The market structure in which firms operate has important implications for prices, products, suppliers and profits. In competitive markets, we expect to see low prices, many firms competing with new innovations and firm behavior that is in, or at least not against the public interest. As a firm becomes dominant in a market, its behavior is likely to change and consumers and suppliers can be adversely affected. Is this the case with Amazon?
Much attention has been given to the dispute centering around Amazon and its actions in the market for e-books, where it holds close to two thirds of the market share. Critics of Amazon suggest that this is just one example of Amazon using its monopoly power to exploit consumers and suppliers, including the publishers and their authors. Although Amazon is not breaking any laws, there are suggestions that its behavior is ‘brutal’ and is taking advantage of consumers, suppliers and its workforce.
But rather than criticizing the actions of a monopolist like Amazon, should we instead be praising the company and its ability to compete other firms out of the market? One of the main reasons why consumers use Amazon to buy goods is that prices are cheap. So, in this respect, perhaps Amazon is not acting against consumers’ interests, as under a monopoly we typically expect low output and high prices, relative to a model of perfect competition. The question of the methods used to keep prices so low is another matter. Two conflicting views on Amazon can be seen from Annie Lowrey and Franklin Foer, who respectively said:
“Amazon relentlessly drives down prices for goods and services and delivers them fast and cheap. It ploughs its profits into price cuts and innovation rather than putting them in the hands of its investors. That benefits millions of families – full stop.”
“In effect, we’ve been thrust back 100 years to a time when the law was not up to the task of protecting the threats to democracy posed by monopoly; a time when the new nature of the corporation demanded a significant revision of government.”
So, with Amazon we have an interesting case of a monopolist, where many aspects of its behaviour fit exactly into the mould of the traditional monopolist. But, some of the outcomes we observe indicate a more competitive market. Paul Krugman has been relatively blunt in his opinion that Amazon’s dominance is bad for America. His comments are timely, given the recognition for Jean Tirole’s work in considering the problems faced when trying to regulate any firm that has significant market power. He has been awarded the Nobel Prize in Economics. I’ll leave you to decide where you place this company on the traditional spectrum of market structures, as you read the following articles.
Amazon: Monopoly or capitalist success story? BBC News, Kierran Petersen (14/10/14)
Why the Justice Department won’t go after Amazon, even though Paul Krugman thinks it’s hurting America Business Insider, Erin Fuchs (20/10/14)
Is Amazon a monopoly? The Week, Sergio Hernandez (19/11/14)
Big, bad Amazon The Economist (20/10/14)
Questions
- What are the typical characteristics of a monopoly? To what extent does Amazon fit into this market structure?
- Why does Paul Krugman suggest that Amazon is hurting America?
- How does Amazon’s behaviour with regard to (a) its suppliers and (b) its workers affect its profitability? Would it be able to behave in this way if it were a smaller company?
- Why is Amazon able to charge its customers such low prices? Why does it do this, given its market power?
- Is there an argument for more regulation of firms with such dominance in a market, as is the case with Amazon?
- The debate over e-books is ingoing. What is the argument for publishers to be able to set a minimum price? What is the argument against this?
- Should customers boycott Amazon in a protest over the alleged working conditions of Amazon factory employees?
In an earlier post, Elizabeth looked at oligopolistic competition between supermarkets. Although supermarkets have been accused of tacit price collusion on many occasions in the past, price competition has been growing. And recent developments show that it is likely to get a lot fiercer as the ‘big four’ try to take on the ‘deep discounters’, Aldi and Lidl.
Part of the reason for the growth in price competition has been a change in shopping behaviour. Rather than doing one big shop per week in Tesco, Sainsbury’s, Asda or Morrisons, many consumers are doing smaller shops as they seek to get more for their money. A pattern is emerging for many consumers who are getting their essentials in Aldi or Lidl, their ‘special’ items in more upmarket shops, such as Waitrose, Marks & Spencer or small high street shops (such as bakers and ethnic food shops) and getting much fewer products from the big four. Other consumers, on limited incomes, who have seen their real incomes fall as prices have risen faster than wages, are doing virtually all their shopping in the deep discounters. As the Guardian article below states:
A steely focus on price and simplicity, against a backdrop of falling living standards that has sharpened customers’ eye for a bargain, has seen the discounter grab market share from competitors and transform what we expect from our weekly shop.
