Oligopoly: it’s a complex market structure and although closer to the monopoly end of the ‘Market Structure Spectrum’, it can still be a highly competitive market. The characteristics are well-documented and key to the degree of competition within any oligopoly is the number of competitors and extent to which there are barriers to entry.
The greater the barriers and the fewer the competitors the greater the power the established firms have. This can then spell trouble for pricing and hence for consumers. The following articles are just some examples of the oligopolies that exist around the world and some of the benefits and problems that accompany them.
Articles
Oligopoly of PSU oil cos reason for high ATF prices The Indian Express, Smita Aggarwal (30/4/12)
Group energy buying hits the UK headlines Spend Matters UK/Europe(18/1/11)
German cartel office probes petrol companies on pricing Fox Business (4/4/12)
Gov’t unveils steps to lower fuel prices Yonhap News (19/4/12)
How big banks threaten our economy Wall Street Journal, Warren Stephens (29/4/12)
UK Governance: Call for Whitehall to simplify the landscape for SME suppliers to win more government contracts The Information Daily (26/4/12)
Other blogs
Pumping up the price: fuel cartels in Germany April 2012
Energy profit margins up by over 700% October 2011
Every basket helps October 2011
The art of oligopoly December 2010
Questions
- What are the assumptions of an oligopolistic market structure?
- Consider (a) the energy sector and (b) the banking sector. To what extent does each market conform with the assumptions of an oligopoly?
- In the ‘Spend Matters’ article, a group of people in a Lincolnshire village formed a local buying consortium to negotiate deals for heating oil. What could we refer to this as?
- To what extent is an oligopoly in the public interest?
- Explain how barriers to entry in oligopolies affect the competitiveness and efficiency of a market.
- Illustrate how an oligopolistic market structure can fix prices and hence exploit consumers.
- How have the actions of the big oil companies in both the UK and Germany been against independent retailers and the consumer interest?
- What action can governments take to break up oligopolies? Will it always be effective?
According to the Sunday Times Rich List, the combined wealth of Britain’s 1000 richest people grew by nearly 4.7% last year to £414 billion (after growing by 18% in 2010).
This is in stark contrast to average households, who saw their real incomes decline by 1.9% in 2011. As the Guardian article below says:
The Rich Listers are not merely the 1%, but the 0.01%, and this fanfared celebration of their assets feels like a celebration of things that nobody feels like celebrating: bankers’ bonuses, complex corporate tax-avoidance structures, the stifling grip of aristocratic family wealth.
So why are the rich getting richer and what are the implications for society and the economy? Watch and read the following webcasts and articles and then see if you can answer the questions below.
Webcasts
Rich List shows how super-wealthy have dodged recession (or) Channel 4 News (29/4/12)
Sunday Times Rich List: Wealthy getting richer BBC News, Ben Thompson (29/4/12)
Articles
Britain’s richest see fortunes rise to record high Reuters, Tim Castle (29/4/12)
Sunday Times Rich List shows rich recover wealth twice as fast Myfinances.co.uk, Ben Salisbury (29/4/12)
Sunday Times Rich List suggests UK’s wealthiest defy recession BBC News (28/4/12)
Sunday Times Rich List 2012: Wealth of richest grows to record levels The Telegraph, Patrick Sawer (28/4/12)
The Not-So-Rich-Any-More List Guardian, Oliver Burkeman and Patrick Kingsley (27/4/12)
Sunday Times Rich List ITV News (29/4/12)
Data
Distribution of Personal Wealth HMRC
The effects of taxes and benefits on household income ONS (19/5/11)
Household Quarterly Release 2011 Q4 – Real household actual income and expenditure per head ONS
Questions
- Distinguish between stocks and flows. Which of the following are stocks and which are flows: income, wealth, savings, saving, expenditure, possessions?
- If the combined wealth of the 1000 wealthiest people increased in 2011, does this imply that their incomes rose? Explain.
