Blockbuster US has become the latest in a long line of companies filing for bankruptcy. With huge debts and a need to restructure the business, given the huge competition in America, Blockbuster has made agreements with its creditors to cut its debts from $1 billion to $100 million. Blockbuster has suffered from mail-order and online film rental services, in particular in America.
Blockbuster is a worldwide phenomenon with stores ranging from the UK to Mexico. However, as legally separate entities, the non-US branches of Blockbuster are protected from the bankruptcy. While the UK branches will remain unaffected, there are concerns that they may suffer from a lack of new DVD stock, especially with the approach of Christmas.
As news of Blockbuster’s bankruptcy spread, Netflix – a key competitor – saw its shares soar. Netflix was a catalyst in the demise of Blockbuster US and it has seen its market share increase rapidly over the past few years, with subscribers increasing from 1 million in 2002 to 15 million in 2010. Blockbuster responded by ending late fees and started its own online services, but it has been unable to compete effectively in this competitive market. Although restructuring of Blockbuster has begun, only time will tell what the future is for this once dominant movie rental firm.
Blockbuster files for Bankruptcy in US BBC News (23/9/10)
Blockbuster fizzles in US, but renters overseas haven’t switched to Netflix – yet The Christian Science Monitor, Stephen Kurczy (23/9/10)
Blockbuster files for Chapter 11 protection Guardian, Richard Wachman (23/9/10)
Blockbuster wins Court’s approval to draw $20 million from bankruptcy loan Bloomberg, David McLaughlin and Tiffany Kary (23/9/10)
Fitch lowers debt rating on Blockbuster Bloomberg BusinessWeek (23/9/10)
Netflix shares hit high after Blockbuster bankruptcy Reuters, Sue Zeidler (23/9/10)
Debt, changing media habits topple Blockbuster The Associated Press, Mae Anderson (23/9/10)
Questions
- What are the key factors behind Blockbuster’s decline?
- New competitors have entered the market for movie rental. Illustrate this on a diagram. How can we use this to explain Blockbuster’s problems?
- Online services and mail-order have become increasingly popular services in this market. Is the extra competition in the market in the best interests of consumers?
- What type of market structure is the rental movie industry? Explain your answer.
- What type of legal structure does Blockbuster operate under? What are the key advantages and disadvantages of this?
- Why are the non-US chains not affected by the bankruptcy of Blockbuster US?
- Have a look at the share prices of Blockbuster and Netflix. What has happened to them over rthe past year? Is this consistent with recent developments?
What is the future of the Royal Mail? One thing for certain is that it needs an injection of money, which has led the government to consider either privatisation of the Royal Mail or selling it. Over the past years, we have seen continued strikes by the postal service in response to proposed changes in working practices. Mr. Cable commented that:
‘Royal Mail is facing a combination of potentially lethal challenges – falling mail volumes, low investment, not enough efficiency and a dire pension position.’
However, there are concerns that the privatisation or sale of the Royal Mail could lead to higher prices, job losses and further pension problems. The transfer of the Royal Mail to the highest bidder could shift the pension deficit, currently standing at £13.3 billion, to the taxpayer, potentially costing each taxpayer £400. The choice for the public is stark: either lose the right to send a letter anywhere in the UK for the same price or take on postal workers’ pensions.
Expecting massive opposition from the Communication Workers Union (CWU), Ministers are looking to pursue an arrangement similar to that of John Lewis, whereby staff are given shares in the company. This will give the staff an incentive to perform well to improve the performance of the company and hence increase their future dividend. Read the following articles and then try answering the questions that follow.
