Here’s an interesting example of oligopoly – one you probably haven’t considered before. It’s the art market. And it’s not just one market, but a whole pyramid of markets. At the bottom are the ‘yearning masses’ of penny-poor artists, from students to those struggling to make a living from their art, with studios in their attic, garden shed or kitchen table. At the top of the pyramid are those very few artists that can earn fantastic sums of money by selling to collectors or top galleries. Then there are all the layers of markets in between, where artists can earn everything from a modest to a reasonable income.
The pyramid is itself depicted as a work of art, which you can see in the linked article below. It’s worth studying this piece of art carefully as well as reading the article.
A guide to the market oligopoly system Reuters, Felix Salmon (28/12/10)
Questions
- Identify the increasing barriers to entry as you work up the art market pyramid.
- Are there any other market imperfections in the art market that you can identify from the diagram?
- What are the key differences between the ‘primary market, tier 1’, the ‘primary market, tier 2’ and ‘the secondary market’?
- Are artists ‘rational maximisers’? If so, what is it they are trying to maximise? If not, why not?
- How would you set about determining the ‘worth’ of a piece of art? How do possible future value of a piece of art determine its present value?
Later this afternoon I’ll be going down to watch my beloved Leicester City. Our first home match drew a crowd of just over 21,500. This was perhaps a little disappointing for the first home match of the season. Normally, supporters’ spirits are high are the start of the season, we all go down to the ground with renewed optimism, and so ‘first match’ crowds are high. But, this year a number had not come along and the problem was not confined to my club. Just down the road in Coventry, their first match against fellow Midlanders Derby County drew a crowd of only a little over 13,000. While this match was televised by SKY, the attendance is likely to have disappointed many at this historic club. Up by the River Tees, Midllesbrough’s first home match drew a record low league crowd of 14,633 and led manager Gordon Strachan to blame poor crowds on the recession. But, while some clubs are struggling to get supporters through the turnstiles, others seemed rather more immune from the affects of the economic climate. Manchester United’s first home match drew a near-capacity 75,221, despite being a televised match on a Monday night, while Arsenal’s first home match against newly promoted Blackpool drew a capacity crowd of 60,032.
These contrasting experiences amongst football clubs raise some important questions about the nature of demand for attending football matches. Perhaps a good place to start for any chief executive thinking about the demand for their club’s matches is to actually step back and consider about how supporters derive satisfaction from attending matches. This satisfaction from consuming something is also known by economists as ‘utility’. In understanding how supporters derive utility clubs may gain some really useful information when pricing season tickets or match-day tickets.
Well, let’s start with me! I am a fox (a Leicester supporter) through and through and so it’s about an emotional attachment. I was first taken down to Filbert Street by Grandfather in the early 1980s. We were soundly beaten on the day by Notts County on the day. But, while I was gutted, I was supporting my team! I derive a lot of my satisfaction from supporting my home-town team. I guess that makes me what we might term a ‘core supporter’. It’s important for clubs to have a sense of their core support because these are likely to be supporters who are least sensitive to pricing. In other words, this group of supporters is more likely to exhibit a price inelastic demand.
So, a happy chief executive of a football club is likely to be one with a sizeable core support. Another way of looking at this, which is not always popular amongst football traditionalists, is to think of a football club as a brand. A popular, sought-after brand gives the supplier a greater degree of power over pricing. The greater the attachment to the brand the greater the power to set price. While for me the attachment comes from the geography of my birth, for others the attachment comes from being associated with success. This helps to explain the attachment of so many supporters to what we refer to as ‘the big clubs’. Therefore, success can help generate supporter-attachment which can therefore be ‘priced-in’ by clubs when determining the pricing structure for matches and season tickets.
But, not everybody is attached to a team out of loyalty to their town or city or because of its success. For others, the utility from attending matches could come from a variety of sources. A ‘floating supporter’ is therefore likely to be more choosey and pricing needs to try and take this into account. For these supporters it might be a question of who the two teams on show are on a particular day. This helps, in part, to understand why local derbies are generally well attended – but why they are also relatively expensive to attend. It might also be the case that particular matches allow supporters to see a ‘superstar’. If a certain player or club is in town then prices at the turnstiles are likely to reflect this.
