Category: Essential Economics for Business: Ch 05

Like most other sectors of the economy, private schools have been significantly affected by the coronavirus pandemic. As with all schools, they have been restricted to providing their pupils with online instruction. In addition, some parents are likely to have seen their ability to pay the high fees private schools charge restricted. As a result of both of these factors, private schools have been forced to look into providing discounts or refunds on their fees. However, the UK competition authority have received evidence that these schools may have been communicating with each other over how they will set these fee reductions. The authority is concerned that this will allow the schools to restrict the discounts and keep their fees higher.

In other markets (see here and here) the competition authorities have been prepared to relax certain elements of competition law in light of the coronavirus situation. However, price fixing is the severest breach of competition law and the Competition and Markets Authority (CMA) has been clear that this continues to be the case in the current climate. A CMA spokesperson said:

Where cooperation amongst businesses or other organisations is necessary to protect consumers in the coronavirus outbreak, the CMA will not take enforcement action. But we will not tolerate organisations agreeing prices or exchanging commercially sensitive information on future pricing or business strategies with their competitors, where this is not necessary to meet the needs of the current situation.

Therefore, the CMA has written to the Independent Schools Council and other bodies representing the private school sector. This letter made clear that communicating over the fee reductions would be very likely to breach competition law and could result in fines being imposed.

This warning is important since the sector has a history of illegal communication between schools. In 2006 the Office of Fair Trading (OFT) (one of the predecessors to the CMA) imposed fines when it discovered that 50 of them, including Eton and Harrow, had for a number of years shared information on the fees they intended to charge. The OFT discovered that this had taken place following evidence obtained by a student who hacked into their school’s computer system. Here the student found information on the intended fees of competitor schools and leaked this information to the press. It is clear that the CMA will keep a close eye on private schools as they react to the ongoing pandemic.



  1. What are the key features of the private school sector? Is this a market where you would expect competition to be intense?
  2. Why is price fixing the severest breach of competition law?
  3. Assuming communication between the private schools is eradicated, how would you expect the sector to be affected by the coronavirus pandemic?

As the Coronavirus pandemic continues to escalate in the UK, the government has been forced to introduce a range of drastic measures, including severe restrictions on movement of people to ensure social distancing. Supermarkets have also been forced to act as they experienced panic buying and struggled to keep up with supply. They responded by starting to impose limits on the number of certain items an individual consumer could purchase and by reducing the range of products they made available. In addition, supermarkets contacted the government to suggest that competition law should be relaxed to allow the rival chains to coordinate their response to the ongoing situation.

WM Morrison, the forth largest supermarket retailer in the UK, was one of the key players lobbying for this change. Their chief executive, David Potts, argued that “There will be legislation that works perfectly in peacetime and not so well in wartime.”

The supermarket industry is in fact a market where the UK competition authorities have expressed considerable concerns in the past regarding a lack of competition (see for example the 2008 market investigation and the recent decision to block the merger between Sainsbury’s and Asda). The supermarkets also previously made similar demands for a relaxation of competition law in the event of a no-deal Brexit.

Despite this, the government has agreed to temporarily relax elements of competition law to help supermarkets respond to the Coronavirus crisis with the Environment Secretary, George Eustice, stating that:

By relaxing elements of competition laws temporarily, our retailers can work together on their contingency plans and share the resources they need with each other during these unprecedented circumstances.

In moves supported by the Competition and Markets Authority, laws enabling them to do so will soon be passed through Parliament. Supermarkets will be allowed to:

  • share data with each other on stock levels
  • cooperate to keep shops open
  • share distribution depots and delivery vans
  • pool staff with one another to help meet demand.

It is also expected that the Groceries Code Adjudicator will take a pragmatic approach to rules previously in place to prevent the big supermarket chains abusing their power over suppliers. These rules previously prevented supermarkets from stopping orders from a given supplier without reasonable warning. However, it is now accepted that they may need to do so in order to focus on supplying a restricted range of essential products.

Such relaxation of competition laws has been rare, with previous examples being measures taken in 2006 for the maintenance and repair of warships and in 2012 during the fuel crisis. In contrast, typically competition law is extremely hot on preventing agreements between firms. This is due to the fact that they distort competition and prevent the considerable benefits that can arise for consumers when firms compete to offer the best deals.

In the extreme situation the UK is currently in, the government’s stance appears to be that there are sufficient other benefits from restricting competition between supermarkets and allowing some degree of cooperation. It is then important that the form of cooperation between the supermarkets is restricted to narrow areas that will help to ensure the continuity of supply. In particular, it would be worrying if the supermarkets started discussing the prices they charge. Already food prices may rise due to increased demand and a potential shortage of supply. Furthermore, many consumers will see their income reduced. Therefore, it is important that coordination between supermarkets doesn’t result in further increases in prices.

