Last week saw the launch of Apple’s new music streaming service. This will clearly provide serious competition for the existing music streaming providers such as Spotify and Tidal. One important difference is that whilst Spotify offers a free version to listeners funded by advertising revenue, all Apple Music users will be required to pay a monthly subscription charge. However, Apple will allow listeners a free three-month trial of its service.
Initially Apple intended not to pay artists royalties during this trial period. However, it soon reversed this plan when the pop-star Taylor Swift wrote a blog post criticising Apple for this and threatening to withhold her most recent album.
The negotiations between Apple and the record labels are also facing considerable scrutiny from the competition authorities on both sides of the Atlantic. They seem particularly concerned that Apple may have conspired with or pressured labels to withdraw their support for rival streaming services such as Spotify that offer free versions to consumers. Although not clear, it has been suggested that the European Commission’s initial probe into this may have been initiated by a complaint from a company offering such a free version of its service.
On the other hand, there has also been considerable criticism of free music services such as Spotify. One of the cofounders of the Beats music streaming service, which was subsequently acquired by Apple, has argued that the free business model does not properly value recorded music. Likewise, Taylor Swift removed her entire back catalogue from Spotify, and the leading record label, Universal, is applying pressure on Spotify to change its business model. It is currently unclear whether Apple has been directly responsible for Universal’s standpoint. What is clear is that Apple’s entry will shake-up this market and the identity and business model of the future market leader is at stake.
Streaming sets off a painful debate in the music industry Financial Times, Jonathan Ford (22/03/15)
Apple’s new music service will push paid subscriptions, with free samples re/code, Dawn Chmielewski and Peter Kafka (08/05/15)
Taylor Swift is fighting the wrong part of the music industry Financial Times, Jonathan Ford (05/07/15)
Here’s what happens to your $10 after you pay for a month of Apple music re/code, Peter Kafka (15/06/15)
Questions
- What are the key features of the music streaming service market?
- What are the pros and cons of Spotify’s business model?
- Why might the views on free streaming services differ between small and large artists and labels?
- How do you think the music streaming market might develop in the future?
The negotiations between Greece and the ‘troika’ of creditors (the IMF, the European Commission and the ECB) have seen many twists and turns before breaking down on 26 June. Throughout, both sides have sought to give as little as possible while seeking a compromise. Both sides have claimed that their position is reasonable, even though a gulf has remained between them.
What has been playing out is a high-stakes game, where the optimum outcome for each side is quite different.
Greece seeks bailout terms that would allow it to achieve a smaller primary budget surplus (but still a surplus in the midst of a deep recession). The surplus would be achieved largely through tax rises on the wealthy rather than further cuts that would hit the poor hard. It is also seeking a substantial amount of debt forgiveness to make servicing the remaining debt possible.
The troika is seeking a larger budget surplus than the Greeks are willing to contemplate. This, it maintains, should be achieved largely through additional cuts in government expenditure, including further reductions in pensions and in public-sector wages.
Both sides used threats and promises as the negotiations became more and more acrimonious.
The troika threatened to withhold the final €7.2bn of the bailout necessary to pay the €1.6bn due to the IMF on 30 June, unless the Greeks accepted the terms of the austerity package put to them. The Greek Prime Minister, Alexis Tsipras, in rejecting the proposals, called a referendum on the package. This threatens the stability of the eurozone as a No vote, if it led to a Greek exit from the eurozone, could undermine confidence in monetary union. After all, if Greece could be forced out, other countries facing severe difficulties might also be forced out at some point in the future. Once a country leaves the eurozone, the monetary union becomes more like a system of pegged exchange rates. And pegged exchange rates are open to destabilising speculation at times of economic divergence.
A Greek exit from the euro (dubbed ‘Grexit’) is seen as undesirable by most Greeks and by most politicians in the rest of Europe. The optimum for both sides collectively would be a compromise, which saw more modest cuts by Greece and the eurozone remaining intact. By both sides seeking to maximise their own position, the Nash equilibrium is certainly not the best outcome.
