Some firms in the high-Covid, tier 3 areas in England are being forced to shut by the government. These include pubs and bars not serving substantial meals. Similarly, pubs in the central belt of Scotland must close. But how should such businesses and their employees be supported?
As we saw in the blog, The new UK Job Support Scheme: how much will it slow the rise in unemployment?, the government will support such businesses by paying two-thirds of each employees’ salary (up to a maximum of £2100 a month) and will give cash grants to the businesses of up to £3000 per month.
This support has been criticised by local leaders, such as those in Greater Manchester, as being insufficient. Workers, they argue, will struggle to pay their bills and the support for firms will be too little to prevent many closing for good. What is more, many firms and their employees in the supply chain, such as breweries, will get no support. Greater Manchester resisted being put into tier 3 unless the level of support was increased. However, tier 3 status was imposed on the authority on 20 October despite lack of agreement with local politicians on the level of support.
Jim O’Neill, Vice Chair of the Northern Powerhouse partnership, has argued that the simplest way of supporting firms forced to close is to guarantee their revenue. He stated that:
The government would be sensible to guarantee the revenues of businesses it is forcing to shut. It is easier, fairer and probably less costly in the long run – and a proper test of the government’s confidence that in the New Year two of the seven vaccines the UK has signed up to will work.
This would certainly help firms to survive and allow them to pay their employees. But would guaranteeing revenues mean that such firms would see an increase in profits? The questions below explore this issue.
Articles
Questions
- Identify the fixed and variable costs for a pub (not owned by a brewery).
- If a pub closed down but the wages of workers continued to be paid in full, what cost savings would be made?
- If a pub closed down but was given a monthly grant by the government equal to its previous monthly total revenue but had to pay the wages of it workers in full, what would happen to its profits?
- On 19 October, the Welsh government introduced a two-week lockdown for Wales. Under these restrictions, all non-essential retail, leisure, hospitality and tourism businesses had to close. Find out what support was on offer for such firms and their workforce and compare it to other parts of the UK.
- What type of support for leisure and hospitality businesses forced by the government to close would, in your opinion, be optimal? Justify your answer.
- Is there any moral hazard from the government providing support for businesses made unprofitable by the Covid-19 crisis? Explain.
The term ‘Google it’ is now part of everyday language. If there is ever something you don’t know, the quickest, easiest, most cost-effective and often the best way to find the answer is to go to Google. While there are many other search engines that provide similar functions and similar results, Google was revolutionary as a search engine and as a business model.
This article by Tim Harford, writing for BBC News, looks at the development of Google as a business and as a search engine. One of the reasons why Google is so effective for individuals and businesses is the speed with which information can be obtained. It is therefore used extensively to search key terms and this is one of the ways Google was able to raise advertising revenue. The business model developed to raise finance has therefore been a contributing factor to the decline in newspaper advertising revenue.
Google began the revolution in terms of search of engines and, while others do exist, Google is a classic example of a dominant firm and that raises certain problems. The article looks at many aspects of Google.
Just google it: The student project that changed the world BBC News, Tim Harford (27/03/17)
Questions
- Is Google a natural monopoly? What are the characteristics of a natural monopoly and how does this differ from a monopoly?
- Are there barriers to entry in the market in which Google operates?
- What are the key determinants of demand for Google from businesses and individuals?
- Why do companies want to advertise via Google? How might the reasons differ from advertising in newspapers?
- Why has there been a decline in advertising in newspapers? How do you think this has affected newspapers’ revenue and profits?
German Engineering has dominated for decades and is seen as the pinnacle of quality and the key to manufacturing long-lasting products. But are long-lasting products a good strategy for a company? If products break quickly, customers need to replace them and this encourages more spending. But does this encourage customers to switch to other suppliers? Instead, do high quality products that don’t require replacement but demand a higher price offset this lack of repeat custom?
Markus Miele is the Chief Executive of Miele, the German domestic appliance manufacturer and he takes a personal interest in his products and customers. Typical appliances from Miele can cost up to twice as much as similar appliances from other companies and yet this company is going from strength to strength. Rather than selling products that need frequent replacements, Miele is proud of its strategy to retain customers by selling products at a very high price, knowing that they will last for years. Customers appear equally willing to pay this high price for big consumer durables and their long-lasting nature is clearly encouraging its customers to buy other products too. This strategy has been so successful that other big companies are now targeting these customers. Anthony Williams, from GfK said:
“Evidence suggests manufacturers are putting in money to ensure good build quality…There are so many standards that now have to be adhered to, particularly for hi-tech products, by the nature of the product they have to make sure the [manufacturing] environment is very carefully monitored.”
The following article from BBC News considers the market for domestic appliances and the role of durability.
Can you charge double and still keep your customers coming back? BBC News, Lucy Hooker (2/10/15)
Questions
- How important is the concept of price elasticity of demand in determining a company’s strategy?
- If other firms are targeting a similar strategy to that of Miele, what might this mean for prices?
