Economics

Monetary transmission mechanism is a policy and a process where the change in the interest rates affects the levels of inflation. This mechanism generally describes how changes that are induced by policies in the nominal short term interests can have a major impact on several variables such as employment and the output aggregate.  There are particular channels of monetary transmission that work on the premises that monetary policy has effects on interest rates, rates of exchange, prices of the real estates, equities, bank lending and  the balance sheets of firms. This paper will focus on the mechanisms and policies of monetary transmission in relation to the oil industry.

Preview
Monetary transmission mechanism is the channel through which a countrys monetary policy has an impact on the economic variables of that country which include output and employment. Comprehension of this mechanism has been very essential topic of research in macro economics and is central to the analysis of the economic policy.  There are various explanations of the monetary transmission policy to the real economy and they try to capture the total effects. These channels include the Cost of Capital Channel (traditional view), the Credit Channel (which has traditionally been broken down into Bank Lending Channel and Balance Sheet Channel) and the financial accelerator.  Cost of capital channel can be explained in the following way. Companies fund their operations using three ways. These ways include stocks and equities, debt methods and the reinvestment of money earned through previous trading. This means that the weight of capital for a company is weighted upon the sub total of equity and debt while the reinvested capital is charged as the cost of equity because if that money us not reinvested, it is normally returned to the company investors who are the share holders. The cost of debt is also termed as the cost of borrowing money.

In this traditional channel, when the central bank reserves reduce, the demand for deposits by the commercial bank reduces and it the prices get prickly a short term decrease in the monetary holdings in the real economy always leads to real interest rates that are higher than the normal ones and this translates into a contracted interest positive elements of aggregate expenditure. The credit channel approach of transmission postulates that fictions in information in the credit market always worsens during tight money periods and there is a resulting increase in the external finance premium which is seen as the cost variation between internal and external funds. This enhances the effects of the policy on the economic situation of a country and can be seen in the response in the GDP.  In this policy of monetary transmission, a change in the interest rates affects the levels of inflation. This mechanism generally describes how changes that are induced by policies in the nominal short term interests can have a major impact on several variables such as employment and the output aggregate.  There are particular channels of monetary transmission that work on the premises that monetary policy has effects on interest rates, rates of exchange, prices of the real estates, equities, bank lending and the balance sheets of firms. The transmission mechanism has three stages.

Stages of monetary transmission
Monetary transmission channels occur in different stages. The first stage is where a change in the rates of interest that are set by the MPS influence changes on all the other rates. This is where banks and all the other institutions react to an official change in the rates by changing their rates that govern savings and loans. This change will always affect the prices of very many other things like the households assets, security prices, shares and equities, energy and equities. The expectations of individuals and companies will also change to accommodate that change in the interest rates. The confidence about the future financial path begins to wane. The second stage is where the spending patterns of the consumers are affected thus affecting the demand of goods and services.

When the interest rates are high, the level of aggregate demand for goods is usually low because the consumers in the wake of the increased rates and the accompanying effects cut back on their spending meaning that their purchasing power is very low. The effects will also be felt internationally as the volumes of exports and imports are also affected. The third stage is the impact of the monetary transmission mechanism on inflation and the gross domestic product of the nation. These are largely dependent on the total levels of supply and demand underpinned by the fluctuations in the interest rates. However, if there is an AD increase, and enough economic capacity, then the increase in the rates may not cause a noticeable inflation.

Impacts Economic Downturn
In 2008 there was an economic crisis that had a very huge impact on the monetary transmission mechanisms and the energy sector was one of the hardest hit by the economic downturn that started toward the end of 2007. In 2008 petroleum prices went up to unprecedented levels, something that pushed up the interest rates all over the world and had a huge impact on prices of very many commodities around the world since petroleum products are hugely involved to fuel the transport industry that relays different consumer goods through the different levels. The petroleum crisis had an interweaving relationship with the global economic downturn because the shortage of petroleum led to the rapid increase in prices of the petroleum products while the global economic down turn affected the spending power of most consumers meaning that in the long run, the consumption of petroleum products went down because of the low purchasing power.

