Chapter 7 Product Variety and Quality under Monopoly.docx

Chapter 7: Product Variety and Quality under Monopoly
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Product Variety and Quality under Monopoly
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IntroductionMost firms sell more than one productProducts are
differentiated in different wayshorizontallygoods of similar
quality targeted at consumers of different typeshow is variety
determined?is there too much varietyverticallyconsumers agree
on qualitydiffer on willingness to pay for qualityhow is quality
of goods being offered determined?
*
Horizontal product differentiationSuppose that consumers differ
in their tastesfirm has to decide how best to serve different
types of consumeroffer products with different characteristics
but similar qualitiesThis is horizontal product
differentiationfirm designs products that appeal to different
types of consumerproducts are of (roughly) similar
qualityQuestions:how many products?of what type?how do we
model this problem?

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A spatial approach to product varietyThe spatial model
(Hotelling) is useful to considerpricingdesignvarietyHas a much
richer application as a model of product
differentiation“location” can be thought of inspace
(geography)time (departure times of planes, buses,
trains)product characteristics (design and variety)consumers
prefer products that are “close” to their preferred types in
space, or time or characteristics
*
An geographic example of product variety
McDonald’s
Burger King
Wendy’s
*
A Spatial approach to product variety 2Assume N consumers
living equally spaced along Main Street – 1 mile
long.Monopolist must decide how best to supply these
consumersConsumers buy exactly one unit provided that price

plus transport costs is less than V.Consumers incur there-and-
back transport costs of t per mileThe monopolist operates one
shopreasonable to expect that this is located at the center of
Main Street
*
The spatial model
z = 0
z = 1
Shop 1
t
x1
Price
Price
All consumers within
distance x1 to the left
and right of the shop
will by the product
1/2
V
V
p1
t
x1
p1 + tx
p1 + t.x
p1 + tx1 = V, so x1 = (V – p1)/t
What determines
x1?
Suppose that the monopolist
sets a price of p1

*
The spatial model 2
z = 0
z = 1
Shop 1
x1
Price
Price
1/2
V
V
p1
x1
p1 + t.x
p1 + t.x
Suppose the firm
reduces the price
to p2?
p2
x2
x2
Then all consumers
within distance x2
of the shop will buy
from the firm

*
The spatial model 3Suppose that all consumers are to be served
at price p.The highest price is that charged to the consumers at
the ends of the marketTheir transport costs are t/2 : since they
travel ½ mile to the shopSo they pay p + t/2 which must be no
greater than V.So p = V – t/2.Suppose that marginal costs are c
per unit.Suppose also that a shop has set-up costs of F.Then
profit is p(N, 1) = N(V – t/2 – c) – F.
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Monopoly pricing in the spatial modelWhat if there are two
shops?The monopolist will coordinate prices at the two
shopsWith identical costs and symmetric locations, these prices
will be equal: p1 = p2 = pWhere should they be located?What is
the optimal price p*?
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Location with two shops
Suppose that the entire market is to be served
Price
Price
z = 0
z = 1
If there are two shops

they will be located
symmetrically a
distance d from the
end-points of the
market
Suppose that
d < 1/4
d
1 - d
Shop 1
Shop 2
1/2
The maximum price
the firm can charge
is determined by the
consumers at the
center of the market
Delivered price to
consumers at the
market center equals
their reservation price
p(d)
p(d)
Start with a low price
at each shop
Now raise the price
at each shop
What determines
p(d)?
The shops should be
moved inwards
V
V

*
*
Location with two shops 2
Price
Price
z = 0
z = 1
Now suppose that
d > 1/4
d
1 - d

Shop 1
Shop 2
1/2
p(d)
p(d)
Start with a low price
at each shop
Now raise the price
at each shop
The maximum price
the firm can charge
is now determined
by the consumers
at the end-points
of the market
Delivered price to
consumers at the
end-points equals
their reservation price
Now what
determines p(d)?
The shops should be
moved outwards
V
V

*
Location with two shops 3
Price
Price
z = 0
z = 1
1/4
3/4
Shop 1
Shop 2
1/2
It follows that
shop 1 should
be located at
1/4 and shop 2
at 3/4
Price at each
shop is then
p* = V - t/4
V - t/4

V - t/4
Profit at each shop
is given by the
shaded area
Profit is now p(N, 2) = N(V - t/4 - c) – 2F
c
c
V
V
*
Three shops
Price
Price
z = 0
z = 1
1/2
What if there
are three shops?
By the same argument
they should be located
at 1/6, 1/2 and 5/6
1/6

5/6
Shop 1
Shop 2
Shop 3
Price at each
shop is now
V - t/6
V - t/6
V - t/6
Profit is now p(N, 3) = N(V - t/6 - c) – 3F
V
V
*
Optimal number of shopsA consistent pattern is emerging.
Assume that there are n shops. We have already considered n
= 2 and n = 3. When n = 2 we have p(N, 2) = V - t/4 When n =
3 we have p(N, 3) = V - t/6 They will be symmetrically located
distance 1/n apart. It follows that p(N, n) = V - t/2n
Aggregate profit is then p(N, n) = N(V - t/2n - c) – nF
How many
shops should

there be?
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Optimal number of shops 2
Profit from n shops is p(N, n) = (V - t/2n - c)N - nF
and the profit from having n + 1 shops is:
p*(N, n+1) = (V - t/2(n + 1)-c)N - (n + 1)F
Adding the (n +1)th shop is profitable if p(N,n+1) - p(N,n) > 0
This requires tN/2n - tN/2(n + 1) > F
which requires that n(n + 1) < tN/2F.
*
An example
Suppose that F = $50,000 , N = 5 million and t = $1
Then tN/2F = 50
For an additional shop to be profitable we need n(n + 1) < 50.
This is true for n < 6
There should be no more than seven shops in this case: if n =
6 then adding one more shop is profitable.
But if n = 7 then adding another shop is unprofitable.
*
Some intuitionWhat does the condition on n tell us?Simply, we
should expect to find greater product variety when:there are

many consumers.set-up costs of increasing product variety are
low.consumers have strong preferences over product
characteristics and differ in theseconsumers are unwilling to
buy a product if it is not “very close” to their most preferred
product
*
How much of the market to supplyShould the whole market be
served?Suppose not. Then each shop has a local monopolyEach
shop sells to consumers within distance rHow is r determined?
it must be that p + tr = V so r = (V – p)/tso total demand is
2N(V – p)/tprofit to each shop is then p = 2N(p – c)(V – p)/t –
Fdifferentiate with respect to p and set to zero:dp/dp = 2N(V –
2p + c)/t = 0So the optimal price at each shop is p* = (V +
c)/2If all consumers are served price is p(N,n) = V – t/2nOnly
part of the market should be served if p(N,n)< p*This implies
that V < c + t/n.
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Partial market supplyIf c + t/n > V supply only part of the
market and set price p* = (V + c)/2If c + t/n < V supply the
whole market and set price p(N,n) = V – t/2nSupply only part
of the market:if the consumer reservation price is low relative
to marginal production costs and transport costsif there are very
few outlets

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Social optimum
Are there too
many shops or
too few?
What number of shops maximizes total surplus?
Total surplus is therefore NV - Total Cost
Total surplus is then total willingness to pay minus total costs
Total surplus is consumer surplus plus profit
Consumer surplus is total willingness to pay minus total
revenue
Profit is total revenue minus total cost
Total willingness to pay by consumers is N.V
So what is Total Cost?
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Social optimum 2
Price
Price
z = 0
z = 1
Assume that
there
are n shops
Consider shop
i
1/2n
1/2n
Shop i
t/2n

t/2n
Total cost is
total transport
cost plus set-up
costs
Transport cost for
each shop is the area
of these two triangles
multiplied by
consumer density
This area is t/4n2
V
V
*
Social optimum 3
Total cost with n shops is, therefore: C(N,n) = n(t/4n2)N + nF
= tN/4n + nF
Total cost with n + 1 shops is: C(N,n+1) = tN/4(n+1)+ (n+1)F
Adding another shop is socially efficient if C(N,n + 1) < C(N,n)
This requires that tN/4n - tN/4(n+1) > F
which implies that n(n + 1) < tN/4F
The monopolist operates too many shops and, more
generally, provides too much product variety

If t = $1, F = $50,000,
N = 5 million then this
condition tells us
that n(n+1) < 25
There should be five shops: with n = 4 adding another shop is
efficient
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Product variety and price discriminationSuppose that the
monopolist delivers the product.then it is possible to price
discriminateWhat pricing policy to adopt?charge every
consumer his reservation price Vthe firm pays the transport
coststhis is uniform delivered pricingit is discriminatory
because price does not reflect costs
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Product variety and price discriminationSuppose that the
monopolist delivers the product.then it is possible to price
discriminateWhat pricing policy to adopt?charge every
consumer his reservation price Vthe firm pays the transport
coststhis is uniform delivered pricingit is discriminatory
because price does not reflect costs
*

Product variety and price discrimination 2Should every
consumer be supplied?suppose that there are n shops evenly
spaced on Main Streetcost to the most distant consumer is c +
t/2nsupply this consumer so long as V (revenue) > c + t/2nThis
is a weaker condition than without price discrimination.Price
discrimination allows more consumers to be served.
*
Product variety & price discrimination 3 How many shops
should the monopolist operate now?
Suppose that the monopolist has n shops and is supplying the
entire market.
Total revenue minus production costs is NV – Nc
Total transport costs plus set-up costs is C(N, n)=tN/4n + nF
So profit is p(N,n) = NV – Nc – C(N,n)
But then maximizing profit means minimizing C(N, n)
The discriminating monopolist operates the socially optimal
number of shops.
*
Monopoly and product qualityFirms can, and do, produce goods
of different qualitiesQuality then is an important strategic
variableThe choice of product quality determined by its ability
to generate profit; attitude of consumers to q ualityConsider a
monopolist producing a single goodwhat quality should it
have?determined by consumer attitudes to qualityprefer high to
low qualitywilling to pay more for high qualitybut this requires
that the consumer recognizes qualityalso some are willing to

pay more than others for quality
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Demand and qualityWe might think of individual demand as
being of the formQi = 1 if Pi < Ri(Z) and = 0 otherwise for each
consumer iEach consumer buys exactly one unit so long as price
is less than her reservation pricethe reservation price is affected
by product quality ZAssume that consumers vary in their
reservation pricesThen aggregate demand is of the form P =
P(Q, Z)An increase in product quality increases demand
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Demand and quality 2
Begin with a particular demand curve
for a good of quality Z1
Price
Quantity
P(Q, Z1)
P1
Q1
If the price is P1 and the product quality
is Z1 then all consumers with reservation
prices greater than P1 will buy the good
R1(Z1)
These are the
inframarginal
consumers

