Monday 17 July 2017

The Dark Side of Supermarket Warfare

All competition is good competition... right?

Entering through the doors of your local Tesco, you are not just entering a supermarket. You are entering a battleground. But in this battle, there are no guns or swords- instead, you'll find weapons of words scattered around the place- "I'm cheaper", "Brand Guarantee", and the like.

The supermarket industry has reached saturation point, and as a result, the players are all scrambling to win the pound in your pocket. One of the most prominent tactics to do this, that has risen to fame in the past decade, is the phenomenon of 'Price Matching'. The essence of this is that if you go to your local Tesco, for example, and find that the cereal you are buying could be had for less money in Sainsbury's, if you can prove this to the cashier at Tesco, they will match the cheaper Sainsbury's price in store. In some stores, the offer is made to go even lower than the competitor price.

Seems great, doesn't it? On the surface, yes. Competition is very important in any market, especially one that is as large a part of our daily lives as our supermarkets. Competition leads to better service, better stores, and, perhaps most importantly, lower cost to customers.

And at first glance, price matching seems to be competition set in stone by the supermarkets- a written promise to compete with each other. Furthermore, one could argue that price matching means setting low prices is not enough to compete- it arguably puts stores on a level playing field to compete on other aspects of the customer experience, such as customer service.

But not all is as rosy as it seems, because in reality, price matching is unlikely to lead to a better outcome for the consumer.

Firstly, the notion of price matching allows stores to set higher prices than competitors in the first place. Price matching means stores can attract those who are so sensitive to higher prices that they may have avoided the store if it wasn't a policy. In the case of direct price matching, where one store exactly matches, and doesn't beat, another store's price, the incentive to 'compete' and set truly lower prices is dulled. Essentially, price matching weakens the link between demand and supply that otherwise would drive a store to cut prices.

There are more practical arguments against price matching too. These are well set out in Morten Hviid and Greg Shaffer's 1999 paper on the subject, but in reality these weaknesses are not too difficult to comprehend.

Firstly, the procedure for actually gaining the right to a price match is not so simple- this is usually designed to be an inconvenience by supermarkets. For example, the very act of providing another store offers the same product at a cheaper price is often a hassle. The customer must provide written proof of the competitor's offer, usually a difficult task unless the customer is willing to travel between multiple stores in search of the best price. And if he does so, why would he then not purchase the product at the originally cheapest store?

And once the proof is provided, the ultimate approval is given by the store- who may disagree that the two compared products are the same, or have some other quarrel with the proof provided. The terms and conditions make the process far less open than it first appears.

Furthermore, as Hviid and Shaffer point out, "In every instance it takes longer to complete a transaction when price matching is requested than when it is not". This means there is a non-financial cost to entering a price matching deal, and often the amount you are saving is not enough to make this a cost worth bearing.

So while price matching is indeed a form of competition, it is not as beneficial to the consumer as advertised. It arguably allows stores to be less proactive in setting low prices, and also provides many practical stumbles that to many consumers will just not be worth it. It's a form of what is called imperfect, oligopolistic Bertrand competition- in which there are a few firms who compete with each other on price. In theory, Bertrand competition leads to an optimal solution for the consumer. But the painstaking realities of the price matching process mean this, in practice, is far from the case.

As consumers wise up to this reality, it seems some supermarkets are too- Sainsburys announced the removal of their price matching program last year, highlighting the need for "clear, simple pricing". The question that remains is whether other supermarkets will follow suit.

Saturday 10 June 2017

What Is A Hung Parliament?

To say that the morning of Friday 9th June brought an unpleasant surprise to British Prime Minister Theresa May and her Conservative Party would be a massive understatement. Having been expected since by the mainstream media to wipe out Jeremy Corbyn, not only did the Tories themselves perform poorly and lose 13 seats, but Corbyn's Labour Party performed beyond expectations, gaining an extra 30 seats from 2015, and earning the largest vote share gain the party has gotten since 1945.