Impact on oil and Auto Industry
One of the industries that were worst hit by this monetary transmission crisis in the petroleum industry is automotive making industry especially in the US. There was substantial increase in the cost of the fuels that drive automobiles because of the combination of the energy crisis and the economic downtown. Automakers that deal in vehicle that do not have low fuel economy were the hardest hit by the this instance of monetary transmission because the demand for the sports utility vehicles that guzzle fuels and trucks went down visibly This is because of the reduced spending power occasioned by the high interest rates that had been pushed up by the effects of the energy crisis and the economic downturn. The sales for the giant automakers in America, GM Ford and the Chrysler started sliding and they did not have alternative fuel-efficient autos to provide to the customers who were highly watching their pockets. This scenario had a double impact on petroleum companies because to start with, there is a problem with the availability of fuel meaning that they will have to spend more to get the usual amount of fuel, and secondly, even if the fuel is there, the rate of consumption was very low because of the spending habits of most people who were economically conscious because of the credit crunch. Some of the petroleum companies were forced to reduce their operations in various countries.

For example, Caltex pulled out of various African countries including Kenya while Shell sold half of their stations in a number of countries to the emerging oil Libya. It is during this energy crisis coupled with the economic downturn in 2008 that prompted the shell CEO to create a global scenario that he called the scramble and Blue prints that focused on the state of the oil industry and the energy sector in the next five years onwards, forecasting a global crisis should the world opt to follow the scramble option that will see the countries scramble for the available petroleum resources, thus depleting them without having made an alternative form of energy to replace the dwindling oil resources.

Impact on Future of Oil Industry
To make long term strategies, shell has been developing scenarios since the 70s and the latest scenario is the Scramble and Blueprints that illustrates the routes the world will take in the face of the energy crisis that will hit the world as from 2015. The scramble route will be an exciting route with a lot of competition but will grind to a halt with unimaginable consequences. The scramble scenario is a path of less resistance where the nations will make haste while the sun shines meaning that they will run to secure energy resources and there will be losers and winners. However, a time will come when all the fuel energy will be depleted and the race will come to a painful end. This method solves no problem because the supplies will run short leading to high energy prices, political response and volatility. However, the Blueprint option will have a lot of problems at the start and the ride will be bumpy but due to the ingenuity and technical innovation, the excitement will be felt at the end. 

Whichever route is taken, the problem cannot be solved without the addition of other energy sources in the world in order to keep up with the increasing demand occasioned by the population upsurge. However, the Blueprints route will be disorderly at the start but less painful toward the end because positive coalitions will emerge to ensure energy security and enhance more innovation. This scenario will work hand in hand with the environmental sustainability path and there will be growth of number of cars that use alternative energy sources like electricity and hydrogen. This is where the shells scramble and blue prints scenario and the automotive industry relate because the path taken will have an impact on the automotive industry.

According to the shell CEO, this will occasion unprecedented monetary transmission mechanism around the world with prohibitive interest rates and very high prices of assets and products. Once again, the industries that will be heavily affected are the motor and petroleum industries. This is because, auto industry relies on petroleum products and with the dwindling resources it means that there will be an extremely low demand for motor vehicles from a global population that will already being reeling from the effects of an unprecedented credit crunch. The main reason for the increased demand of oil that will outstrip the capacity of the world resources to supply it is the revolutionary growth of economies especially China and India, if the world does not invest in alternative forms of energy like the oil sands or nuclear energy. However, the shell CEO says that if the world chooses to follow the blueprint option, such a monetary transmission crisis may be avoided because the blueprints path will ensure that countries invest in alternative forms of energy in the face of dwindling oil resources. This is a path of creativity and auto makers will not suffer from demand problems because they will have prepared for this eventuality by manufacturing vehicles that use alternative forms of energy and the interest rates will have been cushioned by this preparedness unlike the just ended economic crisis that saw the purchasing power of many household being completely depleted.

Inflation
There are energy advocates who are pushing for a consistent policy of energy because the swings in prices have become wild thus affecting inflation and interest rates and this has crippling effects in many industries. For example, due to the credit crunch, the GM motor company almost collapsed and it was not in a good financial position to obtain credit for it to be able to make an acquisition of Chrysler. The fall of sale and tightening consumer credits was another big impact that almost drove the automaker out of market. The other impact of monetary transmission was the effect on credit worthiness of people. The financial crisis made it hard for the average person to get credit from banks to buy vehicles meaning the rate of vehicle consumption went down thus also pushing down the demand for oil products. Most average people buy cars using loans granted by banks and at that time when the interest rates were at an all time high, most people would shy away from such risky monetary commitments. This is especially because of the instability in the job market.

