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Welcome to the Sloman Economics News Site. This blog contains links to topical stories in the news discussing key economic issues and concepts.

Each news item starts with an introduction to the issue. This is followed by several links to relevant news articles – some to videos or podcasts. The item finishes with discussion questions that can be used either for self-testing or for use in class.

Scroll down below to read the latest articles posted, or use the search facilities on the left-hand side to search the articles by date, keyword and your chosen textbook.

Most of the postings are by Elizabeth Jones, John Sloman, Dean Garratt, Matt Olczak, Jon Guest and Alison Wride.

We also welcome guest posts from lecturers using one or more of the books in their teaching – see the About this Site section on the left for more details.

For registration and access to companion websites, MyEconLab products or lecturer resources accompanying your Sloman textbooks click here to access the Sloman textbook online resources page.

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A growing debt burden

The linked article below from The Guardian paints a disturbing picture of the long-term problem of servicing both private-sector and public-sector debts.

With interest rates at historical lows, the problem has been masked for the time being. But with interest rates set to rise within a few months, and significantly over the coming years, the burden of debt servicing is likely to become severe. This could have profound effects both on long-term economic growth and on the distribution of income.

As the author, Phillip Inman states:

The funding gap is growing and with deficits on so many fronts, it is hard to see how promises to pensioners and health service users can be met without a dash for growth that is unsustainable, a switch to dramatic cost-cutting in other areas or higher taxes on those who came through the recession relatively unscathed.

You are probably facing the problem of growing debt yourself. How long, if ever, will it take you to repay your student loans? What impact will this have on your ability to spend and to have a ‘decent’ standard of living? Will you be able to afford a mortgage large enough to buy a reasonable house or flat? Will you be able to afford to do a masters degree or PhD without support from your parents or relatives or without a scholarship? And even if you manage to secure a well-paid job, will you be able to afford a reasonable pension for when you eventually retire?

The article looks at the nature of the problem and its causes. It concludes by saying:

Britain has become expert at putting off decisions and hoping for something to turn up. Without a return to ultra-cheap commodities, another technological/productivity revolution, or a return to more modest living and delayed gratification, it’s a plan that is running out of time.

Article
Trouble in store: the grave future of British public and private debt The Guardian, Phillip Inman (20/7/14)

Report
Fiscal sustainability report Office for Budget Responsibility (10/7/14)
Fiscal sustainability report – Executive summary Office for Budget Responsibility (10/7/14)
Fiscal sustainability report – Supplementary data series Office for Budget Responsibility (10/7/14)

Questions

  1. Why is public-sector debt likely to continue rising significantly over the coming years unless there is a concerted policy to make cuts in public expenditure?
  2. What factors are likely to lead to a rise in private-sector debt over the coming years?
  3. What factors have caused a redistribution from the younger to the older generation?
  4. How have ultra low interest rates affected the distribution of income?
  5. What is likely to happen to the gap in wages between ‘graduate’ jobs and ‘non-graduate’ jobs? Identify the factors likely to influence this gap?
  6. What is meant by ‘hire purchase’? Are leasing schemes for car purchase a form of ‘hire purchase? Are there similar schemes in the housing market?
  7. Does it matter if a country’s debts rise (either public or private) if the creditors are in the same country? Explain.
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Galvanised into action

The Competition and Markets Authority (CMA), launched in October 2013, has been operating since April of this year. It is the successor to the Office of Fair Trading (OFT) and the Competition Commission. One of the current cases under investigation by the CMA is that of suspected criminal cartel activity in the supply of galvanised steel tanks.

On 11 July, Clive Geoffrey Dean, a former director of Kondea, and Nicholas Simon Stringer, a former director of Galglass, appeared before Westminster Magistrates Court. They were charged with dishonestly agreeing with others to divide customers, fix prices and rig bids between 2004 and 2012. The deals were with a number of companies. The charges are under section 188 of the Enterprise Act 2002.

This is the second prosecution in this case. On 17 June 2014, Mr Peter Nigel Snee, Managing Director of Franklin Hodge Industries, pleaded guilty to similar charges.

Under the Act, directors found guilty face custodial sentences of up to 5 years and unlimited fines. The CMA and government are keen to send the message that they will not tolerate cartels and that board members had better beware of colluding with other companies. Indeed, the CMA is committed to pursuing cases of suspected criminal cartels more frequently and more rigorously.

The question is whether this will deter criminal collusion or whether it will simply make companies more careful to keep collusion hidden from the authorities.

Two men face charges in ongoing criminal cartel investigation CMA Press Release (11/7/14)
The First Real Test of Sentencing for the UK Cartel Offence Competition Policy Blog: UEA/ESRC/ccp, Andreas Stephan (24/6/14)
An Important Watershed in the CMA’s Prosecution of the Criminal Cartel Offence Eversheds (18/6/14)

Questions

  1. What types of restrictive practices constitute ‘cartel agreements’?
  2. In what ways are cartels against the interests of their customers?
  3. Are there any ways in which consumers might gain from a cartel?
  4. What factors are taken into consideration in deciding whether a director is guilty under section 188 of the 2002 Enterprise Act.
  5. Find out what other cases are being considered by the CMA. Choose one or two and examine how the activities of the firms/people involved might adversely affect consumers or other firms.
  6. Is anti-cartel legislation in the UK similar to that in the EU for cartels operating in more than one EU country?
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How does the design of a penalty shoot-out influence the success of the teams involved?

