I am an avid tennis fan and have spent many nights and in the last 10 days had many early mornings (3am), where I have been glued to the television, watching in particular Rafael Nadal in the Australian Open. Tennis is one of the biggest sports worldwide and generates huge amounts of revenue through ticket sales, clothing and other accessories, sponsorship, television rights and many other avenues. When I came across the BBC article linked below, I thought it would make an excellent blog!
There are many aspects of tennis (and of every other sport) that can be analysed from a Business and Economics stance. With the cost of living having increased faster than wages, real disposable income for many households is at an all-time low. Furthermore, we have so many choices today in terms of what we do – the entertainment industry has never been so diverse. This means that every form of entertainment, be it sport, music, cinema, books or computer games, is in competition. And then within each of these categories, there’s further competition: do you go to the football or the tennis? Do you save up for one big event and go to nothing else, or watch the big event on TV and instead go to several other smaller events? Tennis is therefore competing in a highly competitive sporting market and a wider entertainment market. The ATP Executive Chairman and President said:
We’ve all got to understand the demands on people’s discretionary income are huge, they are being pulled in loads of different avenues – entertainment options of film, music, sport – so we just need to make sure that our market share remains and hopefully grows as well.
As we know from economic analysis, product differentiation and advertising are key and tennis is currently in a particularly great era when it comes to drawing in the fans, with four global superstars.
However, tennis and all sports are about more than just bringing in the fans to the live events. Sponsorship deals are highly lucrative for players and, in this case, for the ATP and WTA tennis tours. It is lucrative sponsorship deals which create prize money worth fighting for, which help to draw in the best players and this, in turn, helps to draw in the fans and the TV companies.
With technological development, all sports are accessible by wider audiences and tennis is making the most of the fast growth in digital media. Looking at the packaging of tour events and how best to generate revenues through TV rights is a key part of strategic development for the ATP. It goes a long way to showing how even one of the world’s most successful sporting tours is always looking at ways to innovate and adapt to changing economic and social times. Tennis is certainly a sport that has exploited all the opportunities it has had and, through successful advertising, well-organised events and fantastic players, it has created a formidable product, which can compete with any other entertainment product out there. As evidence, the following fact was observed in the Telegraph article:
A 1400 megawatt spike – equivalent to 550,000 kettles being boiled – was recorded at around 9.20pm on that day [6/7/08] as Nadal lifted the trophy. The surge is seen as an indicator of millions viewing the final and then rushing to the kitchen after it is over. The national grid felt a bigger surge after the Nadal victory even than at half time during the same year’s Champions League final between Manchester United and Chelsea.
Tennis top guns driving ATP revenues BBC News, Bill Wilson (20/1/14)
The top 20 sporting moments of the noughties: The 2008 Wimbledon Final The Telegraph, Mark Hodgkinson (14/12/09)
The global tennis industry in numbers BBC News (22/1/14)
Questions
- How does tennis generate its revenue?
- In which market structure would you place the sport of tennis?
- What are the key features of the ATP tour which have allowed it to become so successful? Can other sports benefit from exploiting similar things?
- How has technological development created more opportunities for tennis to generate increased revenues?
- Can game theory be applied to tennis and, if so, in what ways?
- Why does sponsorship of the ATP tour play such an important role in the business of tennis?
- How important is (a) product differentiation and (b) advertising in sport?
The price of road fuel is falling. Petrol and diesel prices in the UK are now at their lowest level since February 2011. The average pump price for a litre of unleaded petrol has fallen to 130.44p in November – down nearly 8p per litre since September.
According to the AA, the reduction in price equates to a fall in the average monthly expenditure on petrol of a two-car family of £14.49 – down from £252.54 to £238.05. This saving can be used for spending on other things and can thus help to boost real aggregate demand. The fall in price has also helped to reduce inflation.
But will lower fuel prices lead to a rise in fuel consumption? In other words, will some of the savings people make when filling up be used for extra journeys? If so, how much extra will people consume? This, of course depends on the price elasticity of demand.
The following articles explain why the price of road fuel has fallen and look at its consequences.
Webcast
Good news for motorists as fuel prices fall in the East ITN (22/11/13)
Articles
November fuel price update Automobile Association (22/11/13)
Finally there is good news for motorists as petrol prices hit lowest level since 2011 The Telegraph, Steve Hawkes (22/11/13)
Petrol prices fall to lowest level for almost three years as strong pound gives motorists relief on the forecourt This is Money, Lee Boyce (22/11/13)
Falling petrol prices boost motorists The Guardian (22/11/13)
Data
Weekly road fuel prices Department of Energy & Climate Change
Europe Brent Spot Price US Energy Information Administration
Spot exchange rate, US $ into Sterling Bank of England
Questions
- Why have the prices of petrol and diesel fallen?
- Illustrate the fall in price of road fuel on a demand and supply diagram.