- Why have the super rich got richer, while average incomes in the country have fallen?
- What are the costs and benefits to society (other than the super rich) of the super rich becoming richer?
- Distinguish between the income and substitution effects of an increase in income of the wealthy. Which is likely to be larger and why?
The UK hosted the third Clean Energy Ministerial conference on 25/26 April 2012. More than 20 energy ministers from around the world attended. In his address, David Cameron, gave his backing to more wind farms being built in the UK, both onshore and offshore.
Currently just under 10 per cent of the UK’s electricity is generated from renewable sources. But to meet agreed EU targets this must increse to at least one-third by 2020. Most of this will have to come from wind.
But whilst wind turbines create no CO2 emissions, electricity generated from wind is currently some 15% more expensive than from gas. To make wind power profitable, energy companies are required by law to generate a certain percentage of their electricity from renewables and the cost is passed on to the consumer. This adds some £20 per year to the average household energy bill.
Over the coming years, many new power plants will have to be built to replace the electricity generated from older plants that reach the end of their life. So what types of plant should be built? Unfortunately measuring the costs and benefits from power generation is not easy. For a start, energy needs are not easy to predict. But more importantly, electricity generation involves huge environmental and social externalities. And these are extremely difficult to measure.
What is more, the topic is highly charged politically. The social costs do not fall evenly on the population. People might favour wind turbines, but they do not want to see one outside their window – or from their golf course!
The following videos and articles will give you some insight into the difficulties that any decision makers face in making the ‘right’ decisions about electricity generation
Webcasts and podcasts
Can Cameron still claim the ‘greenest government ever’? Channel 4 News, Tom Clarke (26/4/12)
Energy Secretary: UK will meet green targets BBC News, Ed Davey (25/4/12)
Donald Trump attacks Scottish government’s green policy BBC News, James Cook (25/4/12)
Trump: Wind farms ‘bad for Scotland’ BBC News (24/4/12)
Tycoon Trump fights Scotland over wind farms near golf resortReuters, Deborah Gembara (25/4/12)
Wind power blows Siemens off course Euronews, Anne Glemarec (25/4/12)
Mexico inaugurates largest wind farm in Latin America BBC News, Carolina Robino (9/3/12)
BP’s Flat Ridge 2 Wind Farm in Kansas YouTube, BPplc (10/4/12)
Arnold Schwarzenegger: Green quest goes on BBC News (26/4/12)
Denmark Pioneers Clean Energy Green TV (18/4/12)
EU wind industry defies recession Green TV (16/4/12)
Wind Farm Issues – Compilation LiveLeak (15/4/12)
News articles
David Cameron commits to wind farms The Telegraph, Louise Gray (26/4/12)
David Cameron says wind energy must get cheaper The Telegraph, Louise Gray (27/4/12)
Could 2012 be year of the wind turbine? The Telegraph, Louise Gray (3/2/12)
Green energy vital, says David Cameron Independent, Emily Beament (26/4/12)
Cameron: renewables are ‘vital to our future’ businessGreen, Will Nichols and James Murray (26/4/12)
Green energy ‘must be affordable’ – Cameron BBC News (26/4/12)
Wind farms will kill tourism, says Donald Trump Independent (25/4/12)
Donald Trump accuses Salmond of ‘betrayal’ over wind farm plans The Telegraph, Simon Johnson (25/4/12)
Turbine scheme provokes wuthering gale of protest Independent, Mark Branagan (6/4/12)
Prince Charles endorses wind power in new film at Sundance Festival The Telegraph, Roya Nikkhah (29/4/12)
Study claims tourists ‘not put off’ by wind farms in Scotland BBC News (24/4/12)
Tide turns in favour of wave power instead of wind farms Scotsman, David Maddox (23/4/12)
Rush towards wind-generated electricity will not reduce fuel poverty Power Engineering (21/4/12)
Shell says no to North Sea wind power Guardian, Terry Macalister (26/4/12)
David Cameron, the Speech He Needs to Make Huffington Post, Juliet Davenport (25/4/12)
Campaigners want David Cameron to come clean over wind farm policy Western Daily Press (27/4/12)
Being Green Doesn’t Mean Higher Electricity Costs Says Green Energy UK DWPub (27/4/12)
Documents
Cost Benefit Methodology for Optimal Design of Offshore Transmission Systems Centre for Sustainable Electricity and Distributed Generation, Predrag Djapic and Goran Strbac (July 2008)
A Cost Benefit Analysis of Wind Power University College Dublin, Eleanor Denny (19/1/07)
Ecological and economic cost-benefit analysis of offshore wind energy Renewable Energy 34, Brian Snyder, Mark J. Kaiser (2009)
Questions
- Why is difficult to predict the future (financial) cost per kilowatt-hour of electricity generation by the various methods?
