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Articles for the ‘Economics for Business: Ch 08’ Category

Studies show that money can buy happiness (but only if you spend on experiences)

Guest post by Hazel Garcia from InvestmentZen

An oft-repeated quote is that money can’t buy happiness. But according to multiple studies, yes, it can. The key is what you spend that hard earned cash on. When researchers asked individuals to reflect on their recent purchases, those who had made experiential purchases i.e. trips, lessons, events, etc. were much happier compared to those who had made material purchases.

Why is this the case? According to a 20 year study at Cornell, our excitement from new purchases fades quickly over time. That new watch you bought quickly becomes a part of your everyday life. This is what psychologists call the “hedonic treadmill,” which describes the way we return to our normal state of happiness after a momentous occasion. However, buying a new chair will return you much quicker to that state than an adventure across the Rocky Mountains.

Researchers identified several key reasons why this is the case. One reason is that an object is just an object and can never become a part of your identity (at least, not a healthy one), whereas experiences shape us over time. In addition, because by definition unique experiences are only short-lived, we don’t adapt to them the way we might with a new phone or watch. They do not become part of the routine and as such are usually viewed in a special light.

Interestingly, researchers found that even a negative experience could be rated more highly than purchasing a luxury good. In the study, participants were asked to describe a bad experience they had recently and a few weeks later, they were asked again about it. Over the course of just a few weeks, most people’s opinion of that moment had changed.

This is because the human brain has a tendency to reduce the impact of stressful situations. In fact, a significant portion of those polled even stated that in the end, they were happy to have had the negative encounter as it gave them a fresh way to look at things. When similar questions were asked to those who had purchased a high-end item, their levels of happiness were consistently lower as time went on.

So when it comes to the age old question of “Does money buy happiness?” the answer is a resounding yes – provided you spend it on the right things. But of course, you should still aim to make every dollar go as far as possible in pursuit of great experiences. Take a look at the infographic below to see a visual summary of the research on money and how it can buy happiness.

If you want to be happy, spend money on experiences, not things

Blog
If You Want To Be Happy, Spend Money On Experiences, Not Things InvestmentZen news, Hazel Garcia (23/1/17)

References
Why You Should Spend Your Money On Experiences, Not Things Forbes, Travis Bradberry (9/8/16)
The science of why you should spend your money on experiences, not things Fast Company, Jay Cassano (30/3/15)
To feel happier, talk about experiences, not things Cornell Chronicle, Susan Kelley (29/1/13)
The way we shop now: the revolution in British spending habits The Guardian, Katie Allen and Sarah Butler (6/5/16)
Just do it: the experience economy and how we turned our backs on ‘stuff’ The Guardian, Simon Usborne (13/5/17)

Questions (by JS)

  1. Why does buying material goods not buy happiness? Does this apply to all material goods?
  2. What is different, in terms of happiness, about buying experiences? Does this apply to the consumption of all services?
  3. Is the consumption of experiences subject to diminishing marginal utility (a) for specific experiences; (b) for experiences in general? Explain.
  4. Why do we seem not to care as much about the “Jones’” vacation as about their income or possession of material goods?
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Google it

The term ‘Google it’ is now part of everyday language. If there is ever something you don’t know, the quickest, easiest, most cost-effective and often the best way to find the answer is to go to Google. While there are many other search engines that provide similar functions and similar results, Google was revolutionary as a search engine and as a business model.

This article by Tim Harford, writing for BBC News, looks at the development of Google as a business and as a search engine. One of the reasons why Google is so effective for individuals and businesses is the speed with which information can be obtained. It is therefore used extensively to search key terms and this is one of the ways Google was able to raise advertising revenue. The business model developed to raise finance has therefore been a contributing factor to the decline in newspaper advertising revenue.

Google began the revolution in terms of search of engines and, while others do exist, Google is a classic example of a dominant firm and that raises certain problems. The article looks at many aspects of Google.

Just google it: The student project that changed the world BBC News, Tim Harford (27/03/17)

Questions

  1. Is Google a natural monopoly? What are the characteristics of a natural monopoly and how does this differ from a monopoly?
  2. Are there barriers to entry in the market in which Google operates?
  3. What are the key determinants of demand for Google from businesses and individuals?
  4. Why do companies want to advertise via Google? How might the reasons differ from advertising in newspapers?
  5. Why has there been a decline in advertising in newspapers? How do you think this has affected newspapers’ revenue and profits?
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Christmas Trading

We all know that our spending changes during the Christmas period: namely we spend a lot more than during the rest of the year. This applies across the board – we buy more clothes, food and drink, even though each day, we can generally only wear, eat and drink the same amount as usual! This has some interesting points from a behavioural economics stance, but here I’m going to think about the impact of this on some key retailers.

