Last month the Swiss air freight company Kuehne + Nagel International AG was fined just over NZ$3m (around £1.5m) by the New Zealand Commerce Commission for their part in a price fixing cartel that ran for 5 years.
In 2002 the firms in the industry faced higher costs due to increased security measures imposed by the British government. They formed a cartel to agree to pass these increased costs on to their customers for air freight services from the UK to a number of countries, including New Zealand. The investigation by the New Zealand competition authority followed a leniency application by one of the participants in 2007. Five other participants had previously been fined, but Kuehne + Nagel decided to fight the case. The fine imposed on them brought the total fines to almost NZ$12m (around £6m).
A previous post on this site highlighted how golf played a prominent role in several previous cartels. However, this cartel seemed to have had a fixation on gardening and referred to the cartel as the gardening club. Other parties involved in the cartel were referred to as fellow gardeners and the agreed upon price as the price for asparagus! When a participant suspected a rival may have cheated on the cartel agreement email exchanges such as this one took place:
I hear… concerns about the price of produce from the garden of Velcro, which appears to be operating as a charitable cooperative for the benevolence of vegetable eaters rather than growers…
It is not known whether the Kuehne + Nagel employees involved in the cartel were placed on gardening leave during the investigation!
‘Gardening Club’ hid hardcore air freight cartel New Zealand Herald, Hamish Fletcher (04/04/14)
‘Gardening Club’ Air Freight Forwarding Cartel Finally Buried by High Court Handy Shipping Guide (08/04/14)
Swiss firm fined $3.1 million over cartel 3 News (08/04/14)
‘Gardening Club’ freight cartel participant, Kuehne + Nagel, fined $3.1m The National Business Review (08/04/14)
Questions
- Why is an increase in costs likely to trigger price fixing behaviour?
- Why might the members want to use code names to run a cartel’s activities?
- Why do competition authorities grant leniency to cartel members that inform them about price fixing behaviour?
According to latest evidence from the Bank for International Settlements, in April 2013 some £3.2 trillion ($5.3 trillion) of foreign exchange was traded daily on global foreign exchange (forex) markets. About 40% of forex dealing goes through trading rooms in London. This market is highly profitable for the UK economy. But all is not well with the way people trade. There is a scandal about rate fixing.
Exchange rates on the forex market are freely determined by demand and supply and fluctuate second by second, 24 hours a day, except for weekends. Nevertheless, once a day rates are fixed for certain trades. At 4pm GMT a set of reference rates is set for corporate customers by banks and other traders. The rates are set at the free market average over the one minute from 16:00 to 16:01. The allegation is that banks have been colluding, through text messaging and chat rooms, to manipulate the market over that one minute.
Since the early summer of 2013, the Financial Conduct Authority (FCA) in the UK, along with counterparts in the USA, Switzerland, Hong Kong and elsewhere, has been looking into these allegations. Last week (4/3/14), the Bank of England suspended a member of its staff as part of its own investigation into potential rigging of the foreign exchange market. The allegation is not that the staff member(s) were involved in the rigging but that they might have known about it.
The Bank said that, “An oversight committee will lead further investigations into whether bank officials were involved in forex market manipulation or were aware of manipulation, or at least the potential for such manipulation.”
Meanwhile, the House of Commons Treasury Select Committee has been questioning Bank of England staff, including the governor, Mark Carney, about the scandal. Speaking to the Committee, Martin Wheatley, head of the FCA said that the investigation over rigging had been extended to 10 banks and that the allegations are every bit as bad as they have been with Libor.
Forex rigging ‘as serious as’ Libor scandal: Carney Yahoo News, Roland Jackson (11/2/14)
Forex manipulation: How it worked HITC (Here Is The City), Catherine Boyle (11/3/14)
Bank of England Chief Grilled Over Forex Scandal ABC News, Danica Kirka (11/3/14)
Carney Faces Grilling as Currency Scandal Snares BOE Bloomberg, Scott Hamilton and Suzi Ring (10/3/14)
UK financial body urges quick action over foreign exchange ‘fixing’ Reuters, Huw Jones (11/3/14)
Timeline -The FX “fixing” scandal Reuters, Jamie McGeever (11/3/14)
Forex in the spotlight Financial Times (16/2/14)
Forex scandal: What is that all about? BBC News (11/3/14)
Bank of England in shake-up after rate manipulation criticism BBC News (11/3/14)
Mark Carney faces Forex questions from MPs BBC News, Hugh Pym (11/3/14)
Bank of England’s Paul Fisher: ‘It’s not our job to go hunting for market wrongdoing’ Independent, Russell Lynch , Ben Chu (11/3/14)
Questions
- For what reasons would sterling appreciate against the dollar?
