Tag: competition

Posted on

President Reagan on tariffs

In a 1987 address to the US nation, Republican President Ronald Reagan discussed the question of tariffs. His message was clear.

You see, at first, when someone says, ‘Let’s impose tariffs on foreign imports,’ it looks like they’re doing the patriotic thing by protecting American products and jobs. And sometimes for a short while it works – but only for a short time. What eventually occurs is:

First, homegrown industries start relying on government protection in the form of high tariffs. They stop competing and stop making the innovative management and technological changes they need to succeed in world markets.
 
And then, while all this is going on, something even worse occurs: high tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars. The result is more and more tariffs, higher and higher trade barriers, and less and less competition. So, soon, because of the prices made artificially high by tariffs that subsidise inefficiency and poor management, people stop buying.
 
Then the worst happens: markets shrink and collapse; businesses and industries shut down; and millions of people lose their jobs.
 
The memory of all this occurring back in the thirties made me determined when I came to Washington to spare the American people the protectionist legislation that destroys prosperity.
 
Now, it hasn’t always been easy. There are those in this Congress, just as there were back in the ’30s, who want to go for the quick political advantage, who will risk America’s prosperity for the sake of a short-term appeal to some special interest group, who forget that more than five million American jobs are directly tied to the foreign export business and additional millions are tied to imports.
 
For those of us who lived through the Great Depression, the memory of the suffering it caused is deep and searing. And today, many economic analysts and historians argue that high tariff legislation, passed back in that period called the Smoot-Hawley Tariff, greatly deepened the Depression and prevented economic recovery.

He returned to the topic of tariffs in November 1988, when he reflected on the benefits of free and fair trade and the dangers of protectionism.

Here in America, as we reflect on the many things we have to be grateful for, we should take a moment to recognize that one of the key factors behind our nation’s great prosperity is the open trade policy that allows the American people to freely exchange goods and services with free people around the world. The freedom to trade is not a new issue for America.

In 1776 our Founding Fathers signed the Declaration of Independence, charging the British with a number of offenses, among them, and I quote, ‘cutting off our trade with all parts of the world’.
 
And that same year, a Scottish economist named Adam Smith launched another revolution with a book entitled ‘The Wealth of Nations’, which exposed for all time the folly of protectionism. Over the past 200 years, not only has the argument against tariffs and trade barriers won nearly universal agreement among economists but it has also proven itself in the real world, where we have seen free-trading nations prosper while protectionist countries fall behind.
 
America’s most recent experiment with protectionism was a disaster for the working men and women of this country. When Congress passed the Smoot-Hawley tariff in 1930, we were told that it would protect America from foreign competition and save jobs in this country – the same line we hear today. The actual result was the Great Depression, the worst economic catastrophe in our history; one out of four Americans were thrown out of work. Two years later, when I cast my first ballot for President, I voted for Franklin Delano Roosevelt, who opposed protectionism and called for the repeal of that disastrous tariff.
 
Ever since that time, the American people have stayed true to our heritage by rejecting the siren song of protectionism. In recent years, the trade deficit led some misguided politicians to call for protectionism, warning that otherwise we would lose jobs. But they were wrong again. In fact, the United States not only didn’t lose jobs, we created more jobs than all the countries of Western Europe, Canada, and Japan combined. The record is clear that when America’s total trade has increased, American jobs have also increased. And when our total trade has declined, so have the number of jobs.
 
Part of the difficulty in accepting the good news about trade is in our words. We too often talk about trade while using the vocabulary of war. In war, for one side to win, the other must lose. But commerce is not warfare. Trade is an economic alliance that benefits both countries. There are no losers, only winners. And trade helps strengthen the free world.
 
Yet today protectionism is being used by some American politicians as a cheap form of nationalism, a fig leaf for those unwilling to maintain America’s military strength and who lack the resolve to stand up to real enemies – countries that would use violence against us or our allies. Our peaceful trading partners are not our enemies; they are our allies.
 
