There are seven Indian airlines: state-owned Air India and six private carriers. Since the onset of recession they have all been making losses and were considering a one-day ‘strike’ when services would be removed. The aim was to force the Indian government to reduce fuel and airport taxes.
Do the losses suggest that there is overcapacity in the Indian airline market? Does it matter if, during the current recession, some airlines go out of business? Are bankruptcies necessary if the surviving carriers are to be stimulated to make cost savings and are to achieve sufficient economies of scale? Or should governments offer support to struggling airlines? Is oligopoly the best market structure for such an industry and, if so, how can collusion be avoided? The following articles consider these questions.
How many airlines do we need? Business Line (The Hindu) (4/8/09)
Indian airlines call off Aug 18 strike Forbes (3/8/09)
When corporations capture the state Rediff Business (7/8/09) (see middle part of article)
Blaming everyone else Indian Express (3/8/09)
India’s air carriers spin loss riddle Asia Times Online (8/8/09)
A strategic vision for Indian aviation The Economic Times (8/8/09)
Flight to value The Economist (6/8/09)
Federation of Indian Airlines
Questions
- Describe the features of the market structure in which Indian airlines operate.
- Is the Federation of Indian Airlines a cartel?
- Should (a) any; (b) all Indian airlines be given government support, and, if so, what form should the support take? Should Air India be treated differently from the other Indian airlines? Explain your answer.
- Is it in Air India’s long-term interests to embark on a price war with the other Indian airlines?
- Is oligopoly necessarily the optimal market structure for a capital-intensive industry?
Changes in the price of oil have effects throughout the economy. And it’s not just on the obvious things, such as petrol prices, energy bills and rail, bus and air fares. Most companies are significantly affected by the price of oil, as oil is a key input into their production, whether for transporting their inputs or the goods they produce, or as plastics or other petrochemicals. This is why the price of oil receives so much attention: we’re all affected by it. You will have seen the price of petrol changing dramatically over the past year or so and this is largely due to changing oil prices. The price of oil peaked at $147 a barrel in July 2008 and fell as low as $32 a barrel in December 2008.
So what is it that causes these changes in oil prices and what does it mean for the world’s economies? Read the following articles, which discuss these issues, and look at recent developments in the oil industry.
First fall in oil use since 1993 BBC News (10/6/09)
Trump’s world view Fox News, Interview between Greta van Susteren and Donald Trump (30/6/09) Oil settles above $71; China to boost reserves The Associated Press, Dirk Lammers (29/6/09)
Nigeria worries push up oil price BBC News (29/6/09)
Oil up to near $72 on dollar fall, Nigeria attack Town Hall, Pablo Gorondi (30/6/09)
Chinese demand forecast to boost oil price The Star Phoenix, Joanne Paulson (30/6/09)
Lower oil price hits Total profit BBC News (6/5/09)
Oil price hovers at $70 amid pipeline attacks Financial Times, Miles Johnson, Javier Blas, London (27/6/09)
What is going on in the oil market? BBC News (27/10/08)
Rising oil prices poses threat to recovery, Alistair Darling warns Telegraph (12/6/09)
Fears of oil crunch recede as recession knocks down global demand The Independent, Sarah Arnott (30/6/09)
Questions
- How is the price of oil determined? Give 2 examples of factors that could cause (a) the price of oil to increase and (b) the price of oil to decrease.
- How are company profits affected by the changing price of oil?
- OPEC is an oil cartel. What are the factors that make collusion more likely to succeed? Do they apply to OPEC?
- When prices of oil increase, why do we still use similar amounts of energy; still buy petrol? What’s so special about this commodity? Think about elasticity.
- How is the price and consumption of oil affected by the macroeconomic situation?
Walk down any street in the country, and you’re bound to see a Sky dish. With subscribers still increasing, a viewing target of 10 million by 2010 and revenue increasing to £1.4 billion, it seems that Sky TV is hardly suffering from the current ‘challenging conditions’ besetting so many firms.
