Whether or not you admit it, most people are aware of what’s happening in the X factor. With massive viewing figures, the X Factor remains one the most highly viewed entertainment programmes, so it’s hardly surprising that demand for advertising slots is so high especially when people are waiting for news about the contestants. The X Factor pulls in £8000 per second from TV adverts and it is estimated that the charge for a 30 second advertising slot is a staggering £190,000, expected to rise to £250,000 for the live final. It looks like the recession has had little impact on those wanting to sponsor the X Factor.
Nevertheless, there has been some controversy this week. Every Monday morning we see stories about the contestants and this week was no exception. But, it wasn’t so much about the contestants this week, but rather it concerned the voting. Following the episodes over the weekend of 7th and 8th November 2009, both the ITV and Ofcom, the telecommunications regulator, received thousands of complaints as Simon Cowell gave his support to ‘Jedward’ over Lucie Jones, even though in earlier episodes, he had said he would ‘leave the country if they won’.
However, Ofcom has said that the X Factor won’t be investigated, as the regulator only investigates voting irregularities and the treatment of contestants and not the outcome of the programme. Meanwhile, speculation is rife that Simon Cowell either wants to keep Jedward on the show, because of their viewer ratings, or that by voting Lucie off, the public will rebel and vote Jedward off this week and Simon will avoid looking like the bad guy.
Who knew that the world of entertainment could be analysed using economics!!
Ofcom won’t investigate X Factor ITN (11/11/09)
750 complain to Ofcom over Lucie’s X Factor exit Wales Online (12/11/09)
£8k a second bonanza for X Factor ads as ITV chiefs cash in on Jedward mania Mail Online (11/11/09)
Watchdog rules out X Factor probe BBC News (10/11/09)
Thousands complain to ITV and Ofcom over X Factor ATV Network News, Doug Lambert (10/11/09)
X Factor: Simon Cowell is an evil genius and we love him Telegraph, Liz Hunt (11/11/09)
Simon Cowell’s evil genius rules The X Factor Guardian, Marina Hyde (13/11/09)
Resistance is futile in the face of this master of psychology Independent, Matthew Norman (12/11/09)
Jedward: X Factor twins John and Edward help ITV rake in advertising Telegraph (11/11/09)
The X Factor becomes the ‘British Superbowl’ as advertising fees soar Tines Online, Dan Sabbagh (11/11/09)
The Ofcom site can be found at:
Ofcom (Home Page)
Questions
- What is the purpose of regulation? What are the advantages and disadvantages of legal restrictions?
- What is the role of Ofcom? How does it regulate telecommunications and what other regulators are there?
- Why is the price for an advertising slot during the X Factor so expensive? What does this tell us about price elasticity and income elasticity of demand?
- Ofcom is not going to investigate X Factor. What are the main reasons behind this decision? Do you think this was the right decision?
- If a judge’s decision can increase advertising revenue, then from a commercial point of view does that make it the ‘right’ decision?
In a speech to Scottish business organisations, Mervyn King, the Governor of the Bank of England, argued that it might be necessary to split banks up. The aim would be to separate the core retail banking business, of receving deposits and lending to individuals and businesses, from the more risky and exotic wholesale acitivites of banks, such as securitisation, speculation and hedging – so-called ‘casino banking’.
Governments around the world, as represented at the G20 meeting at Pittsburg in September, have favoured tougher regulation of banks. But Mervyn King believes that this is not enough. It may not prevent the reckless behaviour that resulted in the credit crunch and bank bailouts by the government. “Never has so much money been owed by so few to so many. And, one might add, so far with little real reform.” And if regulation were to fail and banks were to get into difficulties, what would happen? There would have to be another bailout. As Mervyn King said, “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”
There are two key problems.
The first is Goodhart’s Law. If rules are set for bank behaviour, banks may adhere to the letter of the rules, but find ways around them to continue behaving in risky ways. The rules may cease to be a good measure of prudent behaviour.
