I hardly need to say that the title is no reflection on England’s World Cup performance – or lack thereof. Instead, it relates to the opportunity for more people to watch the Premier League, which I’m sure most of you’ll agree is good news!
In 2007, BT, Virgin, Top up TV and Setanta complained about Sky’s dominance within the pay-TV industry. We considered Sky’s dominance and the subsequent investigation by Ofcom in a posting in March: Is the sky falling in?. Ofcom ruled that Sky would have to reduce the price it charged to other broadcasters to show its premium sports channels.
In more recent developments, there has now been a deal signed between Sky and BT, which will allow BT Vision customers to view Sky Sports 1 and Sky Sports 2 from August 1st 2010 (just in time for the start of the new football season, for those that are interested!) There are still ongoing debates about how much BT will charge for these new channels and it will depend largely on the outcome of the Sky’s appeal against Ofcom’s decision about the prices Sky has set. Although this may be good news to BT Vision viewers (excluding the fact that the deal does not include Sky Sports 3 and 4), there are many who agree on just one point: the regulator got it wrong. The Premier League could lose millions due to a loss of exclusivity and BSkyB argues that Ofcom didn’t even have the right to make the ruling.
These mini disputes are likely to go on for some time, but at least we can be certain about one thing: Ofcom’s decision can’t be any worse than Capello’s decisions in South Africa! Bring on the Premier League!!
Articles
Sky Sports 1 and 2 available to BT vision customers BBC News (28/6/10)
BT to offer Sky Sports in time for soccer season Reuters (28/6/10)
BT signs BSkyB deal to show Sky Sports channels BusinessWeek, Simon Thiel (28/6/10)
Sky forced to cut price of sports channels Telegraph (31/3/10)
New ruling lets fans see Premier League on TV for just £15 a month London Evening Standard, Jonathan Prynn (31/3/10)
Virgin media cuts Sky Channels prices Digital Spy, Andrew Laughlin (11/6/10)
BSkyB, BT and FAPL join Ofcom appeal Broadband TV News (11/6/10)
Sky wrongfoots rival BT by raising prices Guardian, Richard Wray (30/6/10)
BT charges £16.99 for Sports 1 and 2 BBC News (1/7/10)
BT launches cheap package to view Sky Sports Guardian, Lisa Bachelor (1/7/10)
BT Wades Into Pay-TV Sports Market Sky News, Nick Phipps and Emma Rowley (1/7/10)
Sky Sports broadcast costs set to rise BBC News, John Moylan (1/7/10)
Ofcom report
Delivering consumer benefits in Pay TV Ofcom Press Release (31/3/10)
Questions
- Ofcom’s initial ruling forced Sky to reduce prices. What will be the impact on a demand curve? How might this affect consumer choice?
- Sky has 85% of the market. Would you class it as a monopoly? Explain your answer. Is this agreement between Sky and BT likely to reduce or increase Sky’s market power?
- How might other Pay-TV providers be affected by this decision?
- What are the disputes surrounding Ofcom’s decision? Why might the Premier League lose so much revenue?
On the 24th May the new collation government released details of its plan to make £6.2 billion of savings (see HM Treasury press release). As part of this package, The Department for Business, Innovation and Skills (BIS) – headed by Business Secretary, Vince Cable – will make savings of £836 million, equivalent to 3.9% of its budget. One of the areas identified by BIS for ‘savings’ is the higher education budget, which will lose £200 million. Also targeted are the Regional Development Agencies (RDAs) in England. These are the strategic drivers of economic development in the English regions. They will lose £74 million from BIS as well as a further £196 million from other government departments.
So what is the Department for Business, Innovation and Skills charged with doing? Well, according to the BIS website it is charged with
…building a dynamic and competitive UK economy by: creating the conditions for business success; promoting innovation, enterprise and science; and giving everyone the skills and opportunities to succeed. To achieve this it will foster world-class universities and promote an open global economy.
In describing what BIS does, BIS states that it
…brings all of the levers of the economy together in one place. Our policy areas – from skills and higher education to innovation and science to business and trade – can all help to drive growth.
In other words, the BIS is intended to be a key player in affecting the UK’s long-term rate of economic growth. Since 1948 the average annual rate of growth of the UK economy, as measured by constant-price GDP (real GDP), is 2.4%. Of course, a key question is how we might do better. But, there is a significant disagreement amongst economists about the role that government should play in advancing long-term economic growth. This debate largely centres both on how activist a government should be and on the types of policy that a government should pursue.
The ’case for industrial activism’ is made in the leading article of The Independent on 25 May. It nicely encapsulates some of the policy issues surrounding long-term growth and, in reflecting on the cuts to BIS, identifies the role it believes BIS should play.
