Everyone knows about ‘Google’ – a search engine. But, if you’ve happened to google ‘Google’ recently, you’ll be aware that it is being investigated by the European Commission, following claims by other search engines that it is abusing its dominant position.
It is not against the law to have a monopoly, but anti-trust legislation does make it illegal to abuse that dominant position. Those making the complaints argue that Google manipulates its search results and puts competing services further down the page whenever you search for something. The investigation has been launched following:
“complaints by search service providers about unfavourable treatment of their services in Google’s unpaid and sponsored search results coupled with an alleged preferential placement of Google’s own services.”
Google operates two services: unpaid results and ads. The investigation will aim to see whether the method that Google uses to generate unpaid results is to the detriment of its competitors. The following articles look at this issue.
EU to launch Google search investigation Guardian, Mark Sweney (30/11/10)
EU launches antitrust probe into alleged Google abuse BBC News (30/11/10)
EU launches investigation into allegations that Google abuses its dominance of internet search Telegraph, Rupert Neate (30/11/10)
Google faces European Competition Inquiry BBC News (24/02/10)
EU launches Google investigation after complaints Reuters (30/11/10)
Questions
- What are the characteristics of a monopoly? Why is it argued to be against the consumer’s interest?
- To what extent does Google have a monopoly over internet searches?
- What is the purpose of the investigation into Google? If Google is found guilty of ‘abusing its dominant position’, what action could be taken?
- Why is competition argued to be a good thing? Could the EU’s investigation actually not be in the interests of the public?
There has been a 38% increase in profit margins made by energy companies in the last 2 months and it is this which has prompted an investigation by Ofgem, the electricity and gas market regulator in the UK. Alistair Buchanan, Ofgem’s chief executive, said:
“With Britain facing an investment bill of £20bn over the next 10 years, consumers have the right to expect that the energy retail market is providing them with value for money. Our analysis published today shows an increase in company margins from £65 to £90 at a time of rising energy prices, which causes Ofgem to rightly ask if companies are playing it straight with consumers.”
Three of the big six suppliers have recently announced price rises and the fast-track review by Ofgem will consider whether consumers should be better protected. Scottish Power has increased gas prices by 2% and electricity prices by nearly 9%, meaning some customers may pay an extra £138 per year. British Gas is also planning on raising prices from December 10th, with gas and electricity bills expected to increase by 7%. Scottish and Southern Energy said it will increase domestic gas tariffs by 9.4%. EDF has promised a price freeze – at least until after the winter and nPower and E.ON are yet to announce their plans, but we can expect some form of a price rise.
While the review won’t make any difference to customer bills in the short term, Ofgem does have the power to make some changes to the way the companies are run. It is also expected that Ofgem will ask for more legislative support from the government and the Competition Commission. Although there are several suppliers in the energy market, each has market power and their dominance is preventing new firms from entering. As Adam Scorer, Director of Reputation and Impact at Consumer Focus, said:
“They do not feel the hot breath of competition on their necks.”
Articles
Energy firms facing gas and electricity price review BBC News (26/11/10)
Energy firms face new Ofgem enquiry over price rises and increased profits Telegraph, Andrew Hough (26/11/10)
Ofgem promises review as energy firms boost profit margins 38% Guardian, Jill Treanor (26/11/10)
Fuel bills: turning up the heat Guardian (27/11/10)
Energy firms face profit rise probe The Press Association (26/11/10)
Scepticism greets energy price probe Financial Times, David Blair (26/11/10)
UK utilities face review after recent price hikes Reuters (26/11/10)
UK to review retail energy market after price rises Bloomberg, Business Week, Kari Lundgren (26/11/10)
Has the toothless energy regulator learnt how to bite? Independent on Sunday, Julian Knight (28/11/10)
How to beat the energy price rise Telegraph (20/11/10)
Ofgem must mean business this time Herald (27/11/10)
Ofgem Press Release
Ofgem to review the effectiveness of the retail energy market to see if further action is needed to protect consumers Ofgem (26/11/10)
Questions
- What type of market structure is the UK energy market?
- The BBC News article talks about barriers preventing new competitors from entering the market. What types of barriers exist in this sector?
- What is a profit margin?
- What is likely to be the impact on family income following such price rises? Illustrate this on a diagram.
- Britain faces a £200 billion bill to invest in updating the energy network. What sort of updates are being referred to?
- What power do regulators such as Ofgem actually have? Why won’t they be able to change the amount that consumers pay?
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?
You might think that small environmentally-friendly companies would be moving into the green energy market: that setting up a wind farm, for example, would be a perfect business opportunity for a small company. In fact, the big companies are taking over this market. As the Der Spiegel article below states:
Europe’s wind energy sector is currently experiencing a major transformation. New massive offshore wind parks are soon expected to crop up off Europe’s coastline. Big companies like Siemens and General Electrics are increasing their stakes in a market worth billions. But experts warn that a new energy oligopoly may soon emerge.
So what is it about the wind energy market that makes it suitable for an oligopoly to develop? The two articles explore this question.
Winds of Change Der Spiegel, Nils-Viktor Sorge (1/11/10)
GE and Siemens Outpacing Wind Pioneers, Becoming Clean Energy’s “New Oligopoly” Fast Company, David Zax (2/11/10)
Questions
- What market failures are there in the wind energy market?
- What barriers to entry are there in the wind energy market?
- What economies of scale are there in this market?
- How are changes in this market affecting the minimum efficient scale of companies?
- Would there be room in the market for enough competitors to prevent collusion?
- How might the authorities prevent (a) open and (b) tacit collusion in the wind energy market?
- Do small wind energy companies have any market advantages?
As students, many of you probably have a student identification card, which you might use when you go to the cinema or when you buy something in a shop offering student discounts. Your parents or grandparents, if they are 60 or over, may get similar discounts, and your younger siblings or nieces and nephews may pay nothing for certain services.
It doesn’t cost a cinema more to provide a seat for an adult than it does for a child, a student or a senior citizen. So, why is it that firms can charge different groups of consumers different prices, even though they are consuming the same good or service? We are, of course, referring to the ability of a firm to price discriminate. The following short cases look at the concept in action.
Price discrimination: Russians get a discount Daily Markets, Mark Perry (12/10/10)
Theme park tickets and passes for Florida residents Walt Disney World 2010
Price discrimination: India and Disney World Daily Markets, Mark Perry (10/10/10)
Freedom’s just another word for getting a state subsidy The Economist (18/10/10)
Questions
- What are the different types of price discrimination?
- In the cases in the articles above, what type of price discrimination is being used?
- Illustrate this concept on a diagram and explain why a firm would use price discrimination. How will it affect revenue and profits?
- What are the key conditions needed for price discrimination to take place? In the cases above, why is it that British consumers are charged a higher price? What does this tell us about their price elasticity of demand?
- What forms of price discrimination (a) are being practised by US private universities and (b) being proposed in the Browne report for students at English universities?
- What other examples of price discrimination can you think of? Try and think of examples that fit into the different types of price discrimination.