Marks & Spencer have previously made headlines for the wrong reasons: poor sales on clothes and the need for serious restructuring of its stores, target audience and marketing in order for this long-standing retailer to remain current and competitive. Although sales were expected to rise in the Christmas period, they did significantly better than expected, with sales growth of 2.3%, above the expected 0.5%. More encouragingly, this growth was not just in food, but in clothing and homeware as well.

One of the key reasons given for this above-expected improvement in sales was the conveniently timed Christmas, falling on a Sunday and hence giving extra shopping days. M&S have said that this certainly helped with their Christmas trading. Although this was good for Q4 trading, the timing will not play ball for Easter and they are expecting a negative effective during that trading period. Some analysts have said that despite the growth being boosted by the timing of Christmas, there were still signs of a change in fortunes. Bryan Roberts from TCC Global said:

“It might be the sign of some green shoots in that part of the business.”

This is consistent with the Chief Executive, Steve Rowe’s comments that despite the timing of Christmas adding around 1.5% to clothing and home sales growth, the recovery was also due to “better ranges, better availability and better prices”.

It appears as though many other retailers have experienced positive growth in Christmas sales, with the John Lewis Partnership seeing like-for-like sales growth of 2.7%, with Waitrose at a 2.8% rise.

The other interesting area is supermarkets. Waitrose and M&S are certainly competitors in the food industry, but at the higher end. If we consider the mid-range supermarkets (Asda, Morrisons, Sainsbury’s and Tesco), they have also performed, as a whole, fairly well. The low-cost Aldi and Lidl have been causing havoc for these supermarket chains, but the Christmas period seemed to prove fruitful for them.

Tesco saw UK like-for-like sales up by 1.8%, which showed significant progress in light of previously difficult trading periods with the emergence of the low-cost chains. Q$ was its better quarter of sales growth for over five years. One of the key drivers of this growth is fresh food sales and its Chief Executive, Dave Lewis said “we are very encouraged by the sustained strong progress that we are making across the group.” However, despite these positive numbers, Tesco only really met market expectation, rather than surpassing them as Morrison, Sainsbury’s and Marks & Spencer did.

Perhaps the stand-out performance came from Morrisons, with its best Christmas performance for seven years. Another casualty of the low-cost competitors, it has been making a recovery and Q4 of 2016 demonstrated this beyond doubt. Like-for-like sales for the nine weeks to the start of 2017 were up by 2.9%, with growth in both food and drink and clothing.

Morrisons has been on a long and painful journey, with significant reorganisation of its stores and management. While this has created problems, it does appear to be working.

We also saw a general move up to the more premium own-brands and this again benefited all supermarkets. Morrisons Chief Executive, David Potts said:

“We are delighted to have found our mojo … Every year does bring its challenges, but so far we haven’t seen any change in consumer sentiment. Customers splashed out over Christmas and wanted to trade up … We are becoming more relevant to more people as we turn the company around.”

So it seems to be success all round for traders over the Christmas period and that, in many cases, this has been a reversal of fortunes. The question now is whether or not this will continue with the uncertainty over Brexit and the economy.

Articles
M&S beats Christmas sales forecast in clothing and homeware BBC News (12/1/17)
Marks & Spencer reports long-awaited rise in clothing sales The Telegraph, Ashley Armstrong (12/1/17)
Marks and Spencer reveals signs of growth in clothing business Financial Times, Mark Vandevelde (12/1/17)
Tesco’s festive sales lifted by fresh food The Telegraph, Ashley Armstrong (12/01/17)
Tesco caps year of recovery with solid Christmas Reuters, James Davey and Kate Holton (12/1/17)
Tesco, Marks & Spencer, Debenhams, John Lewis and co cheer strong Christmas trading Independent, Josie Cox and Zlata Rodionova (12/1/17)
Morrisons sees best Christmas performance for seven years BBC News (10/12/17)
Morrisons enjoys some ‘remarkable’ Christmas cheer’ The Guardian, Sarah butler and Angela Monaghan (10/1/17)
Record Christmas as Sainsbury’s ‘shows logic of Argos takeover’ The Guardian, Sarah Butler and Angela Monaghan (11/1/17)