…we need to think clearly about the proper role for the state in the private sector. There is no future in a return to the heavy-handed statism of the 1970s or the discredited policy of trying to “pick winners”. The guiding principle as far as industrial policy is concerned is that government should do what the free market will not, or cannot. The function of the DBIS should be to increase Britain’s long-term growth potential.
This means supporting industries that cannot get funding from the capital markets and funding important research that would otherwise go unperformed. Most of all, it means education. Britain cannot compete successfully with the rising economic powers of China and India, which have access to a vast pool of cheap workers, on labour costs. Our only hope for advantage lies in our human capital. That makes the case for intensive vocational and advanced skills training.
Therefore, industrial activism, as envisaged by The Independent is about correcting for market failures and ensuring that there is sufficient investment in education and training.
The Confederation of British Industry, which describes itself as the ‘UK’s top business lobbying organisation’, in its press release of 19 May identified the following as ‘essential’ for delivering growth:
• Establishing competitive business taxes
• Developing a strong banking system
• Skilling students for the future and strengthening apprenticeships
• Attracting and cultivating enterprise and industry
• Prioritising energy security
• Working towards a low-carbon economy
• Developing the infrastructure for economic growth
The CBI too identifies the significance of skills. But, it believes that in the previous decade growth was driven too much by government spending (as well as by unsustainable growth in the financial sector). It argues that the private sector, along with trade, needs to be ‘the growth engine for the future’.
What is interesting about the proposed cuts to BIS is that they very visibly draw attention to the differences that exist among commentators, industrialists and economists as to industrial policy. In particular, they ignite the debate about the most effective role that a government can play in promoting long-term growth. Don’t expect too much agreement any time soon!
Press Releases
Government announces £6.2 billion of savings in 2010-11 HM Treasury (24/5/10)
Private sector growth and public sector reform needed to restore economy CBI (19/5/10)
Articles
The case for industrial activism Independent (25/5/10)
Public sector deficit cuts: Higher education and RDAs hit hard in BIS efficiency savings plan eGov Monitor (25/5/10)
George Osborne outlines details of £6.2 billion spending cuts BBC News (24/5/10)
Government axes £836 billion from business budget Growing Business (24/5/10)
Department for Business, Innovation and Skills hit hard by spending cuts Training Journal, Martin Kornacki (24/5/10)
Business department hammered as Osborne swings the axe Management Today (24/5/10)
Big cuts signal end to activism Financial Times, Jean Eaglesham, Andrew Bounds and Clive Cookson (24/5/10)
Businesses take a pounding as coalition cuts hit home London Evening Standard, Hugo Duncan (24/5/10)
Vince Cable explains spending cuts u-turn Newsnight (24/5/10)
Questions
- What do you understand by long-term growth? How does this differ from short-run growth?
- Evaluate the argument advanced by The Independent for industrial activism? What sort of policies might fall under this description?
- In considering the CBI’s list of influences on long-term economic growth outline what role you think government could play and what policies it could enact.
- Do you think the savings being made by BIS signal a new policy approach to delivering long-term economic growth in the UK?
The EU competition acuthorities have just fined ten producers of memory chips a total of €331 million for operating a cartel. One of the ten, Micron, will pay no fine because it blew the whistle on the other nine. They, in turn, have had their fines reduced by 10% for co-operating with the authorities. According to the EU Press Release:
The overall cartel was in operation between 1 July 1998 and 15 June 2002. It involved a network of contacts and sharing of secret information, mostly on a bilateral basis, through which they coordinated the price levels and quotations for DRAMs (Dynamic Random Access Memory), sold to major PC or server original equipment manufacturers (OEMs) in the EEA.
“This first settlement decision is another milestone in the Commission’s anti-cartel enforcement. By acknowledging their participation in a cartel the companies have allowed the Commission to bring this long-running investigation to a close and to free up resources to investigate other suspected cartels. As the procedure is applied to new cases it is expected to speed up investigations significantly”, said Commission Vice President and Competition Commissioner Joaquín Almunia.
Articles
Chipmakers to pay fines of €330m over cartel Financial Times, Nikki Tait (20/5/10)
Chipmakers fined by EU for price-fixing BBC News (19/5/10)
European Commission douments and findings
Antitrust: Commission introduces settlement procedure for cartels Europa Press Release (3/6/08)
Antitrust: Commission introduces settlement procedure for cartels – frequently asked questions Europa Memo (30/6/08)
Antitrust: Commission fines DRAM producers € 331 million for price cartel; reaches first settlement in a cartel case Europa Press Release (19/5/10)
Antitrust: Commission adopts first cartel settlement decision – questions & answers Europa Memo (19/5/10)
Questions
- Explain how the new fast-track cartel settlement procedure works.