Theresa May is no doubt being force-fed copious amounts of humble pie, after this decision to hold a re-election that many are branding one of the worst political decisions in British history. The reasons for the defeat are pretty simple: on one hand, Theresa May ran a wooden campaign hiding in the shadows, and on the other, Jeremy Corbyn made the most of his party's superbly popular manifesto by doing one of the things he does best- going out on the road and connecting with ordinary people.

But despite May's humiliation and Corbyn's victory, the fact remains that the former is still Prime Minister. This comes as a result of the hung parliament that came from the election, and the Tories' alliance with the Democratic Unionist Party of Northern Ireland.

What is a hung parliament?
To define a hung parliament, first it's important to understand what exactly constitutes a victory in a British general election. 

There are 650 seats in Parliament up for grabs throughout the UK, each for a certain area of the nation. To rule effectively, a party must rule 'in the majority'- that means to have more than half (at least 326) of the seats under their control. This means that if there is a future vote in Parliament, for example on a policy being passed, the ruling party can ensure that it is passed- because it can tell all of its party MPs to vote in favour.

Before Friday morning, a strong performance in 2015 meant that the Conservatives held 331 seats in Parliament, meaning a majority of 5. Theresa May held this re-election hoping to increase this figure- instead, following this election, Conservatives are 8 seats short of holding a majority.

Labour won 262 seats; while this was impressively 30 up from 2015, it was still far short of the Conservative number. So the Conservatives had won the most votes, most seats, and thus the election- but, they did not command a majority in Parliament, and neither did Labour. This outcome is a hung parliament.

How common is a hung parliament?
Hung parliaments are usually highly rare, but seem to be becoming less so, most probably due to the emergence of more non-mainstream political parties taking away votes from Labour and the Conservatives. Since 1929, there have been just 3 hung parliaments- in 1974, 2010, and now in 2017. 

A winning party confronted by a hung parliament typically has 2 options:

i) Coalition
This was seen in 2010 when David Cameron's Conservatives failed to command a majority in the House of Commons, despite thumping the Labour Party and winning 48 more seats. 20 seats short, Cameron requested the support of the 3rd place Liberal Democrats, who had won 57 seats. In a formal coalition, this would effectively grant the new government a total of 363 seats, well clear of the majority threshold. Nick Clegg, the then-leader of the Liberal Democrats agreed to this coalition, and thus came the Coalition Government.

ii) Rule in minority
In February 1974, Labour under Harold Wilson won 301 seats, just 4 more than Ted Heath's Conservatives. However, rules dictate that if no party has a majority, the current Prime Minister has the first chance to try to form a new government, and this was Ted Heath. Heath tried, and failed, to form a coalition with the Ulster Unionist Party, and so consequently resigned, leaving the path clear for Wilson to take power. Wilson was also unable to command a majority via any coalition deal, but he ruled in minority. Knowing that in the long run, it would be highly difficult to pass through policy in a Parliament where Labour were a minority, Wilson announced an election for the October of that very year, where Labour won more comfortably to command a majority.

Theresa May has opted for a third route, a combination of these two options- a 'confidence and supply' agreement. This is a type of informal coalition, in which the DUP will promise its support in Parliament to the Conservative Party, with its 10 MPs granting Theresa May's government a working majority of 2. Of course, the DUP will expect some favours from Theresa May.

Where does the UK go now?
Far from 'strong and stable', May's government has come out of the election bruised and weak, leaving the Conservative Party worse off than they would have been without the election. The Prime Minister's own position as leader of the party is under jeopardy- Boris Johnson especially is rumoured to be sharpening his knives to take the throne- and the Labour party are resurgent.

The agreement with the DUP is necessary for the Tories to stay in power, but the fact that it leaves the government indebted to another party will not be something May will be totally satisfied with. 

What is highly likely to happen amidst all this uncertainty is another election, likely to be close to the end of this year or the beginning of the next. In this, the Conservative Party (under the leadership of Theresa May or not) will seek to regain the majority of Parliament, and the Labour Party will seek to finally end years of electoral disappointment and take control. 