Questions

  1. Why have the big four in the supermarket industry been under pressure over the past 2 years in terms of their sales, profits and market share?
  2. How have the changes that have been made by M&S’ Chief Executive helped to boost sales once more?
  3. Share prices for supermarkets have risen. Illustrate why this is on a demand and supply diagram. Why has Tesco, despite its performance, seen a fall in its share price?
  4. What are the key factors behind Morrison’s success?
  5. What type of market structure is the supermarket industry? Does this help to explain why the big four have faced so many challenges in recent times?
  6. If there has been a general increase in sales across all stores over the Christmas trading period, that goes beyond expectations, can we infer anything about customer tastes and their expectations about the future?
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How behavioural economics can help you stick to New Year’s resolutions

Many or us make New Year’s resolutions: going on a diet, doing exercise, spending more time studying. But few people stick to them, even though they say they would like to. So how can people be motivated to keep to their resolutions? Well, the experiments of behavioural economists provide a number of insights into the problem. They also suggest various incentives that can be used to motivate people to stick to their plans.

Central to the problem is that people have ‘time inconsistency’. They put a higher weight on the benefits of things that are good for them in the future and less weight on these benefits when they have to act now. You might strongly believe that going to the gym is good for you and plan to go next Monday. But when Monday comes, you can’t face it.

Another part of the time inconsistency problem is the relatively high weighting given to short-term gratification – eating chocolates, watching TV, spending time on social media, staying in bed. When thinking about whether you would like to do these things in, say, a couple of days’ time, you put a low weight on the pleasures. But thinking about doing them right now, you put a much higher weight on them. As the well-known saying goes, ‘Hard work often pays off after time, but laziness pays off now’.

So how can people be motivated to stick to their resolutions? Behavioural economists have studied various systems of incentives to see what works. Some of the findings are as follows:

•  People are generally loss averse. To get us to stick to New Year’s resolutions, we could devise a system of penalties for breaking them, such as paying 20p each time you swear!
•  Given people’s time inconsistency, devising a system whereby you get treats after doing something you feel is good for you: e.g. watching TV for 30 minutes after you’ve done an hour’s revision. Rewards should follow effort, not precede them.
•  Having simple clear goals. Thus rather than merely saying ‘I’ll eat less’, you devise a meal plan with menus that meet calorie and other dietary goals. Rather than saying, ‘I’ll exercise more’, you commit to going to the gym at specific times each week and doing a specific amount of each exercise.
•  Ritualising. This is where you devise a regime that is feasible to stick to. For example, you could always write a shopping list to meet your dietary goals and then only buy what’s on that list; or you and your flatmates could have a rota for household chores.
•  Social reinforcement. This is where people have a joint plan and help each other stick to it, such as going to the gym at specific times with a friend or group of friends, or joining a support group (e.g. to lose weight, or give up drinking or smoking).
•  Avoiding temptation. For example, if you want to give up chocolate, don’t have any in the house.
•  Using praise rather than criticism. People generally respond better to positive incentives than negative ones.

Behavioural economists test these different incentive mechanisms to see what works best and then to see how they can be refined. The testing could be done experimentally, with volunteers being given different incentives and seeing how they respond. Alternatively, data could be collected on the effects of different incentive mechanisms that people have actually used, whether at home or at work.

The advertising and marketing industry analyses consumer trends and how people respond to pricing, quality, display, packaging, advertising, etc. They want to understand human behaviour so that they can ‘direct’ it in their favour of their clients. Governments too are keen to find ways of encouraging people to do more of things that are good for them and less of things that are bad.

The UK government’s Behavioural Insights Team looks at ways people can be ‘nudged’ into changing their behaviour, see the blog A nudge in the right direction?

But back to New Year’s resolutions, have you made any? And, if so, have you thought about how you might stick to them? Have you thought about the incentives?

Podcast
Dan Ariely talks “Payoff” WUNC 91.5: North Carolina Public Radio, Dan Ariely talks to Frank Stasio (3/1/17)

Articles and blogs
50 New Year’s Resolution Ideas and how to Achieve Each of Them Lifehack, Ivan Dimitrijevic (31/12/16)
5 New Year’s Resolutions You Can Keep (With The Help Of Behavioral Science Research) Forbes, Carmen Nobel (3/1/17)
The science behind keeping your New Year’s resolutions BT, SNAP PA (30/12/15)
The Guardian view on New Year resolutions: fitter, happier, more productive The Guardian, Editorial (3/1/17)
The Behavioral Economics of Your New Year’s Resolutions The Daily Beast, Uri Gneezy (5/1/14)
The psychology of New Year’s resolution The Conversation, Mark Griffiths (1/1/16)
Apply Behavioral Economics for a Better New Year Wharton Blog Network, William Hartje (16/1/14)
The Kardashians Can Help Your New Year’s Resolutions Huffington Post, John Beeby (29/12/16)
Using economics to score with New Year resolutions The Hindu, Venky Vembu (4/1/17)
Be It Resolved The New York Times, John Tierney (5/1/12)

Goal-setting site
stickK ‘Set your goals and achieve them!’

Questions

  1. Explain what is meant by time inconsistent behaviour. Is this the same as giving future costs and benefits a lower weighting than present ones (and hence having to discount future costs and benefits)?
  2. Give some examples of ways in which your own behaviour exhibits time inconsistency. Would it be accurate to describe this as ‘present bias’?
  3. Would you describe not sticking to New Year’s resolutions as ‘irrational behaviour’?
  4. Have you made any New Year’s resolutions, or do you have any plans to achieve goals? Could you alter your own personal incentives and, if so, how, to make it more likely that you will stick to your resolutions/goals?
  5. Give some examples of ways in which the government could ‘nudge’ us to behave in ways that were more in our own individual interests or those of society or the environment?
  6. Do you think it’s desirable that the advertising industry should employ psychologists and behavioural economists to help it achieve its goals?
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What’s Next?

The economic climate remains uncertain and, as we enter 2017, we look towards a new President in the USA, challenging negotiations in the EU and continuing troubles for High Street stores. One such example is Next, a High Street retailer that has recently seen a significant fall in share price.

Prices of clothing and footwear increased in December for the first time in two years, according to the British Retail Consortium, and Next is just one company that will suffer from these pressures. This retail chain is well established, with over 500 stores in the UK and Eire. It has embraced the internet, launching its online shopping in 1999 and it trades with customers in over 70 countries. However, despite all of the positive actions, Next has seen its share price fall by nearly 12% and is forecasting profits in 2017 to be hit, with a lack of growth in earnings reducing consumer spending and thus hitting sales.

The sales trends for Next are reminiscent of many other stores, with in-store sales falling and online sales rising. In the days leading up to Christmas, in-store sales fell by 3.5%, while online sales increased by over 5%. However, this is not the only trend that this latest data suggests. It also indicates that consumer spending on clothing and footwear is falling, with consumers instead spending more money on technology and other forms of entertainment. Kirsty McGregor from Drapers magazine said:

“I think what we’re seeing there is an underlying move away from spending so much money on clothing and footwear. People seem to be spending more money on going out and on technology, things like that.”

Furthermore, with price inflation expected to rise in 2017, and possibly above wage inflation, spending power is likely to be hit and it is spending on those more luxury items that will be cut. With Next’s share price falling, the retail sector overall was also hit, with other companies seeing their share prices fall as well, although some, such as B&M, bucked the trend. However, the problems facing Next are similar to those facing other stores.

But for Next there is more bad news. It appears that the retail chain has simply been underperforming for some time. We have seen other stores facing similar issues, such as BHS and Marks & Spencer. Neil Wilson from ETX Capital said:

“The simple problem is that Next is underperforming the market … UK retail sales have held up in the months following the Brexit vote but Next has suffered. It’s been suffering for a while and needs a turnaround plan … The brand is struggling for relevancy, and risks going the way of Marks & Spencer on the clothing front, appealing to an ever-narrower customer base.”

Brand identity and targeting customers are becoming ever more important in a highly competitive High Street that is facing growing competition from online traders. Next is not the first company to suffer from this and will certainly not be the last as we enter what many see as one of the most economically uncertain years since the financial crisis.

Next’s gloomy 2017 forecast drags down fashion retail shares The Guardian, Sarah Butler and Julia Kollewe (4/1/17)
Next shares plummet after ‘difficult’ Christmas trading The Telegraph, Sam Dean (4/1/17)
Next warns 2017 profits could fall up to 14% as costs grow Sky News, James Sillars (4/1/17)
Next warns on outlook as sales fall BBC News (4/1/17)
Next chills clothing sector with cut to profit forecast Reuters, James Davey (4/1/17)
Next shares drop after warning of difficult winter Financial Times, Mark Vandevelde (22/10/15)

Questions

  1. With Next’s warning of a difficult winter, its share price fell. Using a diagram, explain why this happened.
  2. Why have shares in other retail companies also been affected following Next’s report on its profit forecast for 2017?
  3. Which factors have adversely affected Next’s performance over the past year? Are they the same as the factors that have affected Marks & Spencer?
  4. Next has seen a fall in profits. What is likely to have caused this?
  5. How competitive is the UK High Street? What type of market structure would you say that it fits into?
  6. With rising inflation expected, what will this mean for consumer spending? How might this affect economic growth?
  7. One of the factors affecting Next is higher import prices. Why have import prices increased and what will this mean for consumer spending and sales?
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Using incentives to affect throwaway behaviour

Can behavioural economics be applied to the case of Sweden? The Swedish government is trying this out by changing government policy in a way that may encourage its residents to change their behaviour.