- Most of forex trading is for speculative purposes, rather than for financing trade or investment. Why is this and does it benefit international trade?
- If foreign exchange rates fluctuate, is it not a good thing that banks collude to agree the 4pm fixed rate? Explain.
- What was the Libor scandal? Why are some people arguing that the current forex scandal is worse?
- What can the FCA do to prevent collusion over exchange rates?
The UK energy industry (electricity and gas) is an oligopoly. There are six large suppliers: the ‘Big Six’. These are British Gas (Centrica, UK), EDF Energy (EDF, France), E.ON UK (E.ON, Germany), npower (RWE, Germany), Scottish Power (Iberdrola, Spain) and SSE (SSE Group, UK). The Big Six supply around 73% of the total UK market and around 90% of the domestic market.
Energy suppliers buy wholesale gas and electricity and sell it to customers. The industry has a considerable degree of vertical integration, with the energy suppliers also being involved in both generation and local distribution (long-distance distribution through the familiar pylons is by National Grid). There is also considerable horizontal integration, with energy suppliers supplying both electricity and gas and offering ‘dual-fuel’ deals, whereby customers get a discount by buying both fuels from the same supplier.
Smaller suppliers have complained about substantial barriers to entry in the industry. In particular, they normally have to buy wholesale from one of the Big Six. Lack of transparency concerning their costs and internal transfer prices by the Big Six has led to suspicions that they are charging more to independent suppliers than to themselves.
Under new regulations announced by Ofgem, the industry regulator, the Big Six will have to post the prices at which they will trade wholesale power two years in advance and must trade fairly with independent suppliers or face financial penalties. In addition, ‘a range of measures will make the annual statements of the large companies more robust, useful and accessible.’ According to the Ofgem Press Release:
From 31 March new rules come into force meaning the six largest suppliers and the largest independent generators will have to trade fairly with independent suppliers in the wholesale market, or face financial penalties. The six largest suppliers will also have to publish the price at which they will trade wholesale power up to two years in advance. These prices must be published daily in two one-hour windows, giving independent suppliers and generators the opportunity and products they need to trade and compete effectively.
But will these measures be enough to break down the barriers to entry in the industry and make the market genuinely competitive? The following articles look at the issue.
Articles
Boost for small energy firms as Big Six are ordered to trade fairly on wholesale markets or face multi-million pound fines This is Money, Rachel Rickard Straus (26/2/14)
Energy firms told to trade fairly with smaller rivals BBC News, Rachel Fletcher (26/2/14)
Ofgem ramps up scrutiny of Big Six accounts The Telegraph, Denise Roland (26/2/14)
‘Big six’ told to trade fairly – will it make a difference? Channel 4 News, Emma Maxwell (26/2/14)
Energy regulator Ofgem forces trading rules on ‘big six’ suppliers Financial Times, Andy Sharman (26/2/14)
Information
Ofgem tears down barriers to competition to bear down as hard as possible on energy prices Ofgem Press Release (26/2/14)
The energy market explained Energy UK
Gas Ofgem
Electricity Ofgem
Energy in the United Kingdom Wikipedia
Big Six Energy Suppliers (UK) Wikipedia
Questions
- Describe the structure of the UK energy industry.
- What are the barriers to the entry of new energy suppliers and generators in the UK?
- To what extent is vertical integration in the electricity generation and supply industry in the interests of consumers?
- To what extent is horizontal integration in the electricity and gas markets in the interests of consumers?
- How will requiring the six largest energy suppliers to post their wholesale prices for the next 24 months increase competition in the energy market?