It is therefore reassuring that the Government made clear that the relaxation of competition law:

will be a specific, temporary relaxation to enable retailers to work together for the sole purpose of feeding the nation during these unprecedented circumstances. It will not allow any activity that does not meet this requirement.

The Competition and Markets Authority has also stressed that they will not:

tolerate unscrupulous businesses exploiting the crisis as a ‘cover’ for non-essential collusion. This includes exchanging information on longer-term pricing or business strategies, where this is not necessary to meet the needs of the current situation.

Once the current crisis is over, it will also be important that the competition authority closely monitors the supermarket sector to ensure that cooperation between the supermarkets ends and normal competitive conduct is resumed.



  1. Outline the effects agreements between firms to raiser prices have on economic welfare.
  2. What are the pros and cons of allowing cooperation between the supermarkets in response to the Coronavirus crisis?

Economists are often criticised for making inaccurate forecasts and for making false assumptions. Their analysis is frequently dismissed by politicians when it contradicts their own views.

But is this fair? Have economists responded to the realities of the global economy and to the behaviour of people, firms, institutions and government as they respond to economic circumstances? The answer is a qualified yes.

Behavioural economics is increasingly challenging the simple assumption that people are ‘rational’, in the sense that they maximise their self interest by weighing up the marginal costs and benefits of alternatives open to them. And macroeconomic models are evolving to take account of a range of drivers of global growth and the business cycle.

The linked article and podcast below look at the views of 2019 Nobel Prize-winning economist Esther Duflo. She has challenged some of the traditional assumptions of economics about the nature of rationality and what motivates people. But her work is still very much in the tradition of economists. She examines evidence and sees how people respond to incentives and then derives policy implications from the analysis.

Take the case of the mobility of labour. She examines why people who lose their jobs may not always move to a new one if it’s in a different town. Partly this is for financial reasons – moving is costly and housing may be more expensive where the new job is located. Partly, however, it is for reasons of identity. Many people are attached to where they currently live. They may be reluctant to leave family and friends and familiar surroundings and hope that a new job will turn up – even if it means a cut in wages. This is not irrational; it just means that people are driven by more than simply wages.

Duflo is doing what economists typically do – examining behaviour in the light of evidence. In her case, she is revisiting the concept of rationality to take account of evidence on what motivates people and the way they behave.

In the light of workers’ motivation, she considers the implications for the gains from trade. Is free trade policy necessarily desirable if people lose their jobs because of cheap imports from China and other developing countries where labour costs are low?

The answer is not a clear yes or no, as import-competing industries are only part of the story. If protectionist policies are pursued, other countries may retaliate with protectionist policies themselves. In such cases, people working in the export sector may lose their jobs.

She also looks at how people may respond to a rise or cut in tax rates. Again the answer is not clear cut and an examination of empirical evidence is necessary to devise appropriate policy. Not only is there an income and substitution effect from tax changes, but people are motivated to work by factors other than take-home pay. Likewise, firms are encouraged to invest by factors other than the simple post-tax profitability of investment.




  1. In traditional ‘neoclassical’ economics, what is meant by ‘rationality’ in terms of (a) consumer behaviour; (b) producer behaviour?
  2. How might the concept of rationality be expanded to take into account a whole range of factors other than the direct costs and benefits of a decision?
  3. What is meant by bounded rationality?
  4. What would be the effect on workers’ willingness to work more or fewer hours as a result of a cut in the marginal income tax rate if (a) the income effect was greater than the substitution effect; (b) the substitution effect was greater than the income effect? Would your answers to (a) and (b) be the opposite in the case of a rise in the marginal income tax rate?
  5. Give some arguments that you consider to be legitimate for imposing controls on imports in (a) the short run; (b) the long run. How might you counter these arguments from a free-trade perspective?

The USA has seen many horizontal mergers in recent years. This has turned industries that were once relatively competitive into oligopolies, resulting in lower output and higher prices for consumers.

In Europe, by contrast, many markets are becoming more competitive. The result is that in industries such as mobile phone services, airlines and broadband provision, prices are considerably lower in most European countries than in the USA. As the French economist, Thomas Philippon, states in a Guardian article:

When I landed in Boston in 1999, the United States was the land of free markets. Many goods and services were cheaper than in Europe. Twenty years later, American free markets are becoming a myth.

According to Asher Schechter (see linked article below):

Nearly every American industry has experienced an increase in concentration in the last two decades, to the point where … sectors dominated by two or three firms are not the exception, but the rule.

The result has been an increase in deadweight loss, which, according to research by Bruno Pelligrino, now amounts to some 13.3 per cent of total potential surplus.

Philippon in his research estimates that monopolies and oligopolies “cost the median American household about $300 a month” and deprive “American workers of about $1.25tn of labour income every year”.

