No 107: Competition Policy Story 3 - Naughty naughty Benz

WITH some monopoly power stories is quite difficult to see exactly what a firm is doing wrong, and often economists disagree if what has happened was "against the public interest" - that is, unfair to consumers or other firms in the market.

However, I think that this one is clearly a case of unfair competition:

(Full article here.)

These countries include China, Russia, Thailand, Greece, and Iraq, and the money was mostly given to government officials to get contracts.

Anybody still think this was acceptable? Well, that's your opinion, but at the time Mercedes Benz certainly tried to make sure what they did was secret. Otherwise, why did it use "offshore bank accounts, third-party agents and deceptive pricing practices"?

It has since fired 45 of its employees who involved in this.

2 clear signs that a company may have been doing something naughty. It hides its behaviour at the time, and then gets rid of the employees who were doing it afterwards.

No 103: Competition Policy Story 2 - More about banks

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THIS one concerns ISAs (Individual Savings Accounts), tax free savings accounts in which every UK adult can invest up to about £10,000 a year.

Those financial insitutions who provide ISAs have just become subject to a "super complaint".

Now you may think you are a big complainer. Or perhaps someone in your family. Or even your Economics teacher. However, none of us qualify to be called a "super complainer".

Super complainers are independent organisations who try to look after consumer rights. If one of these makes a super complaint, the government competition authorities have to investigate immediately.

There are 8 super complainers (here is a list of them from my least favourite website). They include CAMRA, a most excellent organisation that tries to keep beer cheap.

The ISA super complaint in fact has two parts:

(Read full article here.)

I have in fact experienced both of these problems.

My first ISA paid 4.6% interest, far above the Bank of England base rate and well above the inflation rate of the time. I was happy to leave my savings there, until one day I discovered that for six months I had only been receiving the much lower rate of 0.4%. The bank hadn't told me about the change.

Part of government policy to improve competition is to encourage information comparison websites about such products as bank accounts, insurance, home gas and electricity costs and telephone charges.

When consumers find out they can get better a deal with another company it should be made easy for them to switch to the cheaper provider.

Unfortunately though, most of the paperwork has to be done by the company who the consumer is leaving. Therefore, there is little incentive for this firm to do the paperwork quickly. In fact, switching often takes a very long time.

Last year it took 2 and a half months for me to switch my energy provider. My wife wanted to move her phone number from one mobile provider to another, and this took 2 weeks.

Strangely though, this BBC article reports a very high rate of consumer satisfaction with UK banks.

One aspect of economics I love is the detective work - of seeing beyond what seems to be a confusing surface picture to what really is happening.

Does the fact that only 7% of people with bank accounts are likely to switch next year prove they are happy with their accounts? Or is something else happening?

If you post a comment about this, I'll tell my recent experience with this also.

The final sentence of the quote above may help you, as may reading the full article.

No 102: Competition Policy Story 1 - RBS and Barclays

OUR esteemed Head of Department, Mr Bowen, has many theories.

One of them seems to be coming true. It states that when we come to study certain topics in the syllabus, many news events about that topic suddenly appear.

In A2 classes we will be looking next at government action over problems with monopoly power and lack of competition. The past few days have seen several stories about this issue printed in newspapers.

The first features everybody's favourite bank, RBS.

This story from the Independent (read more here) reports that 2 members of RBS were caught telling Barclays' workers some secret information. As those of you who were in last week's A2 classes will know, this is an example of collusion. Presumably they were hoping Barclays would fix their fixes at the same level as Barclays, allowing both to benefit.

How did we find out about it? Barclays told the Office of Fair Trading, and under competition law, anyone who reports anti-competitive behaviour gets much lighter treatment - a bit like if you were to tell a teacher that yourself and a classmate were breaking school rules.

In fact, Barclays don't have to pay anything, even though they might have used the information, and even RBS have had their fine reduced by about £5 million for agreeing to cooperate with the OFT.

This of course makes me feel very happy. The now mostly government owned RBS will be using my LESS of my tax money to pay for a fine for breaking government laws. Is this a new kind of recycling?

No 42: More about market power and Cadbury

HERE is a report from the Tutor2U website:

Embroiled in what looks likely to be a protracted takeover bid from Kraft, Cadbury’s has suffered a blow with the news that its share of the UK confectionery market has dipped below 30 per cent for the first time in a while.  

The Times reports that Cadbury’s chunk of the chocolate market by value slipped 1.7 per cent to 29.8 per cent last month, the first time that it has fallen below 30 per cent all year. Market share of Mars, its biggest rival, slipped 0.6 per cent in the period. 

There are signs that aggressive pricing of basic chocolate bars by discount retailers such as Aldi and Lidl is having an effect; so too is the growth of sales for own-brand bars offered by Tesco, Sainsbury’s and the ongoing battle for customers between Waitrose and Marks and Spencer. 

Some customers have complained about a 75% rise in the price of a 230g bar of Dairy Milk in the last 12 months. High world cocoa prices have explained some of the price hike but Cadbury’s tactic of launching a new 100g bar priced at £1 had led some to claim that their are deliberately trying to anchor their prices at a higher level to raise profit margins as a defence against the takeover bid. The decline in market share suggests that chocoholics are more price sensitive than Cadburys might have forecast. 

It seems to me that part of the skill of being an economist is to be able to quickly identify the connection between real-world events (such as described above) to as many economic ideas as possible. The comment below lists the concepts I think are in the article. Before you look at the comment, see which ones you can identify yourself.

An excellent economics students is able to take the suggestions of just a few sentences of data and write a 3 page essay about it.

No 41: Decline of Internet Explorer

IN AS classes we have been talking about Microsoft and monopoly power. Here is a chart showing changes in the browser market:

This raises a number of questions:
1) What are the key changes shown in the diagram?
2) Which problems could arise from one company having such a large market share?
3) What are some economic explanations for the decline in IE's market share?
4) Can problems with monopoly power be best solved by using government intervention or by relying on the free market?

All of these are possible exam questions, so if you are doing one soon, you may want to consider your answers and perhaps leave a comment below.

No 21: Cadbury takeover story

ALWAYS a very good idea to put together what you are learning in class at the moment with current events.

Currently my AS students and I are discussing monopoly power. The big news story in this area is about various companies wanting to take over Cadbury who make this:

Here is a video from Fox News about this story:

And here is the BBC news report about it:

http://news.bbc.co.uk/1/hi/8349832.stm