‘Farm-gate’ milk prices (the price paid to farmers) have been rising in the UK. In July they reached a record high of 31.4p per litre (ppl). This was 5.1ppl higher than in July 2012. There were further price rises this month (October). Sainsbury’s increased the price it pays farmers by nearly 2ppl to 34.15ppl and Arla Foods by 1.5ppl to 33.13ppl. Muller Wiseman is set to raise the price it pays to 32.5p per litre.
And yet many farmers are struggling to make a profit from milk production, claiming that their costs have risen faster than the prices they receive. Feed costs, for example, have risen by 2.12ppl. On average, farmers would need over 38p per litre just to cover their average variable costs. What is more, exceptional weather has reduced yields per cow by some 7%.
Meanwhile, in the USA, supply has risen by some 1.3% compared with a year ago. But despite this, the prices of dairy products are rising, thanks to strong demand. Cheese and butter prices, in particular, are rising rapidly, partly because of high demand from overseas. Demand for imported dairy products is particularly high in China, where supply has fallen by some 6% in the past couple of months.
The problem for dairy farmers in the UK is partly one of the power balance in the industry. Farmers have little or no market power. Supermarkets, however, have considerable market power. As large oligopsonistic buyers, they can put downward pressure on the prices paid to their suppliers. These are mainly large processing firms, such as Robert Wiseman Dairies, Arla Foods and Dairy Crest. They, in turn, can use their market power to keep down the price they pay to farmers.
Articles
Dairy farmers renew protests over milk prices Farmers Weekly, Philip Case (5/9/13)
Dairy farmers ‘lost more than 1p/litre last year’ Farmers Weekly, Philip Case (2/10/13)
South West farming businesses and producers still making a loss on milk South West Business (3/10/13)
Q&A: Milk prices row and how the system works BBC News (23/7/12) (note date of this)
Positive Dairy Trend: Rising Milk Production and Strong Demand The Farmer’s Exchange, Lee Mielke (27/9/13)
Chinese supply crisis to delay dairy price adjustment Rabobank (25/9/13)
China milk ‘crisis’ fuels world dairy price rise Agrimoney (1/10/13)
Data
UK milk prices and composition of milk ONS
Combined IFCN world milk price indicator IFCN
Questions
- Give some examples of (a) variable costs and (b) fixed costs in milk production.
- Why may farmers continue in dairy production, at least for a time, even if they are not covering their average variable costs?
- What factors determine (a) the price of milk paid to farmers; (b) the retail price in supermarkets?
- Explain how dairy futures markets work.
- Could the milk processors use their market power in the interests of farmers? Is it in the interests of milk processors to do so?
- Why is there a Chinese “dairy supply crisis”? What is its impact on the rest of the world? What is the relevance of the price elasticity of demand for dairy products in China to this impact?
The pricing model for low-cost airline seats seems simple. As the seats get booked, so the price rises. Thus the later you leave it to book, the more expensive it will be. But, in fact, it’s not as simple as this. Seat prices sometimes come down as the take-off date approaches. So what is the pricing model?
The general principle of raising prices as the plane fills up still applies. This enables the airline to discriminate between passengers. Holidaymakers and those with flexibility about when, and possibly where, to travel tend to have a relatively high price elasticity of demand. People who wish to travel at the last minute, such as businesspeople and those facing a family emergency, tend to have a much lower price elasticity of demand and would be prepared to pay a higher, possibly much higher, price.
With relatively high fixed costs for each flight, low-cost airlines need to fill, or virtually fill, their planes if they are to make a profit. And it’s not just about the direct revenue from ticket sales. Low-cost carriers also rely on the revenue from selling extras, such as on-board refreshments, hold luggage, hotels, car hire and travel insurance. With variable costs being tiny, the pricing model is about maximising revenue for each flight. So the fuller the plane, the better it is for the airline.
The airlines are very experienced in estimating demand over the period from a flight coming on sale and the departure date. If they get it right, then prices will indeed rise as take-off approaches. But sometimes they get it wrong. If, as time passes, a given flight is filling up too slowly, then it makes sense to be more flexible on prices, cutting them if necessary. Pricing may be easy in principle; but not always easy in practice!