This is the
marginal
consumer
Suppose that an increase in
quality increases the
willingness to pay of
inframarginal consumers more
than that of the marginal
consumer
Then an increase in product
quality from Z1 to Z2 rotates
the demand curve around
the quantity axis as follows
R1(Z2)
P2
Quantity Q1 can now be
sold for the higher
price P2
P(Q, Z2)
*
Price
Quantity
P(Q, Z1)
P1
Q1
R1(Z1)
Suppose instead that an
increase in
quality increases the
willingness to pay of marginal

consumers more
than that of the inframarginal
consumers
Then an increase in product
quality from Z1 to Z2 rotates
the demand curve around
the price axis as follows
P(Q, Z2)
Once again quantity Q1
can now be sold for a
higher price P2
P2
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Demand and quality 4The monopolist must choose bothprice (or
quantity)qualityTwo profit-maximizing rulesmarginal revenue
equals marginal cost on the last unit sold for a given
qualitymarginal revenue from increased quality equals marginal
cost of increased quality for a given quantityThis can be
illustrated with a simple example:
- Q) where Z is an index of quality
*
P = Z(q - Q)
Assume that marginal cost of output is zero: MC(Q) = 0
Cost of quality is C(Z) = aZ2

This means that quality is
costly and becomes
increasingly costly
Marginal cost of quality = dC(Z)/d(Z)
= 2aZ
The firm’s profit is:
p(Q, Z) =PQ - C(Z)
= Z(q - Q)Q - aZ2
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Again, profit is:
p(Q, Z) =PQ - C(Z)
= Z(q - Q)Q - aZ2
The firm chooses Q and Z to maximize profit.
Take the choice of quantity first: this is easiest.
Marginal revenue = MR =
Zq - 2ZQ
Zq -
Q* = q/2
*

Total revenue = P*Q* =
(Zq/2)x(q/2) =
Zq2/4
So marginal revenue from increased quality is
MR(Z) = q2/4
Marginal cost of quality is
MC(Z) = 2aZ
Equating MR(Z) = MC(Z) then gives
Z* = q2/8a
Does the monopolist produce too high or too low quality?
*
Demand and quality: multiple productsWhat if the firm chooses
to offer more than one product?what qualities should be
offered?how should they be priced?Determined by costs and
consumer demand
*
Demand and quality: multiple products 2An example:two types
of consumereach buys exactly one unit provided that consumer
surplus is nonnegativeif there is a choice, buy the product
offering the larger consumer surplustypes of consumer
distinguished by willingness to pay for qualityThis is vertical
product differentiation

*
Vertical differentiationIndirect utility to a consumer of type i
from consuming a product of quality z at price p is Vi = qi(z –
zi) – p where qi measures willingness to pay for quality;zi is the
lower bound on quality below which consumer type i will not
buyassume q1 > q2: type 1 consumers value quality more than
type 2assume z1 > z2 = 0: type 1 consumers only buy if quality
is greater than z1:never fly in coachnever shop in Wal-Martonly
eat in “good” restaurantstype 2 consumers will buy any quality
so long as consumer surplus is nonnegative
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Vertical differentiation 2Firm cannot distinguish consumer
typesMust implement a strategy that causes consumers to self-
selectpersuade type 1 consumers to buy a high quality product
z1 at a high priceand type 2 consumers to buy a low quality
product z2 at a lower price, which equals their maximum
willingness to pay Firm can produce any product in the range
MC = 0 for either quality type
z, z
*
Vertical differentiation 3

For type 2 consumers charge maximum willingness to pay for
the low quality product: p2 = q2z2
Suppose that the firm offers two products with qualities z1 > z2
Now consider type 1 consumers: firm faces an incentive
compatibility constraint
q1(z1 – z1) – p1 > q1(z2 – z1) – p2
Type 1 consumers prefer the high quality to the low quality
good
q1(z1 – z1) – p1 > 0
Type 1 consumers have nonnegative consumer surplus from the
high quality good
These imply that p1 < q1z1 – (q1 - q2)z2
There is an upper limit on the price that can be charged for the
high quality good
*
Vertical differentiation 4Take the equation p1 = q1z1 – (q1 –
q2)z2this is increasing in quality valuationsincreasing in the
difference between z1 and z2quality can be prices highly when
it is valued highlyfirm has an incentive to differentiate the two
products’ qualities to soften competition between
themmonopolist is competing with itselfWhat about quality
choice?prices p1 = q1z1 – (q1 – q2)z2; p2 = q2z2check the
incentive compatibility constraintssuppose that there are N1
type 1 and N2 type 2 consumers
*

Profit is
P = N1p1 + N2p2 =
N1q1z1 – (N1q1 – (N1 + N2)q2)z2
This is increasing in z1 so set z1 as high as possible: z1 =
For z2 the decision is more complex
(N1q1 – (N1 + N2)q2) may be positive or negative
z
*
Case 1: Suppose that (N1q1 – (N1 + N2)q2) is positive
Then z2 should be set “low” but this is subject to a constraint
Recall that p1 = q1z1 – (q1 - q2)z2
So reducing z2 increases p1
But we also require that q1(z1 – z1) – p1 > 0
Putting these together gives:
The equilibrium prices are then:
*
Vertical differentiation 7Offer type 1 consumers the highest
possible quality and charge their full willingness to payOffer
type 2 consumers as low a quality as is consistent with incentive
compatibility constraintsCharge type 2 consumers their

maximum willingness to pay for this qualitymaximum
differentiation subject to incentive compatibility constraints
*
Case 1: Now suppose that (N1q1 – (N1 + N2)q2) is negative
Then z2 should be set as high as possible
The firm should supply only one product, of the highest
possible quality
What does this require?
From the inequality offer only one product if:
Offer only one product:
if there are not “many” type 1 consumers
if the difference in willingness to pay for quality is “small”
Should the firm price to sell to both types in this case? YES!
*
Empirical Application: Price Discrimination and Imperfect
Competition
Although we have presented price discrimination and product
design (versioning) issues in the context of a monopoly, these
same tactics also play a role in more competitive settings of
imperfect competition
Imagine a two-store setting again
Assume N customers distributed evenly between the two stores,
each with maximum willingness to pay of V .

No transport cost—Half of the consumers always buys at
nearest store. Other half always buys at cheapest store.
*
Price Discrimination and Imperfect Competition 2
If both stores operated by a monopolist, set price = V.
Cannot set it higher of there will be no customers.
Setting it lower though gains nothing.
What if stores operated by separate firms?
Imagine P1 = P2 = V. Store 1 serves N/4 price-sensitive
customers and N/4 price-insensitive ones. The same is true for
Store 2.
It gains N(V - -sensitive customers
from Store 2
*
MORAL 1: Both firms have a real incentive to cut price.
This ultimately proves self-defeating
Cutting their price does not increase their likelihood
of shopping at a particular place. It just loses revenue.
MORAL 2: Unlike the monopolist who sets the same price to
everyone, these firms have an incentive to discriminate and so

continue to charge a high price to loyal consumers while pricing
low to others.
In equilibrium, both still serve N/2 customers but now do so at a
price closer to cost.
This is especially frustrating in light of the “brand-loyal” or
price-insensitive customers
*
The intuition then is that price discrimination may be associated
with imperfect competition and become more prominent as
markets get more competitive (but still less than perfectly
competitive).
This idea is tested by Stavins (2001) with airline prices.
Restrictions such as a required Saturday night stay-over or an
advanced purchase serve as screening mechanism for price-
sensitive customers. Hence, restrictions lead to lower ticket
price.
Stavins (2001) idea is that price reduction associated with flight
restrictions will be small in markets that are not very
competitive.
*
Stavins (2001) looks at nearly 6,000 tickets covering 12
different city-pair routes in September, 1995.
She finds strong support for the dual hypothesis that:
In highly competitive (low HHI) markets, a Saturday night

restriction leads to a $253 price reduction but only a $165
reduction in less competitive ones.
a) passengers flying on a ticket with restrictions pay less;
b) price reduction shrinks as concentration rises
In highly competitive (low HHI) markets, an Advance Purchase
restriction leads to a $111 price reduction but only a $41
reduction in less competitive ones.
*
Variable Coefficient t-Statistic Coefficient t-
Statistic
Saturday
Night Stay – 0.408 – 4.05 -----
-----
Required
Saturday
Night Stay 0.792 3.39 -----
-----
RequiredxHHI
Advance Purchase ----- ----- – 0.023
–5.53 Required
Advance Purchase ----- ----- 0.098
8.38
RequiredxHHI

NOTE: HHI is the Herfindahl Index. A Saturday Night Stay
or an Advance Purchase lowers the price significantly. But the
HHI terms show that this effect weakens as market
concentration increases.
*
Demand and quality A1
Price
Quantity
q
Z1q
P(Q,Z1)
How does increased quality
affect demand?
Z2q
P(Q, Z2)
MR(Z1)
MR(Z2)
q/2
Q*
P1 = Z1q/2
P2 = Z2q/2
When quality is Z1
price is
Z1q/2
When quality is Z2
price is
Z2q/2

*
Demand and quality A2
Price
Quantity
q
Z1q
Z2q
q/2
Q*
P1 = Z1q/2
P2 = Z2q/2
An increase in quality from
Z1 to Z2 increases
revenue by this area
So an increase is quality from
Z1 to Z2 increases surplus
by this area minus the
increase in quality costs
The increase in total
surplus is greater than
the increase in profit.
The monopolist produces
too little quality
Social surplus at quality Z1
is this area minus quality
costs
Social surplus at quality Z2
is this area minus quality

costs
*
Demand and quality
Derivation of aggregate demand
Order consumers by their reservation prices
Aggregate individual demand horizontally
Price
Quantity
1
2
3
4
5
6
7
8