- Is greater transparency about the revenues, costs and profits of energy suppliers likely to make the market more competitive?
- Identify and discuss other measures which Ofgem could introduce to make the energy market more competitive.
The energy market is complex and is a prime example of an oligopoly: a few dominant firms in the market and interdependence between the suppliers. Over 95% of the market is supplied by the so-called ‘big six’ and collectively they generate 80% of the country’s electricity. There are two further large generators (Drax Power Limited and GDF Suez Energy UK), meaning the electricity generation is also an oligopoly.
This sector has seen media attention for some years, with criticisms about the high profits made by suppliers, the high prices they charge and the lack of competition. Numerous investigations have taken place by Ofgem, the energy market regulator, and the latest development builds on a simple concept that has been a known problem for decades: barriers to entry. It is very difficult for new firms to enter this market, in particular because of the vertically integrated nature of the big six. Not only are they the suppliers of the energy, but they are also the energy generators. It is therefore very difficult for new suppliers to enter the market and access the energy that is generated.
Ofgem’s new plans will aim to reduce the barriers to entry in the market and thus make it easier for new firms to enter and act as effective competitors. The big six energy generators are vertically integrated companies and thus effectively sell their energy to themselves, whereas other suppliers have to purchase their energy before they can sell it. The regulator’s plans aim to improve transparency by ensuring that wholesale power prices are published two years in advance, thus making it easier for smaller companies to buy energy and then re-sell it. Andrew Wright, the Chief Executive of Ofgem, said:
These reforms give independent suppliers, generators and new entrants to the market, both the visibility of prices, and [the] opportunities to trade, [that] they need to compete with the largest energy suppliers…Almost two million customers are with independent suppliers, and we expect these reforms to help these suppliers and any new entrants to grow.
Although such reforms will reduce the barriers to entry in the market and thus should aim to increase competition and hence benefit consumers, many argue that the reforms don’t go far enough and will have only minor effects on the competitiveness in the market. There are still calls for further reforms in the market and a more in-depth investigation to ensure that consumers are really getting the best deal. The following articles consider this ongoing saga and this highly complex market.
Ofgem ramps up scrutiny of Big six accounts Telegraph, Denise Roland (27/2/14)
Energy firms told to trade fairly with smaller rivals BBC News (26/2/14)
Energy regulator Ofgem force trading rules on ‘big six’ suppliers Financial Times, Andy Sharman (26/2/14)
Ed Davey calls on Ofgem to investigate energy firms’ gas profits The Guardian, Sean Farrell and Jennifer Rankin (10/2/14)
UK forces big power companies to reveal wholesale prices Reuters (26/2/14)
Watchdog unveils new rules on Big six energy prices Independent, Tom Bawden (26/2/14)
Energy Bills: New rules to boost competition Sky News, (26/2/14)
Questions
- What are the characteristics of an oligopoly?
- Explain the reason why the vertically integrated nature of the big six energy companies creates a barrier to the entry of new firms.
- What are the barriers to entry in (a) the electricity supply market and (b) the electricity generating market?
- What action has Ofgem suggested to increase competition in the market? How effective are the proposals likely to be/
- Why is there a concern about liquidity in the market?
- If barriers to entry are reduced, how will this affect competition in the market? How will consumers be affected?
- Why are there suggestions that Ofgem’s proposals don’t go far enough?
Facebook has announced that it’s purchasing the messaging company WhatsApp. It is paying $19 billion in cash and shares, a sum that dwarfs other acquisitions of start-up companies in the app market. But what are the reasons for the acquisition and how will it affect users?
WhatsApp was founded less than five years ago and has seen massive growth and now has some 450 million active users, 70% of whom use it daily. This compares with Twitter’s 240 million users. An average of one million new users are signing up to WhatsApp each day. As the Wall Street Journal article, linked below, states:
Even by the get-big-fast standards of Silicon Valley, WhatsApp’s story is remarkable. The company, founded in 2009 by Ukrainian Jan Koum and American Brian Acton, reached 450 million users faster than any company in history, wrote Jim Goetz, a partner at investor Sequoia Capital.