Cyclical Impact
The monetary transmission especially during the 2007 -2008 period also had an impact on the industrial output of very many industries. This is because the credit crunch affected the buying power of consumers meaning that the demand for industrial products went down. Very few companies were operating at maximum capacity while some of the industries had to close down in the wake of the economic downturn that drove levels of inflation to unprecedented heights. All industries use energy meaning that if the companies were not operating at maximum capacity, then the levels of energy that they were utilizing were very low. This means that the demand for energy due to the low industrial production occasioned by the low demand for industrial good and this had a major effects on major oil companies especially the one that concentrate in industrial supplies like Caltex. The situation here was very cyclical and this manifests how deep the impacts of monetary transmission had gone. The cyclical situation starts from the high oil prices that push up the prices of products because oil is used in various stages of business, for example, industrial production and transportation.

The increase in the prices forces the consumers to cut their spending on different industrial goods including automobiles and the increase in interest rates also reduce their chances of getting credit from monetary institutions. Their reduced spending means that the demand for the industrial products goes down and the industries respond by producing lesser goods and in the process of producing lesser goods, they use lesser amount of energy including oil. These industries are now forced to reduce the amount of labour force, who are industrial consumers meaning that their spending power goes down again pushing the demand for industrial products and energy down. With the low demand of energy including oil, the prices of oil go down thus as the levels of inflation also goes down making the situation to go back to a state of normal equilibrium. That is the cyclical impact of monetary transmission mechanism that in this case is triggered by the rise in the fuel prices and is brought to a halt by the reduction of the same prices, but after a series of events and counter events.

The period 2006 to 2008 is an interesting one in the economic sense. This is because of the way the global economy went full cycle and stunned the world. In the year 2006, the global economy was doing well and generally people were hopeful about their future. Due to this optimism, borrowings from the financial markets to fund huge spending by the public dramatically increased, and as a result the financial market kind of overheated. Then towards the end of 2008, economic experts and the general public were engaged in a heated debate on whether or not the world economy was facing or was actually in a recession. However, there was a wide acceptance that the world was facing a financial crisis of unprecedented scale. Businesses were either losing money or closing down and hundreds of thousands were losing their jobs as a result.
    Hence in a way we can visualize an economic cycle having taken place in the period between 2006 and 2008.Given this position, the objective of this paper will be to decipher how economic changes affect the performance of the retail industry. First, before the financial crisis became apparent, that is between 2006 to 2007, we would like to see how the retail industry performed vis a vis the economy. Then after the financial crisis began to take its toll on the global community, spending patterns definitely changed, and it is important to note how this affected the industry. Lastly, it would be important to try and come up with an economic relationship between economic performance and the performance of the retail industry. The resultant model should be able to be used to forecast the future of the retail industry based on economic projections that are normally put forward by economic and financial experts from time to time.
LITERATURE REVIEW
Retailing is primarily concerned with the sale of finished products to the end users (Rakhi, 2009).It is comprised of both individuals and companies. On the retailing continuum, we can have a family run store on one hand. On the other extreme we have such global behemoths like Wal-Mart, the worlds largest retailers, operating in numerous states. Retailing is considered to be a primary driver of the global economy given the fact it permeates all levels of the society and employs millions across the world. For instance, according to Jones (2009) a massive 15.5 million people worked in the United States Retail Industry in the fourth quarter of the year 2007.
Economic Indicators and Retail Performance
According to Euromonitor International (2009), the performance of the economy as a whole has a great impact on retailing. This is because a retailers profits are closely correlated with the performance of the economy. This way, performance indicators such as price growth and retail turnover will either show favorable or poor prospects depending on the movements of the various economic parameters. Economic growth trends such as  HYPERLINK httpwww.investopedia.comtermsggdp.asp Gross Domestic Product (GDP), HYPERLINK httpwww.investopedia.comtermsiinflation.asp inflation, consumer confidence, personal income and interest rates are extremely important when thinking about the expectations and therefore performance  of  the retail industry(Jones,2009). A drop in interest rates by say 50 basis points for example, might look as a small gain to an individual consumer, but Jones (2009) notes that if considered in terms of an economy as a whole, it has a big effect on spending patterns. Likewise, if incomes of people fall, or they are less confident about their economic future, they are likely to cut back on expenditure, and save so as to take care of the future uncertainty (Euromonitor International, 2009).This drop in spending means that the retail industry takes a beating in terms of low sales. Coincidentally, spending is a function of peoples income levels and their confidence, and this varies with the performance of the economy. In Spain for example, 2008 saw a slow down in economic growth accompanied by increased rates of inflation and unemployment, and as a consequent, retail sales grew by only 2 compared by over 10 in 2007(Euromonitor International ,2009).