- Why is it difficult to estimate the demand for electricity in 10 years’ time?
- Identify the external benefits and costs of electricity generation from (a) onshore wind turbines; (b) offshore wind turbines.
- Is ‘willingness to pay’ a good method of establishing the value of external benefits and costs?
- What are the steps in a cost–benefit analysis?
- What types of problems are there in measuring external benefits and costs?
The UK is officially back in recession: or to be more accurate, a double-dip recession.
The generally accepted definition of a recession is two or more quarters of negative growth in real GDP. According to figures released by the Office for National Statistics, the UK economy shrank by 0.2% in quarter 1, 2012, having shrunk by 0.3% in quarter 4, 2011.
(Click on the following link for a PowerPoint of the above chart: Double dip 2)
As you can see from the chart (click chart for a larger version), these declines are tiny compared with the recession of 2008/9. Nevertheless, with the eurozone economy slowing (Britain’s largest export market), and with cuts to government expenditure set to bite harder in the coming months, there are worries that there may be more quarters of negative growth to come.
So what are the causes of this double-dip recession? Are they largely external, in terms of flagging export markets; or are they internal? Is the new recession the direct result of the tight fiscal policy pursued by the Coalition government?
And what is to be done? Is there no option but to continue with the present policy – the government’s line? Or should the austerity measures be reined in? After all, as we saw in the last blog post (Economic stimulus, ‘oui’; austerity, ‘non’), the mood in many European countries is turning against austerity.
The following articles explore the causes and policy implications of the latest piece of bad news on the UK economy.
Articles
Double-dip recession a terrible blow for George Osborne Guardian, Larry Elliott (25/4/12)
Double-dip recession figures mark another bad day for George Osborne Guardian, Larry Elliott (25/4/12)
UK double-dip recession: what the economists say Guardian (25/4/12)
Feared double dip recession becomes reality as British economy contracts again in first quarter of 2012 Daily Record (25/4/12)
Britain in double-dip recession as growth falls 0.2pc The Telegraph, Angela Monaghan and Szu Ping Chan (25/4/12)
Did the eurozone crisis cause the double-dip recession? Guardian, Polly Curtis (25/4/12)
UK’s double-dip recession Financial Times, Chris Giles (25/4/12)
UK is in ‘double dip’ recession FT Adviser, Rebecca Clancy and John Kenchington (25/4/12)
Flanders explains GDP figure BBC News, Stephanie Flanders (25/4/12)
No recovery for UK: No let up for ONS BBC News, Stephanie Flanders (25/4/12)
Double-dip recession: There’s always fantasy island BBC News, Paul Mason (25/4/12)
UK double-dip recession to drag on into summer, economists warn The Telegraph, Philip Aldrick (26/4/12)
George Osborne can stop the rot, but only by spending as he slashes The Telegraph, Jeremy Warner (25/4/12)
Double dip has arrived – and Osborne is running out of escape routes Independent, Ben Chu (26/4/12)
Britain’s bosses tell the ONS: it’s bad, but not a recession Independent, Tom Bawden, Lucy Tobin , Gideon Spanier (26/4/12)
The Chancellor received plenty of warning Independent, David Blanchflower (26/5/12)
Data
Gross Domestic Product: Preliminary Estimate, Q1 2012 ONS (25/4/12)
Preliminary Estimate of GDP Time Series Dataset 2012 Q ONS (25/4/12)
World Economic Outlook Database IMF (17/4/12)
Business and Consumer Surveys (for all individual EU countries and for the EU as a whole) European Commission: Economic and Financial Affairs
Consumer Confidence Nationwide Building Society
Questions
- Assess the current state of the UK economy and its likely course over the coming few months.