- How does the brand ‘made in Germany’ affect the demand for a product? Is there imperfect information here?
- With increase competition, companies such as Miele may be pressured into moving into cheaper production markets. How would this affect the company?
- Will the recent scandal at VW have a negative impact on companies such as Miele who rely on the ‘brand Germany’?
In the year to June 2014, Qantas, the Australian airline, posted record losses of $2.8 billion. The airline was seen to be in some serious trouble and engaged in various cost-cutting measures. This, together with help from falling oil prices appears to have reversed this company’s fortunes. It posted profits of $557 million in the year to the end of June 2015.
The airline industry was hit by the financial crisis and subsequent worldwide recession. Holidays are a luxury item, such that when incomes are rising, there is a greater demand for travel abroad. Conversely, when incomes fall (as we see in a recession) demand will fall and this can hurt the revenues and profits of airlines such as Qantas. 
Qantas, in particular, had been struggling with a high degree of competition from other airlines, who are also competing on key long-haul routes, for example Emirates, Etihad and Singapore. Further competition came at home from Virgin Australia, who had significant backing from other large airlines and Qantas found itself unable to compete with such low prices and restrictions on foreign ownership.
However, with significant layoffs, cancelling some unprofitable routes and various other cost-cutting measures, Qantas will return $505 million of profits to its shareholders and will purchase 8 Boeing 787-9 Dreamliners. This will certainly boost confidence in the company and its Chief Executive, Alan Joyce’s comments may well add to this. He said:
“We are halfway through the biggest and fastest transformation in our history … Without that transformation, we would not be reporting this strong profit, recommencing shareholder returns, or announcing our ultra-efficient Dreamliner fleet for Qantas International.”
Although the investment in so many new planes is a large outlay, it is expected that they will improve the efficiency of its fleet, reducing its fuel bill significantly, especially over its longest routes. As these profit figures only represent a job that is half done, it will be interesting to see how Qantas fares with the recovery of the global economy.
Qantas to buy eight Boeing dreamliners after posting profit of $557m The Guardian (20/8/15)
Qantas returns to full-year profit and pledges new growth phase BBC News (20/8/15)
Qantas soars past overhaul to return to profit Wall Street Journal, Rebecca Thurlow (20/8/15)
Qantas injects another $55 million into Jetstar Japan Sydney Morning Herald, Jamie Freed (24/8/15)
Is Qantas set to keep on soaring? Sydney Morning Herald, John Collett (21/8/15)
Qantas to expand fleet after rapid profit turnaround Reuters (20/8/15)
Qantas turnaround gains altitude with swing to profit Financial Times, Jamie Smyth (20/8/15)
Questions
- Into which market structure would you place the airlines industry?
- Consider the different strategies that were adopted by Qantas and in each case, explain whether it would have had an impact on the firm’s costs or revenues.
- Why was Virgin Australia proving to be such fierce competition for Qantas?
- The Wall Street Journal Article refers to Qantas finding it difficult ‘to attract a White Knight’. What is meant by a White Knight?
- What has been the impact of falling global oil prices on the airline industry? Use a diagram to explain your answer.
Ever been to the cinema and found it almost empty? And then wondered why you paid the full price? Perhaps you’ve taken advantage of Orange Wednesday or only go if there’s a particularly good film on? Often it might be cheaper to wait until the film is out on DVD!
Going to the cinema can be an expensive outing. The ticket, the popcorm, a drink, ice cream – it all adds up! Orange Wednesday has recently disappeared and this will definitely have an impact on consumption of movies at your local Odeon, Vue or Showcase. The impact will be on how many seats are left empty.
However, a new app could be set to generate revenues for the cinema and provide cheaper entertainment for your everyday consumer. This new app will allow cinemas to send out alerts to people in the local area advising them that a screening will have many empty seats. What’s the incentive? Perhaps a discount, or some food. But, why would they do such a thing?
If a movie is being shown at a cinema, there will be a large fixed cost. However, what happens as each additional consumer enters the theatre? Does the cost to the cinema rise? Perhaps there is a small cost with more cleaning required, but the additional cost of actually showing the film if there 11 rather than 10 people is almost (if not equal to) zero. That is, the marginal cost of an extra user is zero. Therefore, if there is a screening with many empty seats, wouldn’t the cinema be better to offer the seats for half price. After all, if you can earn £5 from selling a ticket and the additional cost is almost zero, then it’s better to sell it for £5 than not sell it for £10! The following article and video from BBC News considers this new app and other strategies to maximise cinema usage!
Apps in pockets, bums on cinema seats BBC News, Dave Lee (27/2/15)
Questions
- What would the budget constraint look like for a cinema where a discount was offered if you purchased two cinema tickets and then received the third ticket for half price?
- Why is the marginal cost of an extra user at the cinema almost zero?
- If the MC = 0, does this mean that a cinema is a public good?
- How will this new app allow a cinema to increase total revenue and profit?
- If it is cheaper to buy a DVD rather than go to a cinema, why do people still go to the cinema?