- How does the size of the fall in price depend on the price elasticity of demand for road fuel?
- If a fall in price results in a fall in expenditure on road fuel, what does this tell us about the price elasticity of demand?
- Why may the price elasticity of demand for road fuel be more elastic in the long run than in the short run?
- If a motorist decides to spend a fixed amount of money each week on petrol, irrespective of the price, what is that person’s price elasticity of demand?
- Using the links to data above, find out what happened to the dollar price of sterling and the Brent crude oil price between September and November 2013.
- How do changes in the exchange rate of the dollar to the pound influence the price of road fuel?
- If the price of oil fell by x per cent, would you expect the price of road fuel to fall by more or less than x per cent? Explain.
- Why do petrol prices vary significantly from one location to another?
UK Supermarkets: a prime example of an oligopoly. This industry is highly competitive and over the past decade, but particularly since the onset of the credit crunch, price wars have been a constant feature of this market. You could barely watch a full programme on commercial TV without seeing one of the big supermarkets advertising that their prices were lower than everyone else’s! So, despite oligopoly being towards the ‘least competitive’ end of the market structure spectrum, this is an example of just how competitive the market can actually be.
With household incomes being squeezed, in particular by another oligopolistic industry (energy) and with the ‘middle market’ being pinched by higher-end retailers and budget retailers, the supermarket sector is facing uncertain times. Asda’s sales growth has continued to slow and in response, the giant supermarket chain will be launching a £1 billion price-cutting campaign. Tesco is the market leader, but Sainsbury’s and Asda have been battling over the second spot. One of Asda’s selling points is its low prices. Perhaps not as low as Aldi and Lidl, but this new pricing strategy will aim to bring its prices further below Tesco, Sainsbury’s and Morrisons and
close the gap with the two big discount supermarkets. As Andy Clarke, Asda’s Chief Executive, said:
We regard ourselves as the UK’s leading value retailer and it is against this backdrop that I have today set out our strategic priorities which will improve, extend and expand the business over the next five years.
So, what will be the impact of lower prices? It appears as though Asda is marketing itself towards the budget end of the pricing spectrum, perhaps aiming to become fiercer competitors with Aldi and Lidl and let Tesco and Sainsbury’s do battle with the higher-end retailers, such as Waitrose and Marks and Spencer. Lower prices should cause a substitution effects towards Asda’s products, as many of them will have relatively price elastic demand. If the other supermarkets don’t respond, this should lead to sales growth. However, the key to an oligopoly is interdependence: the actions of one firm will affect all other firms in the market. The implications then, are that Tesco may react to this pricing strategy by engaging in its own price cuts, especially as the Christmas period approaches. The characteristic of interdependence was evident in the aftermath of Asda’s announcement when shares in Tesco and Morrisons both fell, showing how the markets were responding.
Of course, there are many other factors that affect a consumer’s decision as to whether to shop at Asda, Tesco or any other big supermarket. In the area where I live, we have a Tesco and a Morrisons (a few years ago, we had neither!). I don’t shop at Asda, as the nearest branch is over 30 miles away – even if prices were significantly lower, it would be more expensive to get there and back and a lot less convenient. For others, it may be loyalty and not just of the ‘I’ve shopped there all my life’ kind! For some, clubcard vouchers from Tesco may be preferred to Asda’s offerings and thus tiny price differences between the supermarkets may have little effect on a consumer’s decision as to where to shop. Many products at supermarkets are relatively cheap and thus as the proportion of our income that we spend on these goods is pretty low, any change in price doesn’t cause much of an effect on our demand.
It’s not just a pricing strategy where money is being invested by Asda. More investment will be going into their online services and more stores will be created, kin particular in London and the South East where their presence is low, but demand appears to be high. Improving ‘product quality, style and design’ will also be on the agenda, all with the aim of boosting sales growth and securing its position as the second largest retailer in the sector, perhaps with a long term aim of one day overtaking Tesco. The following articles consider the supermarket battleground.
Supermarket battle heats up as Asda announces £1bn price-cutting plan The Telegraph, Graham Ruddick (14/11/13)
Sainsbury’s profits make it second biggest supermarket BBC News (13/11/13)
Asda to launch £1bn price-cut plan AOL, Press Association (15/11/13)
Asda takes fight to rivals with £1bn investment plan The Guardian, Angela Monaghan (14/11/13)
UK’s Asda promises £1 billion investment in price cuts Reuters (14/11/13)
Asda makes bid to woo shoppers with vow of five-year £1billion price war after it was overtaken in market share by Sainsbury’s Mail Online, Sean Poulter (15/11/13)
Sainsbury’s overtakes Asda on demand for its premium lines Independent, Simon Neville (14/11/13)
Asda to put £1bn into lowering prices over five years The Grocer, Thomas Hobbs (14/11/13)
Wal-Mart posts $3.7bn quarterly income BBC News (14/11/13)
Questions
- What are the key characteristics of an oligopoly?
