How do firms set prices?

For economics students, obsessed with demand and supply diagrams, setting prices is child's play. But how do firms set their prices? What information do thay need to set a price that will hopefully clear the market. An interesting article in the FT, offering advice to firms about what to consider when setting prices in an economic slowdown. A key factor is to 'understand how price-sensitive customers will behave - and act on that knowledge more quickly than competitors'. Price sensitivity, a concept that should be familiar to students. Read the FT article here.

Water sector competition proposed

The water and sewerage industry should be opened up to competition, says regulator Ofwat. Competition was "severely limited by legislation" and had "not developed successfully", said Ofwat, the regulator in England and Wales. Opening up the sector would help it address climate change and water scarcity, as well as lower costs. Ofwat said it would challenge firms on price and service until competitof the syatem by whichion was "strong enough to protect customers".

The watchdog said competition would help "respond to the environmental challenge of water scarcity, which the government highlighted in its water strategy". It also said "markets could spur innovation in developing and making better use of water resources and more water efficiency services, supporting sustainable water abstraction". Read the BBC article here.

Think about the challenges the water industry faces. How could competiton help address these? What effect would greater competition have on customers? Would they be able to switch supplers easily? Would it lead to a reform of the way in which most customers now pay for their water?

UK unemployment rises by 14,000

UK unemployment rose by 14,000 to 1.61 million in the three months to March, official figures show. The number of people claiming Jobseeker's Allowance climbed by 7,200 to 806,300 last month, the Office for National Statistics (ONS) said. Analysts warned the figures may indicate that global financial problems were hitting the UK and could impact the labour market in coming months. The unemployment rate was unchanged at 5.2% in the three months to March. The figures come amid signs that the UK economy is slowing. At the same time, inflation has picked up, driven by higher food and fuel costs. Read the details here.

The Independent had the headline today 'The spectre of 'stagflation'; a combination of stagnant output and high inflation not seen for decades is set to haunt policy makers for months if not years to come. Click here for the article.

Click for video from BBC News with an anlaysis of the change in Unemployment. The commnetator also makes the point that employment has also increased, with an attempt to explain how this can be the case.

With inflation rising to 3%, how influential will this rise in unemployment be in persuading the MPC to cut rates when it meets next month?

Why are food prices rising?

Food prices have been rising steadily in the past few months and the effects are being felt globally. As agricultural commodities such as wheat and dairy trade at record highs, some governments, such as Russia, are implementing price controls on selected types of bread, cheese, milk, eggs and vegetable oil. But why is food getting more expensive? What role do biofuels play and how has the weather affected crop yields this year? How does the cost of oil factor into the price of food? A really informative FT multimedia feature explains. Click here for link.

Headline inflation up to 3% - further interest rate cuts in doubt?

UK consumer inflation reached its highest level in 13 months driven by high food and fuel costs, according to the Office for National Statistics. The Consumer Prices Index (CPI) hit 3% on a yearly basis in April, up from 2.5% in March. The monthly rate was 0.8%, the biggest leap since May 2001. According to the figures, the Retail Prices Index rose to 4.2% from 3.8%. The inflation data would probably stop the Bank of England cutting interest rates in the near term, analysts said. "It was a pretty horrific headline number," said Lee Hardman, an economist at BTM-UFJ. "It limits the scope for monetary easing from the Bank, it will be hard for them to cut in June." However, some analysts added that the main drivers of price growth were fuel and food costs, which higher interest rates did little to control or rein in. UK inflation jumps to 3% in April

Listen to Melvyn King, Governor of the Bank of England, presenting this month's Inflation Report. Click here for link. He is quite pessimistic about the short term outlook but believes inflation will be back on target in the near future. He outlines clearly the inflationary pressures currently affecting the UK economy. Most significantly he stated that the NICE decade was over - NICE means non-inflation continuous expansion.

This BBC News clip explains the underlying pressure on prices. Click here for 'Why inflation keeps rising'.

Why do analysts think that further interest rate cuts are unlikely? What are the main causes of the current increase in prices? What type of inflation is this?

Ticket touts back in the news

Two interesting articles about ticket touts, a subject much discussed recently in recognition that they are unlikely to go away. The FT reported that Madonna is endorsing the sell-on of concert tickets, condemned by some concert promoters as scalping or touting, by making two leading companies in the secondary ticket market official partners for her forthcoming Sticky & Sweet tour of North America and Europe. Secondary ticketing companies enable the public to trade their tickets online with customers who are prepared to pay above their face value. The company takes a cut of about 10 to 15 per cent. Many sports promoters complain that they are not getting any share of the premium on these ticket sales and concert promoters in the UK have pressed unsuccessfully for the government to outlaw the practice. Madonna endorses seconday ticket markets

According to The Observer ticket touts will make more than £10m in the next week by cashing in on the success of Britain's football teams in Europe and at home But potential buyers are warned to be wary. It is illegal to resell football tickets in the UK - unless it is through an official, recognised third party. However, many of the online firms are able to flout the law by operating offshore, out of reach of the UK authorities. Details here.

Think about the market conditions that enable secondary markets (ticket touting) to exist. Should the law be used more effectively against them or should they be allowed to trade under certain conditions (eg give a percentage of the earnings back to the original body that issued the tickets)?

Further evidence of 'cost push' inflationary pressure.

A Confederation of British Industry (CBI) survey shows that manufacturers are raising prices as they face the strongest cost pressures in over 20 years.The CBI said that small and medium firms were struggling with high energy and raw material prices. However, there is some good news as the survey said that despite the prospect of higher costs, manufacturers were taking on new staff. The reasons appear to be that some firms are benefiting from the weaker pound and strong growth in Asia. At the moment price rises were affecting other businesses and had yet to transfer to consumers. Details here.

This was reinforced by further figures published by the government. The price of goods leaving Britain's factories rose at the fastest level in more than 20 years last month as soaring food and fuel bills pushed up the cost of production. In a fresh inflation warning to the Bank of England, the Office for National Statistics said so-called factory gate prices were up by 1.4% in April and by 7.5% over the past 12 months. Both were the highest since the series began in 1986. Read the article.

What factors will determine the ease to which firms can pass cost increases into consumers in the form of higher prices?