What we have suggested here is that in beginning to understand the demand for attending football matches, clubs need to build up a profile of their supporters and their potential supporters. We have focused on how supporters derive satisfaction from watching football and how this affects what they are willing to pay. Yet they need to do more than this, including building up a profile of the economic, social and geographic demographics of supporters. As Gordon Strachan points out, supporters are not immune to economic conditions and football clubs can’t be either. Therefore, clubs will also need to have a sense of how income-sensitive is the demand for attending their matches. The economic climate means that many in football, especially those at clubs involved in setting prices, may need to give considerable thought to the demand function for attending live football matches. May be an economist really could help in the board rooms of many football clubs. While I may not make the board room at the Walkers Stadium later, I will be in the crowd!
Articles
Boro boss Strachan blames recession for poor crowds BBC News (22/8/10)
Premier League fun for all – at a cost BBC Sport, Matt Slater’s Blog (27/8/10)
Inside football with Rob Tanner: Where have all the fans gone Leicester Mercury, Rob Tanner (27/8/10)
Questions
- What do you understand by term ‘utility’? Think of any two products or services and draw up a list of how you derive utility from them?
- What do you understand by the terms ‘price elasticity of demand’ and ‘income elasticity of demand’? Try applying these concepts to the demand to attend matches at any two football clubs that you might be aware of.
- Are football clubs price-takers or price-makers when determining match prices? Is this true of all clubs?
- Imagine that a club is promoted to the top league in its country for the first ever time. How will this affect the position and slope of its demand curve for season tickets?
The UK section of the North Sea used to be sufficient to supply all of the country’s gas requirements, but now some has to be imported from countries such as Norway. With the cold weather, the usage of gas has increased to record levels and there are now concerns for future supplies, especially if the cold weather returns.
However, the National Grid has said that there isn’t a problem, despite a glitch with a Norwegian gas supply. Gas supplies from various sources have been increased to deal with this record demand. There have been calls for Britain to build more gas storage facilities and the National Grid did issue ‘gas balancing alerts’, asking power firms and other large industries to cut back on their gas consumption. There are suggestions that even if supplies of gas aren’t a problem at the moment, we could see serious shortages in a few years.
Following growing demand for gas supplies, wholesale prices rose, but they did fall again when supplies were increased. Prices of household bills could be affected in the future, but for now, it’s too soon to tell. However, rising prices could spell further trouble for ours and other economies suffering from extreme weather on top of a financial crisis. Economic recovery could be put in jeopardy.
This fear of gas shortages and security of supply has led environmental and business groups to argue that Britain needs to diversify its energy supplies and become less dependent on foreign exports. This issue fits in with the latest developments in new investment in wind turbines.
Who knew that something as beautiful as snow could cause so much trouble and provide so much economic analysis!
National Grid warns of UK gas shortage Guardian, David Teather (5/1/10)
Is the United Kingdom facing a natural gas shortage The Oil Drum (9/1/10)
Wind farms: Generating power and jobs? BBC News (8/1/10)
Gas rationing in -22C Britain increases fears of energy crisis Mail Online, Martina Lees (8/1/10)
Gas usage hits new high in UK cold snap BBC News (8/1/10)
Energy fears over gas and kerosene shortages Scotsman (6/1/10)
Gas shortages highlights firms’ exposure to energy security risks Business Green, Tom Young (8/1/10)
Uh-oh: the return of $3 gas CNN Money, Paul R La Monica (7/1/10)
Natural gas prices seen rising with winter shortages Global Times, Chen Xiaomin (4/1/10)
Gas demand hits record on Thursday Reuters (8/1/10)
Gas demand in UK hits another highBBC News, Hugh Pym (7/1/10)
Questions
- Illustrate the effects in the gas market of increasing demand and the resulting shortages. Then show the effects of increasing the supplies of gas. How is equilibrium achieved when there is a shortage in the market?
- Why did energy prices increase and then fall?
- To what extent should the government have been able to forecast this higher demand? Should better contingency plans have been in place?
- The article from CNN Money looks at the effect of rising prices of oil and energy and how this is likely to affect consumer spending. Why could rising prices of these commodities adversely affect economic recovery?
- What is an ‘interruptible contract’ and how useful have they been in dealing with these gas shortages?
- Why has this gas shortage presented environmental groups with an opportunity to promote renewable energy supplies? Think about economic interdependence.
- What alternatives are there to our current gas sources? Are they realistic alternatives?