But as long as the troika believes that the Greeks are likely to vote Yes to the proposed bailout terms, it still hopes to get the outcome that is best from its point of view – an outcome that would probably involve regime change. And as long as the Greek government hopes that a No vote will force the troika to think again and come back with less austere proposals, it still hopes to get the outcome that is best from its point of view. But the outcome of this game of ‘chicken’ could well be Grexit and a Nash equilibrium that neither side wants.
But while the endgame is being played out by politicians, people in Greece are suffering. Policies of severely depressing aggregate demand to turn a large budget deficit into a primary budget surplus have led to the economy shrinking by 26%, overall unemployment of 27% and youth unemployment of over 60%. The Greeks truly believe themselves to be stuck between a rock and a hard place.
The following articles look at the nature of the ‘game’ being played and at the effects on the Greek economy, both of the proposed austerity package proposed by the troika and Grexit. They also look at the knock-on effects for the eurozone, the EU and the global economy.
Can game theory explain the Greek debt crisis? BBC News Magazine, Marcus Miller (26/6/15)
Against the Grain: What Yanis Varoufakis can learn from a real game theory master – Nicola Sturgeon City A.M., Paul Ormerod (24/6/15)
John Nash’s Game Theory and Greece Bloomberg, Mohamed A. El-Erian (29/5/15)
The Greek crisis: that 1931 moment The Economist, Buttonwood column (23/6/15)
How game theory explains Grexit and may also predict Greek poll outcome The Conversation, Partha Gangopadhyay (1/7/15)
Greece debt crisis: Tsipras may resign if Greeks vote yes BBC News (30/6/15)
Greek debt crisis: Is Grexit inevitable? BBC News. Paul Kirby (29/6/15)
Existential threat to euro from Greek exit BBC News, Robert Peston (29/6/15)
How I would vote in the Greek referendum The Guardian, Joseph Stiglitz (29/6/15)
Greece in chaos: will Syriza’s last desperate gamble pay off? The Guardian, Paul Mason (29/6/15)
What happens if Greece defaults on its International Monetary Fund loans? The Telegraph, Mehreen Khan (30/6/15)
For Greece’s international creditors, regime change is the ultimate goal The Telegraph, Jeremy Warner (29/6/15)
Europe has suffered a reputational catastrophe in Greece The Telegraph, Ambrose Evans-Pritchard (2/7/15)
Questions
- What is meant by a primary budget surplus?
- What was the troika’s proposal on the table on the 26 June that was rejected by the Greek government?
- What was the Greek government’s proposal that was rejected by the troika?
- Explain the decision trees outlined in the first BBC article below.
- In terms of game theory, what form of game is being played?
- Are the negotiations between the Greek government and the troika a prisoners’ dilemma game? Explain why or why not.
- Does the game being played between the SNP and the Conservative government in the UK offer any useful lessons to both sides in the negotiations over Greece’s possible bailout and its terms?
- Does a No vote in the referendum on 5 July imply that Greece must leave the euro? Explain.
- What would be the effects of further austerity measures on aggregate demand? What benefits to the Greek economy could be achieved from such measures?
- Why may pegged exchange rates be regarded as the worst of both worlds – a single currency in a monetary union and floating exchange rates?
Deloitte recently published its 24th Annual Review of Football Finance and it contained some surprising results. Historically, most teams in the English Premier League (EPL) have made accounting losses with any increases in revenues being offset by higher wage costs. However, this report found that in 2013–14 most teams in the EPL actually made accounting profits.
The Deloitte’s review reported that the combined operating profits of clubs in the EPL increased from £82 million in 2012–13 to £614 million on 2013–14 – an enormous increase of 649%. Nearly all of the teams (19 out of 20) in the league made an operating profit while 14 also reported pre-tax profits. Dan Jones, head of Deloitte’s Sports Business Group, commented that:
“The change in club profitability in 2013–14 was more profound than anything we could have forecast.”