*
Location choice 1
d < 1/4
We know that p(d) satisfies the following constraint:
p(d) + t(1/2 - d) = V
This gives:
p(d) = V - t/2 + td
- t/2 + td
Aggregate profit is then: p(d) = (p(d) - c)N
= (V - t/2 + td - c)N
This is increasing in d so if d < 1/4 then d should be increased.
*
Location choice 2
d > 1/4
We now know that p(d) satisfies the following constraint:
p(d) + td = V
This gives:
p(d) = V - td
Aggregate profit is then: p(d) = (p(d) - c)N
= (V - td - c)N
This is decreasing in d so if d > 1/4 then d should be decreased.
UNKNOWN-0.bin

UNIVERSITY OF NORTHAMPTON
FACULTY OF BUSINESS & LAW
MASTER OF BUSINESS ADMINISTRATION
Financial Decision Making (FINM036)
Written Assignment
Author:
Student ID:
Instructor:
Submission Date: 19th December 2022
Report Analyzing the Performance and Operations of James
Halstead PLC
Table of Contents
James Halstead PLC
Introduction
This statement is a financial analysis of James Halstead PLC,
which is a significant international group of business that
product flooring or commercial, contract and residential

markets. With the complexities and difficulties of running a
business, financial analysis, performance evaluation of the
company, corporate governance, and the evolution of various
business operations have emerged as important tasks that every
manager have to occasionally complete in order to assess when
a break is necessary to boost productivity. Jams Halstead PLC
has been listed on the Alternative Investment Market (AIM) in
London Stock Exchange (LSE) since 2006 (James Halstead
PLC,2022). In this statement will analysis the radios for the
past 5 years as well as efficiency and liquidity.
Additionally, the business will be compared with the
competitor named Headlam Group, which is British company
and distributes flooring all over Europe. Headlam Group also
listed on the Alternative Investment Market in London Stock
Exchange as same as James Halstead PLC. Moreover, both of
them are the same industry and same goal which is become a
Financial Times Stock Exchange 100 (FTSE 100) company in
the future. To become FTSE 100, the company’s storks have to
be weighted by market capitalization and the 100 companies
with the highest market caps make it into index (IG.COM,2019).
Company Overview
James Halstead PLC is British company which was
founded by James Halstead in 1915. Nowadays, in 2022, James
Halstead PLC has workforce about 820 individuals with sixteen
(16) sites worldwide comprises three (3) sites in United
Kingdom, two (2) sites in Germany, one (1) site in Ireland, one
(1) site in Norway, one (1) site in France, one (1) site in
Sweden, one (1) site in Australia, one (1) site in New Zealand,
one (1) site in Hong Kong, one (1) site in China, one (1) site in
Canada, one (1) site in India, one (1) site in Dubai and one (1)
site in Malaysia (Financial Times,2022). However, the
headquarters of the company located in Manchester, England,

United Kingdom.
Back to beginning, the company was started as a weaving
enterprise, and its initial product line consisted of woven cotton
fabrics that were both waterproofed and colored. However, this
was to turn to the production of rubberized fabric, which is used
to make rainwear and outdoor clothes and in 1934, they
increased their ability to manufacture flooring materials. Before
the end of 1940’s, they successes created a first of its kind vinyl
sheet product, Polyflor which is become the foundation of the
business's success. The company was on the Stock Exchange,
issuing 10,000 ordinary shares of 10 shillings each and the
company chose to focus 100% of its resources into the flooring
market in 2004. Today, Halstead's flooring materials can be
found in public, commercial, and residential structures
worldwide, including schools, hospitals, and transportation
facilities. Members of the Halstead family are still on the board
of directors, and the company is still committed to
entrepreneurship and innovation.
The stork of the company was listed on the Alternative
Investment Market in London Stock Exchange on 18th
December 2006. The company operates several subsidiaries,
including Polyflor Limited, Halstead Flooring International
Limited, Halstead Flooring Concepts Pty Limited, Phoenix
Distribution (N.W.) Limited and Polyflor Australia Pty Limited,
and so forth.
Not to mention, James Halstead PLC believes that economic and
environmental sustainability are mutually exclusive. Because of
this, they always working to increase reuse and recycling while
decreasing resource use, waste and the carbon footprint. James
Halstead PLC was assured by the external audits and
certification listed such as ISO 14001, ISO 9001, BES 6001, SA
8000 and BS OHSAS 18001 (James Halstead PLC,2022).
Equity Holdings

The top 10 shareholders of James Halstead PLC are
summarized in the table below based on the quantity of stocks
held and the ownership percentage. The top ten shareholders
hold 47.52% of the total equity whereby the institutional
stockholders and individual stockholders account for 31.71%
and 15.81% respectively.
Shareholders
Names
Equities
%
John Halstead Settlement
70,894,436
17.0%
Mark Halstead
26,505,134
6.36%
Octopus Investments Ltd.
25,037,295
6.01%
Sanford DeLand Asset Management Ltd.
13,522,766
3.24%
Lt Col Warren Settlement
11,975,000
2.87%
Mavis Warren Settlement
11,975,000
2.87%
Edith Hayhurst
11,427,000
2.74%
Investec Wealth & Investment Ltd.
10,789,000

2.59%
Susan Jane Halstead
8,027,000
1.93%
Geoffrey Halstead
7,945,000
1.91%
Total
198,097,631
47.52 %Statement
Chairman's Statement to the Annual General Meeting
reveals that James Halstead PLC took the decision to increase
the levels of stockholdings since cost and supply continued to
affect the global markets. Commercial flooring continues to be
resilient and sales are generally higher than they were at this
stage last year also the stock levels reduce by over 10%.
Besides that, availability of shipping has improved on the other
hand, the shipping rate will remain lower. Additionally, the fall
in the value of the pound has given exports a competitive edge.
Although their international markets face difficulties, it is still
early in their fiscal year, and historically, the second part of
their financial year has been their stronger
(RSN,2022).Competition
Headlam Group is produces and distributes flooring
products under palettone, polyflor and camaro and so forth, as
same as James Halstead PLC, for commercial and domestic uses
in the United Kingdom, Australasia, Asia, Scandinavia and the
rest of Europe. Heaslam Group also registered in Alternative
Investment Market (AIM) on London Stock Exchange (LSE).
The company was founed in 1992 by Headlam. Headlam run 66
businesses across the United Kingdom and Continental Europe.
Each company uses its own sales team and trade brand while

receiving support from the group's network, central teams, and
resources (Headlam,2022).
The mission of the company is providing their customers
with service with unparalleled product, solutions and
knowledge. Furthermore, they were assured by certification
listed, ISO 45001, which is the world’s most popular standard
for occupational health and safety. As a consequence, the
business establishes itself as James Halstead PLC's legitimate
rival.
Financial Ratios Analysis
Profitability Ratios
Profitability is one for many financial matrices that used to
evaluate a company's potential to create profits over time, based
on information from a specific point in time, in relation to its
revenue, operating costs, balance sheet assets, or shareholders'
equity (AMY DRURY,2021). This report also compared
between the chosen company, James Halstead PLC, and
competitor company, Headlam Group, for 5 years, 2018 – 2022.
James Halstead PLC and Headlam profitability ratios are
summarized below.

Year
2018
2019
2020
2021
2022
Gross Margin
James Halstead PLC
42.90%
43.00%
42.10%
41.91%
38.89%
Headlam Group
33.34%
31.90%
30.81%
33.05%
33.52%
Net
Margin
James Halstead PLC
14.71%
14.94%
14.39%
14.96%
13.82%
Headlam Group
4.37%
3.97%

- 3.51%
3.66%
4.14%
Return
on assets
James Halstead PLC
18.63%
17.52%
15.87%
17.00%
16.00%
Headlam Group
7.46%
5.75%
- 4.34%
5.16%
5.90%
Return
on Equity
James Halstead PLC
28.50%
28.40%
24.99%
25.47%
24.46%
Headlam Group
14.25%
11.66%
- 9.23%
10.51%

12.47%
Efficiency Ratios
Year
2018
2019
2020
2021
2022
Efficiency Ratios
Inventory Turnover
James Halstead PLC
Headlam Group
Asset
Turnover
James Halstead PLC

Headlam Group
Receivables Turnover
James Halstead PLC
Headlam Group
Liquidity Ratios
Year
2018
2019
2020
2021
2022
Liquidity Ratios

Current Ratio
James Halstead PLC
2.94
2.75
3.18
2.69
2.44
Headlam Group
1.57
1.44
1.46
1.60
1.43
Quick Ratio
James Halstead PLC
1.60
1.63
1.86
1.81
1.18
Headlam Group
0.86
0.78
0.84
0.92
0.72
Cash Ratio
James Halstead PLC
1.10
1.11

1.31
1.19
0.58
Headlam Group
0.23
0.17
0.31
0.64
0.15
Gearing Ratios (Debt Radios)
Year
2018
2019
2020
2021
2022
Gearing Ratios
Debt
Ratio
James Halstead PLC
34.62%
38.32
36.46%
33.26%
35.75%
Headlam Group
47.66%
50.71%
52.93%
50.88%

53.88%
Debt to equity
James Halstead PLC
52.94%
62.12%
57.39%
49.84%
55.65%
Headlam Group
91.05%
102.88%
112.45%
103.58%
116.82%
Times Interest Earned Ratio
James Halstead PLC
463.26%
450.5%
13.38%
Headlam Group
Corporate Governance Compliance

