Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.
You would think that larger catches would be good news for fishermen. But prices now are so low that they barely cover variable costs. Individual fishermen fish harder and longer to bring in even bigger catches to make up for the lower price. This, of course, compounds the problem and pushes the price even lower.
So what are the answers for the fishermen of Maine? One solution is to diversify their catch, but with lobster so plentiful and other fish stocks depleted, this is not easy.
Another solution is to cooperate. The Reuters article below quotes John Jordan, a lobsterman and president of Calendar Islands Maine Lobster Co.:
‘If you had an industry that actually cooperated, you wouldn’t be bringing in more product if you couldn’t sell what you already had, right?’
Restricting the catch would require lobster distributors to cooperate and set quotas for what the fishermen would be permitted to sell. But with over 5000 fishermen, this is not easy.
Another solution is to expand the market. One way is for the distributors or other agencies to market lobster and lobster products more aggressively. For example, 
this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.
Jordan’s company and others are frantically seeking new ways to sneak lobster into unexpected corners of the food market, from gazpacho to puff pastries and quiche.
In the meantime, for consumers the question is whether the low prices paid to the fishermen of Maine will feed through into low prices in the fishmonger, supermarket and restaurant. So far that does not seem to be happening, as the final two articles below explain.
Webcasts
US lobster fishermen’s ‘problem of plenty’ BBC News, Jonny Dymond (5/10/13)
Maine lobstermen in a pinch over low prices, record catch: Part 1, Part 2, Part 3 Aljazeera America, Adam May (11/10/13)
Articles
Something fishy is going on in the nation’s lobster capital CNBC, Heesun Wee (1/9/13)
Booming lobster population pinches profits for Maine’s fishery Reuters, Dave Sherwood (25/8/13)
Lobster’s worth shelling out for The Observer,
Rachel Cooke (21/9/13)
Clawback The New Yorker, James Surowiecki (26/8/13)
Why The Glut Of Cheap Lobster Won’t Lower Price Of Lobster Rolls Gothamist, John Del Signore (20/7/12)
Questions
- Why have lobster prices paid to fishermen fallen? Illustrate your argument with a demand and supply diagram
- What has determined the size of the fall in prices? What is the relevance of price elasticity of demand and price elasticity of supply to your answer?
- How is the fallacy of composition relevant to the effects on profits of an increase in the catch by (a) just one fisherman and (b) all fishermen? What incentive does this create for individual fishermen in a competitive market?
- What can lobster fishermen do to restore profit margins through collaborative action?
- In what ways is there a conflict between economics and ecology in the lobster fishing industry?
- How does stored lobster affect (a) the price elasticity of supply and (b) the price volatility of lobster?
- How could cooperation between lobster fishermen and lobster processors and distributors benefit all those involved in the cooperation?
- Why may restaurants choose to maintain high prices for lobster dishes for ‘psychological reasons’? Are there any other reasons?
After weak Christmas trading, Tesco issued a profit warning – its first in 20 years. Following this, their shares fell in value by some £5bn, but this was met with an announcement of the creation of 20,000 jobs in the coming years, as part of a project to train staff, improve existing stores and open new ones. Yet, Tesco has reported another quarter of falling sales.
Trading times have been challenging and the fact that the UK’s biggest supermarket is struggling is only further evidence to support this. In the 13 weeks to the 26th May 2012, Tesco reported a decline in like-for-like sales of 1.5%. Although much of the £1bn investment in Tesco is yet to be spent, the fact that sales have fallen for a full year must be of concern, not only to its Chief Executive, but also to analysts considering the economic future for the UK.
Consumer confidence remains low and together with tight budgets, shoppers are continuing to be very cautious of any unnecessary spending. Part of Tesco’s recent drive to drum up sales has been better customer service and a continuing promotion war with the other supermarkets. This particular sector is highly competitive and money-off coupons and other such promotions plays a huge part in the competitive process. Whilst low prices are obviously crucial, this is one sector where non-price competition can be just as important.
Although Tesco sales in the UK have been nothing to shout about – the Chief Executive said their sales performance was ‘steady’ – its total global sales did increase by 2.2%. The Chief Executive, Mr Clarke said:
‘Internationally, like-for-like sales growth proved resilient, despite slowing economic growth in China…Against the backdrop of continued uncertainty in the eurozone, it is pleasing to see that our businesses have largely sustained their performance.’
A boost for UK sales did come with the Jubilee weekend and with the Olympics just round the corner, Tesco will be hoping for a stronger end to the year than their beginning. The following articles consider Tesco’s sales and the relative performance of the rest of the sector.