We should beware of the demagogs who are ready to declare a trade war against our friends – weakening our economy, our national security, and the entire free world – all while cynically waving the American flag. The expansion of the international economy is not a foreign invasion; it is an American triumph, one we worked hard to achieve, and something central to our vision of a peaceful and prosperous world of freedom.
 
After the Second World War, America led the way to dismantle trade barriers and create a world trading system that set the stage for decades of unparalleled economic growth. And in one week, when important multilateral trade talks are held in Montreal, we will be in the forefront of efforts to improve this system. We want to open more markets for our products, to see to it that all nations play by the rules, and to seek improvement in such areas as dispute resolution and agriculture. We also want to bring the benefits of free trade to new areas, including services, investment, and the protection of intellectual property. Our negotiators will be working hard for all of us.
 
Yes, back in 1776, our Founding Fathers believed that free trade was worth fighting for. And we can celebrate their victory because today trade is at the core of the alliance that secure the peace and guarantee our freedom; it is the source of our prosperity and the path to an even brighter future for America.

The questions below address whether these radio addresses by President Reagan are relevant in today’s context of the imposition of tariffs by President Trump.

Videos of Radio Addresses

Articles and postings

Questions

  1. Summarise Ronald Reagan’s arguments.
  2. How would Donald Trump reply to these arguments?
  3. Can tariffs ever be justified on efficiency grounds?
  4. Can tariffs be justified as a bargaining ploy? Can they be used as a means of achieving freer and fairer trade?
  5. Find out why the Smoot-Hawley Tariff Act was introduced in 1930 and what were its consequences.
  6. How does the World Trade Organization seek to promote freer and fairer trade? How does it resolve trade disputes?
Posted on

From swiping right to swiping out: the economics of the dating app decline

According to Ofcom’s November 2024 Online Nation report (see report linked below), UK adults are falling out of love with dating apps. Use of the top three platforms in the UK (Tinder, Hinge, and Bumble) is declining, even though most users are juggling multiple apps at once. So, what’s going on? Economics may have some valuable insights to help explain the decline.

Too much choice

First, dating platforms don’t function like typical commodity markets, where prices adjust until supply and demand balance. Instead, dating can be seen as what economists call a ‘matching market’, where success depends on mutual interest, not on a specific price. So even with thousands of potential matches, forming actual connections remains difficult, and more choice doesn’t necessarily translate into better outcomes.

In fact, more choice can backfire. The paradox of choice, a behavioural economics concept, suggests that too many options can lead to choice paralysis. Instead of feeling empowered by an abundance of potential partners, users can feel overwhelmed, unsure, and often less satisfied with whatever choice they end up making (if they make one at all).

So, while we often think of dating apps, like many other platforms, benefiting from positive network effects, where more users increase the platform’s value by offering more potential matches, this can also have negative effects. Swiping through endless profiles and repeating the same small talk, can turn dating into a chore rather than an exciting opportunity.

Adverse selection

What makes this even harder is that users can’t easily distinguish between who’s genuinely looking for the same thing you are, and who’s just there to pass the time. This information asymmetry leads to the adverse selection problem – a concept famously explored by economist George Akerlof in his 1970 paper ‘The Market for Lemons’ (see link below). He showed how lack of information about product quality can cause high-quality sellers to exit, resulting in market failure where the market becomes dominated by low-quality goods (i.e. ‘lemons’).

A similar dynamic can play out on dating apps. If users believe most profiles are unserious or not genuine, they become less willing to engage, or even stay on the platform. Meanwhile, the most genuine users may give up altogether, worsening the quality of the pool and discouraging others.

In economics, there are some well-known ways in which the problem of adverse selection could be overcome. One such possibility is through signalling, where the more informed person tries to reveal important information to the uninformed person. Indeed, platforms have experimented with signalling mechanisms, like verification tools for example. Paid subscriptions have also been implemented, which could help to some extent (assuming that those who are willing to pay are those who are genuine and serious about finding a match). But these solutions only go so far, and with fewer users paying to signal intent, the problem persists.