- What is meant by a price war? Who benefits?
- How important is the concept of price elasticity of demand when deciding whether or not to cut the price of a range of products?
- Why is the proportion of income spent on a good a key determinant of the elasticity of demand of a product?
- How can market share be calculated?
- Many suggest that the ‘middle market’ of the supermarket sector is slowly disappearing. Why is this?
- How effective will Asda’s price cutting strategy be? Which factors will determine its effectiveness?
As Elizabeth noted in Fuelling the Political Playing Field, there has been much debate recently about energy prices in the UK. Four of the ‘Big Six’ energy companies have now announced price rises. They average 9.1% – way above the rate of consumer price inflation and even further above the average rate of wage increases. What is more, they are considerably above the rate of increase in wholesale energy prices, which, according to Ofgem, have risen by just 1.7% in the past year.
The bosses of the energy companies have appeared before the House of Commons Energy and Climate Change Select Committee to answer for their large price increases. The energy companies claim that the increases are necessary to cover not only rising wholesale prices, but also green levies by the government and ‘network charges’ for investments in infrastructure. 
However, it is hard to see how, even taking into account all three of these possible sources of cost increases, the scale of price increases can be justified.
Another possible explanation for the price hikes is that they are partly the result of a system of transfer pricing (see). The energy industry is vertically integrated. Energy companies are not only retailers to customers, but also generators of electricity and wholesale shippers of gas. It is possible that, by the producing/shipping arms of these companies charging higher prices to their retailing arms, the retailers’ costs do indeed go up more than the wholesale market cost. The result, however, is higher profits for the producing arms of these businesses. In other words, a higher transfer price allows profits to be diverted from each company’s retailing arm to its producing arm.
This is an argument for making the wholesale market more competitive and for stopping the by-passing of this market by producing arms of companies selling directly to their retailing arms. What the companies are being accused of is an abuse of market power and possibly of colluding with each other, at least tacitly, to support the continuation of such a practice.
So is the answer a price freeze, as proposed by the Labour Party? Is it an investigation of the energy market by the Competition Commission? Or is it, at least as a first step, much more openness by the energy companies and transparency about their pricing practices? Or is it to encourage consumers to switch between energy companies, including the smaller ones, which at present account for less than 5% of energy supply? The videos, podcasts and articles consider these issues.
Webcasts and Podcasts
Energy bosses blame high bills on wholesale prices Channel 4 News, Gary Gibbon (29/10/13)
Why are energy bosses being questioned? BBC News, Stephanie McGovern (29/10/13)
Key questions Big Six energy companies must answer The Telegraph, Ann Robinson (29/10/13)
Energy bosses offer excuses for prices rises The Telegraph (29/10/13)
Energy bosses face MPs over price rises BBC News, John Moylan (29/10/13)
Energy boss ‘can’t explain’ competitors’ price hikes The Telegraph (29/10/13)
Ovo boss: Competition Commission would take too long BBC News (30/10/13)
Dale Vince: Energy market is ‘dysfunctional’ BBC Today Programme (30/10/13)
Tony Cocker: Public mistrust energy industry BBC Today Programme (30/10/13)
Ed Davey: Energy deals not just for ‘internet savvy’ BBC Today Programme (31/10/13)
Articles
Energy giants ‘charge as much as they can get away with’ The Telegraph, Peter Dominiczak (29/10/13)
UK energy markets need perestroika Financial Times (27/10/13)
Britain’s energy utilities must embrace glasnost Reuters, John Kemp (29/10/13)
Small energy firms ‘escape levies’ BBC News (30/10/13)
Is the energy market structurally flawed? BBC news, Robert Peston (30/10/13)
The energy market needs a Competition Commission investigation Fingleton Associates, John Fingleton (12/10/13)
Energy firms raised prices despite drop in wholesale costs The Guardian, Rowena Mason (29/10/13)
Only full-scale reform of our energy market will prevent endless price rises The Observer, Phillip Lee (26/10/13)
Energy Giants Blame Rising Bills On Green ‘Stealth Taxes’ Huffington Post, Asa Bennett (29/10/13)
Big Six energy firms ‘like cartel’ Belfast Telegraph (30/10/13)
Energy boss says he hasn’t done sums on green levies The Telegraph, Georgia Graham (30/10/13)
Graphic: How your energy bills have soared in ten years The Telegraph, Matthew Holehouse (30/10/13)
British energy suppliers’ explanations for price hikes just don’t add up The Guardian, Larry Elliott (31/10/13)
The 18th energy market investigation since 2001: Will this one be different? The Carbon Brief, Ros Donald (31/10/13)
Energy: Is there enough competition in the market? BBC News, Hugh Pym (26/11/13)
Information and Reports
Wholesale [electricity] market Ofgem
Wholesale [gas] market Ofgem
Response on wholesale energy costs Ofgem Press Release (29/10/13)
Response to Government’s Annual Energy Statement Ofgem Press Release (31/10/13)
Real Energy Market Reform The Labour Party
Questions
- Why may the costs of energy paid by the energy retailers to energy producers/shippers have risen more than the wholesale price?