People in many countries in the world live in what is often called a ‘throwaway society’. If something breaks, it’s often easier and cheaper simply to get rid of it and buy a new one. But with changes in government policy, including VAT cuts on repairs to white goods, the objective is to encourage consumers to repair their goods, rather than buying new ones. This is also contributing towards the wider objective of sustainable consumption, which is being promoted by the Swedish government.

Per Bolund, who is one of Sweden’s six Green Ministers, spoke about this policy commenting that:

“Consumers are quite active in changing both what they buy and how they buy in Sweden … We believe that getting lower costs for labour is a big part in making it more rational to repair rather than just to buy cheap and throw away …If we don’t change the economic incentives the change will never come.”

Whether or not this policy works will take some time to see, but it’s certainly an interesting test of how changing incentives affect consumer behaviour. You can read about other examples of nudging in the following blog A nudge in the right direction?.

Articles
Waste not want not: Sweden to give tax breaks for repairs The Guardian, Richard Orange (19/9/16)
Can Sweden tackle the throwaway society? BBC News (20/9/16)
Trendy now, trash tomorrow Huffington Post, Kirsten Brodde (29/9/16)
Hong Kong needs a strategy quickly for dealing with waste South China Morning Post (27/9/16)

Questions

  1. If VAT on repairs falls, how will this affect consumer behaviour?
  2. Do you think there would be an income and a substitution effect from this change in government policy? What would they be?
  3. How is the Swedish government using incentives to change consumer behaviour?
  4. If it is cheaper to buy a new white good, then is it rational to buy a new one rather than repair an existing one?
  5. How effective do you think this policy would be in encouraging consumers to change their behaviour?
  6. Find some other examples of how people might be nudged to behave in ways that are in their own interest or that of society.
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A nudge in the right direction?

Behavioural economists study how people’s buying, selling and other behaviour responds to various incentives and social situations. They don’t accept the simplistic notion that people are always rational maximisers. As the Livemint article below states, “According to behavioural economists, the human brain neither has the time nor the ability to process all the information involved in decision making, as assumed by the rational model.” Instead, rationality is bounded: people use simple rules of thumb in making decisions – rules they have developed over time in the light of experience.

So can people’s behaviour be altered by understanding their limited rationality? Advertisers are only too well aware of a number of psychological ‘tricks’ to change people’s purchasing behaviour. For example, wanting to be approved of by your friends is used by advertisers to sell various fashion products and toiletries. Often, people need only a relatively small ‘nudge’ to change the way they behave.

And it is not just advertisers who are using the insights of behavioural economics. Governments are increasingly trying to find ways of nudging people to behave in ways that are better for themselves or for society.

In 2010, David Cameron set up a ‘Nudge Unit’, formally know as ‘The Behavioural Insights Team‘. It has produced a number of academic papers on topics as diverse as tax compliance, incentives for university attendance, charitable giving in the workplace and using SMS reminders to reduce missed hospital appointments. The academic evidence can then be use as the basis for policy.

Another nudge unit has been set up in Australia (see second article below). The USA, Singapore and various other countries are increasingly using the insights of behavioural economics to devise policy to affect human behaviour.

Two recent pieces of work by the UK team concern ways of discouraging doctors from over-prescribing antibiotics and using encouraging text messages to FE students to reduce dropout rates. Another nudge has been used by the tax authorities (HMRC) who have been sending out texts to remind people to pay their taxes on time and to make them aware that they are being monitored. The message read, “Most people pay on time to avoid penalties”.

The articles below look at these recent initiatives and how human behaviour can be changed in a relatively low-cost way. In most cases this involves a simple nudge.

Articles
Nudge-unit trials reveal best ways to prod people Sydney Morning Herald, Nick Miller (29/8/15)
Government ‘nudge unit’ to attempt to change people’s behaviours Sydney Morning Herald, Nick Miller (15/9/16)
New frontiers of human behaviour Livemint, Biju Dominic (15/9/16)
Doctors ‘nudged’ into prescribing far fewer antibiotics New Scientist (15/9/16)
GPs handing out fewer antibiotics after warning of over-prescribing, says study BT (15/9/16)
Study of colleges shows ‘encouraging’ texts dramatically cut dropout rates FE Week, Paul Offord (22/7/15)
The text messages getting teenagers better grades BBC Today Programme, David Halpern and Fiona Morey (15/9/16)
Ping! Pay your tax now or face a penalty. HMRC sends out ‘threatening’ SMS texts to taxpayers The Telegraph, Christopher Hope (15/9/16)