Article
Low-cost air fares: How ticket prices fall and rise BBC News, Erica Gornall (21/6/13)
Papers
Pricing strategies of low cost airlines Air Transport Group, Cranfield University, Keith J Mason (2002)
Pricing strategies of low-cost airlines: The Ryanair case study Journal of Air Transport Management, 15, Paolo Malighetti, Stefano Paleari and Renato Redondi (2009)
Questions
- Does a low-cost airline always charge lower prices than a traditional scheduled airline? If not, why not?
- Identify the various reasons why holidaymakers may have a relatively elastic demand for a particular flight?
- Explain the system of ‘buckets’ of seats?
- Are low-cost airlines engaging in price discrimination and, if so, which type?
- Are there any variable costs of operating a particular flight (assuming that the flight does actually take place)?
- If demand for a flight becomes less elastic as the date of departure gets nearer, why might a budget airline choose to lower the price, at least for a few days?
- Why can Ryanair operate with lower costs than easyJet?
- Would it be in low-cost airlines’ interests to charge more (a) to overweight people; (b) for using the toilet?
Market trading has existed for centuries and in many respects it hasn’t changed very much. One thing that has developed is the means of exchange. Goods used to be traded for other goods – for example 1 pig for 4 chickens! But then money was developed as a means of exchange and then came cheques and plastic.
However, for many market traders, accepting credit and debit cards is relatively costly. It involves paying a monthly contract, which for many traders is simply not worthwhile, based on the quantity and value of the transactions. But, for many customers using debit or credit cards is the preferred method of payment and the fact that some traders only accept cash can be a deterrent to them making purchases and this therefore reduces the sales of the market traders.
But, with advances in technology a new way of paying has emerged. Small card readers can now be plugged into iphones, ipads, other tablets and smartphones. By putting a customer’s card into this device customers can then pay by card and either sign for their purchase or use the phone to enter their security details. There are plan for these companies to offer chip and pin technology to further ease payment by card on market stalls. The traders pay a small commission per transaction, but aside from that, the initial start-up cost is minimal and it is likely to encourage more customers to use markets. Jim Stewart, the Director of a firm that has begun using this technology said:
I think it’s definitely going to take off, the world is going that way … The money has always appeared in my bank account, no transactions have been declined, my accountant is happy, it’s all been good.
Some customers have raised concerns about the security of these transactions, as they have to put their cards into someone else’s ipad. However, traders have said that there are no risks and that customers can be sent a receipt for their purchase. The following few articles look at this latest (and other) technological developments.
Smartphone card payment system seeks small firms BBC News, Rob Howard (19/1/13)
POS Trends: What’s new for 2013 Resource News (17/1/13)
Payments by text message service to launch in UK in Spring 2014 BBC News (15/1/13)
Questions
- What are fixed cost and why does having a traditional card payment machine represent a fixed cost for a firm?
- How might this new technology affect a firm’s sales and profits?
- Will there be an increase in the firm’s variable costs from adopting this technology?
- Using a cost and revenue diagram, put your answers to questions 1 – 3 into practice and show how it will shift them and thus how the equilibrium may change for a market trader.
- What are the properties of money that allow it to be a good medium of exchange?
- How will this increased use of debit and credit cards affect the demand for money? Use a diagram to illustrate your answer.
Comet, Peacocks, Woolworths, JJB, Jessops and now HMV – they all have one thing in common. The recession has hit them so hard that they entered administration. HMV is the latest high street retailer to bring in the administrators, despite insisting that it does have a future on the UK’s high streets. With debts of £176m and huge competition from online retailers, the future of HMV is very uncertain.