Lack of innovation

This ties into the wider revenue model of dating apps. Unlike many apps that rely on revenue from advertising on one side of the market to offer the app free to consumers on the other side, dating platforms often rely more on revenue through monthly subscriptions and paid upgrades. But with fewer users willing to pay, these platforms may be under pressure. This financial pressure may also affect their ability to innovate or improve the service.

In fact, in the dating app world, there is another reason why platforms may not be innovating as much as they should, aside from simply trying to convince their users to pay for a better service. While it seems like there’s endless choice in the dating app world, much of the market is controlled by a single company, InterActiveCorp (IAC), which owns Tinder, Hinge, Match.com and more. With limited competition, there’s less incentive to compete on quality.

Worse still, dating apps face a unique business problem: if their service works too well, users leave and delete the app. So, there may be a built-in tension between helping users succeed and keeping them swiping.

The outlook for dating apps

So, is the decline in dating app use just temporary, or the start of something bigger? Time will tell. However, from an economics perspective, there is a noticeable shift in demand towards substitutes, such as organised in-person social events and activities, which encourages more and more of these opportunities to emerge. This shift may reflect changing preferences and the costs (in terms of time and emotional energy) that users are willing to invest in online dating.

At the same time, AI already plays a key role in dating apps, and new possibilities seem to be emerging. For example, we could see a bigger rollout of AI-driven chatbots that facilitate conversations or even interact on behalf of users. This could make it easier to connect with potential matches and might help in addressing some of the other issues discussed above.

Articles

Video

Report

Questions

  1. How might ‘signalling’ and ‘screening’ be used to create new features or services that could help overcome the adverse selection problem in this market?
  2. Can you think of any other ways in which the adverse selection problem could be overcome in this context?
  3. Draw a diagram to illustrate the two-sided nature of the dating app market, making clear where there may be positive or negative network effects.
  4. How else might dating app platforms be making revenue that allows them to offer the app to users at no charge?
  5. Is the dating app market competitive? You might consider factors such as the availability of substitutes, barriers to entry and innovation.
Posted on

Why are Tesla sales plummeting?

Tesla sales have fallen dramatically recently. In Europe they were down 47.7% in January 2025 compared with January 2024. In Spain the figure was 75.4%, in France 63.4%, in Germany 59.5%, in Sweden 44.3%, in Norway 37.9%, in the UK 18.2% and in Italy 13.4%. And it was not just Europe. In Australia the figure was 33.2%, in China 15.5% and in California 11.6%. Meanwhile, Tesla’s share price has fallen from a peak of $480 on 17 December 2024 to $338 on 21 February 2025, although that compares with $192 in February 2024.

So why have Tesla sales fallen? It’s not because of a rise in price (a movement up the demand curve); indeed, Tesla cut its prices in 2024. Part of the reason is on the supply side. In several countries, stocks of Teslas are low. Some consumers who would have bought have had to wait. However, the main reason is that the demand curve has shifted to the left. So why has this happened?

A reaction to Elon Musk?

One explanation is a growing unpopularity of Elon Musk among many potential purchasers of electric vehicles (EVs). People are more likely to buy an EV if they are environmentally concerned and thus more likely to be Green voters or on the political left and centre. Elon Musk, by supporting Donald Trump and now a major player in the Trump administration, is seen as having a very different perspective. Trump’s mantra of ‘drill, baby drill’ and his announced withdrawal from the Paris agreement and the interventions of Trump, Vance and Musk in European politics have alienated many potential purchasers of new Teslas. Elon Musk has been a vocal supporter of the right-wing Alternative for Germany (AfD) party, describing the party as the ‘last spark of hope for this country’ (see BBC article linked below).

There has been outspoken criticism of Musk in the media and the Financial Times reports existing owners of Teslas, who are keen to distance themselves from Musk, ordering stickers for their cars which read ‘I bought this before Elon went crazy’. In a survey by Electrifying.com, 59% of UK potential EV buyers stated that Musk’s reputation put them off buying a Tesla.