The result is that the big four are seeing their market share falling, as the chart shows. 
(Click here for a PowerPoint of the chart.) In the past year, Tesco’s market share has fallen from 29.9% to 28.1%, Asda’s from 17.8% to 16.3%, Sainsbury’s from 16.9% to 16.2% and Morrisons’ from 11.7% to 11.0%. By contrast, Aldi’s has risen from 3.9% to 5.4% and Lidl’s from 3.1% to 4.0%, while Waitrose’s has also risen, from 4.7% to 4.9%. And it’s not just market share that has been falling for the big four. Profits have also fallen, as have share prices. Sales revenues in the four weeks to 13 September are down 1.6% on the same period a year ago; sales volumes are down 1.9%.
But can the big four take on the discounters at their own game? Morrison’s has just announced a form of price match scheme called ‘Match & More’. If a shopper finds that a comparable grocery shop is cheaper in not only Tesco, Sainsbury’s or Asda, but also in Aldi or Lidl, then ‘Match & More users will automatically get the difference back in points on their card. Shoppers also will be able to collect extra points on hundreds of featured products and fuel’. When the difference has risen to a total £5 (5000 points), the shopper will get a £5 voucher at the till. The idea is to encourage customers to stay loyal to Morrisons.
But what if Tesco, Asda and Sainsbury’s do the same? What will be the impact on their prices and profits. Will there be a race to the bottom in prices, or will they be able to keep prices higher than the deep discounters, hoping that many customers will not cash in their vouchers?
But if effectively the big four felt forced to cut their prices to match Aldi and Lidl, could they afford to do so? This depends on their comparative average costs. At first sight, it might be thought that the big four could succeed in profitably matching the discounters, thereby clawing back market share. After all, they are much bigger and it might be thought that they would benefit from greater economies of scale and hence lower costs.
But it is not as simple as this. The discounters have lower costs than the big four. Their shops are typically in areas where rents or land prices are lower; their shops are smaller; they carry many fewer lines and thus gain economies of scale on each line; they have a much higher proportion of own-brand products; products are displayed in the boxes they come in, thus saving on the staff costs of unpacking them and placing them on shelves; they buy what is cheapest and thus do not always display the same brands.
So is Morrison’s a wise strategy? Will other supermarkets be forced to follow? Is there a prisoners’ dilemma here and, if so, is there any form of collusion in which the big four can engage which is not illegal? Can the big four differentiate themselves from the discounters and the up-market supermarkets in ways that will attract back customers?
It is worrying times for the big four.
Articles
- Heavy Discounters Up Pressure On The UK’s Big Four Supermarkets
Alliance News, Rowena Harris-Doughty (3/6/14)
- Tesco loses more market share as supermarket sector slows to record low
CITY A.M., Catherine Neilan (23/9/14)
- Record low for grocery market growth as inflation disappears
Kantar World Panel, Fraser McKevitt (23/9/14)
- How Aldi’s price plan shook up Tesco, Morrison’s, Asda and Sainsbury’s
The Guardian, Sarah Butler (29/9/14)
- Sainsbury’s shares drop 7% on falling sales report
BBC News (1/10/14)
- Sainsbury results: the reaction
Food Manufacture, Mike Stones (3/10/14)
- Morrisons Becomes First Of Big Four Grocers To Price Match Aldi, Lidl
Alliance News, Rowena Harris-Doughty (2/10/14)
- UK: Morrisons Takes On Discounters With Price Match Card
KamCity (3/10/14)
- Morrisons to match the prices of Aldi and Lidl
The Telegraph, Graham Ruddick (2/10/14)
- Three reasons why Morrisons price-matching Aldi and Lidl is not a ‘gamechanger’
The Telegraph, Graham Ruddick (2/10/14)
Questions
- Would it be possible for the big four to price match the deep discounters?
