CASE STUDY Big price cuts on a wide range of medicines and vitamins were promised by the supermarket chains yesterday as
Posted: Sun May 29, 2022 7:25 pm
CASE STUDY
Big price cuts on a wide range of medicines and vitamins were
promised by the supermarket chains yesterday as 30 years of
price-fixing were swept aside. Many popular products, including
painkillers, cough medicines, indigestion tablets and nutritional
supplements are being halved in price from last night, with
reductions of between 20 and 40 per cent on many others. The Office
of Fair Trading called it excellent news for consumers but the body
representing small pharmacies said that many would close,
threatening community services.
The big supermarkets trumpeted ‘millions of pounds-worth of
savings’ as they competed to offer the biggest reductions. At Asda,
a packet of 16 regular Anadin will be 87p, instead of £1.75, and
Nurofen tablets will cost £1.14 for 16, rather than £2.29.
Reductions at Tesco included a 40 per cent cut in Anadin Extra, to
£1.29 for 16, while Sainsbury’s matched the Asda price for Nurofen,
and reduced Seven Seas Evening Primrose Oil from £5.59 for a
60-pack to £2.79. The cuts came after the Community Pharmacy Action
Group, representing small retailers, withdrew its opposition to a
High Court action brought by the Office of Fair Trading.
The OFT had sought the abolition of resale price maintenance in
the industry, exempted 30 years ago from general price-fixing rules
to try to ensure the survival of small pharmacies. There are 13,500
pharmacies in Britain, of which 9,000 are small shops serving local
high streets and rural communities. The action group backed out
after Mr Justice Buckley said that he believed there was
insufficient proof that a large number of independent pharmacies
would close, or that the range of products would be reduced. But
the group’s chairman, David Sharpe, said that the outcome would be
a devastating blow. ‘Many pharmacists will simply not be able to
survive given the buying power and aggressive pricing of the
supermarkets’ he said. ‘It’s a sad day for Britain.
The potential losers are the elderly, disabled and young mothers
who rely on the free advice and range of services offered by the
local pharmacist. We’ll fight on and hope the public will remain
loyal.’ The changes will cover about 2,500 products sold without
requiring a doctor’s prescription and will have no effect on
prescription drugs or on cosmetics sold by pharmacists. Prices are
likely to fall even lower as competition grows. In the United
States, where prices are unregulated, comparable products are
markedly cheaper.
Richard Hyman, chairman of the Verdict retail research
consultancy, said: ‘This is a market made for supermarkets.
Medicines are small, they fit on shelves and supermarkets are going
to make a lot of noise about the great prices that they will be
offering. Soon medicines will become like any other product and be
part of the weekly shop.’ John Vickers, Director-General of Fair
Trading, said: ‘This is excellent news for consumers, who will now
benefit from lower and more competitive prices for common household
medicines. Consumers will save many millions of pounds a year.’ The
Proprietary Association of Great Britain, which represents medicine
and food supplement manufacturers, said it was disappointed.
Questions
40 marks
SECTION B
Question one
KAD has estimated the following demand
relationship for its product over the last four years, using
monthly observations:
ln Qt = 4.932 –
1.238lnPt +
1.524lnYt-1 +
0.4865lnQt-1
(2.54)
(1.38)
(3.65)
(2.87)
R2 = 0.8738
where Q = sales in units, P =
price in £, Y is income in £,000, and the numbers
in brackets are t-statistics.
Question two
Examine the Four (4) strategies that may be
used to deter entry of potential entrant firms to compete off the
supernormal profit a monopolist enjoy (Give appropriate examples)
(20 marks)
Question Three
The previous month sales of Betts were 24,000 litres of
ice-cream. The variable costs were £2.70 per litre and each litre
contributed 25 per cent of its revenue to fixed costs and profits.
It has just discovered a new supplier which will enable it both to
reduce its cost by £0.40 per litre and to improve its quality.
However, it estimates that it will have to spend another £3,000 on
advertising per month to inform customers of the improvement.
Profits last month were £10,000
Question five
The Kweikuma Corporation’s executive vice president circulates a
memo to the firm’s top management in which he argues for a
reduction in the price of the firm’s product. He says such a price
cut will increase the firm’s sales and profits.