Over the past decades, companies such as Amazon, ebay, LoveFilm, Netflix and apple have emerged providing very stiff competition to the last remaining high street seller of music and DVDs. People have been turning more and more to the internet to do their shopping, with cheaper prices and greater choice. The speed of delivery, which in the past may have been a disadvantage of buying from somewhere like Amazon, is now barely an obstacle and these substitute companies have created a difficult environment for high street retailers to compete in. Despite going into administration, it’s not necessarily the end of the much-loved HMV. Its Chief Executive said:
We remain convinced we can find a successful business outcomes. We want to make sure it remains on the high street … We know our customers fell the same way.
While the recession has undoubtedly affected sales at HMV, is this the main reason for its demise or are other factors more relevant? As discussed, online retailers have taken over the DVD and music industry and with downloading increasing in popularity and CD/DVDs on sale in numerous locations, including supermarket chains, HMV has felt the competitive pressure and its place on the high street has come into question. As Neil Saunders, the Managing Director of Conlumino said:
By our own figures, we forecast that by the end of 2015 some 90.4 per cent of music and film sales will be online. The bottom line is that there is no real future for physical retail in the music sector.
Further to this, prices have been forced downwards and HMV, having to pay high fixed costs to retain their place on the high streets, have been unable to compete and remain profitable. Another contributing factor could be an outdated management structure, which has not responded to the changing times. Whatever the cause, thousands of jobs have been put at risk. Even if buyers are found, some store closures by the administrators, Deloitte, seem inevitable. Customer gift vouchers have already become worthless and further losses to both workers and customers seem likely. It is thought that there will be many interested buyers and huge support from suppliers, but the former is likely to remain a relatively secretive area for some time.
This latest high street disaster will undoubtedly raise many questions. One theory about recovery from a recession looks at the need for many businesses to go under until the fittest are left and there is sufficient scope for new businesses to emerge.
Could it be that the collapse of companies such as Woolworths, HMV, Comet, Jessops and Blockbuster is an essential requirement for economic recovery? Or was the recession irrelevant for HMV? Was its collapse an inevitable consequence of the changing face of Britain’s high streets and if so, what does the future hold for the high street retailers? The following articles consider the demise of HMV.
HMV: a visual history BBC News (15/1/13)
Chief executive says ‘HMV still has a place on the high street’, as customers are told their gift vouchers are worthless Independent, James Thompson (15/1/13)
Potential buyers circle stricken HMV Financial Times, Andrea Felsted (15/1/13)
HMV and independents to urged to work together to save in-store music market BBC News, Clive Lindsay (15/1/13)
HMV record chain was besest by digital downloads and cheap DVDs The Guardian (15/1/13)
The death of traditional retailers like HMV started when we caught on to one-click and the joy of owning DVDs wore thin Independent, Grace Dent (15/1/13)
HMV shoppers: ‘I’m disappointed, but it’s understandable why they went bust The Guardian, James Brilliant (15/1/13)
HMV: Record labels could take HMV back to its 1920 roots The Telegraph, Graham Ruddick (15/1/13)
HMV’s future seen as handful of stores and website Reuters, Neil Maidment and James Davey (15/1/13)
HMV leaves social gap in high street BBC News, Robert Plummer (15/1/13)
Is there good news in HMV’s collapse? BBC News, Robert Peston (15/1/13)
Is it game over for UK retail? The Guardian, Larry Elliott (18/1/13)
High Street retailers: Who has been hit hardest? BBC News (16/1/13)
Questions
- What are the main reasons behind the collapse of HMV?
- Use a diagram to illustrate the impact the companies such as Amazon and Tesco have had on costs and prices in the entertainment industry.
- Has the value we place on owning DVDs truly changed or have other factors led to larger purchases of online entertainment?
- Why is online retail providing such steep competition to high street retailers?
- Explain why it can be argued that economic recovery will only take place after a certain number of businesses have gone into administration.
- To what extent do you think HMV’s collapse is due to its failure to adapt to changing social circumstances?
- Briefly outline the wider economic implications of the collapse of a company such as HMV. Think about managers, employees, suppliers, customers and other competitors, as well as other high street retailers.
- In which market structure would you place the entertainment industry? Explain your answer. Has this contributed to the demise of HMV?