Other reasons for a leftward shift in the demand for Teslas

But is it just the ‘Musk factor’ that has caused a fall in demand? It is useful to look at the general determinants of demand and see how each might have affected the demand for Teslas.

The price, number, quality and availability of substitutes  Tesla faces competition, not only from long-established car companies, such as Ford, VW, Volvo/Polestar, Seat/Cupra and Toyota, moving into the EV market, but also from Chinese companies, such as BYD and NIO. These are competing in all segments of the EV market and competition is constantly increasing. Some of these companies are competing strongly with Tesla in terms of price; others in terms of quality, style and imaginative features. The sheer number of competitor models has grown rapidly. For some consumers, Teslas now seem dated compared with competitors.

The price and availability of complements.  The most relevant complement here is electrical charging points. As Teslas can be charged using both Tesla and non-Tesla charging points, there is no problem of compatibility. The main issue is the general one for all EVs and that is how to achieve range conveniently. The fewer the charging points and more widely disbursed they are, the more people will be put off buying an EV, especially if they are not able to have a charging point at home. Clearly, the greater the range of a model (i.e. the distance that can be travelled on a full battery), the less the problem. Teslas have a relatively high range compared with most (but not all) other makes and so this is unlikely to account for the recent fall in demand, especially relative to other makes.

Expectations.  The current best-selling Tesla EV is the Model Y. This model is being relaunched in a very different version, as are other Tesla models. Consumers may prefer to wait until the new models become available. In the meantime, demand would be expected to fall.

Conclusions

As we have seen, there have been a number of factors adversely affecting Tesla sales. Growing competition is a major factor. Nevertheless, the increasing gap politically between Elon Musk and many EV consumers is a major factor – a factor that is likely to grow in significance if Musk’s role in the Trump administration continues to be one of hostility towards the liberal establishment and in favour of the hard right.

Articles

Questions

  1. Why have BYD EV sales risen so rapidly?
  2. If people feel strongly about a product on political or ethical grounds, how is that likely to affect their price elasticity of demand for the product?
  3. Find out how Tesla shareholders are reacting to Elon Musk’s behaviour.
  4. Find out how Tesla sales have changed among (a) Democratic voters and (b) Republican voters in the USA. How would you explain these trends?
  5. Identify some products that you would or would not buy on ethical grounds. How carefully have you researched these products?
Posted on

The merger of Vodafone and Three: competition implications

In September 2023, UK mobile phone network operators Vodafone and Three (owned by CK Hutchinson) announced their intention to merge. At the time, in terms of total revenue from the supply of mobile phone services to consumers, Vodafone and Three had market shares of 23% and 12%, respectively.

In addition to Vodaphone and Three, there are two other major network operators – the BT Group (BT & EE) and Virgin-media 02, with market shares of around 31% and 23%, respectively, with other operators having a combined market share of 12%. As we shall see below, these other operators use one of the four major networks. Therefore, the merged entity of Vodafone-Three would become the market leader with a share of around 35% and there would only be three major network operators competing in the UK.

Not surprisingly, the UK competition agency, the Competition and Markets Authority (CMA), decided to conduct a detailed investigation into whether the merger would harm competition. However, in early December 2024 the CMA announced its decision to allow the merger to go ahead, subject to several important commitments by the merging parties.

CMA’s phase 1 findings

The CMAs phase 1 investigation raised several concerns with the merger (see fifth CMA link below).

First, it was worried that retail and business customers would have to pay higher prices for mobile services after the merger.

Second, in addition to the four mobile network operators, the UK market is served by a number of mobile ‘virtual’ network operators (MVNOs), for example Sky Mobile and Lyca Mobile. As we saw above, these suppliers account for around 12% of the consumer retail market. The MVNOs do not own their own networks and instead agree wholesale terms with one of the network operators to access their network and supply their own retail mobile services. The CMA was concerned that since the merger would reduce the number of networks competing to host these MVNOs from four to three, it would result in MVNOs paying higher wholesale access prices.

Vodafone and Three did not offer any remedies to the CMA to address these competition concerns. Consequently, the CMA referred the case to phase 2 for a more thorough investigation.