Why has the profitability of teams in the EPL suddenly improved so dramatically? One important factor was the significant increase in revenue. The combined income of the teams was £3.26 billion in 2013–14 – an increase of £735 million, or 29% on the previous year. Although match-day and commercial revenue both increased, the majority of this growth in income (nearly 80%) came from the sale of broadcast rights. The 2013–14 season was the first year of a new three-year contract that raised over £1.7 billion per year from the sale of these rights in both the UK and overseas.
However, clubs in the EPL have received big increases in revenue from TV deals before and still made substantial accounting losses. For example, the broadcasting contract that ran from 2010–13 generated over £1.1 billion per season – a £243 million per annum increase on the previous deal. Significantly, in the first year of this deal (2010–11), 81% of this increase in revenue went straight into higher player salaries, whereas in 2013–14 this figure was only 16%. The ratio of wages to turnover also fell from 71% in 2012–13 to 58% in 2013–14
So why did a smaller proportion of the increase in revenue go to the players compared with previous years? The explanation appears to be the impact of two new controls and regulations that were implemented by the EPL at the beginning of the 2013–14 season.
One of these has received considerable media attention and is similar to UEFA’s Financial Fair Play regulations. The Profitability and Sustainability Rules allow the clubs to make a maximum cumulative loss of £105 million over three seasons before having to face sanctions from the league. The size of the permissible loss is significantly higher than in the UEFA regulations.
The other control that has received far less attention is called Short-Term Cost Control (STCC). This regulation places limits on the extent to which clubs can increase their total wage bill. It operates from 2013–14 to 2015&ndash16: i.e. it covers the same three years as the current TV deal. For the 2013–14 season it worked in the following way.
If teams had a wage bill of less than £52 million they faced no restrictions on their spending on players’ salaries. Only Crystal Palace (£46 million) and Hull City (£43 million) fell into this category. Unsurprisingly, the five biggest spending clubs, Man Utd, Man City, Chelsea, Arsenal and Liverpool, had much greater wage bills of £215m, £205m, £192m, £166m and £144m respectively.
Any of the 18 teams that exceeded the £52m limit would still not face sanctions if their wage bill increased by £4 million or less. For example, Stoke City’s wage bill only increased from £60m to £61m, while Tottenham Hotspur’s increased from £96m to £100m. Some clubs actually managed to reduce their total wage bill, including the champions, Manchester City, which managed to lower its from £233m to £215m.
However, there were still 12 teams with a total wage bill that was greater than £52 million in 2013–14 and which had increased by more than £4 million on the previous year. For these teams not to face any sanctions, they had to prove to the EPL that any of the increase above £4 million was either due to player contracts entered into before January 2013 or could by financed from the following two sources.
• Club Own Revenue Uplift
• Profit from player transfers
Whereas the profit from player transfers is straightforward, the ‘Club Own Revenue Uplift’ requires some explanation, as it excludes a very important part of teams’ incomes – Central Fund payments.
Some revenues earned by clubs in the EPL are referred to as ‘Central Fund payments’. These are, in effect, income payments from money that is raised centrally by the EPL on behalf of the clubs and then distributed to the teams using an agreed formula. The majority of the revenue generated under this category is from the broadcast deals, although some commercial income, such as the sponsorship of the league, also falls under this category. For some teams the money raised from Central Fund payments makes up the majority of their revenue.
‘Club Own Revenue’ in STCC calculations refers to all revenues other than those from Central Fund payments. This includes a number of income streams that the club has more direct control over. They include:
• Gate money/other match-day revenue
• Commercial deals negotiated by the individual club
• Income from playing in European competitions, including TV revenue.
The uplift refers to increases in revenue from these sources compared to 2012–13.
For example, assume a club has made no profit from its transfer dealing and did not enter into any significant player contracts prior to January 2013. If this club’s wage bill increased from £100m in 2012–13 to £110m in 2013–14 then it would have to provide evidence to show that £6m of this increase could be financed from growth in its Club Own Revenue. In other words, it would have to demonstrate how its income from gate money, commercial deals and playing in Europe was at least £6m higher in 2013–14 than it had been in 2012–13.