Publications of Behavioural Insights Team
Publications list BIT
The Behavioural Insights Team’s Update Report: 2015–16: overview BIT (15/9/16)
The Behavioural Insights Team’s Update Report: 2015–16 BIT (15/9/16)
Blog BIT

Questions

  1. Explain what is meant by bounded rationality.
  2. Give some examples from your own behaviour of decisions made using rules of thumb.
  3. Should we abandon models based on the assumption of rational maximising behaviour (e.g. attempts to maximise consumer surplus or to maximise profit)?
  4. Find out some other examples of how people might be nudged to behave in ways that are in their own interest or that of society.
  5. How might people be nudged to eat more healthily or to give up smoking?
  6. To what extent can financial incentives, such as taxes, fines, grants or subsidies be regarded nudging? Explain.
  7. Why, do you think, the message by an Australian hospital, “if you attend, the hospital will not lose the $125 we lose when a patient does not turn up” was successful in reducing missed appointments by 20%, while the message, “if you do not attend, the hospital loses $125″ was not as effective?
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Peak stuff

As most developed countries continue to experience low rates of economic growth, governments and central banks struggle to find means of stimulating aggregate demand. One explanation of sluggish demand is that people on higher incomes have enough of most things. They have reached ‘peak stuff’. As the Will Hutton article linked below states:

Around the developed world consumers seem to be losing their appetite for more. Even goods for which there once seemed insatiable demand seem to be losing their lustre. Last week, mighty Apple reported that in the last three months of 2015 global sales of the iPhone stagnated, while sales of iPads tumbled from 21m units in 2014 to 16m in the same three months of 2015. In the more prosaic parts of the economy – from cars to home furnishings – there are other warnings that demand is saturated.

People on lower incomes may still want more, but with income inequality growing in most countries, they don’t have the means of buying more. Indeed, a redistribution from rich to poor may be an effective means of increasing aggregate demand and stimulating economic growth.

It’s important to clarify what is meant by peak demand for such products. It is not being said that people will stop buying them – that future demand will be zero. People will continue to buy such products. In the case of durables, people will buy replacements when products such as furniture, fridges and cars wear out; or upgraded versions as new models of televisions, smartphones or, again, cars come out; or new music tracks or films as they become available for download, or clothing as new fashions appear in shops. In the case of foodstuffs, concerts, football matches and other consumables, they too will continue to be purchased. The point is, in the case of peak demand, the demand per period of time is not going to grow. And the more products there are that reach peak demand, the harder it will be for companies and economies to grow.

If peak demand has generally been reached, it is likely that the demand for material resources will also have peaked. Indeed, we could expect the demand for material resources to be declining as (a) there has also been an increase in the efficiency of production, so that a lower volume of material inputs is required to produce any given level of output and (b) there has been a general switch towards services and away from physical goods. The graph shows domestic material consumption in the UK in millions of metric tonnes. Domestic material consumption is defined as domestic extraction of resources minus exports of resources plus imports of resources. As you can see, domestic material consumption peaked in 2004.

But, although peak demand may have been reached in some markets, there are others where there is still the potential for growth. To understand this and identify where such markets may be, it is important to step back from simple notions of consumption to satisfy materialistic demand and focus on the choices people might make to increase their happiness or wellbeing or sense of self worth in society. Thus while we might have reached peak red meat, peak sugar, peak cars, peak furniture and even peak electronic gadgets, we have not reached peak demand for more satisfying experiences. The demand for education, health, social activities, environmental conservation and a range of fulfilling experiences may have considerable potential for growth.

There are business opportunities here, whether in the leisure industry, in building networks of like-minded people or in producing niche goods that satisfy the demands of people with specific interests. But without greater equality there may be many fewer business opportunities in the mass production industries producing standardised goods.

This is not a world in which goods and services are produced at scale as conventionally measured, but a honeycomb economy of niches and information networks whose new dynamics we barely understand, even if we have a better grasp of its values.