Tesco’s quarterly sales hit by ‘challenging’ trading BBC News (11/6/12)
Tesco UK arm notches up one year of falling sales Guardian, Zoe Wood (11/6/12)
Tesco upbeat despite new sales dip Independent, Peter Cripps (11/6/12)
Tesco sales seen lower in first quarter Reuters, James Davey(11/6/12)
The Week Ahead: Tesco set to admit it is losing ground to rivals Independent, Toby Green (11/6/12)
Tesco’s performance in the UK forecast to slip again Telegraph, Harry Wallop (10/6/12)
Tesco: What the analysts say Retail Week, Alex Lawson (11/6/12)
Supermarkets issue trading updates The Press Association (9/6/12)
The Week Ahead: Supermarkets prepare to give City food for thought Scotsman, Martin Flanagan (11/6/12)
Asda’s sales growth accelerates Reuters, James Davey (17/5/12)
Asda sales increase helped by Tesco Telegraph, Harry Wallop (18/5/12)
Tesco v. Sainsbury’s in trading update battle Manchester Evening News (11/6/12)
Sainsbury’s out-trades Tesco on UK food sales Independent, James Thompson (10/6/12)
Questions
- Using some examples, explain what is meant by non-price competition.
- Why has Tesco been losing ground to its competitors?
- Given the products that Tesco sells (largely necessities), why have sales been falling, despite household’s tight budgets?
- Into which market structure would you place the supermarket sector? Explain your answer by considering each of the assumptions behind the market structure you choose.
- Why have Tesco’s rivals been gaining ground on Tesco?
- How might this latest sales data affect Tesco’s share prices?
- Based on what the analysts are saying about the food sector, can we deduce anything about the future of the UK economy in the coming months?
The trendy US fashion retailer Abercrombie & Fitch entered the UK in 2007 with the opening of a flagship store close to Savile Row in London. Located in the upmarket Mayfair area of London, Savile Row is famous for its traditional men’s tailors.
Recently Abercrombie & Fitch decided to go one step further by opening a childrenswear store directly on Savile Row. This move upset the local retailers and was met with protests.
This was just the latest in a history of controversy surrounding Abercrombie & Fitch which has included a product boycott and a lawsuit concerning employment issues. Should all this bad publicity be a concern for the company?
We expect tastes to be one of the key determinants of demand. If taste for a company’s product declines, its demand curve shifts to the left. This means it can sell less at any given price and consequently will have a knock-on effect on profits. Somewhat surprisingly, therefore, the PR expert, Mark Borkowski, quoted in the Guardian article above, suggests that all this adverse publicity may have in fact helped the company because:
“…the focus is on the brand. They’ve got a very keen identity of who they are, what they want, who they want to consume their products, and they’ve stuck to it.”
It is also clear that the company is very aware of the importance of protecting its brand – even going as far as paying television actors NOT to wear their clothes! Abercrombie & Fitch has also been reluctant to cut its prices during the current recession, perhaps because of a fear of harming its brand.
Abercrombie & Fitch with its ‘crappy clothes’ threatens staid Savile Row Observer, Euan Ferguson (11/03/12)
Savile Row cannot live in the past Guardian, Charlie Porter (24/04/12)
Sorry chaps, Abercrombie & Fitch simply doesn’t fit Savile Row Guardian, Gustav Temple (24/04/12)
Savile unrest … the tailors who want to stop Abercrombie & Fitch London Evening Standard, Josh Sims (27/04/12)
Questions
- What are the distinctive features of the Abercrombie & Fitch brand?
- What are the key features of competition in this industry?
- Why might Abercrombie & Fitch be keen to open up a store on Savile Row?
- Why might the local tailors object to Abercrombie & Fitch opening a store nearby?
- Why do you think negative publicity appears to have little effect on Abercrombie & Fitch?
- Why do you think television coverage could harm the Abercrombie & Fitch brand?
You’ve probably heard of Groupon. If you join its emailing list, the company will send you daily details of deals in your area that it has negotiated with local retailers. If you want to take advantage of any particular deal, you sign up for it online and if enough people do so to reach a minimum number agreed with the retailer, Groupon will bill your credit card. You then download the voucher and use it to purchase you discounted item or service. Discounts are often substantial – 50% or more.