- What is meant by the prisoners’ dilemma? In what ways are the big four in a prisoners’ dilemma situation?
- Assume that you had to advise Tesco on it strategy? What advise would you give it and why?
- Assume that two firms, M and A, are playing the following ‘game’: firm M pledges to match firm A’s prices; and firm A pledges to sell at 2% below M’s price. What will be the outcome of this game?
- Is Morrisons wise to adopt its ‘Match & More’ strategy?
- Why is it difficult for Morrisons to make a like-for-like comparison with Aldi and Lidl in its ‘Match & More’ strategy?
- Why may Aldi and Lidl benefit from Morrisons’ strategy?
Over the past few decades, numerous areas within the British economy have been partly or fully privatized and one such case is British Rail. Why is this relevant now? We’re once again looking at the potential increase in rail fares across the country and the impact this will have on commuters and households. So, have the promises of privatisation – namely lower fares – actually materialised?
Comparing the increase in rail fares with that of the RPI makes for interesting reading. Data obtained back in January 2013 shows that since 1995, when the last set of British Rail fares were published, the RPI has been 66%, according to data from Barry Doe and this compares unfavourably with the increase in a single ticket from London to Manchester which had increased by over 200%. However, it compares favourably with a season ticket, which had only increased by 65%. In the last couple of years, increased in rail fares have been capped by the government to increase by no more than the rate of inflation. As such, customers are likely to be somewhat insulated from the increases that were expected, which could have ranged between 3 and 5%.
This announcement has been met with mixed reviews, with many in support of such caps and the benefit this will bring to working households, including Passenger Focus, the rail customer watchdog. Its Passenger Director, David Sidebottom said:
The capping of rail fare rises by inflation will be welcome news to passengers in England, especially those who rely on the train for work, as will the ban on train companies increasing some fares by more than the average. It is something we have been pushing for, for several years now and we are pleased that the Government has recognised the need to act to relieve the burden on passengers.
However, others have criticised the increases in rail fares, given the cost of living crisis and the potential 9% pay rise for MPs. The acting General Secretary of the RMT transport union commented:
The announcement from George Osborne does not stack up to a freeze for millions of people whose incomes are stagnant due to years of austerity. To try and dress this up as benefiting working people is pure fraud on the part of the Government … Tomorrow, RMT will be out at stations across the north where some off-peak fares will double overnight.
Commuters in different parts of the country do face different prices and with some changes in peak travel times in the Northern part of the country, it is expected that some customers will see significant hikes in prices. Peak travel prices being higher is no surprise and there are justifiable reasons for this, but would such changes in peak times in the North have occurred had we still been under British Rail? Privatisation should bring more competition, lower prices and government revenue at the point of sale. Perhaps you might want to look in more detail at the actual to see whether or not you think the benefits of privatisation have actually emerged. The following articles consider the latest announcement regarding rail fares.
Rail fares to increase by 2.5% in January after Osborne caps price rises at no more than inflation Mail Online, Tom McTague (7/9/14)
Have train fares gone up or down since British Rail? BBC News, Tom Castella (22/1/13)
Rail fares to match inflation rate for another 12 months The Guardian (7/9/14)
Britain caps rail fares at inflation Reuters (7/9/14)
Regulated rail fares to increase by 3.5% in 2015 BBC News (19/8/14)
Northern commuters face big rise in fares for evening travel The Guardian, Gwyn Topham (7/9/14)
Commuter rail fares frozen again, says George Osborne BBC News (7/8/14)
Rail fares, the third payroll tax Financial Times, Jonathan Eley (22/8/14)
Questions
- What are the general advantages and disadvantages of privatisation, whether it is of British Rail or British Gas?
- Why is it that season tickets have increased by less than the RPI, but single tickets have increased by more?
