There is a huge hole in public finances that needs to be filled and protestors are arguing that part of the deficit can be financed by companies that manage to avoid or indeed evade taxation. Sunday 30th January was marked by many as the day of action against this alleged tax avoidance by companies who choose to register in so-called tax havens. These countries offer much lower tax rates and hence provide an attractive environment for companies and savers.
However, protests by the campaign group Uncut have been targeting companies such as Boots, Vodafone and Top Shop, accusing them of depriving the UK economy of billions of pounds of tax revenue, which could be used to plug the hole in Britain’s finances and put the economy on the road to recovery. While these concerns have been around for a long time, they have been brought to the forefront by the government’s spending cuts in areas such as higher education, public sector pensions and the planned closures of libraries. There are numerous strikes planned by workers facing job losses, pay cuts and pension cuts. However, George Osborne has said:
“I regard these people as the forces of stagnation, when we are trying to get the British economy competitive again, moving forward again.”
With more and more spending cuts expected and households being squeezed could this tax avoidance really fill the gap? It is not known how much tax revenue is lost through tax avoidance and evasion, but HM Revenue and Customs estimated that the size of the tax gap could lie somewhere between £3.7 billion and £13 billion. The Commons Public Accounts Committee estimated a gap of £8.5 billion and the TUC at around £12 billion. A pretty wide divergence on estimates I grant you, but an indication of the sheer volume and value of tax avoidance that takes place. Clamping down on this may not plug the hole, but it would certainly help!
Analysis: UK Uncut- The true costs of tax avoidance Ethical Corporation 2009 (28/1/11)
Tax protestors stage Boots sit-in The Press Association (30/1/11)
Weekend of protests planned over tax cuts Guardian, Matthew Taylor and Jessica Shepherd (28/1/11)
Unions are “forces of stagnation”, says Osborne BBC News (28/1/11)
Day of action against tax avoiders The Press Association (28/1/11)
Firms’ secret tax avoidance schemes cost UK billions Guardian, Tax Gap Reporting Team (2/2/09)
Questions
- Why is the UK running such a large budget deficit?
- What is the point of tax avoidance?
- What are the arguments for companies such as Boots registering in other countries? Are these reasons ever in the interests of consumers?
- How are companies able to reduce their tax burdens by registering in countries like Switzerland?
- Why does George Osborne argue that trade unions and strike action are the ‘forces of stagnation’?
- What are the costs of striking to (a) workers, (b) consumers, (c) firms and (d) the economy?
- Would clamping down on tax avoidance be of benefit to the UK economy in the short and long run?
With news of the economy contracting in the previous quarter, it was perhaps a surprise to some that BSkyB has seen growth in its customer numbers to above 10 million: much of this increase due to growth in broadband numbers. In the second half of 2010, BSkyB reported that revenues increased by 15% to £3.2bn and their pre-tax profits were also on the way up to £467m. These latest figures are likely to put increasing pressure on News Corp’s takeover bid for the shares they do not own in BSkyB (61%), as share prices increase by 2%. Last summer, a bid of 700p per share was rejected and while both companies did agree to work together to determine if a future merger was viable, these higher share prices put BSkyB in a much stronger position.
However, before anything else happens, Rupert Murdoch’s company is waiting for regulatory approval from Ofcom for this takeover. BBC reports sugges that Ofcom has made an:
“unambiguous recommendation that News Corp’s plan to acquire all of BSkyB should be referred to the Competition Commission for further investigation.”
The Culture Secretary, Jeremy Hunt, has spoken of his intention to refer this potential merger to the Competition Commission, following Ofcom’s recommendation. There are concerns about the impact on competition and Rupert Murdochs’ increased influence over public opinion, if this merger were to go ahead. Any delays in finalizing a deal could benefit BSkyB, if their financial performance continues. Analysts suggest that the delay could be 6 months, while any investigation takes place. If profits continue to rise, share prices may also go up, requiring higher and higher bids by News Corp. Watch this space!