Royal Mail is to be privatised, government confirms BBC News (10/9/10)
Royal Mail sell-off is confirmed BBC News, Hugh Pym (10/9/10)
Royal Mail privatisation backed Press Association (10/7/10)
Royal Mail sale could cost £400 per home as taxpayers set to fund £13.3 billion pension deficit Mail Online, James Chapman (10/9/10)
Royal Mail pension plan challenged by regulator BBC News, Ian Pollock (30/7/10)
Ministers consider offering 20 per cent of shares in Royal Mail to staff Telegraph, Christopher Hope (10/9/10)
Cable to privatise ‘inefficient’ Royal Mail Independent, Cahal Milmo and Alistair Dawber (11/9/10)
Royal Mail revolution needed, say bankers Telegraph, Louise Armitstead (10/9/10)
Questions
- What are the problems that the Royal Mail is facing? Why have they occurred?
- What are the arguments for and against privatisation of the Royal Mail?
- How might privatisation lead to job losses and higher prices?
- What type of business arrangement does John Lewis have? Explain why this may improve overall performance of the company?
- If the pension deficit is passed on to the government, why will it cost the taxpayer? Is such an arrangement (a) efficient (b) equitable? Explain your answer.
If we are faced with simple and limited choices, we may make careful decisions based on a number of criteria: in other words, we will identify various characterisitics we are looking for and see how well the various alternative products or activities meet our criteria. When we have lots of choice, however, we may be less careful or get confused.
In this Guardian podcast, the panelists discuss complex choices between many products and/or characteristics. Are people being ‘rational’ when making such choices? Is being less careful simply a rational use of scarce time? Do people really want lots of choice or would they prefer more limited choice? Can experiments where people are given choices help us to understand how people choose and how much choice businesses or government should give people? Then there is the question of producers/suppliers of products. Does choice promote competition and product development and is there an optimum amount of choice to achieve this?
The Business: Choice Guardian Podcasts, Sheena Iyengar, Julian Glover and Andrew Lilico in conversation with Aditya Chakrabortty (1/9/10)
Questions
- Are people ‘rational’ when they make choices? For what reasons may they not be rational?
- Can you make rational choices if your information is imperfect?
- Is there an optimum amount of choice and how would you set about establishing that optimum?
- How useful are experiments in understanding the process of choice? What are the weaknesses of such experiments?
- Should people be limited in the amount of choice they are given over medical treatment and schools?
- What are the advantages to other people of giving people more choice?
- How much does culture influence our attitudes towards choice?
Here’s an exciting bit of news. Lake Eyre in South Australia is filling and the Lake Eyre Yacht Club’s sailing regatta started on 5 July. So what, you may ask! Well, Lake Eyre is in the middle of one of the driest deserts in the world. It virtually never rains there and most of the time, the ‘lake’ is one huge dry salt pan.
But just a few times per century, the rainfall many kilometres away is heavy enough to fill the dry river beds of Cooper Creek, Finke River, Georgina River and Diamantina River. These ‘rivers’ drain about one sixth of the whole of Australia (about the size of Germany, France, Italy combined) – but a sixth where rainfall is normally very low. But this season’s rains have been exceptionally high; the rivers are flowing – and the lake is filling.
When the lake does fill, it teems with life. Fish eggs that have lain buried in the salt for years hatch. Sea birds fly in nearly 1000 kilometres from the Southern Ocean. And it’s then that the enthusiasts come to play.
What’s this got to do with economics? Well economics is about scarcity and choice. Many of the choices we make are not simple buying and selling choices. Many clubs and other organisations thrive on the enthusiasm of their members. They’re not there to make money but certainly add to people’s ‘utility’. And enthusiasm, and hope, is what the members of the Lake Eyre Yacht Club have in abundance. Let’s hope they get lots of utility from sailing in the desert over the coming weeks.