James Halstead PLC have selected to use the QCA code,
which developed by the Quoted Company Alliance and
published in 2018, as their model for excellent corporate
governance because they recognize how important effective
corporate governance is (James Halstead PLC,2022). The
strategy of James Halstead PLC aims to strengthen the brand
identity by generating and enhancing goodwill also customer
satisfaction in order to encourage ongoing repeat business. This
strategy aims to increase revenue, profitability, and cash flow
enabling the continuation of dividend payments and boosting
shareholder value. As a manufacturer, they offer items in large
quantities to distributors who are in charge of regional or local
delivery. A core company principle is that sales representatives
should be assigned specifically to presenting products to end
users and specifiers rather than stockiest (Anthony Wild,2022).
Compliance
According to James Halstead PLC Audit Committee Terms
of Reference, Article 29.2 of the Company's Articles of
Association established this Committee of the Board of
Directors as the Audit Committee. The "Group" in these terms
of reference refers to James Halstead PLC and its affiliates. The
committee shall have at least two members, at least one of
whom shall have recent relevant experience and competence in
accounting or auditing or both, nominated by the board from
among the independent non-executive directors of the company.
James Halstead PLC separate Group Chief Executive (CEO),
Mark Halstead, who was chosen in April 2002, and Non-
Executive Chairman, Anthony Wild, who was appointed in
March 2001, he is a well-known local businessman and a
professional accountant.
“The Board” comprises of one (1) Non-Executive
Chairman, one (1) Group Chief Executive, one (1) Group

Finance Director, one (1) Senior Independent Director, and two
(2) Independent Director. Moreover, James Halstead PLC also
have “Senior Management Team” which is comprises of one (1)
Corporate Development Director (James Halstead PLC’s
board,2020). James Halstead PLC believes that it is important to
take precautions to reduce the possibility of any conflicts of
interest that could be perceived as having an unfavorable
influence. If at all practicable, the Committee's chairman and
members ought to be switched out on a regular basis.
Nevertheless, on the board and corporate development director
consists of 7 without any woman represented on any positions,
it appears that the company does not respect diversity of
gender.Proposed Financial Strategies
The company should focus on improve all products that
they have by research customer satisfaction both satisfied and
dissatisfied. The company also should invent new goods and
technology which no one else be able to create. Once, James
Halstead PLC was the very first company who succeed created a
first of its kind vinyl sheet product, Polyflor. Author believed
that if they were success before, they would be able to achieve
it again. To ensure that the company is running at close to
optimal output, they should concentrate on enhancing
production processes employing the most recent technologies
and boosting the contributions from in-house manufacturing of
its products.
Planning for both the short and long future is always
necessary. Set minor goals that can help you reach your main
objective. Long-term sight is obstructed by the pandemic's
numerous uncertainties, but smaller goals can be set in order to
meet urgent needs while laying the groundwork for a more
ambitious project in the future.

Reference
https://www.investegate.co.uk/james-halstead-plc--jhd-
/rns/chairman-s-statement-to-the-annual-general-
meeting/202212010700021121I/
Zoominfo
https://www.zoominfo.com/c/james-halstead-plc/355713880
Headlam
https://www.headlam.com/governance/responsibility-of-the-
board/
Ratio
https://www.wsj.com/market-data/quotes/UK/JHD/financials
https://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=
10&vw=kr&SecurityToken=0P000090SA%5D3%5D0%5DE0W
WE%24%24ALL&Id=0P000090SA&ClientFund=0&CurrencyId
=BAS
https://www.investopedia.com/terms/e/efficiencyratio.asp
https://www.calculatorsoup.com/calculators/financial/liquidity-
ratios-calculator.php
https://www.forbes.com/sites/forbesfinancecouncil/2021/08/04/
11-ways-for-financial-leaders-to-improve-company-health-and-
guide-overall-strategy/?sh=1beb395c38e8
image1.png

Assessment Brief
Module Code
Module Name Financial Decision Making
Level 7
Module Leader Ewan Tracey
Module Code FINM036
Assessment title:
Written Assignment
Weighting: 50%
Submission dates: Please see NILE
Feedback and Grades
due: Please see NILE
1
Assessment Task
This assessment requires students to produce an individual
report analysing the performance and operations
of a publicly listed company within a selected sector. A list of
companies will be provided for students to
select from. This assessment represents 50% of the total marks.

Module Assignment Information
Due date: To be determined - UK semester 1 / overseas
assignment
due from 1st September 2022 to 31st August 2023
FINM036 Written Assignment
The aim of this assignment is to test students’ knowledge and
understanding of key accounting and
corporate finance concepts, theories and tools that can be used
to critically analyse organisations. It will also
test the ability to present non-financial information
Required:
You have been asked to write a report to the board of directors
of one of the selected companies below as
part of the interview process for your first appointment as a
Finance Director of a company listed on AIM
(which is the Alternative Investment Market for small
companies) within the London Stock Exchange (LSE).
The board of directors have asked you to write a report about
your vision and strategic financial goals for the
company.
The companies are within a selected sector of the AIM. Assume
that your selected company has ambitions
and plans to become a FTSE 100 (the largest UK listed
companies) company in the near future.
Guide:
You need to introduce the company, discuss the product or
services, location, turnover, number of
employees, etc. The report should be maximum 2,500 words (+/-
10%). Remember you need to make an

impression on the board of directors for you to be considered
for the critical post of Finance Director.
The essence of this assignment is to test your knowledge and
understanding of key accounting and
corporate governance concepts, theories and tools and ability to
present data in a concise manner.
Required:
You have been asked to write a report to the board of directors
of one of the selected companies below as
part of the interview process for your first appointment as a
Finance Director of a AIM company. The board of
directors have asked you to write a report about your vision and
strategic financial goals for the company.
The companies are within the AIM index. Assume that your
selected company wants to become a FTSE 100
(the largest UK listed companies) company in the near future.
Additional Guidance
You need to introduce the company, discuss the product or
services, location, turnover, number of
employees, the contribution of the sector to the UK economy.
To analyse, you need to compare the financial
data / ratios of your selected company with either a competitor
within the sector or the average of the sector.
2
The report should be maximum 2,500 words. Remember you
need to make an impression on the board of

directors for you to be considered for the critical post of
Finance Director.
Please note that you must select a company from the list below
for 2019/20
List of companies to select from for 2019/2020
Company Name ICB
Super-Sector
Country of
Incorporation
Market Company Market Cap
(£m)
ACCSYS TECHNOLOGIES PLC Construction &
Materials
United Kingdom AIM £87.65
BILLINGTON HOLDINGS PLC Construction &
Materials
EPWIN GROUP PLC Construction &
Materials
JAMES HALSTEAD PLC Construction &
Materials

MICHELMERSH BRICK HOLDINGS PLC Construction &
Materials
NEXUS INFRASTRUCTURE PLC Construction &
Materials
SIGMAROC PLC Construction &
Materials
VAN ELLE HOLDINGS PLC Construction &
Materials
Section A- 2000 words.
1. Analyse the performance of your chosen company using
relevant financial and non-financial ratios (5
years). Your analysis should include profit ratios, efficiency,
liquidity and other ratios that you
consider relevant.
Section B 500 words
1. Critically evaluate the company’s corporate governance
compliance and its impact on the brand and
reputation as reported in the press (print, online and social
media)

2. Discuss the proposed medium term financial strategies for
your selected company to become a
FTSE100 company or for your company to become dominant in
the industry / sector.
Please note:
If you select a company outside of the list above, you will
automatically fail this part of the
assignment, unless you get a prior written approval from your
tutor.
You can use www.northcote.co.uk, pro-share and the FT to
identify companies within their sectoral
classifications. It is essential that all sources of information are
correctly referenced using the Harvard
system.
Word Limits
The word limit for this assignment is 2500 words (+/- 10%)
Where the submission exceeds the stipulated word limit by more
than 10%, the submission
will only be marked up to and including the additional 10%.
Anything over this will not be
included in the final grade for the assessment item. Abstracts,
bibliographies, reference
lists, appendices and footnotes are excluded from any word
limit requirements.
3
http://www.northcote.co.uk/
Where a submission is notably under the word limit, the full

submission will be
marked on the extent to which the requirements of the
assessment brief have been
met.
Assessment Learning Outcomes
The learning outcomes to be addressed through this assignment
are:
(a) Demonstrate a critical understanding of the nature and role
of the finance professional
and how financial control processes impact on the organisation
and its stakeholders.
(b) Critically evaluate the impact of the external context on the
financial domain, both
domestically and internationally.
(c) Identify, critically appraise and analyse the content,
relevance and use of key financial
accounting information and techniques, both within
organisations and by reference to
relevant research.
(d) Demonstrate the ability to evaluate critically and
communicate effectively the financial
performance of an organisation by reference to internal or
published financial information.
Assessment Grading Criteria
The marking criteria

Criteria Exceptional 70-100% A- to A+ Good C- to C+ Pass D-
to D+ Fail F- to F+
Introduction,
presentation
and refereeing
of the report
10%
7-10
Exceptional report. The
introduction is exemplary and
provides evidence of a complete
understanding of the company’s
activities. The industry and the
company analysed are outline
and justified clearly. The
significance of the industry and
comparative report is presented
clearly. There is clear evidence of
originality and ability to justify the
research effort. Compelling
evidence of research.
6 -6 points
Good: The introduction is
relevant and illustrates an
attempt to address the
assessment requirements.
The industry and company
are described in detail. The
rationale and comparative
data is limited. Good
rationale, but lacks the
details expected to score top

marks probably due to
general unsupported
statements or grammatical /
spelling mistakes.
5 to 5 points
Satisfactory: The
introduction shows
some correlation with
the project
requirements. There is
irrelevant information.
The rationale and
objectives are not
vague. Generally
descriptive. There is
very limited evidence of
research.
1 to 4 points
Fail. The introduction is
descriptive and irrelevant
The work lacks clear
justification of the report
purpose. Industry and
company choice are not
justified. Limited support
for the information given.
The student selected a
company not on the list
without approval
Application of
the theories
underpinning
the report

20%
16to 20 points
Exceptional. A clear
demonstration of complete grasp
of knowledge of the key factors
that drive performance in the
chosen company and the industry
in general. Critical relevant
theories are identified such as the
application of PESTEL or any
other competition or management
theories to support your argument
must apply and critically appraise
the theories. Industry examples
13 to 15 points
Good: The analysis
demonstrates adequate
knowledge of a fair range of
the factors that affect
company performance.
There is intermittent
evidence of an appreciation
of the significance of the
factors to the industry being
analysed. Critical success
factors are outlined. Some
examples and limited
10 to 12 points
Satisfactory: The
analysis is largely
descriptive and narrative
with little evidence of
analysis. There is no

clear evaluation of how
the identified factors
affect the selected
company. Critical
success factors are
vague. Limited evidence
of research. Lack of
1 to 9 points
Fail: The analysis is not
linked to the company.
The analysis is
descriptive and generally
irrelevant to the company
Critical success factors
are not clear or missing.
No relevant examples are
presented. Little evidence
of research
4
to D+ Fail F- to F+
and published literature are used
to develop a logical case on the
relevance of the sector, its
importance and some key
financial indicators such as the
GDP contribution of the sector or
contribution to the country’s
economy over the past five years.

