We frequently hear about two companies merging with each other, whether for certainty, market share or economies of scale. However, in this case, we’re looking at a de-merging of one company to create two companies. Foster’s will be split to create two stand-alone companies.
With Foster’s retaining its beer business, a new company called Treasury Wine Estates will take over its ailing wine division. This split comes after 99% of investors cast their votes in favour of the split. The future profitability of this demerger is uncertain and how the stocks of the two separate companies trade in the coming months will give a clear indication of whether or not this divorce is the right move.
Foster’s votes to split beer and wine business Telegraph, Richard Fletcher and Jonathan Sibun (29/4/11)
Investors agree to split Foster’s into beer, wine units BBC News (29/4/11)
Two halves: Foster’s to split its beer and wine operations Mail Online (29/4/11)
Foster’s wine-beer demerger to clarify divisions’ value The Australian (30/4/11)
Questions
- What type of de-merger could we call this?
- How do you think the share prices of the 2 separated companies will fare following the de-merger?
- How concentrated is the beer and wine market? What effect will the de-merger have?
- In the BBC News article, Donald Williams says ‘The wine business needs a better pricing environment before it is likely to perform.’ What does this mean?
- Why has the wine division been a financial drain for so long?
You will probably have come across the concept of consumer sovereignty. In the mythical world of perfect markets, producers are at the beck and call of consumers. Firms that are not responsive to consumer demand go out of business. In other words, in order to survive they have to respond to any shifts in consumer demand. These in turn can be the result of changes in tastes, changes in income, changes in the prices of other goods, and so on.
Of course, the real world is not perfect, but it is still often assumed that consumers are powerful in influencing what firms sell and at what prices. Well, firms would much rather be in a position of manipulating consumer tastes and hence the huge amounts spent on advertising and marketing.
And it doesn’t end there. Firms use many pricing practices which, to put it mildly, try to confuse consumers or lure them into buying things by making them think they are getting something much cheaper than they really are. Take the case of airline tickets. Some budget airlines offer tickets at extremely low prices, such as 99p. But if you select such a flight, by the time you get to the final screen where taxes, charges, supplements, luggage, etc. are added, the price could exceed £100! And ask yourself this, when you buy something with 20% off, or when you buy ‘three for the price of two’ how rational was your decision? Did you really want the product? Was the offer really ‘genuine’?
The Office of Fair Trading has recently completed two investigations into pricing. As it stated 14 months ago when the investigations were launched:
The first, into online targeting of advertising and prices will cover behavioural advertising and customised pricing, where prices are individually tailored using information collected about a consumer’s internet use. It is expected that this study will be completed by spring 2010.
The second, into advertising of prices, will consider various pricing practices which may potentially mislead consumers. The study will look in particular, but not exclusively, at how these practices are used online.
The following articles look at some of the practices that firms use to drive sales – practices that deliberately attempt to manipulate the consumer. The assumption of ‘perfect knowledge’ by consumers may be a long way from the truth.
Articles
Shoppers lose out on ‘billions’ because of ‘deceitful’ marketing The Telegraph, Harry Wallop (2/12/10)
OFT warns retailers about ‘misleading’ price offers BBC News (2/12/10)
OFT cracks down on price gimmicks Guardian, Rebecca Smithers (2/12/10)
We’re all gulled by special offers BBC News blogs: Peston’s Picks, Robert Peston (2/12/10)
OFT publications
OFT warning on misleading pricing practices, OFT Press Release 124/10 (2/12/10)
OFT launches market studies into advertising and pricing practices, OFT Press Release 126/09 (15/10/09)
Advertising of Prices, Office of Fair Trading, OFT1291 (December 2010)
Advertising of Prices, Office of Fair Trading, project page
Advertising of Prices Study Overview, Office of Fair Trading, video
Questions
- Explain each of the different types of pricing practice investigated by the OFT.
- Which of the pricing practices are the most misleading for customers?
- What is meant by ‘invisible price increases’? How can they be used to mislead the consumer?
- Why do certain pricing practices make it hard for the Office for National Statistics to work out the rate of inflation?
- Explain the new framework the OFT is adopting for ‘prioritising enforcement action’.
- If we end up buying something that we didn’t really intend to buy, does this mean that we were being irrational?
- Is advertising generally in or against the interest of consumers? Explain your answer
Whilst a new version of Windows may make the headlines, it’s not Windows that is the main source of profit for Microsoft: it’s Office, with it’s suite of appplications – Word for word processing, Excel for spreadsheets, PowerPoint for presentations, Access for databases, FrontPage for web pages and Outlook for e-mail. But Office is under threat from two sources.
First, despite that fact that Microsoft’s share of the office applications market has remained fairly constant at around 94%, it is facing increased competition from free alternatives, such as Google docs and Google Apps, and OpenOffice from Oracle (see also).
Second, the demands of users are changing. With the growing use of social networking and file sharing, and with a more mobile and dispersed workforce, Microsoft Office needs to adapt to this new environment.