Articles
Outback Sailors 10 News (6/7/10)
Floods and boat race brings life to desert lake ABC News (7/7/10)
Flightseeing Lake Eyre Stuff.co.nz, James Shrimpton (25/5/10)
Gone (not fishing) flying over Lake Eyre Australian Daily Telegraph, Maralyn Parker (6/6/10)
The Lake Eyre Yacht Club Lounge of the Lab Lemming, Chuck Magee (21/3/10)
Lake Eyre Regatta ExplorOz, The Landy blog (14/6/10)
Boom follows boom in the Lake Eyre Basin ABC Western Queensland, Julia Harris (23/3/10)
Entries flood in for rare outback regatta ABC News (23/6/10)
Yacht club sails into history with a desert regatta The Age (7/7/10)
Chasing water to Lake Eyre ABC Rural, Caitlyn Gribbin (6/7/10)
Lake Eyre brims with life ABC News, Paul Lockyer (15/6/10)
Yachting regatta in Australian desert for first time in 20 years Telegraph, Bonnie Malkin (7/7/10)
Plain sailing for desert regatta Gulf Times (7/7/10)
Information sites
Lake Eyre Yacht Club
Current Lake Status Lake Eyre Yacht Club
Lake Eyre Wikipedia
Lake Eyre Rita’s Outback Guide
Questions
- What attitude do the members of Lake Eyre Yacht Club have towards risk and uncertainty?
- How would you set about estimating the consumer surplus that members are likely to gain from attending the regatta and sailing on the lake?
- How price elastic would you expect the demand for and supply of services to be, such as ferry crossings and accommodation?
- What business opportunities are likely to be associated with sailing on the lake? Would it be ‘rational’ to set up such a business?
Transport issues in the UK are always newsworthy topics, whether it is train delays, cancelled flights, the quality and frequency of service or damage to the environment. Here’s another one that’s been around for some time – high-speed rail-links. Countries such as France and Germany have had high-speed rail links for years, but the UK has lagged behind. Could this be about to change?
The proposal is for a £30bn 250mph high-speed rail link between London and Birmingham, with the possibility of a future extension to Northern England and Scotland. This idea has been on the cards for some years and there remains political disagreement about the routes, the funding and the environmental impact. Undoubtedly, such a rail-link would provide significant benefits: opening up job opportunities to more people; reducing the time taken to commute and hence reducing the opportunity cost of living further away from work. It could also affect house prices. Despite the economic advantages of such a development, there are also countless problems, not least to those who would be forced to leave their homes.
People in the surrounding areas would suffer from noise pollution and their views of the countryside would be changed to a view of a train line, with trains appearing several times an hour at peak times and travelling at about 250mph. Furthermore, those who will be the most adversely affected are unlikely to reap the benefits. Perhaps the residents of the Chilterns would be appeased if they were to benefit from a quicker journey to work, but the rail-link will not stop in their village. In fact, it’s unlikely that they would ever need to use it. There are significant external costs to both the residents in the affected areas and to the environment and these must be considered alongside the potential benefits to individuals, firms and the economy. Given the much needed cuts in public spending and the cost of such an investment, it will be interesting to see how this story develops over the next 10 years.
Podcasts and videos
£30bn high-speed rail plans unveiled Guardian, Jon Dennis (12/3/10)
Can we afford a ticket on new London-Birmingham rail line? Daily Politics (11/3/10)
All aboard? Parties disagree over high-speed rail route BBC Newsnight (11/3/10)
Articles
The opportunities and challenges of high speed rail BBC News, David Miller (11/3/10)
Beauty of Chilterns may be put at risk by fast rail link, say critics Guardian, Peter Walker (11/3/10)
High-speed rail is the right investment for Britain’s future Independent (12/3/10)
Hundreds of homes will go for new high-speed rail line Telegraph, David Milward (12/3/10)
Questions
- Make a list of the private costs and benefits of a high-speed rail link.
- Now, think about the external costs and benefits. Try using this to conduct a Cost-Benefit Analysis. Think about the likelihood of each cost/benefit arising and when it will arise. What discount factor will you use?
- There are likely to be various external costs to the residents of the Chilterns. Illustrate this concept on a diagram. Why does this represent a market failure?
- How would you propose compensating the residents of the Chilterns? Are there any problems with your proposal?
- Will such a rail link benefit everyone? How are the concepts of Pareto efficiency and opportunity cost relevant here?
- To what extent would this rail link solve the transport problems we face in the UK. Think about the impact on congestion.