Theories such as the SWOT
analysis (strength, weaknesses,
opportunities and threats) within
the sector or PEST analysis
(Political, economical, social and
technological) impact of the
industry or sector
literature are used.
Contributions of the sector to
the county’s economy may
be missing
concrete supporting
evidence
without approval.
Depth of
research
including the use
of appropriate
ratios / explained
30%
22 to 30 points
Exceptional. The selected
financial ratios are clearly justified
within the context of the industry
being analysed. Selected
financial ratios for the past five
years are shown and clearly
presented and labelled in
appendices. Comparison to the

competitors financial and non
financial data or the sector
figures. The use of examples and
published literature to justify
choice of ratios is compelling. The
interpretation of financial ratios
and their importance
demonstrates complete grasp of
knowledge. Relevant examples
and references used in
discussion
18 to 21 points
Good: Financial ratios are
selected and outlined clearly.
Most of the financial ratios
for the past five years are
presented in appendices.
The interpretation and
justification of financial ratios
lack consistency. There is
intermittent evidence of an
understanding of the
significance of the financial
ratios. Some examples and
references are used in
discussion.
15 to 17 points
Satisfactory: Financial
ratios are stated but not
clearly justified.
Incomplete financial
ratios for the past five
years are presented in
appendices. A basic

argument is evident but
lacks clarity and
coherence. Limited
examples and
references used in
discussion
1 to 14 points
Fail: Financial ratios are
defined and described
with no justification.
Financial ratios for the
past five years are
incomplete or missing.
Insufficient evidence of
knowledge and research
No examples and lack of
cited published work.
without approval
Formulation of
an effective
summary of key
issues
and potential
actions/ changes
30%
22 to 30 points
Exceptional. The report
summarises the key elements
and brings out the compelling
reasons why potential investors
and other stakeholders should be

keen to invest in the company.
The strategic direction of the
company and key advice on
competitor’s analysis and the
future of the company when
compared to other sectors within
the economy.
The main CG rules and the
analysis of the company’s
compliance with corporate
governance rules such as rules
on diversity, effectiveness,
control, directors’ attendance at
board meetings
The arguments are logical and
backed up with supporting
evidenced that are within the
report. Exceptional comparisons
with competitors and advantages
are enumerated and clearly
stated including plan for future
financial strategy for the company
18 to 21 points
Good: A good attempt to
construct a coherent and
logical discussion of the
relevant issues. The report
shows some relevance and
justification but does not give
details on corporate
governance compliance by
the selected company

There is a lack of focus and
consistency in the
discussion. There is
tendency to narrate and
lacks analysis. Some
examples and limited
literature are used.
15 to 17 points
Satisfactory: Basic
understanding of the
report is understood, but
lacks coherent and
logical flow of the
discussion. Some of the
analysis are not
customised to the
selected company or
comparison made to the
industry.
Very descriptive outline
of company. Limited
analysis with no links to
industry. No or limited
CG compliance issue
1 to 14 points
Fail. Intermittent and
vague description of the
report requirements and
their impact on the
industry. The writing
rarely goes beyond
simplifying paraphrase o

the essential elements of
the requirements of the
report without adequate
justification or any
convincing demonstration
of essence of the report
No discussion of CG
rules or application of the
rules to the selected
company
5
to D+ Fail F- to F+
Conclusion
10%
7 to 10 points
Excellent. The conclusion is a
summative review of the report. The
evaluation is compelling,
interpretation is accurate and the
discourse is clear. Citation and
referencing is accurate, up-to-date
and well presented.
Justification for appointment into the
FD role
6 to 6 points
Good:. The conclusion is a
good review of the report. The

discussion is clear and orderly.
Citation and referencing is clear
throughout. No details on the
justification for the post
5 to 5 points
Satisfactory: The
conclusion is descriptive
and lacks analysis and
critical evaluation. Citation
and referencing is good in
some parts. Lacks the
reason for the appointment
as FD
1 to 4 points
Fail: The conclusion show a
lack of understanding of the
report requirement and
material presented in the
document. Conclusion has
some information that is
irrelevant to the report.
Citation and referencing is
incorrect / missing in most
parts
Generic Grading Criteria for Level 7
See grading criteria below
Assessment Support/Feedforward
Please look out for announcement on NILE on additional
support to help with your work. We
are unable to provide individual review of the draft of your
work

Assessment Submission
To submit, please go to the ‘Submit your work’ area on the
NILE site and use the AS1
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student work for possible textual matches against internet
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Late submission of work
Use either:
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following will apply:
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marked and returned with full
feedback, and awarded a maximum bare pass grade of C-.
● More than one week from original deadline – maximum grade
achievable LG (L
indicating late).
Or, if a resit
Any work submitted late will be awarded a LG grade.
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Use either:
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extensions is to be supportive

of students who have genuine difficulties, but not against
pressures of work that could have
reasonably been anticipated. Please refer to Appendix I of the
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advice on extensions.
Or, if a resit
6
There are NO extensions for resits
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Your grade and overall summary feedback will be available in
Grade Centre. Please also click
through to Turnitin for within text comments.
Academic Practice and Integrity
This is an individual assignment.
The University of Northampton policy will apply in all cases of
copying, plagiarism or any other
methods by which students have obtained (or attempted to
obtain) an unfair advantage.
Support and guidance on assessments and academic integrity
can be found on: SkillsHub:
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misconduct is suspected the tutor
will apply a ZZ grade in NILE.
Mitigating Circumstances
For guidance on Mitigating circumstances please go to
https://www.northampton.ac.uk/about-us/governance-and-
management/university-policies-p
rocedures-and-regulations/ where under Student Issues you will

find detailed guidance on the
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Please note, however, that an application to defer an assessment
on the grounds of mitigating
circumstances should normally be made in advance of the
submission deadline or
examination date.
7
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management/university-policies-procedures-and-regulations/
management/university-policies-procedures-and-regulations/
GENERIC GRADE CRITERIA
These are the criteria required to achieve each classification at:
Level 7
An
outstanding
Distinction
A+ Work which fulfils all the criteria of the grade below, but at
an exceptional
standard
A very strong
Distinction
A Work of distinguished quality which is evidenced by an

authoritative
comprehensive, detailed and systematic knowledge base and
understanding
for specialised area of study. A key feature will be the ability
to work with
creativity and originality using knowledge and insights at the
forefront of the
area of study. There will be a confident grasp of disciplinary
methodologies for
the discipline/area of study which will be consistently reflected
in both own
research and advanced scholarship, effectively integrating
advanced skills of
analysis, synthesis, evaluation and application on a firm
foundation of critical
facility. Work will be characterised by strong technical
expertise to high
professional standards, and there will be sustained evidence of
confident,
autonomous operation and judgment in complex and
unpredictable
professional situations both in relation to working with others
and in relation to
own functioning. Self-direction, creativity, practical
understanding will be
combined to demonstrate the qualities expected of an effective
self critical
independent learner exercising excellent measured judgment,
and will be a
consistent feature of work.
A clear
Distinction
A- Work of very good quality which displays most but not all of
the criteria for the

grade above.
An
outstanding
merit
B+ Work of highly commendable quality which clearly fulfils
the criteria for the
grade below, but shows a greater degree of capability in
relevant advanced
intellectual or specialised skills.
A very
strong
Merit
B Work of commendable quality demonstrating a detailed and
systematic
knowledge base and understanding in specialised areas,
informed by critical
awareness of current issues, research based/theoretical insights
at the
forefront of the area of study. This will be supplemented by a
good
comprehensive understanding of disciplinary methodologies
relevant to own
research or advanced scholarship, which will be reflected in
work which
integrates skills of advanced analysis, synthesis, evaluation and
application with
critical awareness. There will be some evidence of originality
in application of
skills/knowledge, underpinned by good technical expertise
which permits
confident, autonomous operation in a range of complex and
unpredictable

professional situations. The ability to work autonomously, as a
self critical
independent learner exercising good and considered judgment,
will be a
consistent feature of work.
A Merit B- Work of good quality which contains most, but not
all of the characteristics of
the grade above.
An
Outstanding
Pass
C+ Work which clearly fulfils the criteria for the grade below,
but shows a greater
degree of capability in relevant advanced intellectual or
specialised skills.
8
A Very Good
Pass
C Work of capable quality which clearly demonstrates a
systematic
understanding of knowledge in specialised areas and a critical
awareness of
current issues, research based/theoretical knowledge at the
forefront of the
area of study, together with a sound understanding of
methodologies
applicable to own research or advanced scholarship. There may
be limitations

to the application of this knowledge and/or conceptual
understanding of
advanced scholarship, but there will be evidence of critical
awareness in
relation to analysis, synthesis, evaluation and application. The
ability to
exercise initiative as an independent and self critical learner in
complex and
unpredictable professional contexts will be demonstrated, as
will threshold
levels of technical expertise, although the scope of expertise
may be limited.
A Pass C- Work of satisfactory quality which contains most, but
not all of the
characteristics of the grade above.
Fail F+ Work which indicates some evidence of a systematic,
coherent and
analytical engagement with key aspects of the field of study,
including
familiarity with current scholarship, and evidence of ability to
utilise specialised
skills, but which also contains significant limitations.
F Work that falls well short of the threshold standards in
relation to one or
more of knowledge, intellectual, subject based or key skills at
this level.
F- Work of poor quality which is based on only minimal
understanding,
application or effort. It will offer only very limited evidence of
familiarity with
knowledge or skills appropriate to the field of study at this
level.

