Transcript Price

Get Your Price Right
Presented by:
Dawie Roodt
24 July 2007
Price of Building a Name
Source: The Economist
January 20-26, 2007
Full page advertisements
(Est. Cost: £87,500)
The Opposition
p. 15
The Home Team
p. 17
Value for Money?
Macedonia
South Africa
Taxes


Efficiency


Competitive labour


Access to markets


Stability


Infrastructure


Property rights
-

But why say it?
Price of Growth
Economic Overview
2006
2007
M3 (end of year)
23.1%
23.7%
PSCE (adj. end of year)
27.6%
21.5%
CPIX (average)
4.6%
5.8%
Prime (full year)
12.5%
13.5%
Current Account: GDP
-6.4%
-5.5%
R/$ (end of year)
7.04
6.78
Unemployment (strict definition)
26.0%
GDP (full year)
5.0%
5.4%
The Price of Fiscal Stability
Higher Growth = Higher Taxes?
Background
%
State Debt:GDP
50
45
40
35
30
Debt Trap
Recovery
Good/Stable
25
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: SARB and own calculations
Contribution to Fiscus
Revenue Sources (Est. 2006/07)
28%
25%
4%
4%
29%
10%
Individual Tax
Company Tax
VAT
Excise Duties
Fuel Levy
Other
Budget Revenues (per $ GDP)
by Country, 2006
$
Dollar Revenue per Dollar GDP
1.2
Collection cost: 1.3% of
revenue; US 0.5%
Kuwait
1.0
Libya
0.8
South Africa
0.6
Afghanistan
0.4
Average: 0.32
Median: 0.29
0.2
0.0
0
20
40
Source: Nationmaster: CIA, World Factbook
60
80
100
Countries
120
140
160
Company Tax Rate,
per Country (2006)
Company Tax Rates
%
45
Egypt
40
35
Median: 29.0%
30
25
Average: 26.6%
20
South Africa
15
South Africa + STC (’07)
Ireland
10
5
USA
South Africa + STC (’06)
Bulgaria
0
0
Source: worldwide-tax.com
10
20
30
Countries
40
50
60
Individual Tax Rate,
per Country (2006)
Individual Marginal Tax Rates
%
60
Denmark
50
Ireland
40
Russia
Median: 36.0%
Average: 35.4%
30
South Africa
20
USA
10
0
Source: worldwide-tax.com
10
20
30
Countries
40
50
VAT Rate,
per Country (2006)
VAT Rates
%
30
Denmark
Ireland
Median: 18.0%
20
Average: 16.7%
South Africa
10
Singapore
0
0
Source: worldwide-tax.com
10
20
30
Countries
40
50
Fiscal Efficiency:
Revenue Summary
 Average tax red tape
 Individual tax rate: above average (high marginal rate, low
threshold)
 Company tax rate: above average
 VAT rate: below average
But the Result is…
GDP at Market Prices
%
GDP market prices, q:q seasonal
8
7
6
5
4
3
2
1
0
-1
1994
1996
Source: StatsSA / Own forecast
1998
2000
2002
2004
2006
Price Theory
Functions of Price




Co-ordinates customer demands and supplier constraints
Signals changes in demand and supply
Ensures economic efficiency
Optimal allocation of resources
Source: Kaplan Schweser, CFA Institute Notes, Economics
Market Forms
1.
2.
3.
4.

