So much for competition

The way markets are structured is critical to delivering an efficient allocation of resources. During the 1980's the movement to increase competition in markets in order to drive prices down and consumer service up was the basis of the privatisation and deregulation programme.

The idea is essentially that monopolies can exploit their customers and the more firms in the market the better it is for keeping costs and prices down.

In some markets economies of scale means you can't efficiently have hundreds of firms. One such market is energy supply, but you could certainly have up to 15 or 20. But when you have oligopoly market structures there is a tendency to collude and so some regulation to ensure fairness and maintain competition is needed.

So the energy market, dominated by six big suppliers, is one that might fall into a situation where they each decide not to compete too hard for business and all keep prices quite high.

Many people have been disappointed by recent high energy prices, some believe that the firms are keeping prices high when they need not. Others think that pricing is unfair with some people getting good deals while others (without Internet or able to pay by direct debit) pay too much.

So the government are introducing a new regime where there will be fewer price plans and customers will have to be put on the lowest available tariff.

This seems to be abandoning the idea of competition as a way of making sure resources are allocated efficiently.

The fear is that this will eliminate competition. The big firms will set similar but higher prices and while some people will be better off the good deals will disappear. The danger is that the government has just done the firms collusion for them and will prevent prices being forced down in the market.

The BBC survey the change here and make some excellent points

Competition and barriers to entry

Apple have established an awesome reputation for quality and innovation. While they have only about 18% of the personal computer market they dominate the MP3 and phone market and the iPad sets the standard in tablets.

It is very difficult to challenge Apple in these markets and as a result of this barrier to entry (brand loyalty) Apple can charge very high prices.

Amazon have a similar position in book and ebook retailing online.

The problem is that monopoly power (which any firm with a large market share gains) works against the consumer. Competition should bring down prices and raise quality and customer satisfaction, but entering the market is often difficult and does not always work as expected.

Amazon is now taking on Apple's iPad with the Kindle Fire. A combined Kindle and tablet, and it is less than half the price of an iPad.

Is is good for consumers? Only a company like Amazon could really mount a serious challenge in such a market. They are providing an alternative at a lower price. But Amazon are also trying to lock you in to their product - Kindle ebooks. Remember Apple have iBooks, and the two systems don't talk to each other.

So we could look at this as welcome competition, or we could see is as two Oligopolists fighting for bigger market shares at the expense of any other competitors. Both Amazon and Apple would settle for being the Coke and Pepsi of consumer electronics.

My Kindle Fire is ordered and expected delivery is October 25th!

The Telegraph article is here

Increasing competition or normal oligopolist behaviour?

In October it was reported that the big six energy companies had increased profits from £15 to £125 per customer per year. This drew the attention of the regulator Ofgem.

When the nationalised industries were privatised the idea was to move from state monopoly to a competitive market where the consumer got a better deal. What we got in a lot of cases was either private monopolies or strong oligopolies with high barriers to entry.

Ofgem are trying to improve the situation by forcing the 'big six' energy companies to auction off some of the electricity they generate to allow new entrants into the market.

However this week a number of the big six announced price cuts. Does this mean the fear of new entrants is forcing them to act (a contestable market)? Ofgem would be delighted if this were true. But this behaviour is consistent with oligopolist's profit maximising behaviour.

The warmish winter means spot market prices for energy are lower this year than the last two years. With lower than expected costs one firm moves price down to gain market share. The others lower prices to match them to protect their market share. The kinked demand curve model and game theory would both predict this move.

The Telegraph report the story here

Barriers to entry and excess profits

A key difference between different market structures in the existence or not of barriers to entry. If a market has high barriers to entry then we expect to see only a few firms, each able to protect its market share and so charge higher prices. These higher prices mean lower sales but higher (excess) profits for the firms.

Where few, or no, barriers to entry exist new firms can enter a market and compete for a share of the profits earned by others. This leads to an increase in supply and a falling price. Consumers gain but excess profits are competed away.

The telecom companies used to be able to earn a lot of money from text messages (SMS), but this market is changing. There are no barriers to entry for free apps that allow free text or even calls. So the days when O2 or Orange can charge high fees for texts is going and so are their profits.

This, slightly odd, piece from The Age in Australia explains how this market is changing. Not news at all to you I'm sure, but an excellent example of how things you took for granted have an economic explanation.

The Age article is here

When is a single market not a single market?

Barriers to entry in a market allow firms some monopoly power and that gives them the chance to raise prices. produce at lower quality and earn excess profits. This is not good for the consumer and most countries attempt to prevent it through Competition Law. As the European Union is a 'single market' that means Competition Law is a European and not a national matter unless a firm operates only in one country.

The '1993' rules of the EU make it clear there can be no barriers to firms, workers or capital between member nations. All firms are free to operate in any other member state and all citizens of the EU can work where they like within the EU.

To illustrate this before 1993 a computer manufacturer had to produce 11 different models of the same computer to meet local regulations and a British lawyer could not appear in a court in Germany or Italy. The 1993 regulations said that such barriers were illegal.

However in many countries not all of these regulations were adopted. The Spanish banks continue to charge non-Spanish customers a higher interest rate, insurance companies are denied access to the Irish market and domestic broadcasters deny the right of foreign broadcasters to sell their services in the UK.

Yesterday the European Court ruled that the Premier League had no right to deny broadcasters other than Sky and ESPN to sell access to their broadcasts of football matches. To do so breached the 1993 EU regulations and EU competition law.

This is an example of the law removing a barrier to entry in the market. The result will be that more firms will enter the British market, competition will increase and everyone will have cheaper access to broadcasts. (Although the ruling is complicated and will take some time to work through.)

The actual case involves showing Premier League football in a Portsmouth pub. Of course Sky and the Premier League will protest, it will affect their profits, but the winner is the consumer. Just 38 years after Britain joined the European Union it is about to get one of the benefits it was promised!

 The BBC covers the story here

Markets need information to work properly

We know that free markets allocate scarce resources efficiently. But the key point here is that they are 'free' with full information on both sides of the exchange.

Lots of things can make markets fail to work properly. Two are monopoly power and a lack of information on one side (asymmetric information). Governments work to try to avoid such issues and the Competition Commission and the Office of Fair Trading (OFT) exist to protect consumers.

The OFT is going to investigate the charges made to holidaymakers to convert pounds into foreign currency. The problems of lack of information and monopoly power exist here. People don't really understand the service they are paying or the costs involved. Also financial institutions are able to lock in their own customers to their services and also exploit the lack of information because of a lack of competition between banks.

The BBC explain the issue and a 'Super complaint' by 'Consumer Focus' to the OFT in the article below.

For Deps consider the information a market needs to work well and reduce the issue of scarcity through specialization and exchange. Grecians should consider this from the point of view of market failure that is involved in F581 and the issue of market failure that will arise in Transport Economics.

The BBC article is here