The second is moral hazard. If banks know that they will be bailed out if they get into difficulties because they are too big to fail, then this encourages them to take the risks. As Mervyn King said in his speech, “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The ‘too important to fail’ problem is too important to ignore.”
So should the banks be split? Is there any likelihood that they will? Or are Mervyn King’s proposals merely another headache for the government? The following articles looks at the issues. The first link below is to his speech.
Speech by Mervyn King, Governor to Scottish business organisations, Edinburgh (20/10/09)
Mervyn King: bail-outs created ‘biggest moral hazard in history’ (including video of part of speech) Telegraph (20/10/09)
Governor warns bank split needed BBC News (20/10/09)
A sombre warning BBC News, Stephanomics (20/10/09)
Alistair Darling rebuffs Mervyn King’s attack over timidity of banking reforms Guardian (21/10/09)
King and Brown in rift over whether to split the banks Independent (22/10/09)
Tucker set to join calls for stricter controls on banks Scotsman (22/10/09)
Testing times for bank regulators Financial Times (21/10/09)
Mervyn King is right – the economy is changing and we’re blindfolded, without a map Telegraph, Edmund Conway (22/10/09)
Questions
- Explain what is meant by ‘moral hazard’ in the context of bank bailouts. Are the any ways in which banks could be prevented from failing during a crisis without creating a moral hazard?
- Does regulation necessarily involve Goodhart’s Law? To what extent is it possible to devise regulation and avoid Goodnart’s Law?
- What are the arguments for and against splitting banks’ core business from more risky ‘casino banking’?
- Does the separation of retail and investment banking necessarily involve splitting banks into separate organisations? If they are not split, how can the government or central bank underwrite retail banking without underwriting riskier investment banking?
The housing market has been very volatile over the past year or so. House prices crashed, but then appeared to stabilise. Since then, however, different sources have given very different opinions and predictions about future movements. According to Nationwide Building Society, house prices have increased by an average of £53 a day during September, but others suggest that they remain stable and that they may fall again in 2010.
Not only are house prices important to those buying and selling, but the state of the housing market is also crucial for the recovery of the economy. For example, the construction industry has suffered over the past year and, as of the 2nd October 2009, unemployment in this sector stood at 17.1%. As more and more workers lose their jobs, their disposable income falls and hence demand in the economy is affected. With the possibility of an election debate between the party leaders, many will be waiting to see what their strategies are to revitalise a struggling economy.
House prices rise an average of £53 a day’ Daily Record, Clinton Manning (3/10/09)
Mortgage approvals dip in August BBC News (29/9/09)
Construction contracts at slowest pace for seven months Construction News, Nick Whitten (5/5/09)
House sales ‘stalled’ in August BBC News (22/9/09)
Housing market needs ‘feel-good’ factor to recover City Wire, Nicholas Paler (26/6/09)
Double whammy for first-timers as prices stabilise and loans dry up Scotsman, Jeff Salway (3/10/09)
Head-to-head view on house prices BBC News, Kevin Peachey (27/8/09)
UK construction industry still contracting, says Cips Guardian, Kathryn Hopkins (2/10/09)
House prices see ‘slight decline’ BBC News (28/9/09)
House prices ‘back to 2008 level’ BBC News (2/10/09)
Construction unemployment rises to 17.1% HomeTown Sources (2/10/09)
House prices up – but so are insolvencies Management Today (2/10/09)
Financial shadow cast by city apartments BBC News (8/10/09)
For house price data see:
Nationwide House Prices
Halifax House Price Index from the Lloyds Banking Group
Housing Market and House Prices from the Department of Communites and Local Government
Questions
- Why are recent movements in the housing market going to be a problem for first-time buyers?
- The ‘Stamp duty holiday’ will soon come to an end. What do you think will be the impact on the demand for and supply of houses and hence equilibrium prices over the next 6 months?
- One of the reasons why house prices have stabilised is a lack of supply. How does this affect equilibrium prices?