Perfect competition (identical products)
Monopolistic competition (product differentiation)
Oligopoly (similar or differentiated)
Monopoly (single seller)
Obstacles to Efficient Allocation of Productive
Resources (Market Distortions)
 Price controls, such as price ceilings and floors (rent control,
minimum wages)
 Taxes and trade restrictions (subsidies and quotas)
 Monopoly
 External(ities) (e.g. pollution)
 Public goods and common resources
 Price Discrimination
 A Black market
 Illegal Goods (e.g. drugs)
Perfect Competition
“The point is, ladies and gentleman,
that greed – for a lack of a better word
– is good.”
-Gordon Gecko, Wall Street (1987)
Perfect Competition
- The way the world should work…
 A Price-taker market
 Assumes:
 Identical products
 Large number, independent firms
 Small relative to total market
 No barriers to entry/exit
 E.g. Road transport (containers), Air transport (excluding SAA)
Definition Source: Kaplan Schweser, CFA Institute Notes, Economics
Consumer and Producer Surplus
at Equilibrium
Price
- Optimal allocation
of resources
Consumer
surplus
Market Supply (MSC)
- Maximum social
gains
Equilibrium Price
Producer
surplus
Market Demand (MSB)
Quantity
Equilibrium Quantity
Cuppa’ – Impossible to Make
Si
m
Ca
v
ea
u
oi
nt
)
of
(C
fe
T)
e(
Pr
in
gle
Ba
Ar
ab
y)
ell
aS
he
ra
to
n
Br
av
o
(C
T)
Pa
rk
sC
Vi
af
da
é
eC
af
fe
(C
T)
Ca
fé
Ne
o
(C
T)
Ne
ws
Ca
fé
Jo
(C
se
T)
ph
ine
Mi
Ca
ll (
pp
CT
uc
)
cin
o's
(P
re
t)
ply
C
E2
(S
ea
P
Price of Cappuccino
- With Cream
Price of Cappuccino with Cream
R
12.0
11.5
11.0
10.5
10.0
9.5
9.0
Source: www.ideate.co.za / Own Research
Price of Cappuccino
 Price:
 Maximum
12.00
 Minimum
10.00
 Mean
10.94
 Standard Dev
0.87
 Price differential: 20.0%
 Production costs example:
 Estimated mark up of 150% on coffee (US)
 40c to make $1 cup of drip coffee
 <$1 to make latte that sells for $2.5
Source: Tim Harford. The Undercover Economist / Own Research
Self Discrimination
“I love it when you talk foreign”
Cappuccino
R11.50
Hot Chocolate
R10.50
Caffe Mocha
R12.50
White Hot Chocolate
R16.90
Caramel Hot Shot
R19.90
Translation:
Cappuccino – no frills
R11.50
Hot Chocolate – no frills
R10.50
Mix them together – I feel special
R12.50
Use different powder – I feel very special
R16.90
Use different powder – I feel greedy
R19.90
Source: Tim Harford. The Undercover Economist / www.muggandbean.co.za
Do You Have a Light…?
 Suppliers want to decrease consumer surplus, without lower
sales volumes
 How? - Choice of luxury
 I.e. Smoke out customers less sensitive to price
Price of Milk - Clover Full Cream
Price of Milk, 2L Full Cream (Plastic Bottle)
R
15.5
15.0
14.5
14.0
13.5
13.0
Source: Own Research
ur
g
Mi
dd
elb
Pr
et
or
ia
Pr
et
or
ia
Pr
et
or
ia
n
La
ng
eb
aa
fo
nt
ein
n
Bl
oe
m
La
ng
eb
aa
Pr
et
or
ia
n
La
ng
eb
aa
Pl
et
ten
be
rg
ba
a
i
12.5
Price of Milk - Clover Full Cream
 Price (2L, plastic):
 Maximum
15.45
 Minimum
12.99
 Mean
14.28
 Standard Dev
0.88
 Price Differential: 18.9%
 Producer:
 Average price received by farmer between R2.60 and R2.80
per litre (Eastern Cape)
 National Average around R3.0 per litre – Clover CE
Source: Landbouweekblad / Own Research
Rare Delicacies
Uisce Beatha “water of life” (Gaelic)
Age
Price (R)
% Increase
12 years
229
15 years
380
65.9%
18 years
546
43.7%
21 years
1,058
93.8%
30 years
2,152
103.4%
 Malt whiskey must contain no grain other than malted barley
 Only differentiated by age (storage cost)
Source: www.makro.co.za / glenfiddich.com
Administered Price
Parastatals
 Eskom
 Transnet:
 Rail (Spoornet and Transwerk)
 Ports (Sapo and NPA)
 Pipelines (Petronet)
 Telkom
 Acsa
 South African Airways (SAA)
 Sasol
 DWAF
 SA Post Office
White Elephants
 Dead Elephant #1: SAA
 Financial Results: Net profit (loss) for the year:
 2002: R2.1bn
2005: R0.6bn
 2003: (R5.9bn)
2006: R0.07bn
 2004: (R8.6bn)
2007 (interim): (R0.6bn)
 Bailout 1: 2004: R6bn from Transnet
 Bailout 2: 2007: Seeking between R2bn – R4bn?
 CE salary 2006: (including contributions and bonuses): R6.8m
 NO JUSTIFICATION FOR MANGO – IMMORAL!
White Elephants
 Dead Elephant #2: Sentech
 Another bail out – needs R1bn!
 CEO spend R10m on golf sponsorship
 Dead Elephant #3: Denel
 Recorded losses for 10 years, should break even from 2009 – Shaun
Liebenberg, Denel CEO
 Asked state for R5.0bn cash injection
 Another bail out?
White Elephants
 Predatory Elephant: Telkom
 Telecoms cost major obstacle to GDP growth!
 Sate should consider selling 37% stake in the group!
What happened to privatization?
 Telkom value – R52bn
 ACSA value – R50bn+
Acsa
 Shareholders:
 State – 80.0%
 Public Investment Corporation (PIC) – 20.0%
 Parking and landing fees to increase at average 11.4% p.a.
between 2007-2011
 Passenger Service Fees to rise between 46.0% - 50.0% y:y on 1
October 2007
 Capital Expenditure of R20bn towards 2010
 New King Shaka Airport (Durban) to cost R7.0bn (Existing airport
can be sufficiently upgraded for R1.0bn)
 O R Tambo expansions of R4.0bn
Source: Acsa, Financial Mail, June 2007
Monopoly
Monopoly
 Barriers to Entry:
 Legal Barriers
 Patents, copyrights, government granted franchises
 Natural Barriers
 Average cost falls throughout range of consumer demand
 Large economies of scale
 E.g. Eskom/Spoornet/Telkom
Definition Source: Kaplan Schweser, CFA Institute Notes, Economics
Monopolistic Competition
Monopolistic Competition




