The illusion of competition

Hello world. My posts on this blog have been sporadic, I’m generally moved to write by economic activity and the global economy (Africa excluded) has been, by and large plodding along in its sluggish manner. There has been no breakthrough policy shift; no ideological shift away from the current set of policies, rather, a continuation of what we’ve seen, which is public sector cuts and the detrimental consequences of such actions.

What this prolonged period of economic activity has shown us is the fact that profits will always by certain sections of our society. Despite policies that have had a nefarious effect on large sections of our community, profits have been made and if we look at the market structure of the firms making profits then it is clear that they mainly resemble oligopolies and monopolies.

Before I explain the ramifications of this apparent anomaly, I should stress that I am not here to lambast profit making. Profits are a sign of an efficient business, whereby costs are controlled and a business can expand. Without profit business would not exist, not only would there be no incentive to innovate and take ideas to market, but a firm would have no means in which to continue producing their good or service. In an ideal world however, profits would be generated in a naturally competitive market. And a competitive market has no room for oligopolies and/or monopolies to form.

My previous pieces here and here show how oligopolies are bad for consumers because they allow firms to charge whatever prices they feel suitable, leaving consumers with no choice. What is so distasteful is the fact that goods and services that are essential to our wellbeing are the ones where competition is non-existent and legal barriers are erected in order to prevent newer entrants from challenging established firms.

It may be coincidence but as the weather gets cooler the utilities market seems to increase prices and this year is no different. If we look at British Gas, one of the largest firms in this market, they are increasing gas by 8.4% and electricity by 10.4%. Ian Peters of British Gas admits it is “unwelcome news” but in an industry where there is no effective competition comments such as his could act as a condescending reminder of the contrasting fortunes of our increasingly divided society. Whilst I do not doubt the sincerity of his comment, it comes during an extremely difficult period of stagnant economic activity, where households have been forced to cut spending therefore demanding less. Comments such as his can only add insult to injury. The Energy Secretary Ed Davy was not pleased, adding that the price increases in general were “extremely disappointing news.” He and the Prime Minister advocated that consumers “shop around” for the best deals. Therein lies the fundamental problem. Even if consumers switch from one energy company to another the market structure itself dictates similar prices, thus the savings are marginal at best. For savvy consumers looking to save every penny (and in this climate, who could blame them?) this is a restrictive option. It should be noted however that collusion in any oligopoly is either deliberate (which is illegal) or tacit. So firms will mimic their rivals.

Source: BBC
Source: BBC

The formation of the energy cartel in the UK is an explicit example of market failure. Market failure is where the free market fails to effectively distribute resources efficiently. In order for governments to erode this failure there are a number of political and economic tools it could utilise in order to help correct this failure. Governments often spout the notion that markets are regulated. Regulation is a surrogate form of competition that probably disrupts the flow of business activity as oppose to aiding it. What governments should do and what they claimed they were doing when they privatised several important industries was ensure that market power cannot become concentrated into the hands of a few large firms. This has not happened. Rather, the inefficient government owned industries have been replaced by the inefficient privately owned firms. In fact, when government owned them they had to answer to the taxpayer, now these firms answer to shareholders, the stakeholders i.e. consumers have no say. Their acquiesce is a formality.

The same situation is prevalent in transport where prices will rise again in January by 4.1%. Again the traits are synonymous with other oligopolies, consumers have no choice.

Powerful firms often use branding as a way to create the illusion of competition. Branding allows consumers to associate that good or service on its own merits, but as the diagram below highlights, rather poignantly, so few firms actually have substantial control over goods and services we have to demand.

The 10 major food companies
The 10 major food companies

I began this piece by stating that profits are still being made by sections of our society. I am not advocating for some quasi profit distribution to the lower echelons of society. I am however suggesting that the public demand much more from national government. Where oligopolies are formed, governments should be pressured by the public to erode the legal barriers preventing a number of newer entrants challenging the dominant firms. Until actual competition is established and markets resemble a monopolist market structure, where there a lot of firms and new entrants can enter the market easily, prices in essential industries are only going to go in one direction.

Read of the Week

Hello world. This weeks read is from The Guardian and it confirms the unfortunate reality of long and sustained periods of austerity having an adverse effect on economies. This Red Cross study focuses on Europe and highlights a notion I have been writing about for a while now: austerity alone will not result in growth.

http://www.theguardian.com/world/2013/oct/10/austerity-europe-debt-red-cross

A New Economy?