Big price cuts on a wide range of medicines and vitamins were
promised by the supermarket chains yesterday as 30 years of
price-fixing were swept aside. Many popular products, including
painkillers, cough medicines, indigestion tablets and nutritional
supplements are being halved in price from last night, with
reductions of between 20 and 40 per cent on many others. The Office
of Fair Trading called it excellent news for consumers but the body
representing small pharmacies said that many would close,
threatening community services.
The big supermarkets trumpeted ‘millions of pounds-worth of
savings’ as they competed to offer the biggest reductions. At Asda,
a packet of 16 regular Anadin will be 87p, instead of £1.75, and
Nurofen tablets will cost £1.14 for 16, rather than £2.29.
Reductions at Tesco included a 40 per cent cut in Anadin Extra, to
£1.29 for 16, while Sainsbury’s matched the Asda price for Nurofen,
and reduced Seven Seas Evening Primrose Oil from £5.59 for a
60-pack to £2.79. The cuts came after the Community Pharmacy Action
Group, representing small retailers, withdrew its opposition to a
High Court action brought by the Office of Fair Trading.
The OFT had sought the abolition of resale price maintenance in
the industry, exempted 30 years ago from general price-fixing rules
to try to ensure the survival of small pharmacies. There are 13,500
pharmacies in Britain, of which 9,000 are small shops serving local
high streets and rural communities. The action group backed out
after Mr Justice Buckley said that he believed there was
insufficient proof that a large number of independent pharmacies
would close, or that the range of products would be reduced. But
the group’s chairman, David Sharpe, said that the outcome would be
a devastating blow. ‘Many pharmacists will simply not be able to
survive given the buying power and aggressive pricing of the
supermarkets’ he said. ‘It’s a sad day for Britain.
The potential losers are the elderly, disabled and young mothers
who rely on the free advice and range of services offered by the
local pharmacist. We’ll fight on and hope the public will remain
loyal.’ The changes will cover about 2,500 products sold without
requiring a doctor’s prescription and will have no effect on
prescription drugs or on cosmetics sold by pharmacists. Prices are
likely to fall even lower as competition grows. In the United
States, where prices are unregulated, comparable products are
markedly cheaper.
Richard Hyman, chairman of the Verdict retail research
consultancy, said: ‘This is a market made for supermarkets.
Medicines are small, they fit on shelves and supermarkets are going
to make a lot of noise about the great prices that they will be
offering. Soon medicines will become like any other product and be
part of the weekly shop.’ John Vickers, Director-General of Fair
Trading, said: ‘This is excellent news for consumers, who will now
benefit from lower and more competitive prices for common household
medicines. Consumers will save many millions of pounds a year.’ The
Proprietary Association of Great Britain, which represents medicine
and food supplement manufacturers, said it was disappointed.
Questions
40 marks
SECTION B
Question one
KAD has estimated the following demand
relationship for its product over the last four years, using
monthly observations:
ln Qt = 4.932 –
1.238lnPt +
1.524lnYt-1 +
0.4865lnQt-1
(2.54)
(1.38)
(3.65)
(2.87)
R2 = 0.8738
where Q = sales in units, P =
price in £, Y is income in £,000, and the numbers
in brackets are t-statistics.
Question two
Examine the Four (4) strategies that may be
used to deter entry of potential entrant firms to compete off the
supernormal profit a monopolist enjoy (Give appropriate examples)
(20 marks)
Question Three
The previous month sales of Betts were 24,000 litres of
ice-cream. The variable costs were £2.70 per litre and each litre
contributed 25 per cent of its revenue to fixed costs and profits.
It has just discovered a new supplier which will enable it both to
reduce its cost by £0.40 per litre and to improve its quality.
However, it estimates that it will have to spend another £3,000 on
advertising per month to inform customers of the improvement.
Profits last month were £10,000
Question five
The Kweikuma Corporation’s executive vice president circulates a
memo to the firm’s top management in which he argues for a
reduction in the price of the firm’s product. He says such a price
cut will increase the firm’s sales and profits.