AG Work submitted but academic misconduct proven and
penalty given was to
award AG grade
LG Work submitted but given an LG grade due to late
submission
NG Work submitted but work comprises no value
G Nothing presented
9
Billington Holdings Plc 1
1
UNIVERSITY OF NORTHAMPTON
FACULTY OF BUSINESS AND LAW
FINANCIAL DECISION MAKING
FINM036
ASSIGNMENT
REPORT ANALYZING THE PERFORMANCE
AND OPERATIONS OF BILLINGTON

HOLDINGS PLC
2
Table of Contents
Introduction…………………………………….……………………
…………………………….3
Company
Overview………………..……………………………………………
………………3-4
Equity
Holdings………………………………………………………………
………………....4-5
Statement……………………………………………………………
………………….………….5
Competitor……………………………………………………………
…………………………...6
Financial Ratios

Analysis………………………………...……………………………
………….7
Profitability
Ratios………………..………………………………………………
……………..7-8
Efficiency
Ratios…………………………………………………………………
…………..…8-9
Liquidity
ratios…………………………………………………………………
………..…….9-10
Gearing
Ratios…………………………………………………………….……
…………….10-11
Corporate Governance
Compliance………………………………………………………...…
..12
Compliance……………………………………………………………
...……………………12-13
Proposed Financial
Strategies……………………………………………………………
……....13
References…………………………………………………………..
………………………..14-15
Appendix
1………………………………………………………………………
……………….16

Appendix
2………………………………………………………………………
……………….17
3
Introduction
This statement is a financial analysis of the Billington Holdings
Plc, the organisation is
listed on the Alternative Investment Market (AIM) in the
London Stock Exchange, the ratios for
the past 5 years will be analysed, which will include
profitability, efficiency and liquidity.
Moreover, the company will be compared with a competitor
within the same industry, namely
Sigmaroc Plc. Therefore, the analysis will inform the
development of the company’s vision and

strategic financial goals as it anticipates on becoming a FTSE
100 company in the near future.
Lastly, the company’s corporate governance compliance and
brand impact and reputation will be
evaluated. Consequently, the comprehensive report will aim at
creating financial strategies for the
company to become a FTSE 100 company and dominate the
construction and materials industry
in the UK.
Company Overview
The company is located in South Yorkshire, United Kingdom,
and operates within the
construction services, construction equipment, and building
subcontractors sector (Lse, 2019).
Billington Holdings was established in 1989, and the stock were
listed on the London Stock
Exchange under the ticker BILN on November 3, 2000. The
company operates several
subsidiaries, including Billington Structures Limited and Peter
Marshall Steel Stairs Limited,
which predominantly focus on the structural steelwork
manufacturing and design (Marketline,
2020). In addition, the other subsidiary is Easi-Edge Limited,
which provides safety solutions and

barrier systems to the building sector. Notably, the company is
also involved in the manufacturing
of underground tunneling, road heading equipment, and the
construction of schools and power
stations ((BILN, 2020). In this regard, the organisation has
become one of the UK’s leading
4
structural steelwork contractors because of its nearly 70 years’
professional experience within the
industry.
The company has a workforce of nearly 379 individuals,
and the chief executive officer is
Mark Smith, who has to lead the company since 2015 ((BILN,
2019). Because of this experienced
and skilled labor force, the company is capable of producing
complex structures over 12000
tonnes. Moreover, the organization has steel plants in Barnsley
and Bristol, which can produce
nearly 35,000 tonnes of fabricated steel per year. The company
also can service the UK market

and other strategic markets within the European Union.
Additionally, the company has the capacity
and expertise to provide edge protection solutions and safety
barriers for its customers’ labor force.
As expected, the company is also a leading fabricator of steel
staircase for residential, domestic,
and commercial buildings within the UK. Therefore, due to its
presence and vast experience in the
construction sector, the company has a competitive edge against
other players in the industry.
Equity Holdings
The Billington top ten shareholdes are summarised in the table
below based on the amount
of equities held and percentage of ownership. The top ten
shareholders hold 87.16% of the total
equity whereby the instituional stockholders and individual
stockholders account for 80.99% and
6.17% respectively.
Name Equities %
Gutenga Foundation 5,942,985 46.2%
Close Asset Management Ltd. 1,245,000 9.68%
Otus Capital Management Ltd. 1,000,000 7.78%

Billington ESOP 893,719 6.95%
GPIM Ltd. 638,020 4.96%
Cavendish Asset Management Ltd. 371,250 2.89%
IG Markets Ltd. 325,000 2.53%
John Stuart Gordon Non-Executive Director 282,270 2.19%
Andrea Jean Hardie 256,000 1.99%
Kathryn Jane Garnett 256,000 1.99%
11,210,244 87.16%
https://www.marketscreener.com/business-leaders/Andrea-Jean-
Hardie-082386-E/biography/
https://www.marketscreener.com/business-leaders/Kathryn-
Jane-Garnett-08237P-E/biography/
5
The Billington equity holding are summarised below.
Votes Quantity of stock Float Company-owned shares Total
Float
Stock A 1 12,860,959 4,496,866.0 35% 0 0.0% 34.80%

Stock B 1 73,368 0 0% 0 0.0%
Statement
The Chairman’s statement reveals that Billington achieved
impressive performance
evidenced by substantial progress across all divisions regarding
the growth in revenues and profit
before tax as well a strong balance sheet (Annual Report, 2019).
The CEO statement validates that
the company reported strong performance and presents the
operational review of the Billington
Structures, Shafton Steel Services, firm’s commitment to health,
safety, sustainability, people as
well as the steel industry and prospects and outlook (BILN,
2020).
Competition
One of the key strategic competitors of Billington Holdings
PLC is Sigmaroc PLC. Both
companies operate in the construction material space within the
UK and the European Union.
Notably, Sigmaroc PLC is registered in AIM and has a
deliberate understanding of the construction

material industry. The company’s Chief executive Chairman is
David Barret, who has incorporated
a solid strategy and operational expertise within the sector. As a
consequence, the company proves
to be a worthy competitor to Billington holdings PLC (Sigmaroc
Annual Report). Both companies
have tapped into their pool of experienced and skilled labor
force to remain dynamic and
competitive.
6
Theorectical Basis
Billington has been experiencing considerable growth in the
financial performance as
evidenced by revenues and high profits. This can be attributed
to the firm's strengths that include
delivery of diverse projects across varied sectors, like
distribution, high-end residential, leisure.
Another strength is the strong reputation in the market, which
has led to the record order books

that encourage a pipeline of opportunities. In addition, the
company's strengths are the cost savings,
low debt financing, higher efficiency in production, strong
liquidity, and capital positions. The
Group is well-positioned delivers higher growth in the future,
but the main weaknesses are limited
product offerings, minimal international presence, higher input
costs, and other expenses. The
external environment consists of promising prospects of growth
in the industry that offer various
opportunities that can drive the company's growth in the future.
They include responsible sourcing
and sustainable supply chains, global trade, pioneering
technological advancements, the advent of
the circular economy, and UK Export support mechanisms.
Finally, several threats pose a threat
to the company, such as fluctuations and volatility in steel
prices as well as the Depletion of high-
grade raw materials (Lambotte et al. 2018). The UK's departure
from the EU leads to interruptions
of supply, pressures on solid waste management, and an
increasingly competitive environment that
could hinder the future growth of Billington Holdings.

7
Financial Ratios Analysis
These ratios are used to indicate an organisation’s ability to
generate profits from existing
operations. Thus, the focus is predominantly on the company’s
return on investment from
inventory or assets. The information is critical, especially for
investors who seek information on a
company’s profitability capacity. Billington Holdings’
profitability over the past five years will be
analysed using the gross margin, profit margin, return on assets,
and return on equity ratios.
2014 2015 2016 2017 2018
Profita
bility

Ratios
Gross
Margin
Billington
Holdings
38.76% 36.26% 38.41% 35.63
%
35.51
%
Sigmaroc PLC 66.22% 99.89% 94.51% 21.99
%
27.73
%
Net Margin Billington
Holdings
3.20% 4.31% 4.69% 4.77% 5.24
%
Sigmaroc PLC -80.20% -2.80% -6.68% 1.31% 8.78
%

Return on
assets
Billington
Holdings
5.40% 7.48% 8.30% 8.64% 9.09
%
Sigmaroc PLC -125.20% -359.61% -706.29% 0.44% 4.31
%
Return on
Equity
Billington
Holdings
10.10% 14.93% 15.80% 15.94
%
17.27
%
Sigmaroc PLC -242.97% -404.03% 168.09% 0.70% 6.69
%
Since 2014, Billington has seen a considerable growth in
performance owing to consistent

investments and improved business environment, as evidenced
by high profitability ratios relative
to the Sigmaroc PLC and industry margin averages. The gross
margin declined since growth in
revenues (71.31%) was higher than gross profit (56.94%). The
revenues increased primarily due
to the surge in Billington Structures output. At the same time,
gross profit declined at a slower rate
due to pricing pressures, the uncertainty of ongoing and
uninterrupted supply of products.
Contrastingly, the net margin increased since net profit
increased by 180.21%, which was
considerably higher than the 71.31% increase in revenues. In
2018, the revenue raised to £77.3
Pawanrat Meepian
8
million (2014: £45.103 million), and profit increased to £4.05
million (2015: 1.45 million) both
are record values (Annual Report 2018). The ROA and ROE
also increased substantially since the

net profit growth surpassed the increase in total assets (66.67%)
and owners’ equity (63.95%).
This is attributed mainly to the successful delivery of diverse
projects across a significant number
of sectors, like distribution, education, commercial, high-end
residential, sports, and leisure. The
firm recorded remarkable performance across all divisions, as
evidenced by record order books,
promising pipeline of opportunities, and costs savings. The
Group is well-positioned deliver higher
growth in the future.
Efficiency Ratios
Efficiency ratios are used in measuring Billington’s ability to
utilize its asset base and
manage short-term liabilities effectively by assessing how
efficiently the Group uses its assets in
generating sales revenues while managing assets (McLaney and
Atrill, 2018). The Group’s
efficiency will be analyzed using the inventory turnover, asset
turnover, and accounts
receivables turnover ratio and compared to its competitor and
industry average.