It will be interesting to see if (1) the profitability of the clubs continues to improve in future years and (2) the STCC regulations are extended when the new broadcast deal comes into effect in 2016–17.
The EPL Proves Cost Control Works The Judge 13 (4/6/15)
English Premier League clubs made more revenue than Spain and Italy’s clubs combined UK Business Insider, Lianna Brinded (4/6/15)
Premier League football club revenues and profits soar BBC News, Bill Wilson (4/6/15)
Deloitte Premier League list: Clubs’ revenue boom to £3.3billion as Tottenham record highest ever pre-tax profits after Gareth Bale transfer The Independent, Joanna Bourke (4/6/15)
Annual Review of Football Finance 2015 Premier League clubs generate over £3bn revenue in season of records Deloitte (4/6/15)
Premier League top of the rich list with record income of £3.26bn The Guardian, David Conn (4/6/15)
Questions
- What is the difference between an operating profit and a pre-tax profit?
- If a club reports that it is making an accounting profit, does this mean that it must be making an economic profit? Explain your answer.
- Give some examples of the economic costs of running a football club that might not be included in accounting calculations of profit.
- How is the profit/loss from player transfers calculated?
- Explain why the current rules may give teams that play in European competitions a competitive advantage.
John Nash was one of the pioneers of game theory and in 1994 was awarded the Nobel prize in economics for his work in this field. He was also the subject of the 2001 film, A beautiful mind, where the young John Nash was played by Russell Crowe, for which he won an Oscar.
Tragically, John Nash and his wife were killed in a car crash on May 23: he was 86 years old. Since his death there have been many tributes paid to him and his work.
As a student of economics you will almost certainly have studied the concept of a Nash equilibrium: a situation where everyone makes their best choice, given the choices of the other ‘players’ in a ‘game’. But a Nash equilibrium is not in the collective best interests of the participants in a non-cooperative game.
This is a very different concept of equilibrium from the simple equilibrium in a perfectly competitive market. In fact, in the complex world of strategic decision making, where firms are constantly looking at their rivals’ behaviour and possible reactions to their own behaviour, there are all sorts of Nash equilibria which are clearly sub-optimal. Competition may be highly destructive.
The following obituaries look at Nash’s contribution to the development of economics. As the Bloomberg article states:
The game theory concepts that Nash’s math[s] brought to the field were a true paradigm shift in economics. Macroeconomists, who continue to use the old Walrasian notion of equilibrium typically engage in hand-waving about how the macroeconomy is too big for strategic interactions to matter. But most of the economics profession has gradually shifted toward Nash equilibrium. The 2014 Nobel winner, Jean Tirole, is emblematic of the new economics. And many of the biggest successes in applied economics, like the auctions that power Google’s advertising, rely on Nash’s technique.
Do we owe him as much as Adam Smith?
Articles
Death of John Nash and His Beautiful Ideas Bloomberg, Noah Smith (26/5/15)
John Nash, economist and mathematician, 1928–2015 Financial Times, Ferdinando Giugliano (25/5/15)
Obituary: John Nash: Lost and found The Economist (28/5/15)
Remembering John Nash: Finding equations to explain the world The Economist (28/5/15)
John F. Nash Jr., Math Genius Defined by a ‘Beautiful Mind,’ Dies at 86 New York Times, Erica Goode (24/5/15)
Explaining a Cornerstone of Game Theory: John Nash’s Equilibrium New York Times, Kenneth Chang (24/5/15)
John Nash’s Indelible Contribution To Economic Analysis Forbes, Jon Hartley (25/5/15)
John Nash’s ground-breaking contributions to maths BBC News, John Moriarty (24/5/15)
From the archives: Nash’s Nobel prize The Economist (24/5/15)
A beautiful strategy: John Nash’s ‘game theory’ explained Hindustan Times, Gaurav Choudhury (25/5/15)
Interview with John Nash
Interview with John Nash Nobelprize.org (Sept 2004)
Questions
- What is meant by the ‘prisoners’ dilemma’? How is this a demonstration of a sub-optimal Nash equilibrium in a non-cooperative game?
