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.
You may have heard that house prices are stalling. August’s house price numbers from the Nationwide Building Society revealed that the average UK house price fell by 0.9% which came on the back of a 0.5% fall in July. The Nationwide talks of an ‘unwinding of the demand-supply imbalance that drove up prices for much of the last year’. It seems that the house price rises last year have, over recent months, induced additional supply by encouraging home-owners to put their property on the market. Unfortunately, there are indications that housing demand has weakened during 2010 though, of course, this gives buyers a greater degree of bargaining power.
But, you might wonder how we can get a handle on the strength of housing demand. Well, one particularly useful piece of information in assessing housing demand is the number of mortgage approvals for purchasing property. After all, there are not many of us that can reach into our back-pocket to find the £166,507 that the Nationwide estimates is needed to buy the average UK property.
If we look at Table A5.4 from August’s edition of Monetary and Financial Statistics, which is published by the Bank of England, we find that the number of mortgage approvals for house purchase in July was 48,722. Now, this was marginally up on the 48,562 in June, but, of more significance is the fact that July’s number was over 8% lower than in July 2009 when approval numbers stood at 53,126. Indeed, this number was to rise further through 2009, hitting 59,117 in November. This indicates a strengthening of housing demand at the time and helps us to appreciate why house prices rebounded last year.
But, the start of 2010 was to see mortgage approval numbers fall away and they have essentially flatlined over recent months at between 48,000 and 50,000. This time the numbers indicate a weakening of housing demand and so help to explain why house price growth has seemingly ceased and gone into reverse.
It remains to be seen how the balance between housing demand and supply will ‘play out’ over the remainder of the year. Will, for instance, some properties be taken off the market in response to this weaker demand? Could housing demand weaken further in response to economic conditions or to economic uncertainty? The answers to these questions will help to determine that all important balance between housing demand and supply. But, by monitoring the mortgage approval numbers we have a ready-made barometer on the strength of housing demand. Feel free to see which way the barometer needle swings in future!
Articles
UK mortgage approval rise but total lending weakest since March Telegraph (31/8/10)
House prices set to slump even further as home loans stay scarce Independent, Sean O’Grady (1/10/10)
Housing market ‘faces double dip’ Press Association (31/8/10)
UK mortgage approvals beat estimates as banks make more funds available Bloomberg, Scott Hamilton (31/8/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- What variables do you think are important in affecting the level of housing demand?
- What variables do you think are important in affecting the level of housing supply?
- Using a demand-supply diagram illustrate how shifts in housing demand and/or supply may have affected house prices (i) during 2009 and (ii) during 2010.
- What would you expect to happen to the strength of housing demand in the coming months? How will this impact on house prices?
$8 billion – this is the likely cost of the BP oil leak, which spilled 206 million gallons of oil into the Gulf of Mexico. Whilst the oil leak has been stopped for some time, there were ongoing concerns that the leak would re-appear due to the underwater pressure. The cost of stopping the leak has been substantial, but BP will face further costs, as the company begins to pay out compensation.
$20 billion is the compensation that residents of the Gulf of Mexico will receive. Further to this, BP has said that it will invest more money in promoting the tourism industry there, which has suffered from the oil spill. However, what about the fishing industry? Although compensation will be paid for the losses incurred, will this continue in the long term? The oil may cause a loss in productivity in certain populations of sea-life. How will this impact us? If certain fish became scarcer, then their price will rise accordingly, whether you purchase the fish at a shop or have it as a meal in a restaurant. To make matters worse, the hurricane season has arrived in the affected areas, which will make the clean-up effort even harder.
As BP’s share price has fallen, individuals have suffered from lower dividends. Jupiter Income Trust had almost 10% of their portfolio invested in BP, which largely explains the 9 per cent drop in their payout.
Articles
BP oil well ‘poses no further risk’, says Allen BBC News (5/9/10)
BP oil spill fallout hits Jupiter dividend Mail Online, Richard Dyson (4/9/10)
Gulf Oil leak: biggest ever, but how bad? BBC News, Richard Black (3/8/10)
BP oil spill didn’t hit tourism too hard Jabber Lounge, Gloria Rand (5/9/10)
BP oil victims face strings on $20 billion oil fund Telegraph, Rowena Mason (20/8/10)
BP share price data
BP historical share prices Yahoo Finance
BP share price chart Interactive Investor
Questions
- Which industries have been affected by the oil leak? Don’t think too close to home – look at the wider picture.