2014 2015 2016 2017 2018
Inventory Turnover Billington Holdings 3.26 3.42 3.95 4.30
4.15
Efficiency
Ratios
Sigmaroc PLC n/a n/a n/a 4.76 6.15
Asset Turnover Billington Holdings 1.69 1.74 1.77 1.81 1.73
Sigmaroc PLC 1.56 0.13 0.11 0.33 0.49
Receivables Turnove
r
Billington Holdings 8.88 10.68 11.35 12.90 10.27
Sigmaroc PLC 5.18 1.36 0.23 5.80 6.38
In the past five years, the Group recorded an increase in
efficiency in the management of
the inventory, account receivables, and total assets, as
illustrated by the steady rise in all efficiency
ratios. Billington outperformed Sigmaroc PLC and industry in
terms of the asset turnover and

accounts receivables turnover but, the inventory turnover was
slightly below the peers in the
industry. The inventories, accounts receivables, and total assets
increased by 42%, 48%, and 67%
https://www.investopedia.com/terms/r/receivables.asp
Pawanrat Meepian
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9
as the business enjoyed an increase in activity levels in the past
five years. Thus, the accounts

receivables turnover increased from 8.9 to 10.27, which means
that the Group is now collecting
its receivables more than ten times annually. The upward trend
denotes higher efficiency that is
favorable from the cash flow viewpoint since the cash is
collected sooner and is used in settling
obligations. Likewise, the increasing inventory turnover means
that the Group is efficiently
controlling its merchandise and effectively selling its inventory.
But, in 2018, there was a slight
decline in inventory turnover due to the UK’s imminent
departure from EU and the allied
uncertainty that has undoubtedly presented challenges in the
supply of products since the Group
sources some of its products from Europe through
subcontractors and suppliers
Liquidity Ratios
The liquidity ratios are used in the measurement of the
Billington’s capacity of meet its
current debt obligations by paying off its current liabilities once
they are due (Fridson 2011). The
Group’s liquidity will be appraised using the cash, current, and

acid test ratios.
2014 2015 2016 2017 2018
Liquidity
Ratios
Current Ratio Billington 1.43 1.34 1.43 1.49 1.47
Sigmaroc 1.69 0.98 0.19 1.50 1.75
Acid Test Billington 0.74 0.57 0.77 0.83 0.86
Sigmaroc 1.69 0.98 0.19 1.08 1.19
cash ratio Billington 0.32 0.19 0.40 0.48 0.47
Sigmaroc 0.60 0.12 0.10 0.65 0.44
The liquidity analysis demonstrates that the Group’s liquidity
increased in the last five
years since the cash, current, and acid-test ratios increased
considerably. However, the current and
acid-test ratios are lower than Sigmaroc PLC and industry
average. In terms of the cash ratio,
Billington Holding outperformed Sigmaroc PLC and peers in the
industry. The increasing liquidity

Pawanrat Meepian
10
rations can be attributed to the fact that the increase in current
assets (66%) surpassed the growth
in current liabilities (61%). The 66% increase in current assets
included the increase in inventories,
42%, trade, and other receivables 48%, as well as growth in
cash balances (140%). Whereas, the
total rise of £7,457, 000 in current liabilities mainly comprised
a growth in trade and other payables
following a considerable increase in the activity levels. In 2018,
the Group reported net cash
inflows amounting to £1.20 million resultant in gross cash
balance worth £9.30 million, meaning
that the company has adequate funds to cover its working
capital requirements along with funding
opportunities as soon they arise in the future.
Gearing Ratios
The gearing ratios are used in measuring the financial leverage

of the Group by assessing
the degree of the interest-bearing liabilities in the company
capital structure (Subramanyam 2014).
2014 2015 2016 2017 2018
Gearing
Ratios
Debt to
equity (D/E)
Billington 1.95% 15.22% 10.67% 8.73% 6.40%
Sigmaroc 40.70
%
123.53% -
123.80%
61.52% 55.24%
Interest
coverage
Billington 82.57 118.62 173.86 260.47 86.22

Sigmaroc 39.61 311.14 210.05 7.82 -10.92
Debt to assets Billington 1.04% 7.63% 5.60% 4.73% 3.37%
Sigmaroc 20.97
%
109.95% 520.18% 38.09% 35.58%
The Group’s debt to equity and debt to assets ratios increased
in 2015; since then, the ratio
has declined from 15.22% to 6.40%. The debt to equity and debt
to assets metrics are much lower
than the Sigmaroc PLC and industry average, which implies that
the company uses less debt
funding relative to peer companies in the industry. In 2018, the
debt to equity and debt to assets
11
were 6.40% and 3.37%, which implies the liabilities account for
only 6.40% of the equity and
4.37% of the total assets. Since 2014, the non-current debt
increased by 437.63%, while the

owners’ equity increased by 63.95% (Annual Report 2013). But,
the higher interest coverage ratio
proves that Billington can service its debt because the company
is making sufficient money to pay
its interest as well as principal payment on existing debt. The
interest average ration is too high,
meaning that the company can offset interest on debt with no
chances of defaulting. The
conservative funding policy signifies that the company has
lower financial risks to debt funding
and higher costs of servicing the debt in comparison to the peers
in the industry (Editorial, 2020).
The analysis of the gearing ratios denotes that the company uses
investor funding and a modest
level of debt to invest in the Group’s factories and sites to
ensure that the company continually
improve its operational and financial performance.

12
Corporate Governance Compliance
Good corporate governance is one of the core values upheld as
it is a requirement in the
standards of the AIM-listed entities. The Group has undertaken
a serious approach in safeguarding
that the Board of directors applies the Quoted Companies
Alliances Corporate Governance Code
that is used in the regulation of the Small and Mid-sized Quoted
Companies (Quoted Companies
Alliance 2013).
Compliance
The evidence of compliance with the corporate governance
standards involves the
separation of the role of the CEO (Mark Smith) and Non-
Executive Chairman (Ian Michael
Lawson) (Mallin 2013). The Chairman is accountable for
leading the Board, facilitating the
contribution of members, and ensuring that the Board operates

in the shareholders’ interest. The
CEO is liable for business leadership and the implementation of
the core strategy. The Board
comprises of two (2) Executive and three (3) Non-Executive
Directors, and the Board chair is the
Non-Executive Chairman; hence, the representation of the Non-
Executive to Executive Directors
in the company’s Board is 60% and 40% respectively.
According to Thornton (2018), The Board
meets officially 11 times yearly and on ado basis if necessary.
In the past fiscal year, the board
attendance was Mark Smith (11/11-100%), Trevor Taylor 11/11-
100%), Peter Hems (11/11-
100%), John Gordon (10/11-91%), Doctor Ospelt (2/11-18%),
and Stephen Wardell – 0/0
(appointment January 2019). However, the company does not
observe gender and diversity since
the Board consists of 7 with no women representation on the
company’s Board. The Non-
Executive Directors are viewed by the Board as independent of
the company’s management as
they bring experience welcomed by Executive Directors.
Consistent with the corporate governance
structure, the Board has formed an Audit and Remuneration

Committees. As a result, Billington
13
Holdings’ adherence to corporate governance standards has had
a positive impact on the Billington
brand and reputation in the steel industry (Billington Holdings
PLC. 2020).
Proposed Financial Strategies
The company should focus on improving the production
methods using the latest
technologies and increasing the contributions from in-house
manufacturing of its products to
ensure that Billington Structures and Shafton Steel Services are
operating at the near-optimal
output. The increased production will support the record order
book that has been demonstrated in
recent years while ensuring that the business is well aligned to
deliver revenues in the medium and
long-term. The Group should increase its sales efforts by
focusing more on securing more
extensive and diversified contracts with partner clients across

all segments to generate higher sales.
The company should explore cheaper debt funding options for
funding further investments in a
substantial capital expenditure program in Billington’s core
products, better utilization, as well as
new customer, wins to maximize opportunities in the industry,
and drive growth.
The Group should continue seeking cost savings and improved
utilization where suitable
to enhance the sustainability of the company’s gross and net
profit margins. There are margin
pressures within the global structural steel markets. However,
prospects point towards added
growth driven by growing demand (International Iron and Steel
Institute 2017). The Group should
also remain alert to continuously evolving economic and
political uncertainties like the Brexit by
aiding in the development and implementation of suitable
measures that are aimed at identifying
and addressing the risks presented to each aspect of the
business. The company should undertake
projects in other countries in emerging economies to lower the
present risks of delay in
construction projects, cost fluctuations of the inputs as well as

the uncertainty of quantum of
revenues in the U.K markets. The implementation of these
strategies will result in additional years
of growth and progression for the Billington Group in the near
and long-term.
14
Reference
1. Bilington Holdings PLC.(2020) (n.d.). Retrieved Jan 9, 2020,
from Bloomberg:
https://www.bloomberg.com/profile/company/BNGHF:US
2. (BILN), B. (2020). About Billington Holdings PLC (BILN) -
Investing.com. [online]
Investing.com. Available at:
https://www.investing.com/equities/billington-holdings-plc-
company-profile [Accessed 09 Jan. 2020].
3. Billington Holdings Plc (BILN). (2020). Retrieved Jan 9,
2020, from Market Screener:
https://www.marketscreener.com/BILLINGTON-HOLDINGS-
PLC-4001636/company/

4. Billington Holdings Plc (2019). Company Profiles: Billington
Holdings Plc. Business
Source Premier.
5. Billington Holdings Plc (BILN). (2019). Report and Finanical
Statements for the year
ended 31 December 2018. Retrieved Jan 9, 2020,
https://billington-holdings.plc.uk/wp-
content/uploads/2019/11/BH_Report_and_Financial_Statement_
Year_Ended_2018_WE
B_SP-2.pdf.
6. Billington Holdings PLC. (2020). Board Profile - Billington
Holdings PLC. [online]
Available at: https://billington-holdings.plc.uk/aim-
information/board-profile/ [Accessed
10 Jan. 2020].
7. Eddie McLaney and Peter Atrill, (2018), Accounting and
Finance: An Introduction 9th
edition.
8. Editorial, R. (2020). BILN.L - Billington Holdings PLC
Profile | Reuters. [online]
Uk.reuters.com. Available at:
https://uk.reuters.com/companies/BILN.L/profile [Accessed
10 Jan. 2020].

https://www.bloomberg.com/profile/company/BNGHF:US
https://www.marketscreener.com/BILLINGTON-HOLDINGS-
PLC-4001636/company/
Year_Ended_2018_WEB_SP-2.pdf
15
9. Fridson, S. Fridson and Alvarez Fernando (2011). Financial
statement analysis: a
practitioner's guide.
10. Grant Thornton (2018) An instinct for growth, Corporate
Governance Review.
11. International Iron and Steel Institute. (2017). Scrap and the
steel industry: trends and
prospects for solid metallics. Brussels, Belgium. The Institute.
12. Lambotte, Guillaume., Lee, Jonghyun., Allanore, Antoine.,
& Wagstaff, Samuel.

