In many parts of the UK, bus services are run by a single operator. In other parts, it is little different, with the main operator facing competition on only a very limited number of routes. Over the whole of England, Scotland and Wales there are 1245 bus operators, but the ‘big five’ (Arriva, FirstGroup, Go-Ahead, National Express and Stagecoach) carry some 70% of passengers. Generally these five companies do not compete with each other, but, instead, operate as monopolies, or near monopolies, in their own specific areas. On average, the largest operator in an urban area runs 69% of local bus services.
Given this lack of competition and potential abuse of monopoly power, the Office of Fair Trading referred local bus services in Great Briatin (excluding London) to the Competition Commission (CC) in January 2010. The CC has just published its final report. Paragraph 5 of the summary to the report states:
We concluded that there were four features of local bus markets which mean that effective head-to-head competition is uncommon and which limit the effectiveness of potential competition and new entry. These features are the existence of: high levels of concentration; barriers to entry and expansion; customer conduct in deciding which bus to catch; and operator conduct by which operators avoid competing with other operators in ‘Core Territories’ (certain parts of an operator’s network which it regards as its ‘own’ territory) leading to geographic market segregation.
And paragraph 8 states:
We decided on a package of remedies with three main elements to address the AECs [adverse effects on competition] that we found. First, the remedies include market-opening measures to reduce barriers to entry and expansion, thereby reducing market concentration and providing an environment in which competition is likely to be sustained. By reducing barriers to entry and expansion, we also expect it to become harder for operators to sustain a coordinated outcome. Second, the remedies include measures to promote competition in relation to the tendering of contracts for supported services. Third, we made recommendations about the wider policy and regulatory environment, including emphasizing compliance with and effective enforcement of competition law.
The following articles look at the findings of the report and at the potential for improving the service to passengers, in terms of quality, frequency and price.
Articles
Competition regulator outlines bus market shake-up The Telegraph (20/12/11)
Bus market not competitive, Competition Commission says BBC News (20/12/11)
Passengers ‘need more bus rivalry’ Press Association (20/12/11)
Competition Commission publications
CC sets out Future Destination for Bus Market Competition Commission News Release (20/12/11)
Bus Market Inquiry: Final Report, Case Studies and Appendices Competition Commission (20/12/11)
Local Bus Services: Accompanying Documents Competition Commission (20/12/11)
Questions
- What are the barriers to entry in the market for local bus services?
- In what circumstances are local bus services a natural monopoly? Is this generally the case?
- In a non-regulated bus market, how could established operators use predatory pricing to drive out new entrants?
- How may offering reductions for return tickets reduce competition on routes where there is a large operator and one or more smaller ones?
- What practices can established large operators use to drive out smaller competitors?
- Go through the four reasons given by the CC why head-to-head competition in local bus markets is uncommon and in each case consider what remedies could be adopted by the regulator or by local authorities.
- Which of the remedies proposed by the CC involve encouraging more competition and which involve tighter regulation?
When people shop in supermarkets they often look for what’s on special offer. After all, everyone likes a bargain. About 35–37% of supermarket items are on special offer at any one time and around 50% of the money spent by customers is on such items.
But things aren’t always as they seem. Supermarkets use clever marketing to persuade people that they’re getting a good deal, while sometimes it’s nothing of the sort. Examples include putting up prices for a while and then reducing them again saying “huge reduction”; or promoting an offer of, say, “three for £2”, when you could buy an individual item for 60p; or using the word “now” £2.50 to imply that the previous price was higher, when in fact it wasn’t; or selling a double-sized “value pack” for more than double the price of the regular size. These tricks are commonplace in supermarkets.
Sometimes the wary consumer will be able to find out which offers are genuine, but it’s not always that easy. And even if you do buy something at a genuine discount, is it something you really want? Or have you been persuaded to buy it simply because it’s on offer? Supermarkets study consumers’ psychology. They find clever ways of promoting products to make us feel that we have done well in getting a bargain.
The following programme in the BBC’s Panorama series looks at the big four supermarkets in the UK – Tesco, Asda, Sainsbury’s and Morrisons – which between then have 68% of supermarket sales. It gives examples of some of the not so special offers and how consumers are being hoodwinked.
Webcast
Revealed: The truth about supermarket ‘bargains’ BBC Panorama (clip), Sophie Raworth (5/12/11)
The Truth About Supermarket Price Wars BBC Panorama (full programme), Sophie Raworth (5/12/11)
Articles
What you need to know about the supermarket price wars Totally Money (7/12/11)
Supermarkets accused of misleading consumers The Telegraph, Nick Collins (5/12/11)
Supermarket price war: Can they all be cheapest? BBC News, Anthony Reuben (9/12/11)
Are Our Retailers Criminals? International Supermarket News, Laura Elliott (6/12/11)
Supermarket deals “not what they seem” warns expert Retail Gazette, Gemma Taylor (6/12/11)
Questions
- What types of misleading offers are identified in the Panorama report?