The round robin group stage of the World Cup was recently completed with 16 out of the 32 countries eliminated from the competition – including England, Italy and Spain. The remaining 16 countries progressed to the single game elimination section of the tournament. At the time of writing, the first round of elimination games had been completed with the remaining 8 teams proceeding to the quarter finals of the tournament. Two of these 8 elimination games ended as a draw after extra time. The winner was decided by a penalty shoot-out e.g. Brazil and Costa Rica. Are these shoot-outs just a lottery or are there any factors that significantly influence their outcome?

The penalty shoot-out was first introduced in June 1970 and has become an important part of competitions such as the World Cup and European Championships for national teams and The Champions League, UEFA Cup and FA Cup for club teams. English fans have suffered more than most with victory in only one out of the seven penalty-shoot outs they have been involved in at major tournaments. On average only three out of every five penalties taken were scored. Germany has a very different record. They have won six out of the seven shoot-outs they have participated in and have a scoring rate of 93%. The Czech Republic has an even better record as their players have not missed a single penalty in the three shoot-outs they have been involved in – including beating West Germany in 1976.

Each individual penalty can be thought of as an example of an interdependent or game theoretic situation. The penalty taker (PT) has to choose from one of three different strategies: shoot to the right, shoot to the left or shoot down the middle. The success of the penalty does not just depend on which of these strategies is chosen. It also depends on the choice made by the goalkeeper (GK) i.e. dive to the left, dive to the right or stay where they are.

In the jargon of game theory there is strategic interdependence. It can also be thought of as an example of a simultaneous game. After the ball is struck it takes approximately 0.3 seconds until it hits the back of the net!! Therefore it is impossible for the GK to observe the shot and respond. Instead they simply have to guess which way they think the PT will kick the ball and respond accordingly. The same reasoning applies to the PT. They cannot observe which way the keeper will dive before they strike the ball. A penalty shoot-out is also an example of a zero sum game. If one teams scores they are better off by one goal while the other team is worse off by one goal.

There is also a sequential element to the shoot- outs as in each round one team always follows another. Is there either a first or second mover advantage? Is there any advantage from always shooting first or second? This was a question investigated by some economists who analysed the data from 129 shoot-outs in ten different tournaments taken between June 1970 and June 2003. This cut-off was chosen because up until this point it could be argued that a penalty shoot-out was an example of a truly randomized field experiment. The team that won the coin toss was required to shoot first. Teams were not given a choice of whether to shoot first or second until the rules were amended in June 2003.

The economists found that the teams who took the first shot won in 78 (60.5%) cases while the team that shot second won in only 51 cases (39.5%). This evidence suggests that there is a significant first mover advantage. One explanation for this finding is that there is greater psychological pressure on the PTs who go second in each round of the shoot-off and this has a significantly negative effect on their performance. The researchers also found that in 19 of the 20 shoot-outs they observed after June 2003 the team that won the toss decided to kick first. They concluded that not only is there a first mover advantage, but that teams/players are aware of it.

If there is currently a first mover advantage which provides teams with an unfair advantage then is there anything that the football authorities could do to help reduce the bias? One suggestion is to change the order in which the teams shoot in each round. A similar approach could be taken to that used in tennis in order to determine the order of the server in a tie break.

Imagine a penalty shoot-out between England and Germany. The sequence below provides one possible alternative to the current structure of the contest.

Penalty 1: Germany England
Penalty 2: England Germany
Penalty 3: England Germany
Penalty 4: Germany England
Penalty 5: England Germany
Penalty 6: Germany England

This would involve increasing the number of penalties from 5 to 6 so that both teams get to shoot first in three rounds of the contest. Interestingly the authors also found any first mover advantages fell dramatically if the shoot-outs reached the sudden death stage.

It will be interesting to see if first mover advantages occur in the remaining games in the tournament.

The English Disease – How to handle pressure: lessons from penalty shoot-outs The Economist (14/6/14)
Penalty kick shootouts and the importance of shooting first Soccermetrics Research (3/1/11)
Game Theory Lesson: Man Utd v Chelsea Penalty Shootout Econfix (11/3/14)
World Cup Game Theory – What economics tells us about penalty kicks Slate (24/6/06)
Football penalty shoot-outs are unfair says new research LSE (16/12/10).