Most businesses have suffered over the past year or so. Profits and sales have fallen, as the UK (and global) economy suffered from a recession that’s seen UK interest rates at 0.5%, unemployment rising and public debt at unprecedented levels. Christmas trading always sees a boost in sales and that’s just what’s happened for many businesses. Shoppers have responded to the doom and gloom of the past year by spending and making up for a hard year. Phrases such as “I decided to treat myself” became common on the news as reporters travelled to shopping centres across the UK. However, shops such as M&S and Next have warned that attempts by the government to reduce the public deficit could derail the consumer recovery.
These positive stories, whilst true, are a useful tool to help boost consumer confidence and keep expectations positive for the coming months. However, there are warnings that these figures shouldn’t be taken out of context. The economy is still in trouble and public debt has reached almost 60% of GDP. With cuts in government spending and rises in taxation expected, how much confidence should be taken from these positive signs in the retail sector? Only time will tell.
Online powers Shop Direct sales Financial Times, Esther Bintliff (6/1/10)
Poundland, House of Fraser and Co-op see sales rise BBC News (11/1/10)
Links of London see buoyant festive sales Telegraph, James Hall (5/1/10)
John Lewis reports bumper Christmas trading Retail Week, Jennifer Creevy (5/1/10)
New Look expects to build on strong Christmas London Evening Standard (7/1/10)
Christmas trade booming in City Star News Group, Alex de Vos (7/1/10)
Record trading for Cash Generator Manchester Evening News (7/1/10)
Sainsbury’s hails ‘strong’ Christmas trading BBC News (7/1/10)
Cautious M&S reports strong Christmas trade Times Online, Marcus Leroux and Robert Lindsay (6/1/10)
Asda reports ‘solid’ Christmas trading Guardian (6/1/10)
Questions
- Why are expectations important for the future of the British economy? Are the expectations rational or adaptive or a combination of the two?
- Are high Christmas sales really a sign that the economy is recovering? Discuss both sides of the argument. Will high sales now have an adverse effect on future trade in the UK?
- How will expected cuts in government spending affect sales in the retail sector?
- Tax rises are a possibility. How will this affect consumers and sales in the coming year? Think about the circular flow of income.
- If interest rates are increased in the coming months, trace through the likely effects in the goods market.
The housing market has been very volatile over the past year or so. House prices crashed, but then appeared to stabilise. Since then, however, different sources have given very different opinions and predictions about future movements. According to Nationwide Building Society, house prices have increased by an average of £53 a day during September, but others suggest that they remain stable and that they may fall again in 2010.
Not only are house prices important to those buying and selling, but the state of the housing market is also crucial for the recovery of the economy. For example, the construction industry has suffered over the past year and, as of the 2nd October 2009, unemployment in this sector stood at 17.1%. As more and more workers lose their jobs, their disposable income falls and hence demand in the economy is affected. With the possibility of an election debate between the party leaders, many will be waiting to see what their strategies are to revitalise a struggling economy.
House prices rise an average of £53 a day’ Daily Record, Clinton Manning (3/10/09)
Mortgage approvals dip in August BBC News (29/9/09)
Construction contracts at slowest pace for seven months Construction News, Nick Whitten (5/5/09)
House sales ‘stalled’ in August BBC News (22/9/09)
Housing market needs ‘feel-good’ factor to recover City Wire, Nicholas Paler (26/6/09)
Double whammy for first-timers as prices stabilise and loans dry up Scotsman, Jeff Salway (3/10/09)
Head-to-head view on house prices BBC News, Kevin Peachey (27/8/09)
UK construction industry still contracting, says Cips Guardian, Kathryn Hopkins (2/10/09)
House prices see ‘slight decline’ BBC News (28/9/09)
House prices ‘back to 2008 level’ BBC News (2/10/09)
Construction unemployment rises to 17.1% HomeTown Sources (2/10/09)
House prices up – but so are insolvencies Management Today (2/10/09)
Financial shadow cast by city apartments BBC News (8/10/09)
For house price data see:
Nationwide House Prices
Halifax House Price Index from the Lloyds Banking Group
Housing Market and House Prices from the Department of Communites and Local Government
Questions
- Why are recent movements in the housing market going to be a problem for first-time buyers?
- The ‘Stamp duty holiday’ will soon come to an end. What do you think will be the impact on the demand for and supply of houses and hence equilibrium prices over the next 6 months?
- One of the reasons why house prices have stabilised is a lack of supply. How does this affect equilibrium prices?
- Why is the economy so affected by changes in house prices? Think about what happens when construction workers lose their jobs and how this affects aggregate demand. Then consider how the macroeconomy will be affected.
- When demand for houses increases, why do prices increase so rapidly? Consider elasticity.