- For what reasons are consumers “taken in” by such offers? Does this imply that consumers are irrational?
- Does intense oligopolistic competition between the big four supermarkets lead to lower prices?
- How is it possible for two supermarkets to claim that they are cheaper than the other? How would you decide which supermarket was generally cheaper?
- Why might it be difficult for an independent agency to do a comparison of prices of different supermarket chains?
You’ve probably heard of Groupon. If you join its emailing list, the company will send you daily details of deals in your area that it has negotiated with local retailers. If you want to take advantage of any particular deal, you sign up for it online and if enough people do so to reach a minimum number agreed with the retailer, Groupon will bill your credit card. You then download the voucher and use it to purchase you discounted item or service. Discounts are often substantial – 50% or more.
But are these deals as good as they seem? On 2 December, the UK’s Advertising Standards Authority took the decision to refer Groupon UK to the Office of Fair Trading, following 48 breaches of the advertising code of practice in eleven months. It referred complaints about Groupon’s:
• Failure to conduct promotions fairly, such as not making clear significant terms and conditions
• Failure to provide evidence that offers are available
• Exaggeration of savings claims
And it was not just consumers who had complained. Many retailers found that so many people signed up for certain deals and the discounts were so great, with Groupon often charging the retailer half the discounted price, that retailers made substantial losses on the deals. One example was a cupcake maker, Rachel Brown, who runs the Need a Cake bakery in Reading, Berkshire. She had to bake so many extra cupcakes below cost that profits for the year were wiped out.
So what is the nature of this market failure and how appropriate are the competition authorities for dealing with it? The following webcasts and articles look at the issues. They also consider the growing problems Groupon faces in the market from new competitors.
It has not been good news recently for Groupon and it’s hardly surprising that, following Groupon’s flotation on the Nasdaq stock exchange in the USA last month, and an initial surge in the share price, its shares have since fallen by over 40%.
Webcasts
Groupon investigated by OFT Channel 4 News on YouTube, Benjamin Cohen (2/12/11)
Time to Jump Off Groupon Bandwagon? Newsy (24/11/11)
Articles
Groupon to be investigated by Office of Fair Trading Guardian, Mark Sweney (2/12/11)
OFT launches investigation into Groupon advertisements BBC News (2/12/11)
UK regulator launches Groupon probe Financial Times, Michael Stothard (2/12/11)
Groupon investigated by UK advertising authorities ZDNet, Eileen Brown (5/12/11)
Deal with it: Groupon ponders its future Independent, Stephen Foley (6/12/11)
Groupon’s Business Model Doomed To Fail Seeking Alpha, Mazen Abdallah (5/12/11)
Small Businesses Hate Groupon LiveOutLoud, Loral Langemeier
Competition authorities sites
ASA refers complaints about Groupon to OFT Advertising Standards Authority (2/12/11)
Investigation into the trading practices of MyCityDeal Limited (trading as Groupon UK) Office for Fair Trading (2/12/11)
Questions
- What market failings are there in the discount voucher market?
- What to retailers gain from dealing with companies such as Groupon?
- Do small businesses have anyone other than themselves to blame if they make a loss from doing a deal with Groupon?
- What should be the role of the competition authorities in the discount voucher market?
- Is Groupon’s business model ‘doomed to failure’ and if so why?
- Does Groupon have a ‘first-mover advantage’?
- Are there any barriers to entry of new firms into the discount voucher market? If so, what are they? What are the implications of your answer for the future of Groupon?
Families in the UK seemed to have been squeezed in all areas. With incomes flat, inflation rising, petrol and bills high, there seems to be a never ending cycle of price rises without the corresponding increase in incomes. This has been confirmed by the latest figures released from the big six energy companies, whose profit margins have risen from £15 per customer in June to £125 per customer per year. This is assuming that prices remain the same for the coming year.