If having more no longer satisfies us, perhaps we’ve reached ‘peak stuff’ The Guardian, Will Hutton (31/1/16)
Steve Howard, Ikea Exec, Says The World Has Hit ‘Peak Stuff’ Huffington Post, Zi-Ann Lum (20/1/16)
We’ve hit peak home furnishings, says Ikea boss The Guardian, Sean Farrell (18/1/16)
Peak stuff: the ‘growth’ party is over. So what next? The Ecologist, Bennet Francis and Rupert Read (22/1/16)
Have we reached peak ‘stuff’? The Mancunion, Tristan Parsons (22/2/16)
Ikea senses room to grow amid ‘peak stuff’ Financial Times, Aliya Ram and Richard Milne (18/1/16)
Peak Stuff ifs insights, Janet Hontoir (21/2/16)
UK retail sales soar as Brits splash their cash on ‘fun stuff’ The Telegraph, Szu Ping Chan (19/2/16)
How less stuff could make us happier – and fix stagnation The Guardian, Katie Allen (26/4/16)

Questions

  1. What are the implications of countries reaching ‘peak stuff’ for (a) the marginal utility of mass produced goods; (b) the marginal propensity to consume and the multiplier?
  2. Give some examples of goods or services where peak stuff has not been reached.
  3. If peak stuff has only been reached for certain products, does this mean that there may still be considerable potential for stimulating aggregate demand without a redistribution of income?
  4. Would it be in the interests of companies such as Asda to make a unilateral decision to pay their workers more? Explain why or why not.
  5. Why may we be a long way from reaching peak demand for housing, even without a redistribution of income?
  6. Make out a case for and against tax cuts as a way of stimulating (a) economic growth and (b) a growth in wellbeing? Do your arguments depend on which taxes are cut? Explain.
  7. The Ecologist article states that “Attaining one-planet living will probably involve in due course achieving degrowth in countries such as ours: building down our economy to a safe level.” Could such an objective be achieved through a mixed market economy? If so, how? If not, why not?
  8. Does the Telegraph article suggest that peak stuff has not yet been reached as far as most UK consumers are concerned?
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When it’s a pain choosing the right painkiller

One type of market failing is the asymmetric information between producers and consumers. Advertising, branding and marketing can either help to reduce consumers’ limited information or play on ignorance to mislead consumers.

Misleading consumers is what the pharmaceutical company Reckitt Benckiser is accused of doing with its Nurofen brand of painkillers. There are very few types of painkiller – the most common three being paracetamol, ibuprofen and aspirin. These are sold cheaply in chemists as unbranded ‘generic products’. Or you can buy much more expensive branded versions of the same drugs. Many people believe that the branded versions are more effective as they are cleverly marketed.

Reckitt Benckiser has been found guilty by the Australian federal court of deceiving consumers. The company produces various varieties of Nurofen, each claiming to target a particular type of pain. But Nurofen Back Pain, Nurofen Period Pain, Nurofen Migraine Pain and Nurofen Tension Headache are in fact identical! And in many outlets, they were sold at different prices – a form of price discrimination reflecting the strength of demand by consumers for a particular type of pain relief.

And now the UK Advertising Standards Authority is investigating the company over whether its adverts for Nurofen Express are misleading by stating that the product ‘gives you faster headache relief than standard paracetamol or ibuprofen’. Also it is investigating the company’s claim that its products directly target muscles in the head. Both Nurofen Migraine Pain and Nurofen Tension Headache claim on the front of the box to provide ‘targeted rapid relief’.

The company adopts similar practices in its combined pain-killer and decongestant drugs for relieving cold symptoms. For example, its Nurofen Cold and Flu Relief, Nurofen Day and Night Cold and Flu, Nurofen Sinus and Blocked Nose and Nurofen Sinus Pain Relief all contain the same quantities of ibuprofen and the decongestant phenylephrine hydrochloride, but each claims to do something different.

So there are various issues here. The first is whether excessive profits are made by charging a price typically 3 to 4 times greater than the identical generic version of the drug; the second is whether the company deliberately misleads consumers by claiming that a particular version of the drug targets a particular type of pain; the third is whether ‘faster acting’ versions are significantly different; the fourth is whether price discrimination is being practised.

Articles
Nurofen maker Reckitt Benckiser suffers advertising headaches Financial Times, Robert Cookson and Scheherazade Daneshkhu (15/12/15)
Nurofen Express advertising claims probed by UK watchdog BBC News (15/12/15)
ASA probing ‘misleading’ painkiller claims in advert by drug firm behind Nurofen The Telegraph, Tom Morgan and agency (15/12/15)
The great painkiller con: Top drug brands accused of huge mark-ups and misleading claims Mail Online, Sean Poulter and John Naish (16/12/15)
Nurofen Under Investigation By UK Watchdog Over Claims Advert ‘Misled’ Customers Huffington Post, Natasha Hinde (15/12/15)

Australian Competition & Consumer Comission media release
Court finds Nurofen made misleading Specific Pain claims ACCC (14/12/15)