- Why is the economy so affected by changes in house prices? Think about what happens when construction workers lose their jobs and how this affects aggregate demand. Then consider how the macroeconomy will be affected.
- When demand for houses increases, why do prices increase so rapidly? Consider elasticity.
It’s probably one of the most recognisable names in the world – Disney. Well, as if the company wasn’t already established enough, it’s just got a bit bigger, with a $4bn deal with Marvel Entertainment, Inc. Characters such as Mickey Mouse, Cinderella and Donald Duck have now been joined by some more masculine characters including Spider-Man, Iron Man and the X-Men. Much of Disney’s recent success has come from films appealing to girls, but in-house Disney franchises appealing to boys are fewer and further between. “We would love to attract more boys, and Marvel skews more in the boys’ direction, although there is universal appeal to many of its characters” said Bob Iger, Disney chief executive. “Marvel’s is a treasure trove of characters and stories, and this gives us an opportunity to mine characters that are well known and characters that are not well known.”
This new deal is likely to have major repercussions for Warner Bros and all of the major Hollywood studios, as well as those with a vested interest in Marvel. It is also hoped that this deal will restore some of Disney’s profits, which have been reduced through the current economic downturn. The following articles consider this deal and the likely results.
Weaker sales dent Disney profits BBC News (30/7/09)
Disney to buy Marvel in $4bn deal BBC News (31/8/09)
Walt Disney buys Marvel Entertainment in £2.5billion deal Mirror News (1/9/09)
Disney take-over of Marvel Telegraph, Paul Gent (2/9/09)
Disney’s Marvel Deal Forces DC’s Hand Defamer, Andrew Belonskey (10/9/09)
Disney deal puts Marvel online slots at risk for Cryptologic Online Gambling News (9/9/09)
Disney’s picl-up of Marvel not so super: Citi FP, Trading Desk (4/9/09)
Disney to buy Marvel in $4bn deal (video) BBC News (1/9/09)
Of mouse and X-men Economist (3/9/09)
Disney buys Marvel, Now in Business with every studio in Hollywood Defamer, Brian Moylan (31/8/09)
For Disney’s announcement of the take-over, see:
Disney to acquire Marvel Entertainment Disney Corporate News Release
Questions
- Discuss the pros and cons for consumers of the take-over of Marvel Entertainment by Disney.
- Which factors will have had a significant impact on Disney’s profits in the current recession? Explain why.
- What do you think will be the likely impact of the take-over on Marvel’s shareholders?
- Discuss the main ways in which a business can grow and consider their advantages and disadvantages.
- How will Disney’s Marvel deal affect its competitors and those with whom it does business? Is Disney going to be able to control prices and other aspects of business deals?
With recession biting, many people are cutting back on spending. This has not been even across products, however. People have tended to shift from more luxurious products, such as foreign holidays and branded products, to holidays at home and supermarkets’ own-brand products (see Shoppers opt for supermarket brands Financial Times (4/8/09)). There has also been a decline in spending on consumer durables, such as cars, furniture and kitchen appliances.
One sector that has fared better than most, however, is the teenage market. “So far it seems teenagers have not cut back on their shopping. Teen-targeted retailers such as Primark, New Look, H&M, Asos and Hot Topic are all weathering the recession better than rivals aimed at an older demographic.” This is a quote from the first of the two linked articles below, which look at this market and its future prospects.
Teenage spenders struggle to learn BBC News (4/8/09)
Hollister: the shop that smells like teen spirit Times Online (5/8/09)
Questions
- How is spending on particular products during a recession related to their income elasticity of demand? How does the income elasticity of demand depend on the length of the time period under consideration?
- Why has the teenage market been less susceptible to the recession than many other markets?
- To what extent will being ‘bargain savvy’ be enough for teenagers to survive the recession without having to make substantial changes in spending patterns? Consider the concept of price elasticity of demand in your answer.