The Economy and Different Retail Segments
Economic hardships are likely to limit peoples spending, in view of the fact that most people will have lost jobs and therefore incomes earmarked for purchases would have fallen. Johnson and Scholes (2003) notes that each segment or range of products is affected differently by the economic cycles. The impact of economic cycles on each retail segment therefore tends to vary substantially. According to Jones (2009), this reflects how each group of goods represents a discretionary form of household expenditure. Some segments of the retail industry will therefore record robust sales figures while others will suffer loses. These trends might cancel out each other. As a result, the retail industry might actually record growth, even in difficult economic times. For instance, only 20 of the variation in the volume of food retailing may be attributed to changing economic conditions, compared to around 85 of movements in the hospitality and services sector (Shulha ,2006).This means that in an economic downfall, the food industry is likely to experience modest changes in sales figures while the service sector suffers huge losses.
Employment and Retail Performance
According to Shulha (2006), employment rates within an economy, which is closely linked with the economic strength, also affects the performance of the retail industry. This is particularly because the unemployed tend to exhibit spending patterns different from the employed. Myers (2004) notes that during difficult economic times, there is a tendency towards hidden unemployment whereby more people are willing to take up part time and casual employment which in many cases represents a form of under employment. On the other hand, the increasing incidence of under funded retirees who are unable to maintain previous levels of consumption takes an upward turn. All these groups represents a form of unemployment given the fact that spending is cut, particularly for discretionary items such as clothing, electronic goods and holidays. And this pattern is likely to negatively impact on  retailing. The opposite is true when an economy is experiencing a boom, when people are able to find jobs, are more confident about the future and therefore feel free to maintain high consumption levels.

Income Distribution
Income distribution also impacts significantly upon per capita retail expenditure. This is because of the income elasticity of demand (Johnson and Scholes, 2003).The income elasticity of demand is the extent to which demand for a product changes in response to a change in income. According to Johnson and Scholes (2003), per capita expenditure on clothing, and caf and restaurant meals, increases sharply with household income. This contrasts with spending on food which is relatively more stable across income groups. According to Euromonitor International (2009), these patterns of expenditure have significant implications where changes in household income occur in response a structural change in employment patterns. Considering the period 2006 to 2008, it will be interesting to see how retail industry performed in the face of drastic changes in income patterns, given that millions of people across the world lost their jobs towards the end of 2008.

RESEARCH METHODOLOGY
Information Sources
Given the size, dynamism and complexity of the retail industry, primary methods of data collection might not give a true picture of the happenings in the retail industry. Besides, the sheer volume of work involved in analyzing a representative sample is not only enormous, but also requires a lot of time, which is not available. Consequently, secondary methods will be used to collect data. Information will be sourced from newspaper articles, trade journals and white papers. Data from various government agencies, trade associations, paid databases and credible internet sources will also be considered. Among factors to be considered will include the retail turnover indicators, changes in consumer expenditure patterns, changes in factors driving growth in the industry and the influence of economic performance on retail performance indicators.
Analysis Methods
Given the global economic performance in the period 2006 to 2008, whereby the economy did very well in the beginning (2006) and headed towards a recession (towards the end on 2008) it will be important to find out how economic indicators relate to retail performance. In this regard, Linear Regression Analysis will be employed to determine the existence, if any, of causality between the two parameters. Besides, attempts will be made to come up with a Historical Trend Analysis of the period under review. This will be represented in bar graphs and line graphs. Lastly, Ratio Analysis will be used to analyze performance in the period .This will give us a glimpse of whether the retail industry has the capacity to pose any further growth..