- What are the conditions needed to allow train companies to charge a higher price at peak travel times?
- Are higher prices at peak times an example of price discrimination? Explain why or why not.
- In the Financial Times article, it is suggested that rail fares are like a payroll tax. What is a payroll tax and why are rail fares related to this? Does it suggest that the current method of setting rail fares is equitable?
- Based on the arguments contained in the articles, do you think the cap on rail fares is sufficient?
With the new Premier League football season only a week away, TV companies are heavily advertising the matches they will be showing. Until recently, BSkyB, having seen off competition from Setanta and ESPN, appeared to have an untouchable position in this market. However, competition now appears to be intensifying.
BT entered the market in 2012 by paying £738m for the rights to screen 38 Premier League matches a season for 3 seasons, with Sky showing another 116 matches. BT is clearly heavily backing its sports coverage with an initial outlay of £1.5b and them continuing to sign up high profile presenters and ambassadors including former players and a current manager.
Furthermore, BT dealt Sky (and ITV) a hefty blow last year when it outbid them to win the rights to exclusively show European club competition matches from 2015. Sky responded by saying that:
We bid with a clear view of what the rights are worth to us. It seems BT chose to pay far in excess of our valuation
If true, this would illustrate the winner’s curse which can arise in auctions. However, John Petter, chief executive of BT Retail, said that the deal demonstrated that BT Sport was committed to establishing itself in this market and countered Sky’s suggestion that they had overpaid by saying:
They would say that, wouldn’t they? Secretly, I’d expect them to be kicking themselves and full of regrets this morning
Clearly important to BT’s strategy is bundling its sports coverage in for free with their broadband packages. This is not without controversy since, at the same time as spending vast amounts of money to setup its sports coverage, BT is receiving large government subsidies to improve rural broadband provision.
An important forthcoming ruling from the Competition Appeal Tribunal will have a significant effect on how competition between BT and Sky develops. In this case Sky is accused of abusing its dominant position by refusing to supply BT’s YouView service with its sports channels at a reasonable wholesale price and could now be forced to do so.
It will also be fascinating to see how BT Sport’s strategy develops over time. BT is unlikely to continue 
to provide all its coverage for free once it includes the European matches that it has won the rights to show at great expense. It will also be fascinating to see the extent to which it continues to have success in winning broadcasting rights in the future.
Competition will inevitably push up the amount that the Premier League raises in the next rights auction. Current predictions are that these will be sold for over £4bn, up from £3bn in the previous auction. This will increase the amount the Premier League clubs receive and is also likely to further push up player wages. It remains to be seen the extent to which this will benefit viewers, not to mention pubs wishing to show the games some of whom have in the past looked for alternative solutions because of the high prices they have to pay.
BT wins court battle forcing review of Sky wholesale pricing decision The Guardian, Mark Sweney (17/02/14)
BT Sport does little to lift BT TV homes informitv – connected vision (01/08/14)
BT Sport continues to invest in football line-up MediaWeek, Arif Durrani (29/07/14)
Questions
- What are the key characteristics of the market for sports broadcasting rights?
- What are the pros and cons for consumers of BT Sport’s emergence?
- How do you think Sky might respond to competition from BT Sport?
- How do you think BT Sport’s strategy might develop over time?
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
- What types of restrictive practices constitute ‘cartel agreements’?
- In what ways are cartels against the interests of their customers?
- Are there any ways in which consumers might gain from a cartel?
- What factors are taken into consideration in deciding whether a director is guilty under section 188 of the 2002 Enterprise Act.
- 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.
- Is anti-cartel legislation in the UK similar to that in the EU for cartels operating in more than one EU country?
The market structure in which firms operate has important implications for prices, products, suppliers and profits. In competitive markets, we expect to see low prices, many firms competing with new innovations and firm behavior that is in, or at least not against the public interest. As a firm becomes dominant in a market, its behavior is likely to change and consumers and suppliers can be adversely affected. Is this the case with Amazon?
