Last week, the European Commission imposed a record fine of almost €1.5b on a group of firms found to have been involved in price fixing. Between 1996 and 2006 these firms fixed world-wide prices of cathode ray tubes which are used to make TV screens and computer monitors.
The firms involved in fixing the prices in one or both of these markets included household names such as Samsung, Panasonic, Toshiba and Philips. As these tubes accounted for over half the price of a screen this clearly had a significant knock-on effect on the amount final consumers paid. The European competition agency only discovered the cartel when it was informed that it had been in operation by Chunghwa, a Taiwanese company that had also been involved. Therefore, under the Commission’s leniency policy Chunghwa was granted full immunity from the fines.
The cartel members held frequent meetings in cities across Europe and Asia. The top level meetings were known as ‘green meetings’ as they were often followed by a round of golf. Interestingly, this is not the first time the game of golf has featured in an international cartel. In the famous lysine cartel an informant working for the FBI used the quality of the golf courses to convince the cartel members to meet in Hawaii, where the FBI had the jurisdiction to secretly record the meeting as evidence.
The screen tube cartel is one of the most highly organised cartels the European Commission has ever detected. Different prices were even fixed for individual TV and computer manufacturers. Furthermore, compliance with the cartel agreement was strictly monitored with plant visits to audit how much firms were producing. The cartel was also clearly very aware that it was breaking the law and that information needed to be concealed as some of the documents discovered stated that they should be destroyed after they had been read. One document even said that:
“Everybody is requested to keep it as secret as it would be serious damage if it is open to customers or European Commission.”
Another interesting feature of the cartel is that it occurred at a time when the technology was being replaced by LCD and plasma screens. Therefore, the cartel appears to have been partly motivated by a desire to mitigate the negative impact the declining market would have on the firms involved.
“Philips said it would challenge what it called a disproportionate and unjustified penalty. Panasonic and Toshiba are also considering legal challenges. Samsung reserved its comment.
Ministers are considering introducing a minimum price of 45p per unit of alcohol on all drinks sold in England and Wales. The Scottish government has already passed legislation for a minimum price of 50p per unit in Scotland. This, however, is being challenged in the Scottish courts and is being examined by the European Commission.
As we saw in a previous blog, Alcohol minimum price, the aim is to prevent the sale of really cheap drinks in supermarkets and other outlets. Sometimes supermarkets sell alcoholic drinks at less than average cost as a ‘loss leader’ in order to encourage people to shop there. Two-litre bottles of strong cider can be sold for as little as £2. Sometimes they offer multibuys which are heavily discounted. The idea of minimum pricing is to stop these practices without affecting ‘normal’ prices.
The effect of a 45p minimum price per unit would give the following typical minimum prices (depending on strength):
Strength
Size
Minimum price
Wine
12.5%
750ml
£4.22
Beer/lager (normal)
4.5%
pint (568ml)
£1.15
Beer/lager (strong)
7.5%
pint (568ml)
£1.92
Beer/lager (normal)
4.5%
2 litres
£4.05
Beer/lager (strong)
7.5%
2 litres
£6.75
Cider (normal)
5%
pint (568ml)
£1.28
Cider (strong)
8%
pint (568ml)
£2.04
Cider (normal)
5%
2 litres
£4.50
Cider (strong)
8%
2 litres
£7.20
Whisky
40%
700ml
£12.60
Vodka
37.5%
700ml
£11.81
The hope is that by preventing the sale of really cheap drinks in supermarkets, people will no longer be encouraged to ‘pre-load’ so that when they go out for the evening they are already drunk.
But how successful will such a policy be in cutting down drunkenness and the associated anti-social behaviour in many towns and cities, especially on Friday and Saturday nights? The following articles discuss the issue and look at some of the evidence on price elasticity of demand.
Draw a diagram to illustrate the effect of a minimum price per unit of alcohol on (a) cheap cider; (b) good quality wine.
How is the price elasticity of demand for alcoholic drinks relevant to determining the success of minimum pricing?
Compare the effects of imposing a minimum unit price of alcohol with raising the duty on alcoholic drinks? What are the revenue implications of the two policies for the government?
What externalities are involved in the consumption of alcohol? How could a socially efficient price for alcohol be determined?
Is imposing a minimum price for alcohol fair? How will it effect the distribution of income?
The environment has been a growing part of government policy for many years. With the Kyoto Protocol and Europe’s carbon trading system, effort has been made to reduce carbon emissions. Part of UK policy to meet its emission’s target requires substantial investment in infrastructure to provide efficient energy.
Details of the government’s Energy Bill sets out plans that will potentially increase average household energy bills by about £100 per annum, although estimates of this vary from about £90 to £170. This money will be used to finance much needed investment in infrastructure that will allow the UK to meet its carbon emissions target. With this extra cost on bills, energy companies will increase bring in something like £7.6bn. The benefit of this higher cost is that investment today will lead to lower energy bills tomorrow. Essentially, we’re looking at a short-term cost for a long-term gain.
The Energy Bill also delayed setting a carbon emission target until 2016. Crucially, this will come after the next election. Environmentalists have naturally criticised this omission. John Sauven of Greenpeace said:
’By failing to agree to any carbon target for the power sector until after the next election, David Cameron has allowed a militant tendency within his own ranks to derail the Energy Bill … It’s a blatant assault on the greening of the UK economy that leaves consumers vulnerable to rising gas prices, and sends billions of pounds of clean-tech investment to our economic rivals.’