Enter Ofcom, the independent regulator and competition authority for the UK’s communication industries that has been investigating the UK Pay TV industry since 2007. A consultation was published on the 26th June 2009 in which Ofcom indicated that BSkyB should be forced to make its premium sports and film channels available to rival broadcasters in a bid to ‘promote choice and innovation’. The articles below look at this conflict.
Sky may have to share TV channels BBC News (26/6/09)
Ofcom may set Sky’s wholesale prices Digital Spy, Andrew Laughlin (25/6/09)
Ofcom proposes measures to improve competition in pay TV Ofcom (26/6/09)
Pay TV Phase three document: Proposed remedies Ofcom Consultation (26/6/09)
BSkyB in war of words with Virgin Media and BT Guardian, Leigh Holmwood (24/6/09)
BSkyB keeps Premier League rights BBC Sport, Football (3/2/09)
Sky will fight Ofcom over Premium TV Tech Radar, Patrick Goss (26/6/09)
Pay TV market investigation: Consultation document Ofcom (18/12/07)
Sky asked to open up Premium sports and movies Times Online, Peter Stiff (26/6/09)
All believers in a competitive market must back Ofcom to take on Sky Telegraph, Neil Berkett (26/6/09)
Ofcom: Sky not playing fair with premium content Tech Radar, Patrick Goss (26/06/09)
Questions
- How well does BSkyB fit into a monopoly position for its premium content?
- What are the regulatory options open to Ofcom?
- How does Ofcom aim to introduce more competition and fairer prices into the Pay TV market?
- Why is it argued that competition is in the public’s best interest? Do you agree with this, or should BSkyB be allowed to carry on as it is?
- What has enabled Sky to become such a dominant force?
- How do you think the collapse of Setanta will affect this debate?
- Sky TV has seen its profits continuing to grow. Given that we’re in a recession, what does this tell us about Sky and the type of good or service that it supplies?
The first linked article below is from the American business magazine Forbes. It looks at the economics of football (‘soccer’) signings and, in particular, that of Robinho by Manchester City. In September 2008 the club was bought by an Abu Dhabi investment fund, controlled by Sheikh Mansour bin Zayed Al Nahyan, for £210 million. But does the investment in new players make good business sense?
Also, what should determine whether a club sells a player? The third link below considers this issue. The link is to the Embedding Threshold Concepts (ETC) site at Staffordshire University. ETC was funded by the Higher Education Funding Council for England’s Fund for the Development of Teaching and Learning (FDTL). The site has a number of teaching and learning resources.
City of Dreams Forbes (8/4/09)
Man City beat Chelsea to Robinho BBC Sport (1/9/08)
Selling footballers: the economic viewpoint ETC reflective exercise
Questions
- Was it consistent with the goal of profit maximisation for Manchester City pay Real Madrid £32.5 million for Robinho? Was it consistent with the goal of profit maximisation for Real Madrid to sell him?
- If Real Madrid had decided to keep Robinho, how would you estimate the cost of doing so?
- What difficulties are there in developing Manchester City into a ‘global brand’?
- In what sense are the top Premier League clubs a ‘self-perpetuating oligopoly’?
Google is a classic example of the new ‘Internet economics’. The main service it provides – search – is completely free and yet it is an enornmously profitable company and growing fast. Much of what they provide in addition to their search service is also free: Google Docs, Google Maps and Google Scholar. So how do they do it? The first link below is an article considering this issue and the second link gives access to an archived version of In Business giving further detail. The programme is well worth listening to. A key part of the explanation for this new phenomenon relates to the low and falling costs of providing these internet services.
Buy none, get one free BBC News Online (8/1/09)
Free for all BBC News Online (8/1/09) In Business – programme archive
Questions
- Write a short paragraph explaining briefly the Google business model.
- Identify two fixed and two variable costs of running an internet search service.
- What are the marginal costs of Google providing additional internet searches?
- Discuss the relationship between costs, revenue and profit for a company like Google as demand for their servces grows.