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 The first link below is an article considering this issue and the second link gives access to an archived version of In Business giving further detail.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.
The European Commission has fined four glass companies, including the UK firm Pilkington, for operating a price-fixing cartel in the market for car glass. As part of the cartel, managers in the firms, met in secret to fix prices and carve up the market between them. The largest single fine was handed down to the firm Saint-Gobain, the owner of the UK plasterboard group BPB. Saint-Gobain was fined 896 million euros. The four firms between them controlled around 90% of the market for car glass at the time the cartel operated.
Glassmakers fined record €1.4bn for price-fixing by European regulators Guardian (13/11/08)
Europe fines glassmakers record €1.4bn Times Online (12/11/08)
Questions
- Explain what is meant by a cartel and how it is able to increase the profits of its members.
- What market conditions are most likely to lead to the formation of a cartel?
- Compare and contrast the role of the UK Competition Commission and the European Commission in maintaining competitive markets.
- Evaluate two policies that can be used by governments to prevent price-fixing.
Energywatch, an industry watchdog, has argued in a recent report to MPs that Britain’s electricity and gas supply industry is a “comfortable oligopoly” that feels little need to innovate or compete. They have called for the sector to be subject to a Competition Commission investigation.
Power companies are ripping off consumers Times Online (21/5/08)
Age of cheap power is over Times Online (21/5/08)
Call to investigate energy ‘oligopolies’ Guardian (21/5/08)
Questions
| 1. |
Explain the main characteristics of an oligopolistic industry. |
| 2. |
What aspects of the electricity and gas supply market would the Competition Commission consider if asked to investigate the industry? |
| 3. |
Assess the extent to which the electricity supply industry exhibits oligopolist collusion. |
Shell have announced record profits of $27bn. This is the highest profit ever made by a European company and is only surpassed worldwide by the annual profits of another oil company ExxonMobil at $40bn. These high profits have led to calls for a windfall tax to be imposed on the oil companies and the articles below consider the likely impact of a tax of this nature.
Threat of windfall tax to energy companies is ‘legalised piracy’ Times Online (28/2/08)
Tax uncertainty a sure-fire killer Times Online (28/2/08)
Q&A: Windfall tax on Shell BBC News Online (31/1/08)
The great fuel folly Guardian (5/2/08)
Video
Windfall tax suggested for fuel profits BBC News Online (February 2008)
Questions
| 1. |
Using diagrams as appropriate, show the impact on the equilibrium level of price and output of Shell of a windfall tax being imposed on their profits. |
| 2. |
Discuss the extent to which the high level of profitability of oil companies is determined by the oil price. |
| 3. |
Analyse whether a windfall tax is an economically efficient form of taxation. What alternatives could a government consider that might be more efficient?
|
The start of 2008 saw oil prices hit $100 per barrel – a new record. This important psychological as well as economic milestone has, as a result, also seen petrol prices rising to over £1 per litre. The increase in prices may prove to be an important factor in determining whether the Bank of England is able to lower interest rates.
The heavy price of $100 per barrel Guardian (4/1/08)
Oil sets fresh record above $100 BBC News Online (3/1/08)
Oil price at record $100 a barrel BBC News Online (2/1/08)
What is driving oil prices so high? BBC News Online (2/1/08)
Global oil industry in figures BBC News Online (2/1/08)
Plenty of oil left in the global tank Times Online (16/12/07)
Oil at $100 threatens to choke economy Times Online (3/1/08)
Videos
Oil prices break $100 barrier BBC News Online
Questions
| 1. |
What are the main factors that have driven oil prices over $100 per barrel. |
| 2. |
Using diagrams as appropriate, illustrate the changes that have taken place in the oil market. |
| 3. |
Assess the likely impact of the increase in the oil price on the major UK economic targets. |
| 4. |
Discuss the extent to which the Bank of England will need to take account of higher oil prices in its decisions on interest rates. |