(2018). Materials processing fundamentals 2018.
13. Mallin .A. Christine (2013). Corporate governance. Oxford,
Oxford University Press.
14. Marketline-com.ezproxy.northampton.ac.uk. (2020). Sign
In. [online] Available at:
https://advantage-marketline-
com.ezproxy.northampton.ac.uk/Company/Summary/billington-
holdings-plc [Accessed
10 Jan. 2020].
15.
Marketline.https://resolver.ebscohost.com/Redirect/PRL?EPPac
kageLocationID=166.303
1056.11723140&epcustomerid=s3011414.
16. Quoted Companies Alliance. (2013). Delivering growth:
corporate governance code for
small and mid-size quoted companies, 2013. London, Quoted
Companies Alliance.
17. Subramanyam, K. R. (2014). Financial statement analysis.
New York, NY: McGraw Hill
Education.

holdings-plc
holdings-plc
16
Appendix One: Selected Financial Data
Excerpt Financial Data Billington Holdings Sigmaroc PLC 5-
Year Changes
£’000 2014 2015 2016 2017 2018 2018
Revenue 45,103 56,748 63,334 73,518 77,266 41,242 71.31%
Cost of Sales 27,619 36,172 39,005 47,324 49,826 29,805
80.40%
Gross Profit 17,484 20,576 24,329 26,194 27,440 11,437
56.94%
Net Profit 1,445 2,444 2,971 3,504 4,049 5,242 180.21%
Assets 26,735 32,660 35,800 40,564 44,560 84,030 66.67%

Total shareholders' equity 14,304 16,368 18,799 21,976 23,451
54,129 63.95%
Inventories and work in progress 8,472 10,568 9,865 11,012
12,011 4,844 41.77%
Trade and other receivables 5,080 5,315 5,581 5,700 7,527
6,467 48.17%
Cash and cash equivalents 3,872 2,611 6,033 8,063 9,311 3,772
140.47%
Current Assets 17,424 18,494 21,479 24,775 28,849 15,083
65.57%
Total current liabilities 12,152 13,800 14,996 16,670 19,609
8,600 61.36%
Operating profit 1899 3084 3,825 4,428 5,001 11,436 163.35%
Interest 23 26 22 17 58 1046 152.17%
Borrowings (non-current) 279 2,492 2,005 1,918 1,500 21300
437.63%

17
Appendix Two: Formula
Gross Margin Net Margin ROE ROA
Formula Gross profit / Revenue x 100
Profit (loss) for the
year / Revenue x 100
Profit after (loss) tax *
/ Total Owner’s
Equity x 100
Profit after (loss) tax /
Total Assets* x 100
Efficiency Ratios

Asset Turnover Inventory Turnover Accounts Receivable
Turnover
Formula Total Assets /
Revenue
Inventory / Cost of
sales x 365
Trade receivables * /
Revenue
Liquidity Ratios
Current Ratio Acid Test Ratio Cash Ratio
Formula Current assets / Current
liabilities
Current assets
excluding inventory /
Current liabilities
Cash and cash
equivalents / Current

liabilities
Gearing Ratios
Debt to Equity
Net Interest coverage
ratio
Debt to Assets
Formula Borrowings (non-current) /
Total equity x 100
Operating profit (loss)
/ Net Interest
(Finance) expense
Borrowings (non-
current) / Total Assets
x 100

[removed]
Chapter 5: Price Discrimination: Linear Pricing
*
Price Discrimination and Monopoly: Linear Pricing
*
IntroductionPrescription drugs are cheaper in Canada than the
United StatesTextbooks are generally cheaper in Britain than
the United StatesExamples of price discriminationpresumably
profitableshould affect market efficiency: not necessarily
adverselyis price discrimination necessarily bad – even if not
seen as “fair”?
*
Feasibility of price discriminationTwo problems confront a firm
wishing to price discriminateidentification: the firm is able to
identify demands of different types of consumer or in separate
marketseasier in some markets than others: e.g tax consultants,

doctorsarbitrage: prevent consumers who are charged a low
price from reselling to consumers who are charged a high
priceprevent re-importation of prescription drugs to the United
StatesThe firm then must choose the type of price
discriminationfirst-degree or personalized pricingsecond-degree
or menu pricingthird-degree or group pricing
*
Third-degree price discriminationConsumers differ by some
observable characteristic(s)A uniform price is charged to all
consumers in a particular group – linear priceDifferent uniform
prices are charged to different groups“kids are
free”subscriptions to professional journals e.g. American
Economic Reviewairlinesthe number of different economy fares
charged can be very large indeed!early-bird specials; first-runs
of movies
*
Third-degree price discrimination 2The pricing rule is very
simple:consumers with low elasticity of demand should be
charged a high priceconsumers with high elasticity of demand
should be charged a low price
*

Third degree price discrimination: exampleHarry Potter volume
sold in the United States and EuropeDemand:United States: PU
= 36 – 4QUEurope: PE = 24 – 4QEMarginal cost constant in
each marketMC = $4
*
The example: no price discriminationSuppose that the same
price is charged in both marketsUse the following
procedure:calculate aggregate demand in the two
marketsidentify marginal revenue for that aggregate
demandequate marginal revenue with marginal cost to identify
the profit maximizing quantityidentify the market clearing price
from the aggregate demandcalculate demands in the individual
markets from the individual market demand curves and the
equilibrium price
*
The example (npd cont.)
United States: PU = 36 – 4QU
Invert this:
QU = 9 – P/4 for P < $36
Europe: PU = 24 – 4QE
Invert
QE = 6 – P/4 for P < $24
Aggregate these demands
Q = QU + QE = 9 – P/4 for $36 < P < $24
At these prices only the US market is active
Q = QU + QE = 15 – P/2 for P < $24

Now both markets are active
*
Invert the direct demands
P = 36 – 4Q for Q < 3
P = 30 – 2Q for Q > 3
$/unit
Quantity
15
36
30
Marginal revenue is
MR = 36 – 8Q for Q < 3
MR = 30 – 4Q for Q < 3
Demand
MR
Set MR = MC
MC
Q = 6.5
P = $17
6.5
17
Price from the demand curve
*
Substitute price into the individual market demand curves:

QU = 9 – P/4 = 9 – 17/4 = 4.75 million
QE = 6 – P/4 = 6 – 17/4 = 1.75 million
Aggregate profit = (17 – 4)x6.5 = $84.5 million
*
The example: price discriminationThe firm can improve on this
outcomeCheck that MR is not equal to MC in both marketsMR >
MC in EuropeMR < MC in the USthe firms should transfer some
books from the US to EuropeThis requires that different prices
be charged in the two marketsProcedure:take each market
separatelyidentify equilibrium quantity in each market by
equating MR and MCidentify the price in each market from
market demand
*
The example: price discrimination 2
Demand in the US:
PU = 36 – 4QU
$/unit
Quantity
Demand
Marginal revenue:
MR = 36 – 8QU
36
9
MR
MC = 4
MC

4
Equate MR and MC
QU = 4
PU = $20
4
20
*
The example: price discrimination 3
Demand in the Europe:
PE = 24 – 4QU
$/unit
Quantity
Demand
Marginal revenue:
MR = 24 – 8QU
24
6
MR
MC = 4
MC
4
Equate MR and MC
QE = 2.5
PE = $14
2.5
14

*
The example: price discrimination 4Aggregate sales are 6.5
million booksthe same as without price discriminationAggregate
profit is (20 – 4)x4 + (14 – 4)x2.5 = $89 million$4.5 million
greater than without price discrimination
*
No price discrimination: non-constant costThe example assumes
constant marginal costHow is this affected if MC is non-
constant?Suppose MC is increasingNo price discrimination
procedureCalculate aggregate demandCalculate the associated
MREquate MR with MC to give aggregate outputIdentify price
from aggregate demandIdentify market demands from individual
demand curves
*
The example again
Applying this procedure assuming that MC = 0.75 + Q/2 gives:

0
5
10
0
10
20
30
40
D
U
MR
U
17
4.75
Price
(a) United States
Quantity

0
5
10
0
10
20
30
40
D
E
MR
E
1.75
17
Price
(b) Europe
Quantity

0
5
10
15
20
0
10
20
30
40
D
MR
MC
24
6.5
17
Price
(c) Aggregate
Quantity
*
Price discrimination: non-constant costWith price
discrimination the procedure isIdentify marginal revenue in
each marketAggregate these marginal revenues to give
aggregate marginal revenueEquate this MR with MC to give

aggregate outputIdentify equilibrium MR from the aggregate
MR curveEquate this MR with MC in each market to give
individual market quantitiesIdentify equilibrium prices from
individual market demands
*
The example again
Applying this procedure assuming that MC = 0.75 + Q/2 gives:
Price
(a) United States
Quantity
0
5
10
0
10

20
30
40
D
U
MR
U
4
Price
(b) Europe
Quantity
4
0
5
10
0
10
20
30
40

D
E
MR
E
1.75
14
Price
(c) Aggregate
Quantity
0
5
10
15
20
0
10
20

Chapter 7 Product Variety and Quality under Monopoly.docx

Chapter 7 Product Variety and Quality under Monopoly.docx

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