Wednesday 11 January 2017

Education Is King In South Korea

The education systems of East and West are like chalk and cheese. Mohammad Lone outlines the South Korean attitude to education.

Exams. The bane of the student, yet the very thing that actually makes us 'students'. Having five exams in the space of 7 days this month, I'm in a bit of a pickle with regards to preparation and revision. It's a hard act of committing enough time to study and succeed in the exam, while committing enough rest time to maintain your sanity. And in one of these rare periods of rest I had, I flicked on a documentary on iPlayer, called 'School Swap'- in which 3 Welsh teenagers were taken out of Pembrokeshire and plopped into the wealthy district of Gangnam (yes, that Gangnam) in Seoul, South Korea, where they were immersed into the life of a high performing Korean student the same age as them.

The fascinating thing that the documentary highlighted was the stark contrast between not just the education systems, but the entire cultures of South Korea and the UK (and, to an extent, the West as a whole).

Korean parents praying en masse for their children's grades
Education is king in South Korea. For parents, it is the highest priority for their child, to the extent that there are mass congregations of parents in temples, all praying for their childrens' grades, there are night schools that dominate many of the large streets in Seoul (called 'Hagwons'), and a Maths tutor can become a celebrity figure earning around $4m a year.

All this is in preparation for a single exam- the College Scholastic Ability Test (CSAT). This is the test that plays a deciding role in which university a student will attend, and it is believed by many to hold the key to a student's whole career. The day of the CSAT is almost like a national event- whole schools of younger students line the streets to cheer on those taking the exam, government employees are allowed to come to work an hour later so students aren't hampered by traffic congestion, even flights are rescheduled on that morning to minimise noise or disturbance to students. The CSAT is a massive deal in South Korea; after all, it is pretty much the focus of a student's life for 17 years or so.
Students gather to cheer on their seniors taking the CSAT

Clearly, South Korea is reaping its rewards from the high emphasis on education. In the 2015 PISA tests (from which a world academic is produced), South Korea came 7th in Maths, 10th in Science and 7th in Reading- as opposed to the UK, who came 27th, 14th and 22nd in those tests respectively. Such a gap in academic ability was demonstrated in the BBC documentary when a Welsh GCSE Maths paper was handed to a Korean class, who, with no previous experience of the format or style, devoured the paper like they had written the thing themselves.

And this contrast is not just exclusive to these two countries- it is just a single part of the massive gap between East Asian and Western education systems. The 'leader of the free world', the USA, performed even worse than the UK in PISA 2015, coming a pitiful 40th in Maths, 24th in Science and 24th in Reading. This does beg the question of how many of the world's most highly held universities (Harvard, Oxford and the like) are in these two countries that seem to have weaker education systems than in Asia. One could argue that the Western education systems, while not as rigorous in perhaps mathematics or sciences, provides strength in other areas such as humanities and arts- but this is all for another piece.

Samsung, the world's second largest tech company,
 is one of the major success stories of S. Korea's
explosive growth in recent decades.
Academic success has been a clear factor in the economic success of a lot of East Asia- South Korea is a great example of this. Exceptionally talented businessmen now head up Korean firms such as Samsung and Kia, both of which are proving to be ever more competitive global firms. Even on a more micro scale, the general work ethic and challenge that the Korean education system presents to its students to overcome has proven to contribute to Korea's stellar rise as a developed economy in recent decades. According to Sung Chulchung, a Professor at South Korea’s University of Science and Technology, “Without its well-educated, strongly motivated and highly disciplined workforce, South Korea wouldn’t have been able to achieve such success”. So South Korea is not just succeeding in the PISA scores- it is succeeding in creating a culture of discipline and strong work ethic in its people.