Hello world. This feature contains a brief video from Econ4 highlighting the substantial need for a shift in the societal paradigm based around mass consumption and the unsustainable nature of mass production. It is widespread knowledge that people in their thirties and below will be the first generation to have mean incomes below that of their parents, so there is certainly a need for dramatic discussion around how our society operates. Moreover, this video questions the basic economic problem of the fact that wants are infinite and resources are scarce. So if there are methods that can improve this, then it at least deserves your attention.

Read Of The Week

Hello world. This weeks read comes courtesy of the Institute of Economic Affairs (IEA). There is a free download link in the link and the report outlines why Britain’s economy is a long way off tangible growth, a subject I’ve spoken about at some depth previously. Check my pieces out here and here in particular. http://www.iea.org.uk/sites/default/files/in-the-media/files/Will%20flatlining%20become%20normal%20.pdf

5 ways to make yourself recession proof

Don't let a recession do this to you.
Don’t let a recession do this to you.

Technically we are no longer in a recession, but the slow economy, the stagnate demand and the prolonged miserable feeling in society does make it feel as if we are in one.  In the likely event that there will be recessions in the future, follow these steps and you’ll have more than enough tools to make the most of what are difficult times.

1)   Stay positive.  Maintaining a positive mindset is critical to ensuring the negative economic activity does not have the desired impact. Yes one must be realistic and admit things like credit will be harder to obtain and jobs are more difficult to get. But staying positive about what you do already have, i.e. a good education and ambition should provide a solid foundation on which you could make yourself exempt from the negativity associated with a recession.

2)   Work hard. Nothing can beat putting in a solid shift and few things are as rewarding as when you focus on a goal and achieved it through sheer hard work. Moreover, the difficulties of the current situation ensure that there has never been a more important time to work hard. It sounds a little condescending, but rest assured, it is a quiet and effective remedy that could set you apart from others. It applies to any field, any occupation and it has proven results. Working hard is even more important during a recession. Hard work always pays off.

3)   Try to save for long-term gain.  As there is less economic activity going on, the majority of society is simultaneously feeling the effects of less demand; therefore people’s consumption patterns tend to be the same. Therefore, now is a better time than any to put some money away. This idea may seem paradoxical in nature, the fact is when an economy has weak demand you want people spending, not saving. However, on a personal level, those that have utilised savings in the past often enjoy consumption more, mainly because they can afford more, because they have saved. This step does involve sacrificing certain goods or activities but if you think long-term, then it will prove to be an essential method of making yourself recession proof.

4)   Invest in yourself.  This is open to interpretation, but investing in yourself, i.e. increasing your skill set is a valuable way to make yourself more employable, make you feel better about being you and you’ll have a new skill/skills for life. People should always look at ways they can improve. There are thousands of free online courses, podcasts, ebooks and so on out there for people to utilise. Gone are the days where education was exclusive to classrooms. Make the most of it.

5)   Pay attention to the media, but put issues in a personal perspective. Ensuring that you are well-read, clued up and know various facts about an issue will help you deal with it a lot better. However, there is a real danger that the media goes from informing to dictating certain views and on economic issues, this can be detrimental. So always remember to take issues on the economy with a pinch of salt as the news deals in aggregates and cannot accurately factor in individual households. You can however, so ensure to use the media to your advantage.

Read Of The Week

This week’s read comes from Vice Online and it is an explosive read to say the least. Vice’s Greg Palast discusses a certain memorandum that highlights how the global financial crisis unfolded. Certain events seemed to have been choreographed in order for the period of unfettered market capitalism to go unregulated around the world.

I’ve covered the global financial crisis many times on this blog, my piece here, where I elucidate certain facets about the shift in rhetoric about government spending and on this post I display the brilliant documentary from Adam Curtis about the global financial crisis. If you have not seen it, please do. The article from Vice will make even more sense as many of the people in question are featured.

http://www.vice.com/en_uk/read/larry-summers-and-the-secret-end-game-memo

Read of the week

 

This week’s read is from Paul Krugman’s blog and he touches on some prominent economists, Milton Friedman and John Maynard Keynes. Both transformed economics and Krugman alludes to the notion that Keynesian policies are still being discussed, whereas Friedman policies are not as relevant today. Many will suggest otherwise, but Prof Krugman argues his point nonetheless.

http://krugman.blogs.nytimes.com/2013/08/08/milton-friedman-unperson/?_r=0

Check this out

Measuring one’s standard of living can be a difficult task, as it is subjective. Moreover with measuring tools such as the Human Development Index. Pareto Index and others people quantify important aspects of everyday life and average it to give an indication of one’s living standard. I came across this tool on the OECD’s website, its certainly worth playing around with it and it’s really interesting to see where the UK ranks with other nations. Have a gander.

http://www.oecdbetterlifeindex.org/