Economics

In a year in which economics has dominated public conversation and headline space, every week has given our students material to discuss in lessons. Some of our Lower Sixth students have taken discussions one step further and written stories of particular interest.

COMPETITION IN THE GAMING INDUSTRY

Microsoft has been trying to gain a larger market share in the games industry. Their focus has shifted to their subscription service, Game Pass, and they are currently expanding the collection of games available. In January 2022, they announced their intention to acquire Activision Blizzard, the world-leading publisher behind Call of Duty, for $75bn with the hope of strengthening their service. The deal is expected to be finalised around summer 2023 and would cement Microsoft’s position as the third largest video-game firm by revenue.

There are several concerns surrounding such a large forward vertical acquisition. Microsoft could deny competitors access to Activision Blizzard’s games on their platforms. Millions of casual players who buy consoles for Call of Duty alone may need to switch platforms – a move that will significantly disrupt the market.

This year has seen several acquisitions, worth more than $1bn, by major players across the industry. Whilst this may attract consumers to one brand, it also reduces the variety of games on offer across the market, restricting consumers to very few options. Acquisitions like this cause other firms to panic as the race to absorb competitors is already under way. Microsoft’s announcement alone led to a 10% fall in Sony’s share price. If there is no intervention, the industry may soon become monopolistic. Adam Comley

SRI LANKAN DEBT CRISIS

Sri Lanka has defaulted on its debts for the first time in their history as the country battles its worst financial crisis in over 70 years. It was unable to pay £63m in debt interest payments, causing credit rating agencies to refer to it as “defaulted”. Defaulting debts damages the economy as confidence in its currency plummets and it becomes harder to borrow from international markets. The government blames the pandemic and rising energy prices while critics say that this was a selfinflicted problem as the authorities failed to prevent severe inflation and ran out of foreign currency.

After the Sri Lankan civil war ended in 2009, the government implored traders to provide goods to domestic markets instead of entering foreign markets. This reduced income from exports. Tourism, a major source of income, crumbled during the pandemic. Sri Lanka’s foreign currency reserves, £5.8bn at the end of 2019, fell to £1.5bn in March 2020 and now stand at £40.5m. Huge debts racked up as the country aimed to fund infrastructure projects such as the development of Hambantota International Port. The loans Sri Lanka received from China had extremely short repayment periods, making repayment even harder. The shortage of foreign currency to buy imported necessities has caused shortages of food and fuel and skyrocketing prices. Inflation was estimated at 60% in June 2022.

Jake Francis

WINDFALL TAX ON ENERGY COMPANIES

In his first budget, Gordon Brown used a windfall tax to fund his ‘New Deal’ welfare-to-work scheme. It may seem logical to ease the cost-of-living crisis through a similar method, yet the evidence suggests otherwise.

When asked about a windfall tax In May 2020, Shell’s chief executive said that their planned $20–25 bn investment in the UK ‘has to make sense’. Although some energy companies will still invest even if such a tax is implemented, there may well be consequences for foreign investment. Foreign direct investment (FDI) was £50bn in 2020, and £100 bn in 2019. Surely the £1.2bn the tax would bring in is outweighed by the loss of investment?

What may weigh in the Chancellor’s decision is the fact that a windfall tax would also hurt pensioners’ pockets. The Week notes that 8% of Shell and BP’s shares are owned by pension companies. The repercussions could mean that a retiree may have £10 or £20 less a week to spend owing to the dividend they receive being reduced. Oli Dawson

COST OF LIVING

I spend Monday evenings volunteering at the Kingston Foodbank, and it is clear that there is an increasing need, with many of the people using it currently in employment. The Trussell Trust estimates that 2.1 million food parcels have been given to people in crisis in the 2021/2022 financial year.

The war in Ukraine has exacerbated the issue with soaring oil and gas prices. Russia supplies 30–40% of Europe’s gas, with the UK market closely connected to the European market. Nitrogen fertiliser rose by 14% in April, pushing global food prices higher. The price of a basket of food has increased by 6.7% year-on-year as of April 2022 and is expected to increase further.

Governments could increase universal credit or scrap national insurance increases. However, the problem with increased government spending or reduction of taxes is the huge national debt build-up. A windfall tax could be imposed on energy companies but that might hinder their investment in renewable energy. From my perspective, the best way to work towards a solution is a step-up in the voluntary sector to tackle the problem closer to home. Melker Lannero INFLATION IN THE FASHION INDUSTRY

We have watched inflation soar since the pandemic. The fashion industry has been no exception; the CPI for apparel rose 4.9% from June 2020 to June 2021. Brands face higher shipping costs, supplier backlogs, surging consumer demand and labour shortages. These difficulties in the supply chain are not short term — retailers need reliable and resilient supply chains.

These rising prices have come at an interesting time for luxury fashion, as brands look to stop discounts as a means for moving unsold merchandise and begin to focus on improved quality to set them apart. However, some brands have struggled with how to communicate price rises to consumers. Should they raise them gradually and quietly or have complete price transparency?

Upta Dholakia, Professor at Rice University’s School of Business, suggested that retailers “call the action a price increase, not a price adjustment … or another euphemism, explain the reasons for the price increase, and link the price increase to a customer-centric value narrative.” This approach was adopted by London-based jewellery designer Kimai, who specialise in lab-grown diamonds, and warned customers of their 15% price increase.

This was well-received and an increase in orders in the month before the rise.

Alternatively, Alighieri, another London-based jewellery designer, introduced a price increase of 10–15% without telling consumers and reported no decrease in sales or negative response. Previous to the uptick, founder Rosh Mahtani, decided not to do “...a blanket comms because it just didn’t feel right for the brand,” and is now revisiting the brand’s pricing architecture.

Simeon Siegel, retail analyst for BMO capital markets, said, “2022 is the year where we find out which companies actually have pricing power.” While this is definitely true for luxury brands, the future of fast fashion might be less predictable, since this sector of the industry has a much higher price elasticity of demand. Jasmine Levell

Mr S Symington, Head of Economics