An example of how this resilience is built up is in the make up of the school day- as an example, in the documentary, the Korean students were usually up (and studying) from 7-11pm, or even until midnight. The Welsh students, meanwhile, who were sent to shadow their Korean counterparts for just 3 days, could barely handle the first. There is much to be said about how long hours can be detrimental for an individual, much of which is valid, but there are certain life skills such a schedule develops- basic things, like waking up early, using time efficiently, that teens in many other countries are notoriously poor at. In Korea, for example, many schools punish late comers by making them come in earlier the next day to clean corridors.

Teachers command much more respect in South Korea than in much of the West, which in turn leads to less time wasted in dishing out discipline and more time actually teaching.

Furthermore, another aspect of Asian cultures in general is that such skills and attitudes are actively encouraged by parents, who invest incredible amounts of time and effort into their children. In much of Asia, it is not uncommon at all to hear parents saving up extra money to be able to fund extra tuition or academic resources for their children. In the documentary, one of the Korean families had relocated to a new home to get their son into a better school. Despite the fact the new house was smaller, it was more expensive- because everyone wanted to get into that school's catchment. Now of course, such behaviours can be seen across the world- but arguably not as visibly as in Asia.

But this does come at a cost. As mentioned earlier, one could argue that the education system in S. Korea is too focused on fundamentals, which, while may be important, are considered by many not to be the entire point of going to school to get an education. Furthermore South Korean students ranked among the lowest in the world in terms of happiness, and, shockingly, suicide is actually the leading cause of death among Korean teenagers. This is not something to be taken lightly in the least. It raises a key question, that was raised by those 3 Welsh students who hopped over to Gangnam: the hagwons, the celebrity teachers, the CSAT and the stress and pressure that it brings to the Korean student- is it all worth it?

Is it possible at all to have a system that simultaneously instils that work ethic, that academic prowess, into a student, as well as the soft skills, without such a shocking impact?

That's what we will discuss in the next part of this series, as we introduce a certain Scandinavian country which is also known to have an excellent education system- but for totally different reasons... 

Wednesday 14 December 2016

What's Wrong With Airbnb?

In the past decade a new wave of Silicon Valley start-ups have exploded into prominence, becoming part of our daily lives. Along with companies like Uber and Netflix, Airbnb is one of the top influencers in this new generation of businesses. But not all is as rosy as it seems...

The concept of Airbnb is very simple.
People can put their homes, apartments, lofts, spare rooms, even garages up for rent, and anyone can book them on a nightly basis. With over 2 million listings across more than 191 countries, the expansion of Airbnb has been incredible. The popularity is due to a number of reasons- not least of which are the facts that using Airbnb is incredibly easy, and, on average, a cheaper option than alternatives like booking a hotel room. It also gives people going on holiday or with spare rooms a chance to make an extra buck.

So, on the face of it, there do not seem to be any significant issues with the concept. However, the scale of Airbnb has meant that it has had rather significant implications on the property markets in which it operates. Put short- Airbnb is contributing to the economic cleansing happening in city centres throughout the world.

Economic cleansing is perhaps a rather emotive term to use, but this is, in essence, what has been happening, as landlords have sought to take advantage of the more lucrative short-term let market that it offers.

To realise the impact of Airbnb, some rough context of the property market is necessary. You've got two types of property rentals: short-term lets, and long-term lets. Long-term lets are usually taken out by people for whom the property becomes their home, whereas short-term lets are more common for vacationers. Here's the thing: short-term lets, due to their short nature, are more lucrative for landlords than long-term lets. But they come with the risk, that they are not guaranteed- while a long-term renter will mean you have someone always occupying your property and paying rent, relying on short-term rentals could leave you as a landlord with dry periods.

But in comes Airbnb, making it easier than ever for people to find short-term lets wherever they are going. The result of this is that fewer travellers choose to stay in hotels*, instead opting what may be a cheaper, or more unique Airbnb rental. So demand for short-term lets is increased- meaning landlords face less risk of facing that dry period in between short-term lets.