For those looking to buy larger electrical appliances at cheaper prices, things might be looking up, as Comet have begun heavy discounting after entering administration. Deloitte, as the administrator, will now begin the search for a buyer for this retailer, while Comet aims to raise the funds to rescue the company.
Comet was bought by OpCapita last year, but with poor performance continuing across the 200+ stores, we could be about to see the demise of this retailer. Over 6,000 jobs are now at risk, although Deloitte has maintained that stores will continue to trade and that redundancies will not be made. One of the administrators said:
‘Our immediate priorities are to stabilise the business, fully assess its financial position, and begin an urgent process to seek a suitable buyer which would also preserve jobs.’
The retail environment has inevitably suffered over the past few years, with well-known companies such as Woolworths, Optical Express and JJB Sports (to name a few) entering administration. Comet, therefore seems to be the latest in a long line of sad trading stories. So, which factors have contributed towards the collapse of this giant retailer?
Over the past few years, online retailers have gained a larger and larger market share. These internet retailers do not have the same overhead costs that Comet and other high street retailers face. To open a store in an area where customers are in high supply, premium rents must be paid and this adds to the cost of running any given store. In order to cover these higher costs, higher prices can result and this, together with consumers facing tight budgets, has led many customers to look at the cheaper alternatives online. Deloitte has also said that Comet has been suffering from a lack of credit, which has meant that it has not been able to purchase stock in the run-up to Christmas. Deloitte commented that:
‘The inability to obtain supplier credit for the peak Christmas trading period means that the company had no realistic prospect of raising further capital to build up sufficient stock to allow it to continue trading.’
Concerned customers are naturally emerging, wondering whether items they have ordered and paid for will actually turn up. However, Deloitte’s reassurance that trading will continue may go some way to relieving their concern. The following articles consider how Comet has fallen from the sky.
Comet officially enters administration, stores re-open for expected firesale The Telegraph, Graham Ruddick and Helia Ebrahimi (2/11/12)
Comet calls in Deloitte as administrators BBC News (2/11/12)
Apple sky-high as Comet falls to earth The Guardian, Zoe Wood (2/11/12)
Comet enters administration, Deloitte seeks buyer Reuters (2/11/12)
Comet electricals administrators formally begin search for saviour The Guardian, Zoe Wood (2/11/12)
Comet goes into administration Financial Times, Andrea Felsted (3/11/12)
Comet collapse: Deloitte blames internet and lack of first-time home buyers The Telegraph(2/11/12)
Collapse of Comet puts 7000 jobs in danger Independent, James Thompson (2/11/12)
Questions
- Why does the retail environment remain very weak?
- Explain why Deloitte suggest that a lack of first time home buyers has played a part in the demise of Comet.
- Why has a lack of credit contributed towards Comet’s downfall?
- Should customers be concerned about how Comet’s demise (if indeed a buyer is not found) might affect prices in other retailers such as Currys, given that they will now have a larger share of the market?
- Why has online trading contributed towards the harsher retail environment for the high street stores? You should think about fixed and variable costs in your answer.
- Why are companies such as Apple doing so well relative to other companies, such as Comet and JJB Sports? Is there a secret to their success?
- What impact might this collapse have on local labour markets, given Comet employs so many people? Think about the effect on wages, unemployment and on claimants of benefits.
‘Farm-gate’ milk prices (the price paid to farmers) have been rising in the UK. In July they reached a record high of 31.4p per litre (ppl). This was 5.1ppl higher than in July 2012. There were further price rises this month (October). Sainsbury’s increased the price it pays farmers by nearly 2ppl to 34.15ppl and Arla Foods by 1.5ppl to 33.13ppl. Muller Wiseman is set to raise the price it pays to 32.5p per litre.
The problem for dairy farmers in the UK is partly one of the power balance in the industry. Farmers have little or no market power. Supermarkets, however, have considerable market power. As large oligopsonistic buyers, they can put downward pressure on the prices paid to their suppliers. These are mainly large processing firms, such as Robert Wiseman Dairies, Arla Foods and Dairy Crest. They, in turn, can use their market power to keep down the price they pay to farmers.
