Tag: oligopoly

Nokia is finding out just how competitive the phone industry is, as it sees its third quarter figures come in at a loss. Google and Apple have seen their market shares rise and this has had an adverse effect on the Finnish company, Nokia. This goes some way to backing up the job losses seen earlier in the year, when 7000 jobs were cut and there was a re-allocation of workers towards ‘smartphones’.

Despite Nokia’s disappointing results in this sector, it has seen growth in its sales of other more simple phones, illustrating its ability to focus on this aspect of the market. Its sales were higher than forecast at 107 million handsets in the third quarter, showing some signs of a changing trend for the firm. However, with competition ever increasing, Nokia will need to consider its future strategy very carefully.

Nokia reports lower-than-estimated loss as profit forecast for phone unit Bloomberg, Diana Ben-Aaron (20/10/11)
Nokia swings to loss in third quarter BBC News (20/10/11)
Nokia boosted by sales of cheap handsets Financial Times, Daniel Thomas (20/10/11)
Nokia beats forecasts with sales of 107m phones Guardian, Juliette Garside and Charles Arthur (20/10/11)
Nokia prepares for ‘solid’ windows phone launch Telegraph, Matt Warman (25/10/11)

Questions

  1. How would you describe Nokia’s strategy of focusing on cheaper and simpler phones?
  2. Would you say Nokia’s strategy is sensible? What factors will determine its success?
  3. How have Apple and Google managed to expand their market share and become serious competitors to firms like Nokia?
  4. Into which market structure would you classify the phone industry?

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

  1. What type of market structure best describes the energy market?
  2. Of the actions being taken by Ofgem, which do you think will have the largest effect on competition in the market?
  3. Are there any other reforms you think would be beneficial for competition?
  4. Why is transparency so important in a market?
  5. What barriers to entry are there for potential competitors in the energy market?
  6. Why do you think profit margins are so high in this sector?

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

  1. What are the characteristics of an oligopoly? To what extent do you think that the supermarket industry fits into an oligopolistic market structure?
  2. Are the price wars being carried out by Tesco, Sainsbury’s and Asda in the interests of consumers?
  3. 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?
  4. What might explain the growing presence of fast food companies in the top 100?
  5. How could the supermarkets use the concept of elasticity in determining the most effective pricing strategy?
  6. 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.

Following a 38% increase in profit margins made by energy companies towards the end of 2010, Ofgem (the energy and gas regulator) began an investigation into the activities of energy companies. The review by Ofgem was aimed at determining whether or not consumers should be better protected from the powerful energy companies, many of whom had previously raised prices, forcing some consumers to pay an extra £138 per year. At the time, it was believed that Ofgem might request support from the Competition Commission, but it seems as though the big size energy companies have had a lucky escape. They will not be referred to the Competition Commission, even though critics, in particular First Utility – Britain’s largest independent energy supplier – suggest that Ofgem’s proposals are unlikely to be effective. It seems that the big six have shown sufficient co-operation with Ofgem.

A key reform that Ofgem hope to implement will try to reduce the power of this oligopoly by making it easier for new entrants to gain market share. One such proposal would see the big six auctioning off up to a fifth of the electricity they generate. As the owners of Britain’s power stations, new companies cannot buy gas and electricity on the open market and this reform aims to change that. However, there are concerns that this will be ineffective, as the big six may simply outbid the smaller companies or even just buy and sell electricity from each other, thereby keeping their dominant positions in the market. Although the big six have received constant criticism from all sides, the lack of government support for a Competition Commission inquiry may be related to the need for these companies to invest £200bn in Britain by 2020 to help create and build new energy sources, including wind farms and nuclear power. Without this investment, Britain’s energy supply could be in jeopardy. The following articles consider this energetic debate.

Articles

Ofgem may be blown away by the power of the ‘Big Six’ energy companies Telegraph, Rowena Mason (23/6/11)
Ofgem pledges to get tough with ‘big six’ energy companies Guardian, Miles Brignall (22/6/11)
Scottish power investigated over ‘misleading’ marketing campaign Independent, Sarah Arnott (23/6/11)
Ofgem and ‘Big Six’ need to put some energy into cleaning up their acts Telegraph, Richard Fletcher (23/6/11)
In search of a coherent energy policy Independent, David Prosser (23/6/11)
UK suppliers face tough power auction reforms Reuters (22/6/11)
Ofgem: ‘We are watching energy companies closely’ BBC News (22/6/11)

Data

Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change

Questions

  1. What is the role of Ofgem? How does it relate to the Competition Commission?
  2. What factors have contributed to the investigation by Ofgem into the ‘big six’ energy companies?
  3. How much power does Ofgem actually have to implement reforms?
  4. What are the characteristics of an oligopoly? To what extent does the energy market fit into this market structure?
  5. What are the main barriers to entry that prevent new companies from competing with the ‘big six’? Are the reforms likely to help them?
  6. What other proposals have been suggested by parties other than Ofgem in bid to help new competitors and customers? Are any likely to be more effective than those proposed by Ofgem?

Nokia and Microsoft have announced that they are to form a strategic alliance. This will see Nokia using Windows Phone as the software platform for its smartphones. This follows problems with Nokia’s own Symbian software and the success of Apple’s iPhone and Google’s Android software.

Recognising the depth of Nokia’s problems, its new boss, Stephen Elop, sent a memo to staff with apocalyptic warnings. He likened Nokia’s position to one of standing on a burning oil platform about to be engulfed with flames.

So is the alliance with Microsoft the way out of Nokia’s problems? Will it bring problems of its own? The following articles look at the issues.

Nokia to Use Microsoft Software in Smartphones New York Times, Kevin J. O’Brien (11/2/11)
Nokia, Microsoft to Join Forces to Challenge Apple Dominance Bloomberg, Diana ben-Aaron (11/2/11)
Nokia: ELOP’s challenge Bloomberg, Martin Garner (11/2/11)
Nokia falls into the arms of Microsoft The Economist: Newsbook blog (11/2/11)
Nokia and Microsoft sign strategic tie-up Guardian, Graeme Wearden (11/2/11)
Nokia and Microsoft form partnership BBC News (11/2/11)
Is the Nokia/Microsoft horse a stallion or a tired nag? BBC News blogs: Peston’s Picks, Robert Peston (11/2/11)
Microsoft and Nokia announce my dream partnership so why aren’t you all happy? ZDNet (CBS), Matthew Miller (11/2/11)

Questions

  1. What is meant by a strategic alliance? What forms can a strategic alliance take?
  2. For what reasons are Microsoft and Nokia forming a strategic alliance?
  3. How does Nokia hope to benefit from the alliance?
  4. How does Microsoft hope to benefit from the alliance?
  5. Why is Nokia’s share of world profits in the mobile handset market much less than its share of total handset sales (see The Economist article above)? Conversely, why has Apple such a large share of world profits in the handset market (just over 50%) and yet only a tiny market share?