- Is the oil spill an example of a negative externality? Can it be illustrated on a diagram and, if so, how?
- What has happened to BP’s share price since the beginning of the oil spill? Put this on to a graph to trace the trend. Try to explain the changes in the share price using a demand and supply diagram.
- How would BP have calculated the compensation to be paid to residents of the Gulf of Mexico? Would cost–benefit analysis have been involved?
The prices of grains and other foodstuffs are rising rapidly. Wheat prices rose some 40 per cent in July and have continued to rise rapidly since. In June wheat futures were trading at around 450 US cents/bushel. By early September, they were trading at around 700 US cents/bushel. Global food prices generally rose by 5% over the two months July/August. And it’s not just food. Various other commodity prices, such as copper and oil, have also increased substantially.
At the beginning of September there were three days of food riots in Mozambique in protest against the 30% rise in the price of bread. Seven people were killed and 288 were injured. On 2 September Russia announced that it was extending a ban on wheat exports for another 12 months following a disastrous harvest. In Pakistan, the floods have destroyed a fifth of the country’s crops. Drought in Australia and floods in the Canadian prairies have reduced these countries’ grain production.
In response to the higher prices and fears of food riots spreading, the United Nations has called a special meeting on 24 September to bring food exporters and importers together to consider “appropriate reactions to the current market situation”. And yet, although global cereal production is down by some 5% on last year, it is still predicted to be the third largest harvest on record.
So what is causing the price rises? Is it simply a question of the balance of supply and demand and, if so, what has caused the relevant shifts in supply and/or demand? And what role does speculation play? The following articles look at the issues and at the outlook for commodity prices over the coming months.
Clearly changes in commodity prices affect the rate of inflation. The news item (Bank of England navigates choppy waters) amongst other issues looks at the outlook for inflation and the various factors influencing it.
Articles
Commodity prices soar as spectre of food inflation is back Guardian, Simon Bowers (6/8/10)
Food inflation is a rumble that won’t go away Telegraph, Garry White (8/8/10)
Global wheat supply forecast cut BBC News (12/8/10)
Commodity crisis sparks fear of food inflation on high street Independent, James Thompson and Sean O’Grady (10/8/10)
Should we be concerned about high wheat prices? BBC News, Will Smale (6/8/10)
Commodity prices: Wheat The Economist (12/8/10)
Interactive: What’s driving the wheat price spike? Financial Times, Akanksha Awal, Valentina Romei and Steven Bernard (20/8/10)
Wheat pushes world food prices up BBC News (1/9/10)
UN to hold crisis talks on food prices as riots hit Mozambique Guardian, David Smith (3/9/10)
Grain prices spark global supply fears CBC News, Kevin Sauvé (3/9/10)
GRAINS-US wheat firms after Russian ban extension Forex Yard (3/9/10)
Global food prices reach 20 year high BBC News, John Moylan (3/9/10)
Speculators ‘not to blame for higher food costs’ BBC Today Programme, David Hightower (4/9/10)
Q&A: Rising world food prices BBC News (3/9/10)
Don’t starve thy neighbour The Economist (9/9/10)
Data
Commodity prices Index Mundi
Commodity prices BBC market data
Energy prices U.S. Energy Information Administration
Questions
- Use a supply and demand diagram to illustrate (a) what has been happening to wheat prices (b) what is likely to happen to wheat prices over the coming months?
- How relevant is the price elasticity of demand and supply and the income elasticity of demand to your analysis?
- What factors have caused the shifts in demand and/or supply of wheat and copper?
- What has been the role of speculation in the price rises? Is this role likely to change over the coming months?
- What is likely to happen to food prices in the shops over the coming months? Would you expect bread prices to rise by the same percentage as wheat? If so, why; if not, why not?
- If commodity prices generally rose by 5 per cent over the coming year, would you expect inflation to be 5 per cent? Again, if so, why; if not, why not?
