Tag: premium

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‘Better Together’ Indeed

The Scottish debate revolved around a variety of issues and one of the key factors that added weight to the ‘No’ campaign was the idea of being British. But the concept of ‘Britishness’ is not just important to those who live here. It still appears to be a key signal of quality in foreign markets and it is something which foreign consumers are willing to pay a price for.

Barclays Corporate Banking has undertaken research into eight key export markets to determine the value of ‘Britain’. One of the key factors that boost demand for a product is quality and another is the idea of a brand. As quality improves and brands become more recognized, a product’s demand curve will begin to shift to the right, thus pushing up the market price. In other words, with higher quality and brand recognition, an individual’s willingness to pay rises. One brand that foreign consumers seem willing to pay a premium to purchase are those labelled ‘Made in Britain’.

The research indicates that 31% of customers in emerging markets have been prepared to and have purchased products that are from Britain, despite the higher price. Seeing the label ‘Made in Britain’ seems to send the signal of quality and this in turn creates a higher willingness to pay. Furthermore, this willingness to pay, while still good for Scottish, English and Welsh products, is higher for ‘British’ products, perhaps another indication of the truth behind the ‘Better together’ campaign.

The increase in willingness to pay between products with seemingly no country of origin and a British country of origin is 7% and this knowledge should give a confidence boost to the British export market. It should also indicate to exporters in Wales, Scotland and England that they are better to advertise as ‘Made in Britain’ than ‘Made in Wales, Scotland or England’. The expected boost from the 8 key emerging markets is around £2bn. The following articles consider the concept of ‘Brand Britain’.

Good news for exports as Brand Britain is revealed to be valuable concept Small Business, John Bromley (3/11/14)
Britain ‘best brand’ for Welsh exports, survey suggests BBC News (26/11/11)
Overseas consumers 64% more willing to pay premium for ‘Brand Britain’ Marketing Week, Sebastian Joseph (3/11/14)
Report flags up ‘British’ benefit The Courier, James Williamson (3/10/14)

Questions

  1. Using a diagram, illustrate the effect of a product’s being a well-known brand on its equilibrium price and quantity.
  2. Why is it that the relative willingness to pay a premium for British products is higher in developing countries than in developed countries?
  3. Using the concept of marginal utility theory, explain the impact of the ‘Made in Britain’ label.
  4. The BBC News article suggests, however, that some Welsh companies have not found the brand effect to be the case. What factors might explain this?
  5. To what extent are the concepts of consumer and producer surplus relevant here?
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Should cyclists have insurance?

Most people are risk-averse: we like certainty and are generally prepared to pay a premium for it. The reason is that certainty gives us positive marginal utility and so as long as the price of insurance (which gives us certainty) is less than the price we place on certainty, we will be willing to pay a positive premium. By having insurance, we know that should the unexpected happen, someone else will cover the risk. As long as there are some risk-averse people, there will always be a demand for insurance.

However, will private companies will be willing to supply it? For private market insurance to be efficient, 5 conditions must hold:

1. Probabilities must be independent
2. Probabilities must be less than one
3. Probabilities must be known or estimable
4. There must be no adverse selection
5. There must be no moral hazard

If these conditions hold or if there are simple solutions, then insurance companies will be willing and able to provide insurance at a price consumers are willing to pay.

There are many markets where we take out insurance – some of them where insurance is compulsory, including home and car insurance. However, one type of insurance that is not compulsory is that for cyclists. No insurance is needed to cycle on the road, but with cycle use increasing and with that the number of accidents involving cyclists also increasing, the calls for cyclists to have some type of insurance is growing. If they are hit by someone without insurance and perhaps suffer from a loss of income; or if they cause vehicle damage, they will receive no compensation. However, whilst the risk of accident is increasing for cyclists, they are still statistically less likely to cause an accident than motorists. Perhaps a mere £30 or £40 per year for a policy is a price worth paying to give cyclists certainty. At least, this is what the Association of British Insurers (ABI) is claiming – hardly surprising when their members made a combined loss of £1.2 billion!

Articles

Cyclists ‘urged to get insurance’ BBC News, Maleen Saeed (26/11/11)
Cyclists urged to get more insurance by … insurance companies Road.CC, Tony Farrelly (26/11/11)
The future of cycle insurance Environmental Transport Assocaition (24/11/11)

Questions

  1. With each of the above conditions required for private insurance to be possible, explain why each must hold.
  2. What do we mean by no moral hazard and no adverse selection? Why would their existence prevent a private company from providing insurance?
  3. Using the concept of marginal utility theory, explain why there is a positive demand insurance.
  4. What might explain why cyclists are less likely to take out insurance given your answer to the above question?
  5. Do you think cyclist insurance should be compulsory? If governments are trying to encourage more sustainable transport policy, do you think this is a viable policy?