Purchasing power parity is a theory of determining exchange rate and a means of comparing the average costs of goods and services between different countries. This theory operates on the assumption that the actions of both exporters and importers are motivated by cross border countries prices variances, inducing changes in spot exchange rate. In addition, the theory of purchasing power parity also suggests that transactions on a countrys current account, affects the value of the exchange rate on the foreign exchange market.
Purchasing power parity theory states that the exchange rate between one currency and another is in equilibrium when their domestic purchasing powers at exchange rate are equivalent (Joseph, 2002).This means that ther price of goods like a computer in China and United States of America should costs the same taking into account the exchange rate between the two countries.
     According to Sustav Cassel, a Swedish economist, the external value of currency depends on the economic purchasing power of that currency relative to that of another currency (Joseph, 2002).. This means rate of exchange between two inconvertible paper currencies is determined by the equality of their purchasing power or by their relative price levels. The purchasing power parity theory explains   exchange rate determination and its currency fluctuations when different countries are on inconvertible currencies.
The theory of purchasing power parity is best explained using two principles the law of one price and from the Law of One Price (LoOP) to Purchasing Power Parity (PPP).
The Law of One Price (LoOP)
This law states that goods which are identical should be sold for same price in two separate markets when no transportation  costs is incurred and no differential subsidies or  taxes are applied in the two markets. In cases where no transportation cost is incurred on such goods, this opens an opportunity to make profit through trade. Therefore, discrepancies in price of goods is due to transport costs incurred between different countries and taxes applied by different countries  and states on their goods thus leading to variation in prices of goods (Joseph, 2002)..
From Law of One Price (LoOP) to Purchasing Power Parity (PPP).
This theory of purchasing power parity is an aggregate of law of one price with a bit of twist added to it and it says that all identical goods should be sold between countries or in both markets. This law states that if two countries have different inflation rates, then the price of goods in both states will change. Hence, the price of goods is determined by exchange rate through the theory of purchasing power parity. In this case a country with a high inflation rate is believed to have its currency value decreasing.
In conclusion, the theory of purchasing power parity argues that the rate of exchange is usually determined by the ratio of purchasing powers between countries. Therefore, goods and services identical in nature from different countries should cost the same price in different countries. The price differential between different countries is not sustainable in the long run as the market forces (demand and supply) will tend to equalize prices between states or countries and their exchange rates.