- Are the incentives built into the procedure appropriate for reducing oligopolistic collusion?
- Are the any reasons why the chip cartel might have been in consumers’ interests?
- Why does EU competition legislation apply in this case given than all but one of the companies are non-EU businesses?
Two of America’s airlines have agreed to merge to form the world’s largest carrier. The deal between United and Continental Airlines is worth £2.1 billion and the management of the two companies hope that the new airline, to be called United Airlines, will bring cost savings of some £800 million per year. Last year, the two companies lost a total of £900 million. It is also hoped to increase revenues by providing more routes and more effective competition against rivals, such as Delta Air Lines.
But just how significant will any economies of scale be and to what extent will they involve job losses? Certainly the merger has been greeted with caution by the Air Line Pilots Association and unions such as the International Association of Machinists and Aerospace Workers. Also, will the larger company be able to compete more effectively to the benefit of consumers, or will the increased market power see a rise in fares?
And this is not the only airline merger. In April, British Airways and Iberia of Spain signed a deal to merge, thereby creating one of the world’s biggest airlines. Other mergers are expected as airlines battle to cope with rising costs and lower passenger numbers in the wake of the global recession. So will such mergers benefit passengers, or will it simply result in less choice and higher fares? The following articles look at the issues
Articles
1st priority for new United-Continental combo: Keep customers, workers happy Chicago Tribune, Julie Johnsson (3/5/10)
Debating future of US Airways Philadelphia Business Today, Linda Loyd (4/5/10)
Arpey points out good, bad of United-Continental deal The Dallas Morning News, Terry Maxon (3/5/10)
US airline merger creates world’s biggest carrier Independent, Nick Clark (4/5/10)
We can’t fix fares, says chief of merging US airlines Telegraph, James Quinn (3/5/10)
United and Continental Airlines to merge BBC News (3/5/10)
British Airways and Iberia sign merger agreement BBC News (8/4/10)
Are mergers good for airlines? BBC News, Edwin Lane (4/5/10)
United boss Glenn Tilton on Continental merger BBC News (3/5/10)
United and Continental bosses’ press conference on merger BBC News (3/5/10)
Data
Aviation Data & Statistics Federal Aviation Administration
TransStats RITA, Bureau of Transportation Statistics
Airline and Airport Statistics European Regions Airline Association
Questions
- What type of merger is the one between United and Continental: horizontal, vertical, conglomerate or a mixture?
- What types of economies of scale can be achieved by a merger of airlines?
- For what reasons may a merger of airlines result in higher revenues?
- To what extent will passengers (a) gain and (b) lose from airline mergers? What determines the size of these gains and losses?
- Is the airline industry an oligopoly? To what extent is there collusion between the various airlines?
- What should be the attitude of regulatory authorities across the world to airline mergers?
Below you will find links to the manifestos of the three main UK-wide parties for the general election on May 6. It’s not our role to suggest to those of you living in the UK with the right to vote how you should vote. The one thing we would suggest is that you consider carefully what the parties are proposing.
What is clear is that the state of the economy and the policies necessary to tackle economic problems are central to all the manifestos. As a student of economics, you should be able to assess the manifestos in terms of how the parties set out the economic problems facing the UK and what they propose doing about them.
So look through the manifestos below and then answer the questions we’ve posed about the UK economy and about the economic policies being proposed. If you are uncertain about how to answer them, then ask yourself what extra information would I need to enable me to give a good answer.
The manifestos (in alphabetical order)
The Conservative Party manifesto
The Labour Party manifesto
The Liberal Democrat Party manifesto
Other sources
We are reluctant to recommend newspaper articles, as all newspapers at election time tend to be highly partisan and are therefore likely to give you a very specific ‘spin’ on the parties’ proposals. Perhaps the two best independent sources are the BBC and the Institute for Fiscal Studies. See:
Election analysis 2010 Institute for Fiscal Studies
Election 2010 BBC News
Stephanomics Stephanie Flanders’ blog (this links to the archive).
Questions
- How do the analyses of the economic problems facing the UK differ between the three manifestos?
- Compare the policies of the three parties for cutting the public-sector deficit. Consider the following issues: the size and nature of any cuts in government expenditure; the size and nature of any tax increases; the timing of the meaures.
- What assumptions are being made about the determinants of aggregate demand over the coming months and the role of fiscal policy in this?
- Compare the policies of the three parties towards the distribution of income. To what extent have the parties taken into account possible incentive/disincentive effects of policies of redistribution?
- To what extent are the parties proposing using the tax system to tackle problems of externalities? Give examples and assess how effective the policies are likely to be.
- To what extent do each of the manifestos leave you with unanswered questions about the economy and how their proposed policies will tackle economic problems?