CMA’s phase 2 findings

The CMA’s analysis in phase 2 confirmed its earlier concerns (see linked report below). It was still worried that because the merged entity would become the largest network operator, retail customers would face higher prices or get a poorer service – for example, a reduced data allowance in their contract. In addition, the CMA remained concerned that the MVNOs would be negatively impacted and that this would lessen their ability to offer the best deals to retail customers.

However, during the phase 2 investigation, the merging parties put forward various efficiency justifications for the merger. They argued that the merger would provide them with much needed scale and investment capacity to improve their network and roll-out 5G technology. The CMA recognised these claims but questioned the merging parties’ incentives to go through with the investment once the merger was approved. Furthermore, it was concerned that if they did invest, this would be funded by raising the prices charged to consumers.

As a result, the CMA only agreed to allow the merger once Vodafone and Three accepted remedies that would address these concerns.

The remedies necessary for the merger to proceed

First, the merged entity must cap a range of tariffs and data plans it offers in the retail market for three years.

Second, again for three years, it must commit to maintain the wholesale contract terms it offers to MNVOs.

Finally, over the next eight years, the merged entity must deliver the network upgrade plans that it claimed the merger would allow. The CMA believes that in the long run this network development would significantly boost competition between the three remaining mobile network operators.

The acceptance of remedies of this nature was unusual for the CMA. Typically, like other competition agencies, the CMA has favoured divestment remedies in which the merging parties are required to sell-off some of the assets or capacity acquired. In contrast, the remedies in the Vodafone-Three deal impact on the merging parties’ behaviour.

One clear disadvantage of such remedies is that they require the merged firm’s actions to be monitored, in this case for eight years, to make sure it adheres to the agreed behaviour. One reason why the CMA may have been willing to accept this is that the communications industries regulator, OFCOM, will be able to assist with this monitoring.

It was also surprising that the CMA was willing to allow the number of network operators to decrease to three. Previously, there had been a perception that it was important to maintain four networks. This was certainly the view in 2016 when Three’s attempted merger with O2 was prohibited. This decision was made by the European Commission (EC). However, the CMA raised serious concerns to the EC and when the merging parties offered behavioural remedies argued that these were:

materially deficient as they will not lead to the creation of a fourth Mobile Network Operator (MNO) capable of competing effectively and in the long-term with the remaining three MNOs such that it would stem the loss of competition caused by the merger.

Why has the authorities’ attitude towards the merger changed?

So why has there been a change of stance in this latest attempted merger in the mobile phone sector?

One explanation is that the market has fundamentally changed over time. The margins for network operators have declined, network usage has grown and there has been a lack of investment in expensive 5G technology. This would certainly fit with the CMA’s desire to use the remedies to facilitate network investment.

A second possible explanation is that the CMA has recently faced criticism from UK Prime Minister, Keir Starmer (see third Guardian article below). In a speech at the International Investment Summit in London in October 2024, he said that

We will rip out the bureaucracy that blocks investment and we will make sure that every regulator in this country take growth as seriously as this room does.

In response to this, the CMA has indicated that in 2025 it will review its approach to mergers, ensuring that only truly problematic mergers don’t proceed, and reconsider when behavioural remedies may be appropriate (see final CMA link below).

The CMA’s decision in the Vodafone-Three case certainly demonstrates that it is now willing to accept behavioural remedies when there is a regulator in place to support the subsequent monitoring.

It will be interesting to see how this merger affects competition in the mobile phone market and, more generally, whether the CMA starts to implement behavioural remedies more widely, especially in markets where it would have to do all the subsequent monitoring.

Articles

CMA reports, etc

Questions

  1. Why is it beneficial to have MVNOs in the market for mobile phone services?
  2. Why is it important that MVNOs have a choice of mobile networks to supply their retail mobile services?
  3. How do you think the other mobile network operators will react to the Vodafone-Three merger?
  4. Compare the relative benefits of blocking a merger with requiring merging companies to adopt certain remedies.