According to classical economics, wage tends to be flexible in the short-run. Suppose, there is a leftward shift in aggregate demand, aggregate supply shifts leftward. To maintain full employment of labor, firms cut the price of labor (wage). At the new intersection, say point B, L0  L1, or the previous supply of labor is equal to the its present supply. However, w1  w0, or the new wage level is less than its previous level. Cutting wages, in cases of say recession, generally restores full employment.
Stagflation refers to an economic condition where an economy experience stagnation and excessive employment (which remains unchecked for a specified period of time). Keynesian economics attribute stagflation to significant disruptions to the supply side of the supply-demand equilibrium. For example, when there is an artificial scarcity of key goods, resources, or services, production of primary goods are affected. This leads to economic stagnation. The effect however goes beyond stagnation. Scarcity of key commodities triggers excessive inflation. This results , possible, in the contraction of an economy. The 1970s stagflation was generally caused by the failure of the Peruvian anchovy fishery and the 1973 oil crisis. Putting either demand or supply incentive will have no bearing on the actual supply because of relative scarcity. Keynesian economics, therefore, did not offer a realistic solution to the 1970s stagflation.
Supply-side Economics
Supply-side economics rests on the assumption that supply incentives (like tax reductions, the imposition of capital gains tax, and regulation reduction) will lead to steady increases in aggregate supply. If this is the case, aggregate demand shifts rightward (opportunity to increase spending). Inflation follows suit. The gain in consumer and producer surplus is approximately equal to the decrease in government revenues (CS  PS  -R). The effects 1) budget deficit increases equal to the increase in CS and PS (multiplied by a multiplier, a), 2) higher interest rates, and 3) revaluation of the currency. In the case of the United States, the resurgence of the dollar during Reagans administration tripled the foreign debt of the country. US debtor countries such as Indonesia and Thailand suffered considerably from the revaluation of the US dollar. Because their loans were OPEC recycled dollar, the loans would have to be paid at a higher interest, at the real value. Hence, their debts also tripled as a result.
The effect of an increasing GDP to the trade equation is not direct. After the recovery of 1985, the US faced trade deficit. Germany and Japan were blamed for this de-trickling effect. Germany and Japan were major exporters of primarycapital and secondary goods to the United States. The United States, on the other hand, was a major importer of the two countries. Increases in US GDP triggered increases in domestic supply, but increases in aggregate demand seemed to be exuberant. Thus, increasing the import level in the midst of an economic recovery would increase the trade deficit. Thus, as many economists pointed, the increase in the budget deficit was a humorous direction to the trade deficit. Japan devaluated its currency to compensate for the quantity of exported goods to the United States. However, by devaluing its currency, the country had become a major importer of secondary goods.
The function of the International Monetary fund (IMF) is to oversee the global financial system by following the macroeconomic policies of its member countries, specifically those which concerned exchange rates and balance of payments. It is an organization tasked with the objective of stabilizing international exchange rates and facilitating development. The organization also offers low-interest loans to developing countries (long-term loans). Its developmental program, however, was rendered irrelevant in the 1970s following the failure of the trickle-down policy. The trickle-down policy rests on the assumption that technology adoption would generally trickle down to the lowest strata of societies. The benefits of improved technology, thus, would trickle-down. A qualified development would then result to increases in production and consequently demand.
Stimulus packages are conservative means to increase spending. Currently, the Obama administration is distributing stimulus packages to its citizens for the sole purpose of increasing aggregate spending. This is a classical approach. Increasing spending would naturally stimulate firms to increase production schedules. In theory, this causes a shift in the aggregate supply.
The problem, however, with this policy is the potential effect of crowding out. Suppose the deficit increases and savings remains the same, either investment or net exports must fall, causing trade deficit. Hence, the term twin deficit applies. If foreigners pay for the budget deficit, the trade deficit grows. If the countries citizens savings finance the borrowing, the effect of crowding out magnifies. To solve this problem, there is a need to revaluate the currency of the export-oriented country (say China).

In a world like today where everyone wants to have the most economical means of attaining goals and realizing targets, it is but no wonder why companies, employers, and business owners look for alternative means to cut down on costs to augment their income not to mention the most prevalent option of most companies nowadays, the so-called outsourcing.
    Outsourcing typically means that a company would opt to have a particular job or process be done by a third party company. A third party company may be in the same locality with a cheaper labor cost, and the like, or one across the ocean (oversea) like in the case of most call center services and manufacturing firms.
    On the employers perspective, this can be very advantageous since it can cut down costs, like overhead costs for instance, thereby increasing the margin. Companies will have lesser expense on the benefits for their workers since they can already survive with a considerably few people.
    As a result, this can bring about a possible negative economic drawback on its community. This can create an impact of lesser employment opportunity for the area of the company which adapts outsourcing. The idea of patronizing local talents of the productive workforce is being neglected thereby increasing the population of the unemployed individuals for that locality. Companies tend to adapt and prefer foreign talents and skills (from the third party company) over local ones since they could save up on their expenses.
    Looking at another possible effect of this scenario on the behavior of the youth, this could somehow create an atmosphere of confusion and perhaps, a source of panic, for most individuals who are about to pursue a field of specialization in college. Many will get confused on what particular field of study would still be able to give them immense chances of getting employed. Accordingly, a particular individual may have a negative outlook on pursuing college degree, thinking that there will still be a big possibility of being unemployed even if heshe has graduated in college.
    Outsourcing may also heighten the competition in a particular business arena since more and more graduates are produced every year and yet there are only a few job vacancies offered to them. A graduate may be strained on getting on a particular job even if heshe is overqualified due to a strong need to have a source of income. As a result, this would increase the unemployment rate and underemployment rate.  This may even lead to a chain reaction on its economy.
    Hence, outsourcing both has advantages and disadvantages on the economy. This has created positive global economic effects yet along with it, comes domino effects on its local economy as well.

