The Economist | Information asymmetry: Secrets and agents

http://www.economist.com/news/economics-brief/21702428-george-akerlofs-1970-paper-market-lemons-foundation-stone-information?frsc=dg%7Ca

The Economist starts its series of economics briefs with information asymmetry, its beauty lies in its simplicity. Very recently my car failed its MOT. The garage called to say repairs would cost £580 – seeking to exploit my imperfect knowledge of prices and the mechanics of my car. A few phone calls later and I managed to find a local garage willing to do the same repairs for £400. A return call to the original garage found that they would match the price, a saving of £180. I suspect many would not have bothered, I almost said “go ahead” myself, converting consumer surplus into producer surplus in the process. George Akerlof, in his seminal work ‘The market for lemons’, explains that information asymmetry is a very common cause of market failure, when economic thinking at the time was that buyers and sellers had sufficient access to information to make rational decisions, clearly rubbish.

China and the UK

There has been much attention given over to China in recent weeks, following the visit of President XI and the signing of many deals between China and the UK, not least in the energy sector where China (and France) will be financing and largely building a generation of nuclear power plants in the UK. The Times commented that it will not be long before a Midlands UK businessman or woman could breakfast on Chinese cereal (Weetabix), travel to London on a partly Chinese-financed railway (HS2) for a meeting in a Chinese office development (China has invested heavily in UK property), then make a call home on a Chinese mobile phone and arrange to take the family out to a Chinese owned pizza chain (PizzaExpress) to discuss the possible purchase of a Sunseeker Yacht, a company acquired by China in June 2013. It is also worth noting that Chinese tourists to the UK have doubled between 2009 and 2014 to 185,000 and there were 10,468 Chinese pupils and 87,895 students at UK  independent schools and  universities respectively in 2014. By 2030 the World Bank estimates that 30% of global investment will come from China, the year it is estimated that it will become the world’s largest economy.

Currently China provides 9% of our imports of goods but we are only their 7th biggest source of their imports and our 22nd largest export market for goods so there is considerable potential for growth there. Given the UK Government’s intention to move to a budget surplus and not to borrow even to invest, China provides a valuable source of finance for infrastructure investment.

However all is not well at home with recent Chinese growth figures falling to 6.9% in the third quarter, slightly below the target rate of 7%. There has been some doubt expressed about the validity of this figure and some economists suggest that a true figure would be significantly lower, not least because nominal growth was only 6.2% implying a 0.7% deflation in China over the period which some commentators suggest is inaccurate. An alternative measure looks at statistics for electricity, bank lending and rail cargo which suggests growth of between 3% – 4%. Such discrepancies put the UK’s recent fall in GDP growth to 0.5% into perspective.

CMA to investigate 2500% price hike by pharmaceutical firms

http://www.independent.co.uk/news/business/news/pfizer-and-flynn-pharma-accused-of-overcharging-for-epilepsy-drug-10444660.html

Pfizer and Flynn Pharma are in trouble with the Competition and Markets Authority after hiking the price of a drug they sell to NHS by a percentage that wouldn’t look out of place at the end of a payday loan advert.

A few things here. Drug firms spend a lot of money and time (about 17 years) researching and developing drugs, some of which go on to succeed in the market, whilst others fail. Pfizer may argue that the price increase is a result of a business pricing strategy of selling cheap upon entry to the market and then increasing the price as brand loyalty builds. In addition, they may argue that the profits made by Phenytoin Sodium will be used to fund the R&D of new drugs that NHS patients will benefit from in years to come.

You may ask why doesn’t the NHS shop around? Well, they can’t, because the drug is patented. A patent acts as a barrier to entry as it stops other firms from copying a new drug that a firm has spent years and, potentially, billions of pounds developing. After all, who would spend all that time and money if the day after launch a series of copycat firms come and along and copy all your hard (and costly) work? Firms wouldn’t develop new drugs, and new drugs are good, so patents are good?! The problem is that patents prevent competition, for the 25 year life span of the patent at least, and so firms can exploit their monopoly power by charging extortionate prices. It’s a question of balance, and it appears that the CMA believe the scales are weighted too much in favour of the producer in this instance.