One further problem that this lack of a target creates is uncertainty. The energy sector requires significant investment and in order to be encouraged to invest, firms need assurances. Without knowing the target and hence facing a degree of uncertainty, firms may be less likely to invest in building new power plants. And this investment is crucial. The Government has committed to replacing most coal-fired power stations across Britain with low carbon technology at a cost of hundreds of billions of pounds. However, the Chancellor has said “he would not allow saving the planet to come at the cost of ‘putting our country out of business.’”
When this Energy Bill is published, it is claimed that £110bn of spending on different aspects of the National Grid will occur. The suggestion is that this will generate a further 250,000 jobs by 2030 and will be a big step in the right direction towards creating an economy that is more reliant on clean energy.
The following articles consider the wide range of issues surrounding the Energy Bill.
Why does the environment require so much government intervention? Think about the different ways in which the environment as a market fails.
If household bills rise, is there likely to be an income and substitution effect between consumption of ‘energy’ and other goods? Which direction will each effect move in and which do you think would be the largest?
Why is uncertainty such a deterrent for investment? Why does a lack of a carbon emissions target represent uncertainty?
The higher cost of bills today may enable future bills to fall. Why is this? For a household, explain why discount factors could be important here.
Why do some argue that the extra cost to households set out by the government are likely to under-estimate the actual increase households will face?
Is the Chancellor right to say that he will not put our country out of business to save the planet?
Two of the biggest publishing companies, Pearson of the UK and Bertelsmann of Germany are to form a joint venture by merging their Penguin and Random House imprints. Bertelsmann will have a majority stake in the venture of 53% and Pearson will have 47%.
The Penguin imprint, with a turnover of just over £1bn, has an 11% share of the English language book publishing market. Random House has a 15% share, with turnover of around £1.5bn. The new ‘Penguin Random House’, as it will be called, will have nearly 26% of the market, which should give it considerable market power to combat various threats in the book publishing market.
One threat is from online retailers, such as Amazon, Apple and Google, which use their countervailing power to drive down the prices they pay to publishers. Another threat is from the rise of electronic versions of books. Although e-books save on printing costs, competition is driving down prices, including the prices of paper books, which may make publishers more reluctant to publish new titles in paper form.
There has been a mixed reception from authors: some are worried that an effective reduction in the number of major publishers from six to five will make it harder to get books published and may squeeze royalty rates; others feel that an increased market power of publishers to take on the online retailers will help to protect the interests of authors
The following videos and articles look at the nature of this joint venture and its implications for costs, revenues and publishing more generally.
What types of economies of scale are likely to result from the joint venture?
How are authors likely to be affected?
Will the joint venture benefit the book reading public?
The relationship between publishers and online retailers can be described as one of ‘bilateral oligopoly’. Explain what this means and why it is impossible to determine an ‘equilibrium’ wholesale price of books in such a market.
What criteria would the competition authorities use to assess whether or not the joint venture should be permitted to proceed?
What is likely to be the long-term outlook for Penguin Random House?
Assess the benefits and costs of a News Corporation takeover of the Penguin division? This was an alternative offer to Pearson had it not gone with Bertelsmann. (News Corp. has the Harper Collins imprint.)
As resources become scarce, the price mechanism works to push up the price (see, for example, Box 9.11 in Economics 8th ed). If you look at the price of petrol over the past few decades, there has been a general upward trend – part of this is due to growth in demand, but part is due to oil being a scarce resource. Many millions have been spent on trying to find alternative fuels and perhaps things are now looking up!
Air Fuel Synthesis, a small British company, has allegedly managed to make ‘petrol from air’. Following this, the company has unsurprisingly received finance and investment offers from across the world. However, the entrepreneur Professor Marmont has said that he does not want any company from the oil industry to get a stake in this firm. This doesn’t mean that investment is not needed or on the cards, as in order to increase production of petrol from thin air financing is needed. Professors Marmont said:
We’ve had calls offering us money from all over the world. We’ve never had that before. We’ve made the first petrol with our demonstration plant but the next stage is to build a bigger plant capable of producing 1 tonne of petrol a day, which means we need between £5m and £6m
Whilst the process appears to be a reality, Air Fuel Synthesis is a long way from being able to produce en masse. However, it does offer an exciting prospect for the future of petrol and renewable energy resources in the UK. At the moment oil companies appear to be uninterested, but if this breakthrough receives the financing it needs and progress continues to be made, it will be interesting to see how the big oil companies respond. The following articles consider this break-through.
Explain the way in which the price mechanism works as resources become scarce. Use a diagram to help your explanation.
As raw materials become scarce, prices of the goods that use them to work or require them to be produced will be affected. Explain this interdependence between markets.
Why is investment from an oil company such a concern for Professor Marmont?
Why is there unlikely to be any impact in the short run from this new breakthrough?
If such a technology could be put into practice, what effect might this have on the price of petrol?
How might oil companies react to the growth in this technology?
Last week, the European Commission imposed a record fine of almost €1.5b on a group of firms found to have been involved in price fixing. Between 1996 and 2006 these firms fixed world-wide prices of cathode ray tubes which are used to make TV screens and computer monitors.