- Explain what is meant by transfer pricing. How could transfer pricing be used to divert profits between the different divisions of a business?
- How can transfer pricing be designed by multinational companies to help them minimise their tax bills?
- Why is policing transfer pricing arrangements notoriously difficult?
- What evidence is there to show that switching between retailers by customers can help to drive retail energy prices down?
- How did the old electricity pool system differ from the current wholesale system?
- Should electricity companies be forced to pool the electricity they generate and not sell it to themselves through bilateral deals?
- Comment on the following: “The current electricity trading arrangements ‘create the very special incentive for the oligopolists. …The best of all possible worlds is where nobody invests. As supply and demand close up, the price spikes upwards, and supernormal profits result.'”
‘Farm-gate’ milk prices (the price paid to farmers) have been rising in the UK. In July they reached a record high of 31.4p per litre (ppl). This was 5.1ppl higher than in July 2012. There were further price rises this month (October). Sainsbury’s increased the price it pays farmers by nearly 2ppl to 34.15ppl and Arla Foods by 1.5ppl to 33.13ppl. Muller Wiseman is set to raise the price it pays to 32.5p per litre.
And yet many farmers are struggling to make a profit from milk production, claiming that their costs have risen faster than the prices they receive. Feed costs, for example, have risen by 2.12ppl. On average, farmers would need over 38p per litre just to cover their average variable costs. What is more, exceptional weather has reduced yields per cow by some 7%.
Meanwhile, in the USA, supply has risen by some 1.3% compared with a year ago. But despite this, the prices of dairy products are rising, thanks to strong demand. Cheese and butter prices, in particular, are rising rapidly, partly because of high demand from overseas. Demand for imported dairy products is particularly high in China, where supply has fallen by some 6% in the past couple of months.
The problem for dairy farmers in the UK is partly one of the power balance in the industry. Farmers have little or no market power. Supermarkets, however, have considerable market power. As large oligopsonistic buyers, they can put downward pressure on the prices paid to their suppliers. These are mainly large processing firms, such as Robert Wiseman Dairies, Arla Foods and Dairy Crest. They, in turn, can use their market power to keep down the price they pay to farmers.
Articles
Dairy farmers renew protests over milk prices Farmers Weekly, Philip Case (5/9/13)
Dairy farmers ‘lost more than 1p/litre last year’ Farmers Weekly, Philip Case (2/10/13)
South West farming businesses and producers still making a loss on milk South West Business (3/10/13)
Q&A: Milk prices row and how the system works BBC News (23/7/12) (note date of this)
Positive Dairy Trend: Rising Milk Production and Strong Demand The Farmer’s Exchange, Lee Mielke (27/9/13)
Chinese supply crisis to delay dairy price adjustment Rabobank (25/9/13)
China milk ‘crisis’ fuels world dairy price rise Agrimoney (1/10/13)
Data
UK milk prices and composition of milk ONS
Combined IFCN world milk price indicator IFCN
Questions
- Give some examples of (a) variable costs and (b) fixed costs in milk production.
- Why may farmers continue in dairy production, at least for a time, even if they are not covering their average variable costs?
- What factors determine (a) the price of milk paid to farmers; (b) the retail price in supermarkets?
- Explain how dairy futures markets work.
- Could the milk processors use their market power in the interests of farmers? Is it in the interests of milk processors to do so?
- Why is there a Chinese “dairy supply crisis”? What is its impact on the rest of the world? What is the relevance of the price elasticity of demand for dairy products in China to this impact?
I am an avid tennis fan and have spent many nights and in the last 10 days had many early mornings (3am), where I have been glued to the television, watching in particular Rafael Nadal in the Australian Open. Tennis is one of the biggest sports worldwide and generates huge amounts of revenue through ticket sales, clothing and other accessories, sponsorship, television rights and many other avenues. When I came across the BBC article linked below, I thought it would make an excellent blog!
With technological development, all sports are accessible by wider audiences and tennis is making the most of the fast growth in digital media. Looking at the packaging of tour events and how best to generate revenues through TV rights is a key part of strategic development for the ATP. It goes a long way to showing how even one of the world’s most successful sporting tours is always looking at ways to innovate and adapt to changing economic and social times. Tennis is certainly a sport that has exploited all the opportunities it has had and, through successful advertising, well-organised events and fantastic players, it has created a formidable product, which can compete with any other entertainment product out there. As evidence, the following fact was observed in the Telegraph article:
