paid for footballers? Would they be effective and are they needed?
If you want to buy a newly released DVD, a cheaper option than buying off the high-street tends to be to buy online, in particular through Amazon, the world’s largest online retailer. However, Amazon has been facing increasing competition from another US giant, Netflix that has over 16 million subscribers and is looking at entering the British market. Arguably, in a response to this threat, Amazon has agreed to purchase Lovefilm, the online movie rental service that has grown rapidly over the past few years, with over 1.4 million members around the UK.
As of 2008, Amazon already had a 42% stake in the business, but as Lovefilm has been running into difficulties, their senior management team has been looking at the possibility of selling the remaining 58% share. Enter Amazon in a bid to cement and defend their place in the British market to companies such as Netflix. Below are a few articles concerning this takeover – more will be added, as further details emerge.
Amazon acquires Lovefilm for £200m Financial Times, Tim Bradshaw (20/1/11)
Can Lovefilm survive the streaming revolution? Telegraph, James Hurley (27/1/11)
Amazon takes full control of Lovefilm Guardian, Josh Halliday(20/1/11)
Amazon buys remaining stake in Lovefilm DVD service BBC News (20/1/11)
Amazon takes control of Lovefilm Broadband TV News, Julian Clover (20/1/11)
Amazon acquires Lovefilm, the Netflix of Europe Tech Crunch, Mike Butcher (20/1/11)
Questions
- What type of takeover is this and what are the main motives behind it?
- How are consumers likely to a) benefit and b) suffer from Amazon’s takeover bid for Lovefilm?
- Who are Amazon’s main competitors? (Think of all the products they sell.)
- Will the Competition authorities be interested in this takeover? Explain your answer.
- In which type of market structure would you place Amazon, Netflix and Lovefilm? Explain your answer.
Here’s an interesting example of oligopoly – one you probably haven’t considered before. It’s the art market. And it’s not just one market, but a whole pyramid of markets. At the bottom are the ‘yearning masses’ of penny-poor artists, from students to those struggling to make a living from their art, with studios in their attic, garden shed or kitchen table. At the top of the pyramid are those very few artists that can earn fantastic sums of money by selling to collectors or top galleries. Then there are all the layers of markets in between, where artists can earn everything from a modest to a reasonable income.
The pyramid is itself depicted as a work of art, which you can see in the linked article below. It’s worth studying this piece of art carefully as well as reading the article.
A guide to the market oligopoly system Reuters, Felix Salmon (28/12/10)
Questions
- Identify the increasing barriers to entry as you work up the art market pyramid.
- Are there any other market imperfections in the art market that you can identify from the diagram?
- What are the key differences between the ‘primary market, tier 1’, the ‘primary market, tier 2’ and ‘the secondary market’?
- Are artists ‘rational maximisers’? If so, what is it they are trying to maximise? If not, why not?
- How would you set about determining the ‘worth’ of a piece of art? How do possible future value of a piece of art determine its present value?