The regulator, Ofgem has said that profit margins will fall by next year and that they are ensuring that price comparisons between the big energy companies become much easier to allow consumers to shop around. It is a competitive market and yet due to tariffs being so complicated to understand, many consumers are simply unable to determine which company is offering them the best deal. There is certainly not perfect knowledge in this market. Tim Yeo, the Chair of the Energy and Climate Change Committee said the profit margins were:
‘Evidence of absolutely crass behaviour by the energy companies, with a jump in prices announced in the last few months ahead of what will be a winter in which most families face their highest ever electricity and gas bills’
Ofgem will publish proposals later this year with suggestions of how to make the market more competitive. We have already seen in the blog “An energetic escape?” how Ofgem is hoping to reduce the power of the big six by forcing them to auction off some of the electricity they generate. The aim is to free up the market and allow more firms to enter. With the winter fast approaching and based on the past 2 years of snow and cold weather, it is no wonder that households are concerned with finding the best deals in a bid to reduce just one of their bills. The following articles consider this issue.
Energy price hikes see profits soar The Press Association (14/10/11)
Energy suppliers’ profit margins eight times higher, says regulator Ofgem Telegraph (14/10/11)
Energy firms’ profit margins soar, Ofgem says BBC News (14/10/11)
Energy firms’ profits per customer rise 733%, says Ofgem Guardian, Dan Milmo and Lisa Bachelor (14/10/11)
Regulator proposes radical change to energy market Associated Press (14/10/11)
Energy bills face overhaul in first wave of reform Reuters, Paul Hoskins (14/10/11)
Ofgem tells energy companies to simplify tariffs Financial Times, Michael Kavanagh (14/10/11)
You can’t shop around in an oligopoly Financial Times, William Murray (13/10/11)
Questions
- What type of market structure best describes the energy market?
- Of the actions being taken by Ofgem, which do you think will have the largest effect on competition in the market?
- Are there any other reforms you think would be beneficial for competition?
- Why is transparency so important in a market?
- What barriers to entry are there for potential competitors in the energy market?
- Why do you think profit margins are so high in this sector?
Private Finance Initiatives were first introduced by the Conservatives in the early 1990s and they became a popular method of funding a variety of new public projects under New Labour. These included the building of prisons, new roads, hospitals, schools etc. The idea is that a private firm funds the cost and maintenance of the public sector project, whilst the public sector makes use of it and begins repaying the cost – something like a mortgage, with contracts lasting for about 30 years. As with a mortgage, you are saddled with the payments and interest for many years to come. This is the problem now facing many NHS trusts, who are finding it too expensive to repay the annual charges to the PFI contractors for building and servicing the hospitals.
Undoubtedly, there are short term benefits – the public sector gets a brand new hospital without having to raise the capital, but in the long term, it is the public who end up repaying more than the hospital (or the PFI project) is actually worth. Data suggests that a hospital in Bromley will cost the NHS £1.2 billion, which is some 10 times more than it is worth. Analysis by the Conservatives last year suggested that the 544 projects agreed under Labour will cost every working family in the UK about £15,000. This, compared with the original building cost of £3,000, is leading to claims that the PFI projects do not represent ‘value for money.’
More and more NHS trusts are contacting Andrew Lansley to say that the cost of financing the PFI project is undermining their ‘clinical and financial stability’. More than 60 hospitals and 12 million patients could be affected if these hospitals are forced to close. Health Secretary Andrew Lansley commented that:
‘Like the economy, Labour has brought some parts of the NHS to the brink of financial collapse.’
Labour, on the other hand, argue that the PFI contracts they created were essential at the time ‘to replace the crumbling and unsafe building left behind after years of Tory neglect.’ Although the public have benefited from the development of new hospitals, schools, roads etc, the long term costs may still be to come. Once the schemes are paid off, in 2049, over £70billion will have been paid to private contractors – significantly more than the cost and value of the projects and it will be the taxpayer who foots the bill. The following articles consider this controversial issue.
Labour’s PFI debt will cost five times as much, Conservatives claim The Telegraph, Rosa Prince (27/12/10)
Rising PFI costs ‘putting hospitals at risk’ BBC News (22/9/11)
Hospitals face collapse over PFIs The Press Association (22/9/11)
NHS hospitals crippled by PFI scheme The Telegraph, Robert Winnett (21/9/11)
60 hospitals face crisis over Labour’s PFI deals Mail Online, Jason Groves (22/9/11)
Private Finance Initiative: where did all go wrong? The Telegraph (22/9/11)
PFI schemes ‘taking NHS trusts to brink of financial collapse’ Guardian, Lizzy Davies (22/9/11)
Hospitals ‘struggling with NHS mortgage repayments’ BBC News, Nick Triggle (22/9/11)
Questions
- What is a PFI?
- Briefly outline the trade-off between the short term and the long term when it comes to Private Finance Initiatives.
- What are the arguments for a PFI? What are the arguments against PFIs?
- If PFIs had not been used to finance building projects, how do you think that would have impacted the current budget deficit?
- Is the cost of financing PFIs likely to have an adverse effect on the future prosperity of the UK economy?