Later this afternoon I’ll be going down to watch my beloved Leicester City. Our first home match drew a crowd of just over 21,500. This was perhaps a little disappointing for the first home match of the season. Normally, supporters’ spirits are high are the start of the season, we all go down to the ground with renewed optimism, and so ‘first match’ crowds are high. But, this year a number had not come along and the problem was not confined to my club. Just down the road in Coventry, their first match against fellow Midlanders Derby County drew a crowd of only a little over 13,000. While this match was televised by SKY, the attendance is likely to have disappointed many at this historic club. Up by the River Tees, Midllesbrough’s first home match drew a record low league crowd of 14,633 and led manager Gordon Strachan to blame poor crowds on the recession. But, while some clubs are struggling to get supporters through the turnstiles, others seemed rather more immune from the affects of the economic climate. Manchester United’s first home match drew a near-capacity 75,221, despite being a televised match on a Monday night, while Arsenal’s first home match against newly promoted Blackpool drew a capacity crowd of 60,032.
These contrasting experiences amongst football clubs raise some important questions about the nature of demand for attending football matches. Perhaps a good place to start for any chief executive thinking about the demand for their club’s matches is to actually step back and consider about how supporters derive satisfaction from attending matches. This satisfaction from consuming something is also known by economists as ‘utility’. In understanding how supporters derive utility clubs may gain some really useful information when pricing season tickets or match-day tickets.
Well, let’s start with me! I am a fox (a Leicester supporter) through and through and so it’s about an emotional attachment. I was first taken down to Filbert Street by Grandfather in the early 1980s. We were soundly beaten on the day by Notts County on the day. But, while I was gutted, I was supporting my team! I derive a lot of my satisfaction from supporting my home-town team. I guess that makes me what we might term a ‘core supporter’. It’s important for clubs to have a sense of their core support because these are likely to be supporters who are least sensitive to pricing. In other words, this group of supporters is more likely to exhibit a price inelastic demand.
So, a happy chief executive of a football club is likely to be one with a sizeable core support. Another way of looking at this, which is not always popular amongst football traditionalists, is to think of a football club as a brand. A popular, sought-after brand gives the supplier a greater degree of power over pricing. The greater the attachment to the brand the greater the power to set price. While for me the attachment comes from the geography of my birth, for others the attachment comes from being associated with success. This helps to explain the attachment of so many supporters to what we refer to as ‘the big clubs’. Therefore, success can help generate supporter-attachment which can therefore be ‘priced-in’ by clubs when determining the pricing structure for matches and season tickets.
But, not everybody is attached to a team out of loyalty to their town or city or because of its success. For others, the utility from attending matches could come from a variety of sources. A ‘floating supporter’ is therefore likely to be more choosey and pricing needs to try and take this into account. For these supporters it might be a question of who the two teams on show are on a particular day. This helps, in part, to understand why local derbies are generally well attended – but why they are also relatively expensive to attend. It might also be the case that particular matches allow supporters to see a ‘superstar’. If a certain player or club is in town then prices at the turnstiles are likely to reflect this.
What we have suggested here is that in beginning to understand the demand for attending football matches, clubs need to build up a profile of their supporters and their potential supporters. We have focused on how supporters derive satisfaction from watching football and how this affects what they are willing to pay. Yet they need to do more than this, including building up a profile of the economic, social and geographic demographics of supporters. As Gordon Strachan points out, supporters are not immune to economic conditions and football clubs can’t be either. Therefore, clubs will also need to have a sense of how income-sensitive is the demand for attending their matches. The economic climate means that many in football, especially those at clubs involved in setting prices, may need to give considerable thought to the demand function for attending live football matches. May be an economist really could help in the board rooms of many football clubs. While I may not make the board room at the Walkers Stadium later, I will be in the crowd!
Articles
Boro boss Strachan blames recession for poor crowds BBC News (22/8/10)
Premier League fun for all – at a cost BBC Sport, Matt Slater’s Blog (27/8/10)
Inside football with Rob Tanner: Where have all the fans gone Leicester Mercury, Rob Tanner (27/8/10)
Questions
- What do you understand by term ‘utility’? Think of any two products or services and draw up a list of how you derive utility from them?
- What do you understand by the terms ‘price elasticity of demand’ and ‘income elasticity of demand’? Try applying these concepts to the demand to attend matches at any two football clubs that you might be aware of.
- Are football clubs price-takers or price-makers when determining match prices? Is this true of all clubs?
- Imagine that a club is promoted to the top league in its country for the first ever time. How will this affect the position and slope of its demand curve for season tickets?