But are these deals as good as they seem? On 2 December, the UK’s Advertising Standards Authority took the decision to refer Groupon UK to the Office of Fair Trading, following 48 breaches of the advertising code of practice in eleven months. It referred complaints about Groupon’s:
• Failure to conduct promotions fairly, such as not making clear significant terms and conditions
• Failure to provide evidence that offers are available
• Exaggeration of savings claims
And it was not just consumers who had complained. Many retailers found that so many people signed up for certain deals and the discounts were so great, with Groupon often charging the retailer half the discounted price, that retailers made substantial losses on the deals. One example was a cupcake maker, Rachel Brown, who runs the Need a Cake bakery in Reading, Berkshire. She had to bake so many extra cupcakes below cost that profits for the year were wiped out.
So what is the nature of this market failure and how appropriate are the competition authorities for dealing with it? The following webcasts and articles look at the issues. They also consider the growing problems Groupon faces in the market from new competitors.
It has not been good news recently for Groupon and it’s hardly surprising that, following Groupon’s flotation on the Nasdaq stock exchange in the USA last month, and an initial surge in the share price, its shares have since fallen by over 40%.
Webcasts
Groupon investigated by OFT Channel 4 News on YouTube, Benjamin Cohen (2/12/11)
Time to Jump Off Groupon Bandwagon? Newsy (24/11/11)
Articles
Groupon to be investigated by Office of Fair Trading Guardian, Mark Sweney (2/12/11)
OFT launches investigation into Groupon advertisements BBC News (2/12/11)
UK regulator launches Groupon probe Financial Times, Michael Stothard (2/12/11)
Groupon investigated by UK advertising authorities ZDNet, Eileen Brown (5/12/11)
Deal with it: Groupon ponders its future Independent, Stephen Foley (6/12/11)
Groupon’s Business Model Doomed To Fail Seeking Alpha, Mazen Abdallah (5/12/11)
Small Businesses Hate Groupon LiveOutLoud, Loral Langemeier
Competition authorities sites
ASA refers complaints about Groupon to OFT Advertising Standards Authority (2/12/11)
Investigation into the trading practices of MyCityDeal Limited (trading as Groupon UK) Office for Fair Trading (2/12/11)
Questions
- What market failings are there in the discount voucher market?
- What to retailers gain from dealing with companies such as Groupon?
- Do small businesses have anyone other than themselves to blame if they make a loss from doing a deal with Groupon?
- What should be the role of the competition authorities in the discount voucher market?
- Is Groupon’s business model ‘doomed to failure’ and if so why?
- Does Groupon have a ‘first-mover advantage’?
- Are there any barriers to entry of new firms into the discount voucher market? If so, what are they? What are the implications of your answer for the future of Groupon?
The UK Supermarket industry is intensely competitive. It’s hard to slot it directly into a specific market structure, but it has many characteristics of an oligopoly – a market dominated by a few firms with intense competition, both price and non-price.
This competititve aspect of the market structure has become even more important as trading conditions become harsher. The latest development sees Sainsbury’s announcing its price promotion – it will match certain prices offered by Tesco and Asda in a bid to attract customers from its rivals.
The supermarket industry has a history of intense price wars and we can only expect them to increase. This is certainly in the interests of customers, as we face ever decreasing prices. It’s a market in which it certainly pays to shop around and compare prices. The following articles consider the latest developments in one of the most competitive markets out there.
Sainsbury’s joins price cut battle The Press Association (9/10/11)
Sainsbury’s follows rivals in price promotion BBC News (9/10/11)
Every basket helps, as supermarkets battle for shoppers Independent, Laura Chesters (9/10/11)
Sainsbury to extend price match trial Financial Times, Andrea Felsted (7/10/11)
Tesco profits grow but UK sales subdued BBC News (5/10/11)
Sainsbury’s to launch price match scheme The Telegraph, Harry Wallop (7/10/11)
Retail bully boys must not protect themselves unfairly Financial Times, Sarah Gordon (7/10/11)
Questions
- What are the characteristics of an oligopoly? To what extent do you think that the supermarket industry fits into an oligopolistic market structure?
- Are the price wars being carried out by Tesco, Sainsbury’s and Asda in the interests of consumers?
- What aspects of non-price competition have been undertaken by the big supermarket contenders? On what factors does the relative success of these pricing strategies depend?
- What might explain the growing presence of fast food companies in the top 100?
- How could the supermarkets use the concept of elasticity in determining the most effective pricing strategy?
- How has the economic climate affected the supermarket industry? Would you expect the impact to be smaller or larger than that in other sectors of the economy? Explain your answer.
Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.
this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.