BSkyB profits soar 26% to £520m putting pressure on NewsCorp to increase takeover bid Daily Mail (27/1/11)
BSkyB reports big jump in profits BBC News (27/1/11)
BSkyB spends £7m on News Corp bid Guardian, Mark Sweney (27/1/11)
BSkyB result to highlight pressure on News Corp Reuters, Kate Holton (26/1/11)
HD TV, broad demand boosts BSkyB Telegraph (27/1/11)
News Corp bud for Sky should go to Competition Commission, recommends Ofcom Telegraph (27/1/11)
Call off the hunt Financial Times (20/1/11)
Numis raises BSkyB on expected News Corp deal delay Reuters (21/1/11)
Questions
- Explain what type of merger it would be between News Corp and BSkyB.
- What are the arguments (a) for the merger and (b) against the merger? Consider the impact on the public, the competitors, the workers etc.
- What is the role of Ofcom and the Competition Commission? How do their responsibilities differ?
- As demand for Sky’s products increases, what could we expect to see in terms of price? Now explain why your answer may not happen!
- Why have BSkyB’s share prices been affected? Is it the demand of supply of shares that has changed? Illustrate your answer on a diagram.
If you want to buy a newly released DVD, a cheaper option than buying off the high-street tends to be to buy online, in particular through Amazon, the world’s largest online retailer. However, Amazon has been facing increasing competition from another US giant, Netflix that has over 16 million subscribers and is looking at entering the British market. Arguably, in a response to this threat, Amazon has agreed to purchase Lovefilm, the online movie rental service that has grown rapidly over the past few years, with over 1.4 million members around the UK.
As of 2008, Amazon already had a 42% stake in the business, but as Lovefilm has been running into difficulties, their senior management team has been looking at the possibility of selling the remaining 58% share. Enter Amazon in a bid to cement and defend their place in the British market to companies such as Netflix. Below are a few articles concerning this takeover – more will be added, as further details emerge.
Amazon acquires Lovefilm for £200m Financial Times, Tim Bradshaw (20/1/11)
Can Lovefilm survive the streaming revolution? Telegraph, James Hurley (27/1/11)
Amazon takes full control of Lovefilm Guardian, Josh Halliday(20/1/11)
Amazon buys remaining stake in Lovefilm DVD service BBC News (20/1/11)
Amazon takes control of Lovefilm Broadband TV News, Julian Clover (20/1/11)
Amazon acquires Lovefilm, the Netflix of Europe Tech Crunch, Mike Butcher (20/1/11)
Questions
- What type of takeover is this and what are the main motives behind it?
- How are consumers likely to a) benefit and b) suffer from Amazon’s takeover bid for Lovefilm?
- Who are Amazon’s main competitors? (Think of all the products they sell.)
- Will the Competition authorities be interested in this takeover? Explain your answer.
- In which type of market structure would you place Amazon, Netflix and Lovefilm? Explain your answer.
You will probably have come across the concept of consumer sovereignty. In the mythical world of perfect markets, producers are at the beck and call of consumers. Firms that are not responsive to consumer demand go out of business. In other words, in order to survive they have to respond to any shifts in consumer demand. These in turn can be the result of changes in tastes, changes in income, changes in the prices of other goods, and so on.
Of course, the real world is not perfect, but it is still often assumed that consumers are powerful in influencing what firms sell and at what prices. Well, firms would much rather be in a position of manipulating consumer tastes and hence the huge amounts spent on advertising and marketing.
And it doesn’t end there. Firms use many pricing practices which, to put it mildly, try to confuse consumers or lure them into buying things by making them think they are getting something much cheaper than they really are. Take the case of airline tickets. Some budget airlines offer tickets at extremely low prices, such as 99p. But if you select such a flight, by the time you get to the final screen where taxes, charges, supplements, luggage, etc. are added, the price could exceed £100! And ask yourself this, when you buy something with 20% off, or when you buy ‘three for the price of two’ how rational was your decision? Did you really want the product? Was the offer really ‘genuine’?