One industry considered by the final two linked articles below is housebuilding. Since the US housing and financial crash of 2007–8 many US housebuilders have gone out of business. This has meant that the surviving companies have greater market power. According to Andrew van Dam in the linked Washington Post article below:

They have since built on that advantage, consolidating until many markets are controlled by just a few builders. Their power has exacerbated the country’s affordable-housing crisis, some economists say.

According to research by Luis Quintero and Jacob Cosman:

… this dwindling competition has cost the country approximately 150 000 additional homes a year – all else being equal. With fewer competitors, builders are under less pressure to beat out rival projects, and can time their efforts so that they produce fewer homes while charging higher prices.

Thanks to lobbying of regulators and politicians by businesses and various unfair, but just about legal, practices to exclude rivals, competition policy in the USA has been weak.

In the EU, by contrast, the competition authorities have been more active and tougher. For example, in the airline industry, EU regulators have “encouraged the entry of low-cost competitors by making sure they could get access to takeoff and landing slots.” Politicians from individual EU countries have generally favoured tough EU-wide competition policy to prevent companies from other member states getting an unfair advantage over their own country’s companies.



  1. What are the possible advantages and disadvantages of oligopoly compared with markets with many competitors?
  2. How can concentration in an industry be measured?
  3. Why have US markets become more concentrated?
  4. Why have markets in the EU generally become more competitive?
  5. Find out what has happened to levels of concentration in the UK housebuilding market.
  6. What are the possible effects of Brexit on concentration and competition policy in the UK?

Firms are increasingly having to take into account the interests of a wide range of stakeholders, such as consumers, workers, the local community and society in general (see the blog, Evolving Economics). However, with many firms, the key stakeholders that influence decisions are shareholders. And because many shareholders are footloose and not committed to any one company, their main interests are short-term profit and share value. This leads to under-investment and too little innovation. It has also led to excessive pay for senior executives, which for many years has grown substantially faster than the pay of their employees. Indeed, executive pay in the UK is now, per pound of turnover, the highest in the world.

So is there an alternative model of capitalism, which better serves the interests of a wider range of stakeholders? One model is that of employee ownership. Perhaps the most famous example of this is the John Lewis Partnership, which owns both the department stores and the Waitrose chain of supermarkets. As the partnership’s site claims, ‘when you’re part of it, you put your heart into it’. Although the John Lewis Partnership is the largest in the UK, there are over 330 employee-owned businesses across the UK, with over 200 000 employee owners contributing some £30bn per year to UK GDP. Again, to quote the John Lewis site:

Businesses range from manufacturers, to community health services, to insurance brokers. Together they deliver 4% of UK GDP annually, with this contribution growing. They are united by an ethos that puts people first, involving the workforce in key decision-making and realising the potential and commitment of their employees.

A recent example of a company moving, at least partly, in this direction is BT, which has announced that that every one of its 100 000 employees will get shares worth £500 every year. Employees will need to hold their shares for at least three years before they can sell them. The aim is to motivate staff and help the company achieve a turnaround from its recent lacklustre performance, which had resulted in its laying off 13 000 of its 100 000-strong workforce.

Another recent example of a company adopting employee ownership is Richer Sounds, the retail TV and hi-fi chain. Its owner and founder, Julian Richer, announced that he had transferred 60% of his shares into a John Lewis-style trust for the chain’s 531 employees. In addition to owning 60% of the company, employees will receive £1000 for every year they have worked for the retailer. A new advisory council, made up of current staff, will advise the management board, which is taking over the running of the firm from Richer.

According to the Employee Ownership Association (EOA), a further 50 businesses are preparing to follow suit and adopt forms of employee ownership. As The Conversation article linked below states:

As a form of stakeholder capitalism, the evidence shows that employee ownership boosts employee commitment and motivation, which leads to greater innovation and productivity.
Indeed, a study of employee ownership models in the US published in April found it narrowed gender and racial wealth gaps. Surveying 200 employees from 21 companies with employee ownership plans, Joseph Blasi and his colleagues at Rutgers University found employees had significantly more wealth than the average US worker.
The researchers also found that the participatory management practices that accompanied the employee ownership schemes led to employees improving their communication skills and learning management skills, which had helped them make better financial decisions at home.

But, although employee ownership brings benefits, not only to the employees themselves, but also more widely to society, there is no simple mechanism for achieving it when shareholders are unlikely to want to relinquish their shares. Employee buyout schemes require funding; and banks are often cautious about providing such funding. What is more, there needs to be an employee trust overseeing the running of the company which takes a long-term perspective and not just that of current employees, who might otherwise be tempted to sell the company to another seeking to take it over.




  1. What are the main benefits of employee ownership?
  2. Are there any disadvantages of employee ownership and, if so, what are they?
  3. What are the main barriers to the adoption of employee ownership?
  4. What are the main recommendations from The Ownership Effect Inquiry? (See linked report above.)
  5. What are the findings of the responses to the employee share ownership questions in the US General Social Survey (GSS)? (See linked Global Banking & Finance Review article above.)