Families in the UK seemed to have been squeezed in all areas. With incomes flat, inflation rising, petrol and bills high, there seems to be a never ending cycle of price rises without the corresponding increase in incomes. This has been confirmed by the latest figures released from the big six energy companies, whose profit margins have risen from £15 per customer in June to £125 per customer per year. This is assuming that prices remain the same for the coming year.
The regulator, Ofgem has said that profit margins will fall by next year and that they are ensuring that price comparisons between the big energy companies become much easier to allow consumers to shop around. It is a competitive market and yet due to tariffs being so complicated to understand, many consumers are simply unable to determine which company is offering them the best deal. There is certainly not perfect knowledge in this market. Tim Yeo, the Chair of the Energy and Climate Change Committee said the profit margins were:
‘Evidence of absolutely crass behaviour by the energy companies, with a jump in prices announced in the last few months ahead of what will be a winter in which most families face their highest ever electricity and gas bills’
Ofgem will publish proposals later this year with suggestions of how to make the market more competitive. We have already seen in the blog “An energetic escape?” how Ofgem is hoping to reduce the power of the big six by forcing them to auction off some of the electricity they generate. The aim is to free up the market and allow more firms to enter. With the winter fast approaching and based on the past 2 years of snow and cold weather, it is no wonder that households are concerned with finding the best deals in a bid to reduce just one of their bills. The following articles consider this issue.
Energy price hikes see profits soar The Press Association (14/10/11)
Energy suppliers’ profit margins eight times higher, says regulator Ofgem Telegraph (14/10/11)
Energy firms’ profit margins soar, Ofgem says BBC News (14/10/11)
Energy firms’ profits per customer rise 733%, says Ofgem Guardian, Dan Milmo and Lisa Bachelor (14/10/11)
Regulator proposes radical change to energy market Associated Press (14/10/11)
Energy bills face overhaul in first wave of reform Reuters, Paul Hoskins (14/10/11)
Ofgem tells energy companies to simplify tariffs Financial Times, Michael Kavanagh (14/10/11)
You can’t shop around in an oligopoly Financial Times, William Murray (13/10/11)
Questions
- What type of market structure best describes the energy market?
- Of the actions being taken by Ofgem, which do you think will have the largest effect on competition in the market?
- Are there any other reforms you think would be beneficial for competition?
- Why is transparency so important in a market?
- What barriers to entry are there for potential competitors in the energy market?
- Why do you think profit margins are so high in this sector?
Whilst perhaps not an essential in the sense of needing it to live, petrol is about as close as you can get to a ‘non-essential necessity’ these days. Most families have a car (many have more than one) and despite the hikes in petrol prices we’ve seen across the UK, demand for petrol has remained high: it is a prime example of a good with a highly inelastic demand.
Over the past few years many families have chosen to forego their holidays abroad and instead have taken to summer vacations across the UK in a bid to save money. However, with the summer season approaching and families beginning to think about where to go or plan their trips, one thing that should be considered is the cost of travel. Petrol prices across Europe have risen faster than those in the UK over the past year and this may pose a significant cost and possibly deterrent to European travel. As Sarah Munro of the Post Office said:
‘The high fuel price increases in Europe mean that UK holidaymakers should plan their routes carefully in advance to cut costs’.
Petrol prices were found to be the lowest in Luxembourg at 128p per litre and the highest in Norway at 182p – a definite deterrent to filling up your tank in Scandinavia. Despite motorists’ constant exclamations of the price of petrol in the UK, of the 14 countries surveyed the UK came in as the 4th cheapest at 136p. It also had the smallest increase since 2010 of 14p, compared to the average of the countries surveyed of 27.8p.
Although the higher fuel prices have been fuelled (no pun intended) by rising wholesale oil prices, when crude prices started to fall, petrol prices didn’t decline to match. This has sparked an inquiry into petrol prices, with demands for more transparency into the price setting behaviour of firms. The British Petrol Retailers’ Association is planning on referring its concerns to the Office of Fair Trading. So the moral of the story: petrol prices are high in the UK, but if you’re going on holiday this summer, you’ll probably find that many other countries across Europe have even higher prices, so planning is essential.
Holiday hike: European petrol prices soar by up to 35 per cent Daily Mail Online, Sarah Gordon (10/6/11)
UK holidaymakers ‘face high petrol prices’ BBC News (10/6/11)
Petrol prices are 35% higher in Europe than last summer Mirror, Ruki Sayid (10/6/11)
Motoring coalition calls on EU to investigate soaring price of petrol Telegraph, Rowena Mason (10/6/11)
Motoring groups demand petrol price investigation BBC News (30/5/11)
Questions
- How are European petrol prices set?
- Why does the exchange rate against the dollar have a big impact on oil prices?
- Why have petrol prices in the UK not increased by as much as other European countries over the past year?
- Why is there likely to be an investigation into how prices are set? Which factors do you think will be considered?
- The Telegraph article talks about the sport market. What is this and how does it affect how petrol prices are set?
- Why does petrol have such inelastic demand?
- If a higher tax is imposed on petrol, why is it that much of the cost will be passed on to consumers in the form of a higher price? Illustrate this on a diagram.
There has been an ongoing battle between Microsoft and Google for many years in the technology industry. Microsoft have received many fines in countless anti-trust cases, but Microsoft has now taken the upper hand in the most recent development, after filing its first official complaint with the regulators against Google. Microsoft is claiming that Google’s actions are restricting competition in the market and thereby abusing its dominant position. This complaint follows numerous complaints by small businesses. Microsoft’s Brad Smith said that they had been forced to act because of a:
“broadening pattern of conduct aimed at stopping anyone else from creating a competitive alternative”.
Google controls approximately 95% of the European search engine market and complaints have focused on actions that Google have taken to restrict competition, further its dominance in the market and thereby harm consumers. The European Commission is already investigating Google and will continue to discuss the case with all parties involved.
Microsoft takes on Google with antitrust complaint Guardian, Mark Sweney (31/3/11)
Minnow Microsoft v the Google giant BBC News Blog, Rory Cellan-Jones (31/3/11)
Adding our voice to concerns about search in Europe Microsoft Blog, Brad Smith (30/3/11)
Microsoft accuses Google of antitrust violations CNN Money, David Goldman (31/3/11)
Questions
- What constitutes a dominant position? In what forms can a firm abuse its dominant position?
- What is the purpose of anti-trust laws and competition policy?
- To what extent are Google’s actions against consumer’s interests?
- What anti-competitive practices have Google been accused of? Explain how each is against consumer’s interests and against the interests of its competitors.
- What are (a) the arguments for keeping interest rates at 0.5% and (b) the arguments for raising interest rates? Who wins and loses in each case?
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
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?