The Office of Fair Trading has recently completed two investigations into pricing. As it stated 14 months ago when the investigations were launched:
The first, into online targeting of advertising and prices will cover behavioural advertising and customised pricing, where prices are individually tailored using information collected about a consumer’s internet use. It is expected that this study will be completed by spring 2010.
The second, into advertising of prices, will consider various pricing practices which may potentially mislead consumers. The study will look in particular, but not exclusively, at how these practices are used online.
The following articles look at some of the practices that firms use to drive sales – practices that deliberately attempt to manipulate the consumer. The assumption of ‘perfect knowledge’ by consumers may be a long way from the truth.
Articles
Shoppers lose out on ‘billions’ because of ‘deceitful’ marketing The Telegraph, Harry Wallop (2/12/10)
OFT warns retailers about ‘misleading’ price offers BBC News (2/12/10)
OFT cracks down on price gimmicks Guardian, Rebecca Smithers (2/12/10)
We’re all gulled by special offers BBC News blogs: Peston’s Picks, Robert Peston (2/12/10)
OFT publications
OFT warning on misleading pricing practices, OFT Press Release 124/10 (2/12/10)
OFT launches market studies into advertising and pricing practices, OFT Press Release 126/09 (15/10/09)
Advertising of Prices, Office of Fair Trading, OFT1291 (December 2010)
Advertising of Prices, Office of Fair Trading, project page
Advertising of Prices Study Overview, Office of Fair Trading, video
Questions
- Explain each of the different types of pricing practice investigated by the OFT.
- Which of the pricing practices are the most misleading for customers?
- What is meant by ‘invisible price increases’? How can they be used to mislead the consumer?
- Why do certain pricing practices make it hard for the Office for National Statistics to work out the rate of inflation?
- Explain the new framework the OFT is adopting for ‘prioritising enforcement action’.
- If we end up buying something that we didn’t really intend to buy, does this mean that we were being irrational?
- Is advertising generally in or against the interest of consumers? Explain your answer
Last week, I posted an article about a price discriminating tactic in operation by a few firms, whereby they were charging different prices to different consumers, depending on whether or not people could speak the language. (See Entrance this way!). Following this, I had a look around to find some other pricing strategies in practice by firms. These ranged from simple price discrimination to a well-known supermarket, which, following the failure of its till system, decided to trust consumers: estimate the value of the goods in your trolley/basket, deduct 20% and that’s the amount you pay. Also, a strategy being adopted by a number of restaurants – ‘pay what you think it’s worth!’ An advertising gimmick that increased sales.
So, what’s the best pricing strategy for a firm to adopt and which factors affect this? Is it really a rational decision to offer meals, with the possibility that the guests may only be prepared to pay 1p?!
You decide how much meals are worth, restaurants tell customers Telegraph, Nina Goswami (12/06/05)
Panera café says pay what you want Associated Press, Food Inc, Christopher Leonard (18/5/10)
Pound shop forced to close after 99p store opens across the road Daily Mail Online (12/1/09)
Low cost? Not with these extras Times Online, Richard Green (17/8/08)
Cheap hotels: budget accommodation for visits to London Telegraph (25/10/10)
Budget customers call the hotel Tune BBC News, Susannah Streeter (30/8/10)
Questions
- Is it a rational decision to trust consumers and ask them to estimate the value of what’s in their trolleys?
- Why would a restaurant offer consumers the chance to pay ‘what you think it’s worth’? Under what circumstances would this incrrease the firm’s revenue?
- What are the key factors that determine the price a firm will charge for its product?
- How can we use the case in Poole, with the new 99p shop, to analyse the model of perfect competition?
- What pricing tactic is being used by the 99p shop? How could we argue that this is an example of tacit collusion?