- Why may looking at the business surveys provide a truer picture of the state of the UK economy than the official measure of GDP?
- Why has the UK economy gone back into recession?
- Compare the policy approaches of the Coalition government with those of the Labour opposition.
- How important is it for the UK to retain its AAA credit rating?
Vodafone has offered to purchase Cable & Wireless Worldwide (C&WW), with Vodafone paying 38p per share, making this deal worth £1.044bn.
This deal, however, was rejected by C&WW’s largest shareholder, Orbis, within hours, as the price was not high enough, despite the 38p per share offer representing a 92% premium to the level of C&WW’s share price before the bid interest emerged in February. A spokesperson for Orbis said:
‘Although we believe the C&WW management team has handled the bid process responsibly, we have declined to give an irrevocable undertaking or letter of intent to the support the transaction.’
However, with the only other interested party, Tata Communications withdrawing, Vodafone was the only remaining bidder. As such, many suggest that this deal is a good one for the struggling business, despite Orbis’ claim that it under-values the business.
Adding a UK fixed-line cable to Vodafone’s business will increase its capacity, which is much needed at this moment in time with the added demand for mobile data from increased Smartphone usage. Cost savings are also expected from this merger, as the company will no longer have to pay to other companies to lease its fixed-line capacity.
The bid from Vodafone did help C&WW’s trading performance, which had been worsening for some time and so some shareholders will be glad of the bid. Its shares were up following this deal and it went to the top of the FTSE250. Vodafone will also benefit, as this merger would make it the second largest combined fixed and mobile line operator in the UK.
The trends of these two companies in recent years have been very much in contrast. C&WW had been the larger of the two firms up until 1999, yet the price Vodafone would now pay for the company represents a mere 1% of its current market value. The following articles consider this merger.
Vodafone bids for Cable and Wireless: The end of the line The Economist (24/4/12)
Questor shares tip: Vodafone deal looks goodThe Telegraph, Garry White(23/4/12)
Vodafone puts paid to once-revered C&WW Financial Times, Daniel Thomas (23/4/12)
Top CWW shareholder rejects sale to Vodafone Independent, Gideon Spanier (24/4/12)
CWW accepting Vodafone’s £1bn bid is a good call The Telegraph, Alistair Osborne (23/4/12)
Vodafone agrees £1bn deal for Cable & Wireless Worldwide Guardian, Julia Kollewe and Juliette Garside (23/4/12)
Vodafone agrees £1bn takeover of C&W Worldwide BBC News (23/4/12)
Questions
- Into which market structure would you place the above industry? Explain your answer.
- Which factors have caused C&WW’s worsening position? In each case, explain whether they are internal or external influences.
- What type of merger is that between C&WW and Vodafone?
- Explain some of the motives behind this merger.
- Which factors have caused these two companies to have such different trading performances in the last 15 years?
- Why was the announcement of the bid followed by better share prices for C&WW?
- Is there any reason why the competition authorities should be concerned about this merger?
Oligopoly: it’s a complex market structure and although closer to the monopoly end of the ‘Market Structure Spectrum’, it can still be a highly competitive market. The characteristics are well-documented and key to the degree of competition within any oligopoly is the number of competitors and extent to which there are barriers to entry.