The market of a product is the availability of people who can buy the product for consumption or utility. This can be influenced by several factors depending on the demand and supply of the product. Other factors that influence the market of a product may include the tastes of the people fro which it draws its demand, the number of the people available to buy it, the income of the people who are likely to buy it and its price. In essence, price is the biggest factor that influences the demand of a product hence its market. On the other hand, demand is the need for a product by consumers.

    Factors that may likely drive the demand of the product include the tastes of the people who might need to use yachts. There are people who find it within their interest to use yachts for fun or even for business and as such, they might be influenced to purchase the yachts. When used for business, the yachts is bound to be rented out or at other times, leased to tourists or locals. They prices of the yachts also play the key role on its demand. High prices may attract low demand. In such cases, the consumers are highly likely to rent or lease the yacht for use within a specified period. The number of buyers drives the need to supply more or less of the yachts. Other factors include the income of the people who will probably buy the yachts. It is a well known fact that yachts draw their market base from the people whose income is well above the average income earner. Therefore, the higher the income of the people in a specific area, the higher the chance that they can afford yachts.

    Price elasticity is the measure of responsiveness of quantity demanded to a change in price when all other factors are held constant. In this case, when the prices of yachts go down, there is a chance that the demand will increase. On the other hand, when the prices go high, the demand will go down. We have to take note that the low prices might bring about not a steady rise in demand but a gradual one as the buyers are bound to question the price that has gone down. On the same ground, an increase in price might create demand amongst customers who believe that the quality of the yachts might have gone up so as to influence the prices.

    So as to increase demand, the suppliers should increase the advertisements of their products so that they create the demand. They should also bring the price range to a level that favors both their profits and the demand by the customers who might be within the capacity to buy. The supply should be accompanied with such services as after sales services. This should include better offers for warranties and offers for the servicing of the yachts over a certain longer period of time. The suppliers should increase their demand by offering more appealing prices to the tourism sector players as tourists play a huge role in the consumption of services offered by people who rent out their yachts.