- Why is it difficult to predict the outcome of a non-cooperative game?
- Give some examples of non-cooperative games played by companies competing with each other.
- Give some examples of non-cooperative games played by nations competing with each other.
- Why do competition authorities try to prevent cooperation between businesses?
- Why may a cooperative equilibrium between firms be an unstable one?
For years, the UK consumer organisation, Which?, has exposed misleading supermarket pricing practices. These include bogus price reductions, ‘cheaper’ multi-buys, smaller pack sizes and confusing special offers. Claiming that these practices are still continuing, Which? has made a super-complaint (available to designated consumer bodies) to the competition regulator, the Competition and Markets Authority (CMA).
Commenting on this action, Which? executive director, Richard Lloyd said:
“Despite Which? repeatedly exposing misleading and confusing pricing tactics, and calling for voluntary change by the retailers, these dodgy offers remain on numerous supermarket shelves. Shoppers think they’re getting a bargain but in reality it’s impossible for any consumer to know if they’re genuinely getting a fair deal.
We’re saying enough is enough and using one of the most powerful legal weapons in our armoury to act on behalf of consumers by launching a super-complaint to the regulator. We want an end to misleading pricing tactics and for all retailers to use fair pricing that people can trust.”
The CMA will consider the issues raised under the super-complaint to establish whether any of them are significantly harming the interests of consumers. It will publish a response within 90 days from the receipt of the complaint on 21 April 2015. The possible outcomes include:
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recommending the quality and accessibility of information for consumers is improved |
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encouraging businesses in the market to self-regulate |
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making recommendations to government to change the legislation or public policy |
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taking competition or consumer enforcement action |
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instigating a market investigation or market study |
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a clean bill of health |
Some 40% of groceries are sold on promotion. Supermarkets are well aware that consumers love to get a bargain and use promotions to persuade consumers to buy things they might not otherwise have done.
What is more, consumer rationality is bounded by the information and time available. People are often in a hurry when shopping; prices change frequently; people are often buying numerous low-value items; and they don’t know what competitors are charging. People may thus accept an offer as genuine and not spend time investigating whether it is so. Supermarkets know this and use all sorts of tactics to try to persuade people that they are indeed getting a bargain.
Videos
Supermarkets Face Super-Complaint On Pricing Sky News (21/4/15)
UK supermarkets face possible probe over pricing practices Reuters, Neil Maidment (21/4/15)
Which? launches ‘super-complaint’ against supermarkets BBC News, Stephanie McGovern (21/4/15)
Articles
UK supermarkets dupe shoppers out of hundreds of millions, says Which? The Guardian, Rebecca Smithers (21/4/15)
Supermarkets face inquiry into ‘rip-offs’ The Telegraph, Dan Hyde (21/4/15)
15 supermarket rip-offs that led to an inquiry The Telegraph, Dan Hyde (21/4/15)
What does Which?’s supermarket pricing complaint mean for you? The Guardian (21/4/15)
Supermarkets hit back over Which? report on pricing Financial Times (21/4/15)
Press release
Which? ‘super-complains’ about misleading supermarket pricing practices Which? (21/4/15)
CMA case page
Groceries pricing super-complaint Competition and Markets Authority (21/4/15)
Questions
- Give examples of supermarket offers that are misleading.
- Why are supermarkets able to ‘get away with’ misleading offers?
- How can behavioural economics help to explain consumer behaviour in supermarkets?
- Identify some other super-complaints have been made to the CMA or its predecessor, the Office of Fair Trading. What were the outcomes from the resulting investigations.
- What is meant by ‘heuristics’? How might supermarkets exploit consumers’ use of heuristics in their promotions?
Last week saw the launch of Apple’s new music streaming service. This will clearly provide serious competition for the existing music streaming providers such as Spotify and Tidal. One important difference is that whilst Spotify offers a free version to listeners funded by advertising revenue, all Apple Music users will be required to pay a monthly subscription charge. However, Apple will allow listeners a free three-month trial of its service.