Questions

  1. Explain the difference between a sequential and simultaneous game.
  2. Explain how either the penalty taker or goal keeper might attempt to transform the penalty from a simultaneous to a sequential game. (Hint: watch the next time the Brazilian footballer, Neymar, takes a penalty!!!
  3. Give some examples of potential first or second mover advantages in other industries.
  4. What other factors might influence the outcome of a penalty shoot? Is it possible for researchers to obtain any data in order to control for any of the factors you have identified?
  5. Explain the difference between a zero sum game and a non-zero sum game. Give some real world examples of a non-zero sum game.
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Dropbox: success from failure

Every year thousands of entrepreneurs will have another great idea that is sure to take off and bring in millions of customers. However, most of these great ideas will turn into another business failure. But, in the case of Dropbox, it is multiple business failures that eventually created a huge success, giving hope to millions of budding entrepreneurs.

With 300 million users, the file sharing ‘Dropbox’ is certainly a success, estimated at a value of $10bn. But it didn’t happen immediately and was preceded by a few failures. So, what is the secret to success in this case? The co-founder of Dropbox, Drew Houston, said that it is all about providing something that customers want. In the case of Dropbox, customers are crucial: the more people use it, the easier it becomes for others to use it too, as it allows file sharing on a much larger scale. Perhaps here we have a case of network externalities.

With Dropbox people would tell their friends about it and collaborate. So when you go into work and work on a project with colleagues you recruit them in essence to become Dropbox users because you’re all working on a project together.

No doubt there are many other examples of businesses that have proved a success after several failed attempts. Providing customers with what they want, at the time when they need it is clearly a key ingredient, but so, it appears, is business failure. The following article from BBC News considers the rise of Dropbox.

Dropbox and the failures behind it BBC News, Richard Taylor (1/7/14)

Questions

  1. Customers are clearly crucial for any business to succeed. How can a new entrepreneur find out if there is a demand?
  2. Why was timing so important in the case of Dropbox?
  3. Given that customers can actually use Dropbox for free, how does this company make so much money?
  4. What are network externalities? Explain them in the context of Dropbox.
  5. Drew Houston says that ‘distribution’ is another key ingredient to success. What do you think is meant by this and how will it help create success?
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CMA Referral for energy sector

One example of an oligopoly was recently discussed on this blog –supermarkets. Here, is another classic example: the energy sector. It is dominated by six big firms, which hold the majority of the market in an industry with high barriers to entry; there is inter-dependence between the firms; and there are accusations of price fixing and collusion – all typical features of an oligopoly that may operate against consumers’ interests.

There have been numerous investigations into the actions of these energy providers, owing to their high prices, a lack of competition and significant profits. Developments in the industry have focused on reducing the barriers to entry created by the vertical integration of the incumbent firms in order to make it easier for new firms to enter, thus boosting competition.

However, the latest step is the biggest one, with the energy regulator, Ofgem, referring this industry to the Competition and Markets Authority (CMA). The investigation is likely to last 18 months and will ‘leave no stone unturned in establishing the truth behind energy prices’.

One of the key things that will be investigated is the accusation of profiteering and thus whether the big six should be broken up. This would inevitably lead to reductions in entry barriers and more opportunities for new firms to enter the market, thereby creating a much needed increase in competition. The Chief Executive of Ofgem, Dermot Nolan said:

Now is the right time to refer the energy market to the CMA for the benefit of consumers…There is near-unanimous support for a referral and the CMA investigation offers an important opportunity to clear the air. This will help rebuild consumer trust and confidence in the energy market as well as provide the certainty investors have called for.

Further comments were made about the energy sector and the future direction in terms of market reforms. This was another reason given for the referral to the CMA. Dermot Nolan added:

A CMA investigation should ensure there are no barriers to stop effective competition bearing down on prices and delivering the benefits of these changes to consumers.

The impact of this latest news will undoubtedly be felt by the big six, with share prices already taking a small hit, as investors start to look ahead to the potential outcome, despite any decision not being expected for a good 18 months. The following articles consider this latest energy market development.

Ofgem puts big six energy suppliers under CMA spotlight The Guardian, Terry Macalister (26/6/14)
Ofgem refers ‘big six’ energy groups for competition probe Financial Times, Claer Barrett (26/6/14)
U.K. energy regulator Ofgem asks for utilities probe Wall Street Journal, Selina Williams (26/6/14)
Energy probe could lead to ‘major structural change’ BBC News (26/6/14)
Probe into energy firms’ £100 per home profits The Telegraph, Emily Gosden (26/6/14)
UK competition watchdog kicks off energy suppliers probe Reuters (26/6/14)
Energy sharks may £101 profit per family: Major inquiry launched into power Mail Online, Sean Poulter (26/6/14)
Big six energy firms face full competition probe Independent, Simon Read (26/6/14)

Questions

  1. How well does the energy sector fit the structure of an oligopoly?
  2. What are the barriers to entry in the energy market? How can this referral to the CMA help to reduce them?
  3. Which factors determine the price of energy?
  4. The big six have been accused of profiteering. What is meant by this and why is it against the public interest?
  5. Why has it taken so long for such a referral to take place?
  6. In the BBC News article, the suggestion is that this investigation could lead to a ‘major structural change’. What is meant by this and why is it a possibility?
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