2. “Synoptic assessment requires students to work across
different parts of a qualification and to show their
accumulated knowledge and understanding of a topic or
subject area.”
3. Globalisation Technological Change Emerging Economies
Labour Market Environmental Issues Contestable Markets
Economic Efficiency Non-Price Competition Mergers and Takeovers
4. Globalisation Technological Change Emerging Economies
Labour Market Environmental Issues Contestable Markets
Economic Efficiency Non-Price Competition Mergers and Takeovers
5. Globalisation Technological Change Emerging Economies
Labour Market Environmental Issues Contestable Markets
Economic Efficiency Non-Price Competition Mergers and Takeovers
6. Key Parcel Industry Developments
• The global parcels market is currently going through a
period of strong growth and structural change.
UK
• The volume of parcels delivered to customers in the UK
has grown from 1.8 billion in 2014 to 2.1 billion in 2017.
• UK industry now has an annual turnover of £8.7 billion.
7. Key Parcel Industry Developments
• The global parcels market is currently going through a
period of strong growth and structural change.
UK
• The volume of parcels delivered to customers in the UK
has grown from 1.8 billion in 2014 to 2.1 billion in 2017.
• UK industry now has an annual turnover of £8.7 billion.
Consolidation is taking place globally and in the EU - two
examples here of horizontal integration
• 1) FedEx bought TNT in 2016 for £3.4bn - one of the
largest and highest profile takeover deals in the sector
• 2) Dec 2016 - DHL made £243m acquisition of UK Mail
8. Volumes of parcels in the UK inland market with
predicted volumes in UK from 2005 to 2023 (in
billion parcels)
1.3
1.7
2.3
0
0.5
1
1.5
2
2.5
2005 2012 2023
Billionparcels
9. Drivers of UK Market Demand Growth
M-commerce Sustained GDP growth
The UK parcels market is now approaching £10bn in size.
Having fallen during the 2009 economic downturn, the main
driver of growth has since been home shopping.
(Source: Apex Consulting, April 2017)
10. CONDITIONS FOR A CONTESTABLE MARKET
MARKET STRUCTURES
What makes a market contestable?
1. Pool of businesses who are willing and ready to enter
the market – existing firms always face the threat of
entry from new suppliers
2. No significant entry and/or exit costs – this lowers the
risk of market entry i.e. low sunk costs
3. Equal access to available industry-wide technologies
4. High rates of customer switching – i.e. relatively low
brand loyalty, a willingness of customers to change
supplier
11. Scale and supply chain – importance of vertical
integration – including the “last-mile problem”
12. REVENUES, COSTS & PROFITS
LONG RUN AVERAGE COST CURVE (LRAC)
Q1
Average
Cost
(Unit
Cost)
Output
LRAC
Q2 Q3
Economies of
scale cause
AC to fall
Lowest point on LRAC
is output of
productive efficiency
Rising LRAC – means
diseconomies of scale
The leading parcel delivery company
handled over 5bn parcels in 2015. All
companies in the top ten each handled
more than 1bn parcels
14. Actual and Potential Competition
Amazon Logistics Yodel
Parcelforce DPD
FedEx Hermes
Established in the market for parcels
15. Actual and Potential Competition
Amazon Logistics Yodel
Parcelforce DPD
FedEx Hermes
Established in the market for parcels Potential rivals / competitive threats
China Post Click and Collect
Intelligent parcel
locker businesses
3D printing
technology
Uber Rush Shutl / Ebay
16. Price competition
• Royal Mail: Between July and October 2017, the cost of
sending a second-class medium parcel, between 2-5kg,
was reduced from £13.75 to £6.29
• Amazon: In November 2017, Amazon announced it was
offering free one-year Prime memberships to residents in
the ten UK villages which have been the most frequent
Amazon customers. The free membership includes
unlimited one-day delivery
17. PRICES AND PROFITS IN CONTESTABLE MARKETS
MARKET STRUCTURES
MC
Price
and
Cost
Output
AC
MR
P1
Q1
C1 AR
Q2
P2
Profit maximising
price
18. PRICES AND PROFITS IN CONTESTABLE MARKETS
MARKET STRUCTURES
MC
Price
and
Cost
Output
AC
MR
P1
Q1
C1 AR
Q2
P2
Profit maximising
price
19. PRICES AND PROFITS IN CONTESTABLE MARKETS
MARKET STRUCTURES
MC
Price
and
Cost
Output
AC
MR
P1
Q1
C1 AR
Q2
P2
Profit maximising
price
Price where normal
profits are made
20. PRICES AND PROFITS IN CONTESTABLE MARKETS
MARKET STRUCTURES
MC
Price
and
Cost
Output
AC
MR
P1
Q1
C1 AR
Q2
P2
Profit maximising
price
Price where normal
profits are made
Threat of competition likely to cause
firms to price at P2 rather than P1
21. MARKET STRUCTURES
DYNAMIC EFFICIENCY
• Innovation is putting a new idea or approach into action
• Innovation is 'the commercially successful exploitation of ideas’
• Product innovation
• Small-scale and frequent subtle
changes to the characteristics and
performance of a good or a service
• Process innovation
• Changes to the way in which
production takes place or is
organised
• Changes in business models and
pricing strategies
Austrian economist
Joseph Schumpeter
(pictured) coined the
term creative
destruction which
refers to the upheaval
of the established order
in the pursuit of
innovation.