Facebook had fewer than 150 million users after its fourth year, one third that of WhatsApp in the same time period.
Yet, despite its large user base, WhatsApp has just 55 employees, including 32 engineers.
For the user, WhatsApp offers a cheap service (free for the first year and just a 99¢ annual fee thereafter). 
There are no charges for sending or receiving text, pictures and videos. It operates on all mobile systems and carries no ads. It also offers privacy – once sent, messages are deleted from the company’s servers and are thus not available to government and other agencies trying to track people.
With 450 million current active users, this means that revenue next year will not be much in excess of $450 million. Thus it would seem that unless Facebook changes WhatsApp’s charging system or allows advertising (which it says it won’t) or sees massive further growth, there must have been reasons other than simple extra revenue for the acquisition.
Other possible reasons are investigated in the videos and articles below. One is to restrict competition which threatens Facebook’s own share of the messaging market: competition that has seen young people move away from Facebook, which they see is becoming more of a social media platform for families and all generations, not just for the young.
Videos and podcasts
Facebook pays billions for WhatsApp Messenger smartphone service Deutsche Welle, Manuel Özcerkes (19/2/14)
Facebook’s WhatsApp buy no bargain Reuters, Peter Thal Larsen (20/2/14)
Facebook Agrees To Buy WhatsApp For $19bn Sky News, Greg Milam (20/2/14)
Facebook Eliminates Competitor With WhatsApp Bloomberg TV, Om Malik, David Kirkpatrick and Paul Kedrosky (20/2/14)
Why WhatsApp Makes Perfect Sense for Facebook Bloomberg TV, Om Malik, David Kirkpatrick and Paul Kedrosky (20/2/14)
Facebook buying WhatsApp for $19bn BBC News, Mike Butcher (20/2/14)
Is Facebook’s acquisition of WhatsApp a desperate move? CNBC News, Rob Enderle (19/2/14)
Facebook’s $19bn WhatsApp deal ‘unjustifiable’ BBC Today Programme, Larry Magid (20/2/14)
Articles
Facebook to buy WhatsApp for $19 billion in deal shocker ReutersGerry Shih and Sarah McBride (20/2/14)
Facebook to Pay $19 Billion for WhatsApp Wall Street Journal, Reed Albergotti, Douglas MacMillan and Evelyn M. Rusli (19/2/14)
Facebook to buy WhatsApp for $19bn The Telegraph, Katherine Rushton (19/2/14)
Facebook buys WhatsApp: Mark Zuckerberg explains why The Telegraph (19/2/14)
WhatsApp deal: for Mark Zuckerberg $19bn is cheap to nullify the threat posed by messaging application The Telegraph, Katherine Rushton (20/2/14)
Why did Facebook buy WhatsApp? TechRadar, Matt Swider (20/2/14)
What is WhatsApp? What has Facebook got for $19bn? The Guardian, Alex Hern (20/2/14)
Facebook to buy messaging app WhatsApp for $19bn BBC News (20/2/14)
WhatsApp – is it worth it? BBC News, Rory Cellan-Jones (20/2/14)
Facebook buys WhatsApp: what the analysts say The Telegraph (19/2/14)
Facebook ‘dead and buried’ as teenagers switch to WhatsApp and Snapchat – because they don’t want mum and dad to see their embarrassing pictures Mail Online (27/12/13)
Facebook and WhatsApp: Getting the messages The Economist (22/2/14)
Questions
- Are Facebook and WhatsApp substitutes or complements, or neither?
- What does Facebook stand to gain from the acquisition of WhatsApp? Is the deal a largely defensive one for Facebook?
- Has Facebook paid too much for WhatsApp? What information would help you answer this question?
- Would it be a good idea for Facebook to build in the WhatsApp functionality into the main Facebook platform or would it be better to keep the two products separate by keeping WhatsApp as a self contained company?
- What effects will the acquisition have on competition in the social media and messaging market? Is this good for the user?
- Will the deal attract the attention of Federal competition regulators in the USA? If so, why; if not, why not?
- What are the implications for Google and Twitter?
- Find out and explain what happened to the Facebook share price after the acquisition was announced.