With the launch of Office 2010, these issues are being addressed. The following articles examine what Microsoft has done and whether it is a good business model
Microsoft Office 2010 takes aim at Google Docs BBC News (11/5/10)
Office 2010: banking on Apps Sydney Morning Herald, David Flynn (11/5/10)
Microsoft’s two-pronged strategy for Office 2010 BBC News, Tim Weber (12/5/10)
Revamped Microsoft Office Will Be Free on the Web New York Times, Ashlee Vance (11/5/10)
Microsoft Predicts Fastest-Ever Adoption of New Office Software Bloomberg Businessweek, Dina Bass (12/5/10)
Questions
- Discuss the business logic of giving away products free.
- Discuss the likely success of Microsoft’s response to the changing market conditions for office applications software.
- Explain what is meant by ‘cloud computing’. What opportunities does this provide to Microsoft and what are the threats?
- What is meant by ‘network economies’? How do these benefit Microsoft? How is Sharepoint relevant here?
- Are network economies likely to increase or decrease for Microsoft in the future?
The traditional macroeconomic issues are well-known: unemployment, inflation, economic growth and the balance of payments. However, the environment, and specifically climate change, have become increasingly important objectives for the global economy. Over recent months, many countries have announced new policies and measures to tackle climate change.
The costs of not tackling climate change are well-documented, but what about the costs of actually tackling it? Why is a changing climate receiving such attention and what are the economics behind this problem? The articles below consider this important issue.
Tougher climate target unveiled BBC News (16/10/08)
Brown proposes £60 billion climate fund BBC News (26/6/09)
EU says tackling climate change will cost global economy €400 billion a year Irish Times, Frank McDonald (26/6/09)
Obama makes 11th-hour climate change push Washington AFP, Ammenaul Parisse (25/6/09)
UK to outline emission cut plans BBC News (26/6/09)
What’s new in the EU: EU examines impact of climate change on jobs The Jerusalem Post, Ari Syrquin (25/6/09)
Climate change: reducing risks and costs The Chronicle Herald, Jennifer Graham (25/6/09)
Obama to regulate ‘pollutant’ CO2 BBC News (17/4/09)
Billions face climate change risk BBC News (6/5/07)
Obama vows investment in science BBC News (27/4/09)
Japan sets ‘weak’ climate target BBC News (10/6/09)
Questions
- Why is climate change an example of market failure?
- Apart from imposing limits on emissions, what other interventionist policies could be used? What are the advantages and disadvantages of each of them?
- According to the EU, the cost of tackling climate change is very high. So, why are we doing it? See if you can carry out a cost-benefit analysis!
- Why is climate change presenting a problem for insurance companies? Can it be overcome?
- Why is finance such an issue between developed and developing countries in relation to tackling climate change?
- What is the likely impact of climate changing policies on the labour market? Will we be able to adapt in the current economic crisis?
Setanta is a sports broadcaster that emerged from an Irish dance hall in West London in the 1990s. Since 2004 it has grown rapidly, acquiring major sporting rights and acting as something of a rival to Sky. However, Setanta has now gone into administration following the collapse of talks with a US investor, its failure to pay a number of sporting organisations and the loss of its English Premier League games. Having less than 60% of the annual subscribers needed, and competing against Sky, it is hardly surprising that this broadcaster has now exited the industry. But, what are the reasons behind this collapse? Marketing, advertising, pricing, the recession or dominance by its competitors? What will be the impact of this bankruptcy on its employees, the Pay TV market, sporting organisations and its customers?
Offer made for stake in Setanta BBC News (12/6/09)
Troubled sports channel stops broadcasting CBBC Newsround (24/6/09)
Setanta goes off air with loss of more than 200 jobs Guardian, James Robinson, Leigh Holmwood (23/6/09)
Blavatnik offers Setanta lifeline BBC News, Robert Peston (12/6/09)
Last-ditch effort to save Setanta BBC News (9/6/09)
Football’s minnows braced to take full force of Setanta collapse Guardian, Owen Gibson (24/6/09)
UFC: After Setanta divorce where now: Bravo, Viring, Channel 5 or Sky? Telegraph, Gareth Davies (23/6/09)
Setanta sports taken off air in Britain Times Online, Dan Sabbagh (23/6/09)
Questions
- How was Setanta able to expand so quickly? Is this part of the reason for its failure?
- Premium content, such as Premier League matches, is already dominated by BSkyB. What does the collapse of Setanta mean for the structure of the Pay TV market?
- What reasons could explain Setanta’s inability to attract sufficient subscribers? Is its collapse a consequence of the recession, or are there other factors? What are they?
- Who will lose out from Setanta’s bankruptcy? Think about all those connected with Setanta. What will happen to the Scottish Premier League, which has paid the SPL clubs out of its own pocket? Will it get this money back?
- Do you think there were any other options open in a bid to rescue Setanta? If Ofcom had stepped in to regulate the industry, would it have made a difference?