In most cases price discrimination is practiced in market short of perfect competition such as monopoly markets. Where monopoly exists, firms are likely to charge higher prices on product than in competitive market and quantity sold is less generating supernormal profits. Further this profit can be increased if the market is segmented with varying prices charged in different segment.
    However price discrimination can be practiced in oligopoly markets. In order to maximize profits, firms segment markets or customers depending on how sensitive are in their demand. According to most economists price discrimination prevails in monopolistic or oligopoly markets due to customer heterogeneity (Lars, 2006). In perfect competitive market firms have no market powers and hence price discrimination cannot exist because only one price prevails.
    If price for the same product or service vary across market segment and its difference is not based on cost of production then price discrimination is said to exist. Price discrimination can exist in three levels namely First-degree, second-degree and third degree price discrimination.
Price discrimination currently practiced by UK mobile network providers.
    Due to its high technological growth rate, mobile industry plays important role in communication industry (Cricelli, et al, 2005). Over the year the mobile industry has been characterized by exponential growth in demand for traffic.  In UK mobile network providers are practicing different price discrimination as discussed thereof.
    Mobile roaming The UK mobile industry has more than six mobile network providers which include, Vodafone, Orange, O2 etc. according to David (2006) UK mobile operator charge different retail prices in different European Union countries (David, 2006). This form of discrimination can be termed as first degree price discrimination or perfect price discrimination. This is so because in perfect price discrimination, suppliers charge whatever customer segment is willing and able to pay. Although difference in roaming call price is a form of price discrimination, any analyst suggests that it increases operators competitiveness.
    In addition, the big issue which is been debated is not the difference in roaming price but the roaming charges are viewed to high beyond many customers reach. As result the commissioner for information society and media is considering forcing the mobile operators to lower roaming charges.
Network to network calls charges this is another area consumers in UK mobile industry have been discriminated accordingly by mobile operators. It is evidenced that each industry player charges differently to calls made to other networks. This means customer bear more cost when calling to some networks over the others.
    Mobile phone handset subsidies as a strategy to grow their market share and customer base, mobile operators subsidize customer particularly those buying their hand sets (CIT Information  Analysis, 2003). One a customer buys a handset from a given operator he or she is supposed to remain royal to that particular company. Price discrimination come about when customers buy phones from a given company but opt to remain with another operator. What happens is that, a customer who opts to remain with a given operator receives the hand set at reduced price while the one who move to another operator buys at a higher price (not subsidized). In addition mobile handset are subsidized depending on the tariff you are in. pre-paid tariff holder are normally not subsidized when buying phones.
    Different retail prices Each network operator offer different tariff which become difficult to decide on which one best fits your needs (MobileGuru, 2009). Do you go for post or pre paid The choice between the two significantly affects call rates and service received. In pre paid tariffs there are no monthly bills and hence one can control his or her monthly bills. Basically one pays for the service before using it. Under this tariff call charges are high and it supports minimum services. Post-paid services accrue more benefits than pre-paid in that calls rates are lower. In addition the cost of handset for post-paid is lower since they are subsidized. Since one mobile operator offers both services then this is a form of price discrimination as it is charging different price to different customers for the same service. This form of discrimination can also be classified as first-degree price discrimination as the operators charge what consumers are wiling to buy. 
REASONS FOR TARIFF PACKAGES PROLIFERATION
The issue of tariff proliferation has become an everyday among the leading UK mobile phone service providers. These companies are 3mobile, O2, orange, t mobile, Vodafone, and virgin media but not necessarily in that order. Why do these companies have to increase their tariff packages every now and then The answe6rs to this question are the companies want to increase their market share and base in doing this the companies try to shape their tariffs in away that will satisfy the consumer needs and lastly, the current stiff competition calls for such measures as tariff proliferation.
    In this section I will try to expound how the companies try to achieve their objectives through tariff proliferation. By increasing the number of tariffs more often the companies aim at increasing their market share. The argument here is that if a company has ten tariff packages it is possible that it will have captured a small share of the market in every tariff. For example, a company can have 2 per cent of the whole market share in one tariff, 3 percent in another and so on. Then the total number of subscribers in this company will be the sum of all the subscribers in each tariff package. The argument is realistic that if a company can increase the number of tariff packages it can have more subscribers that if it had only a few packages.
    The other reason why the proliferation is of late a common thing is because companies want to capture the different components that form the customer base. A market may be divided into the young and old customers or working class and students or business class and the ordinary jobs category. Companies for instance introduce tariffs that are flat rate all through the days be it week days or weekends. This tariff is usually meant for the business class who has to make calls every time regardless of what time of the day or the week is. Companies do have other tariffs that are meant to capture the students customer base. These tariffs are usually pre paid and the calling rates depend with what time of the day is. At night especially the calling rates are usually low than during the day because of a simple reason students are always busy during day time but at night they are usually free and can make calls at this time. Other tariffs do target the ordinary working class  most phone companies targeting this group have post paid tariffs that are meant to attract this class. These tariffs ensure that customers can make calls even when it is mid month and the customers have spent all of their previous months salary. It also makes sure that a phone company gets the maximum from a subscriber this is because subscribers sometimes do not mind just how much they spend on calls as long as at end month they will have a salary from which the telephone bills will be deducted. Apart from the aforesaid tariffs, companies have also come up with tariffs that target those people who are almost always making trips abroad. These are the roaming tariffs. Companies collaborate with other companies or their subsidiaries in other countries to ensure that a subscriber does not have to migrate to other networks when heshe flies abroad.  Apart from the ones mentioned here there are other tariffs that are meant to capture different classes but in, different ways.
    Another reason that makes companies proliferate their tariffs is because they want to retain their customer base. A company cannot afford to lose its already hard won market share. To achieve this companies have to understand the customers tastes and preferences which do change with time. Sometimes it calls for a tariff package modification or a change if the subscribers tastes and needs have to be fulfilled sufficiently. There are times that companies have d one this just to maintain a few customers but always companies have always weighed the costs and benefits before taking such an action.
    There are also times that companies have introduced new tariffs with an aim of spreading the intervals at which the subscribers are making calls. Calls are usually congested at particular times of the day especially at 9 pm. To reduce this congestion
Some companies have introduced tariffs that do decongest calls from this time to some other time. For example there are times when call networks are idle. Companies in such a case have com-e up with tariffs that ensure that subscribers make calls at this time.