Large number of independent sellers
Differentiated products (at least in the minds of consumers!)
Firms compete on price, quality and marketing
Products are perceived by consumers as close substitutes
 E.g.. Telkom and Neotel when it enters market
Definition Source: Kaplan Schweser, CFA Institute Notes, Economics
Oligopoly
Oligopoly
 Small Number of Sellers
 Interdependence among competitors (Cheat or not to cheat Prisoner’s Dilemma)
 Significant barriers to entry (often large economies of scale)
 Products similar or differentiated
 Eg. Mobile Phone market (Vodacom & MTN control 90%)
Definition Source: Kaplan Schweser, CFA Institute Notes, Economics
Oligopolistic Markets in
South Africa, in 1990
Product
Number of firms supplying over 75 % of the market
Aspirin
2
Sugar
2
Breakfast oats
3
Cement
3
Mealie meal
3
Fertiliser
3
Washing Powder
4
Petrol
5
Toothpaste
5
Source: Mohr P. and Fourie L. Economics for South African Students, 1998
Prisoner’s Dilemma
Prisoner B is silent
Prisoner B confesses
Prisoner A is silent
A gets 6 months
B gets 6 months
A gets 10 years
B goes free
Prisoner A confesses
A goes free
B gets 10 years
A gets 2 years
B gets 2 years
Actual
Oligopoly Application
Firm B honours
Firm B cheats
Firm A honours
A earns eco profit
B earns eco profit
A has eco loss
B earns higher eco
profit
Firm A cheats
A earns higher eco
profit
B has eco loss
A zero eco profit
B zero eco profit
Actual
Other Rare Delicacies
Know Your Choices…
Name
Perks
Price (R), All night
Zelna
Montana
2,000
Air Hostess
Mile High Club…
1,800
Dirk’s Debbie
?
1,300
Chinese Queen
24-7
1,300
Cute Jade
Boeremeisie, hunting
weekends
1,200
Natasha
Not Nights (Married?)
800
Pretoria and Surrounding Areas
Source: Own Research
Get Your Price Right!
 Price (R):
 Maximum 2000.0
 Minimum
800.0
 Mean
1400.0
 Standard Dev
433.6
 Price differential:
150.0%!
 Married Men's Saving: R1400 * 3 * 4 = R16,800 p.m.
 Medical Treatment: doctor(R250), STD (R240*3), HIV (R700 p.m. ARV’s life
long), pathologists (R1000+), antibiotics, related sickness, hospitalisation,
etc…
Source: Jhb pharmacy, medical practitioner
Price may vary
Asset Allocation
Asset Allocation
Reason
Equities
Demand/Rand
Bonds
Inflation/Supply/Interest Rates
Cash
Short Interest Rates
Property
Property Cycle
– Heavy Overweight
– Overweight
– Neutral
– Underweight
– Heavy Underweight
Local Equities, 2006
Economic Sector
MC
EAA
JSE Sector
Mining and Quarrying
32%
33%
Mining, Platinum, Gold, Coal
Finance, prop and bus. serv
30%
25%
Banks, Insurance, Life Ass, Media & Pht, IT, Property,
Support Serv
Manufacturing
12%
18%
Auto, Basic Ind, Beverages, Chem, Elect, IT Hard,
Pharm & Bio, Steel & Other
Personal Service
6%
5%
Cyc Serv, Health, Leisure Ent, Non-cyc Serv, Person
Care
Transport, storage and comm.
6%
6%
Telecomm, Transport
Trade, hotels and restaurants
6%
4%
Cyc Cons, Food & Drug, Gen Retail, House Goods,
Non-cyc Cons
Electricity, gas and water
4%
3%
Oil & Gas
Agri, Forestry and Fishing
3%
1%
Food Prod
Construction
2%
5%
Const & Build
100%
100%
www.efgroup.co.za