Seeing this risk reduced leads to many landlords deciding to pursue lucrative short-term lets- this means that many landlords will have to evict their existing long-term tenants. So, this happening on a large scale means that many people will be left looking for housing in city centres, but there will be fewer properties to choose from- because many landlords may have converted theirs into short-term exclusives. So, in a city there will be more demand for housing, but less supply.

There are significant housing crises in many of today's
major cities. 
Whenever there is more demand and less supply, prices rise. People become desperate to find housing, and the landlords still renting long-term know this- so they can jack their prices up and still find a renter. This results in significant numbers of poorer people (and even people who'd be considered well-off elsewhere) being forced to leave their area in search of affordable housing.

Most demand for Airbnb lets, and generally the most expensive/desirable areas of a city are in the centre- so this is where people are being forced out, 'cleansed', from. London, for example, is an example of a city where such 'economic cleansing' has taken place, due to a severe lack of affordable housing. Since 2011, London rents have increased by a staggering 48%, compared to incomes rising by just 11%. New York City and San Francisco face similar troubles, with housing in city centre areas becoming increasingly out of reach for those not on 6 (or in many cases even 7) figure salaries.  Of course, Airbnb is not solely to blame for this- foreign investment and failed government policies are both arguably more responsible- but amazingly, the success of this one company has had the power to exacerbate these crises that exist.

The problems caused by such a crisis are wide-reaching: homelessness, work issues and strain on infrastructure (for example, trains) are just a few.

This problem is why many cities seem to be waging war against Airbnb, using their weapon of regulation. For example, it is illegal in New York City to rent out a full apartment for fewer than 30 days**. While such regulation was previously battled against tooth and nail by Airbnb, it seems to have taken on a different tune just this month; dropping the lawsuit it took against NYC regulators, and even agreeing to abide by similar regulations in London and Amsterdam.

* Recent study by Zervas, Proserpio and Byers in USA concluded in their study of Texan demand for hotels that Airbnb's entrance into the market "has had a quantifiable negative impact on local hotel revenue". Click here to view the study.

** No doubt, it's important to remember there is a high possibility that such regulations are also being lobbied for by the hotel industry- just a thought.

Friday 2 December 2016

What Happens When 86% Of A Country's Cash Is Made Worthless Overnight

One evening in early November, unscheduled and by surprise, Indian Prime Minister Narendra Modi announced on a televised broadcast that the 500 and 1000 rupee notes that constitute 86% of all cash in India, would be worthless the next day.

The announcement made on the very same day as the 2016 US Presidential election (perhaps a clever ruse to divert global attention) caused shockwaves throughout the country. To invalidate such a massive portion of cash in the economy was one thing; to enforce this just hours after the public announcement further shocked people.

But this element of surprise was a necessary one for Modi's intention behind this drastic policy- that is, to eradicate 'black money', money that is sheltered from tax authorities and used in illegal activities. So Modi's announcement came so immediately in order to spread a wave of panic among agents of the black market. "There is no shortage of money in India, the problem lies in where the money is.", the Indian Prime Minister asserted at a rally following the announcement.

So anyone with 500 and 1000 rupee notes, from the 9th of November onwards, could not use it as legal tender. But, they could be used as deposits to bank or post office accounts, or they could be exchanged with sufficient ID at a bank or post office. This was not unregulated, however- you couldn't just go with all of your notes to exchange or deposit them. There were limits set on the amount you could make use of in one transaction or one day.

"The poor who have welcomed the decision are sleeping peacefully, while those with black money are looking for sleeping pills."

This was what Modi told his supporters at a party rally as he revelled in what he believes to be a successful implementation of his policy.

The policy has indeed gone some way to weed out black money and illicit activities. Forcing people to 'register' their money by exchanging or depositing at a bank means they can be investigated- especially in suspicious circumstances, like if they try to deposit a massive amount into the bank at once. It allows the tax authorities to take register of potential black market agents.

And indeed, numerous seizures of unaccounted money were made within just days of the demonetisation.

But the major question to consider is whether this dramatic policy has been worth it. Because as well as the positive of criminals being exposed, there are a multitude of heavy costs this move has had on the Indian people.