Questions

  1. Is price discrimination always against the consumer’s interests?
  2. What form of price discrimination is being practised in the case of Nurofen?
  3. How, do you think, does Reckitt Benckiser decide the prices it charges retailers for its pain killers and how, do you think, do retailers determine the price they charge consumers for them?
  4. Is it a reasonable assumption that branded products in most cases are better than own-brand or generic versions? How is behavioural theory relevant here?
  5. If Reckitt Benckiser were banned from using the word ‘targets’ when referring to one of its product’s effect on particular type of pain, could the company instead use the words ‘suitable for’ relieving a particular type of pain and thereby avoid misleading consumers?
  6. What is the best way of improving consumer knowledge about particular types of over-the-counter drugs and their effects on the body?
  7. Comment on the following statement by Dr Aomesh Bhatt, the company’s medical affairs director: ‘The Nurofen specific-pain range was launched with an intention to help consumers navigate their pain relief options, particularly within the grocery environment where there is no healthcare professional to assist decision making.’
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Do you mind if your vegetables are wonky?

This rather strange question has been central to a storm that has been brewing between various celebrity chefs, including Jamie Oliver and Hugh Fearnley-Whittingstall, and the supermarkets. Supermarkets say that consumers don’t want irregular shaped vegetables, such as carrots, parsnips and potatoes. ‘Nonsense’, say their critics.

At the centre of the storm are the farmers, who find a large proportion of their vegetables are rejected by the supermarkets. And these are vegetables which are not damaged or bad – simply not of the required shape. Although these rejected vegetables have been described as ‘wonky’, in fact many are not wonky at all, but simply a little too large or too small, or too short or too long. Most of these vegetables are simply wasted – ploughed back into the ground, or at best used for animal feed.

And it’s not just shape; it’s colour too. Many producers of apples find a large proportion being rejected because they are too red or not red enough.

But do consumers really want standardised fruit vegetables? Are the supermarkets correct? Are they responding to demand? Or are they attempting to manipulate demand?

Supermarkets claim that they are just responding to what consumers want. Their critics say that they are setting ludicrously rigid cosmetic standards which are of little concern to consumers. As Hugh Fearnley-Whittingstall states:

‘It’s only when you see the process of selection on the farm, how it has been honed and intensified, it just looks mad. There are many factory line systems where you have people looking for faults on the production line; in this system you’re looking for the good ones.

What we’re asking supermarkets to do is to relax their cosmetic standards for the vegetables that all get bagged up and sold together. It’s about slipping a few more of the not-so-perfect ones into the bag.’

In return, consumers must be prepared to let the supermarkets know that they are against these cosmetic standards and are perfectly happy to buy slightly more irregular fruit and vegetables. Indeed, this is beginning to happen through social media. The pressure group 38 degrees has already taken up the cause.

But perhaps consumers ‘voting with their feet’ is what will change supermarkets’ behaviour. With the rise of small independent greengrocers, many from Eastern Europe, there is now intense competition in the fruit and vegetables market in many towns and cities. Perhaps supermarkets will be forced to sell slightly less cosmetically ‘perfect’ produce at a lower price to meet this competition.

Videos
Hugh’s War on Waste Episode 1 BBC on YouTube, Hugh Fearnley-Whittingstall (2/11/15)
Hugh’s War on Waste Episode 2 BBC on YouTube, Hugh Fearnley-Whittingstall (9/11/15)

Articles
Hugh Fearnley-Whittingstall rejects Morrisons’ ‘pathetic’ wonky veg trial The Guardian, Adam Vaughan (9/11/15)
Jamie Oliver leads drive to buy misshapen fruit and vegetables The Guardian, Rebecca Smithers (1/1/15)
Hugh Fearnley-Whittingstall’s war over wonky parsnips The Telegraph, Patrick Foster (30/10/15)
Asda extends ‘wonky’ fruit and veg range Resource, Edward Perchard (4/11/15)
Wearne’s last farmer shares memories and laments loss of farming community in Langport area Western Gazette, WGD Mumby (8/11/15)
Viewpoint: The rejected vegetables that aren’t even wonky BBC News Magazine (28/10/15)
Viewpoint: The supermarkets’ guilty secret about unsold food BBC News Magazine (6/11/15)

Questions

  1. What market failures are there is the market for fresh fruit and vegetables?
  2. Supermarkets are oligopsonists in the wholesale market for fruit and vegetables. What is the implication of this for (a) farmers; (b) consumers?
  3. Is there anything that (a) consumers and (b) the government can do to stop the waste of fruit and vegetables grown for supermarkets?
  4. How might supermarkets estimate the demand for fresh fruit and vegetables and its price elasticity?
  5. What can supermarkets do with unsold food? What incentives are there for supermarkets not to throw it away but to make good use of it?
  6. Could appropriate marketing persuade people to be less concerned about the appearance of fruit and vegetables? What form might this marketing take?
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