Smaller disruptive
businesses often
challenge existing firms
with market power!
22. Non-price competition in parcels
Speed of delivery Tracking Environmental
impact
Ease of collect
and return
Safety/security of
delivery
Evening and
weekend delivery
26. Projected number of drones in Amazon's
fleet from 2016 to 2020 (in 1,000 drones)
85
172
262
355
450
0
50
100
150
200
250
300
350
400
450
500
2016 2017 2018 2019 2020
Numberofdronesinthousands
Editor's Notes
Parcels and Synoptic Economics
Internet of Things is responsible for driving the demand for intelligent parcel lockers
Parcels and Synoptic Economics
Internet of Things is responsible for driving the demand for intelligent parcel lockers
Parcels and Synoptic Economics
Internet of Things is responsible for driving the demand for intelligent parcel lockers
China:
China is the key growth market for parcels, representing almost 60% of the Asia-Pacific regional total by value. Chinese volumes reached 31.2bn in 2016, over 50% up on 2015”. (The volumes are still on the rise. Reports published in China’s media last week said that the State Post Bureau has calculated that the total volume for 2017 was around 40bn.
Online retail is the main driver of growth in parcel delivery volumes.
Global online sales approached US$2.3trn in 2017, having grown at a rate of 25% per year.
Most markets are contestable to some degree but few come close to being perfectly contestable. The most important condition for contestability is having low entry barriers and exit costs including low sunk costs. It is often easier to enter a market when a new rival is already scaled and have access to the latest technology alongside a brand that consumers recognise and trust and which can be extended into new markets. Amazon Logistics is a good example of this, so too the use of click and collect services by national supermarket / retail chains. If sunk costs are high this makes it difficult for new firms to enter and leave the market. Therefore it will be less contestable
Scale and the supply chain – the importance of vertical integration
GLS includes Parcelforce Worldwide, the parcel delivery business of the Royal Mail
Every day GLS drives around the world 100 times, produces 100m data sets and is active in 16 different languages
The leading 12 parcel delivery companies had combined parcel revenues of almost US$190bn in 2015. The leading parcel delivery company handled over 5bn parcels in 2015. All companies in the top ten each handled more than 1bn parcels, and they handled more than 22.5bn parcels between them. Clearly in global and national parcel industries, internal economies of scale are hugely important in helping to bring down unit costs in the long run and maintain the profitability of the industry.
The UK postal and courier market underwent dramatic changes some years ago when the industry was opened up to full competition. A number of businesses now offer a UK-wide parcel delivery service. These include Amazon Logistics, DHL, DPD, FedEx, Hermes, Royal Mail’s Parcelforce, TNT, UK Mail, UPS and Yodel. Intense competition between service providers has led to a reduction in the average price for each parcel delivered. Ofcom reported that in 2017 the average unit revenue for a domestic parcel had fallen since 2016 from £3.39 to £3.21.
UPS is the largest global carrier by parcel revenues.
However, FedEx has closed the gap since its acquisition of TNT Express, with third-placed Deutsche Post DHL around half the size
Amazon Prime is now a major competitor in the market: Across all its national programmes, more than five billion items were shipped through the Amazon Prime service in 2017. The Prime services include same-day, two day and next day shipping.
The behaviour of businesses in a contestable market is often shaped not just by the conduct of existing firms but also by the prospect of new competitors or new technologies affecting the market. For example, leading online retailers, led by large global marketplaces such as Amazon and Alibaba, are increasingly getting involved in delivery, reflecting the strategic importance of it to their business models. Their large volumes give them significant market power.
Competition is driving down average prices for parcel courier services. In a contestable oligopoly, relative success in non-price competition factors can make a big different to a firm’s turnover, revenue, market share and (ultimately) operating profits. Speed of delivery: Amazon Prime Now two-hour delivery service is available in nine cities in the UK, with a one-hour service available to certain postcodes within these areas.
Share of supporters for drones being used for logistics in the United Kingdom (UK) in 2016
Drones could allow accelerated delivery times, improved accuracy and reduce human cost associated with delivery
Amazon launched its pilot Amazon Prime drone delivery service in Cambridgeshire in December 2016. Launching with two clients, the service can deliver items weighing up to 2.6kg
Hermes announced a trial of autonomous delivery vehicles in Southwark in April 2017
Projected number of drones in Amazon's fleet from 2016 to 2020 (in 1,000 drones)