Firstly, it's highly questionable whether the poor are "sleeping peacefully" as Modi claims, because arguably more than anyone else, they have been hit the hardest by this. Cash is used for 98% of all consumer transactions in India, and the developing popularity of credit and debit cards, particularly among urban middle and upper class Indians, means that this figure is likely to be even higher when we consider rural lower class Indians alone. The rural economy is pretty much entirely cash based.

One might argue, what is to stop these rural Indians going to their local bank or post office and exchanging or depositing the money? Especially to Westerners who have heard numerous stories of India's massive economic growth and development, this might be a pertinent question. But the primary issue here is hidden from us by the tall buildings of Delhi, Mumbai and so on. In the rural areas, very few Indians have neither bank accounts to deposit their 500 and 1000 rupee notes into, nor do they have the official documentation and identification to exchange it.

Not only do poor Indians therefore lose significant amounts of their already pitiful savings, but their very livelihood is threatened. According to the Economist, over 80% of India's workers work in the 'informal' sector- that is, they are paid in cash. As a result, many of these workers may have not only lost significant amounts of what they have earned, but cash constraints mean many of them have been laid off by their employers, putting their future into freefall.

What's more, those with the ability to deposit or exchange their money haven't exactly had a ball either. This has been one of the most shambolically executed monetary changes ever witnessed- lack of administrative capacity, and even a lack of cash money available to replace the outgoing notes, have resulted in massive queues and general chaos, reminiscent of a country in the midst of a bank run or severe economic crisis.

Admittedly, this chaos has created sparked the creativity in many Indians. The days after the announcement saw record rail ticket sales, particularly in first class ticket seats for long journeys- suspected to be bought with 500 and 1000 rupee notes to return later on in exchange for valid currency. It has created some employment in the form of people paid to stand in queue for others. Those unable to afford this have simply put their name on a piece of paper, settled on the ground with a stone on top to represent their place in line. The restrictions on how much can be exchanged in a day have left many Indians reliant on cash struggling to afford their daily needs, such as food and rent.

But there has been severe faults that put all the joviality into the shadow. 33 people died between the 8th and 18th of November, with their deaths directly or indirectly linked to demonetisation and the chaos that has ensued. Exhaustion in queuing and suicide has been one of the primary causes, but in more shocking cases, people have been left unable to pay hospital bills, leading to denial of service and in a number of cases, death as a result.

Prominent economists, including Kaushik Basu, Chief
Economist at the World Bank, have come out against
Modi's demonetisation.
Economic growth is also expected by most to be stunted as a result of demonetisation- forecasts for India's GDP growth have fallen by as much as 0.5%, and former Indian Prime Minister Manmohan Singh has stated that he expects GDP to fall by as much as 2% as a result of his successor's policy. The scheme "will hurt agricultural growth in our country, will hurt small industry, will hurt all of those people who are in the informal sector of the economy", the former PM stated publicly.

Concerns have also been raised over whether the policy will fulfil its intended role of weeding out the black market. Renowned Indian economist Kaushik Basu has claimed that the economics of the policy are "complex" and that "the collateral damage is likely to far outstrip the benefits". Raghuram Rajan, former governor of the Reserve Bank of India, believes that those targeted by demonetisation "find clever ways around it", meaning many remain perhaps inconvenienced, but unscathed on the whole.

So far, the policy represents the Indian government failing in its duty to the poorest in the country. The middle and upper class are relatively well off- a survey done by the Government on a smartphone app showed 90% of respondents to be in favour of the move- the large majority of the Indian population unable to enjoy the luxury of a smartphone have gone unheard. There is almost no doubt that the rural poorer Indians are the true ones who have been hit, and hit hard. And even the wealthier, urbanites of India could be hit, as overall economic growth slows as expected.

This all comes because not only does this policy represent bad economics, but its implementation has been poor. It makes one wonder whether the whole plan for demonetisation was just as rushed and immediate as its announcement.