In several sectors of the economy, negative prices have existed for years, meaning that it is not the seller but the buyer of a product who is paid. Examples can be found in power generation and banking. Triggers are imbalances between supply and demand and marginal costs of zero or below.

In the traditional world of physical products, marginal costs are significant and so prices of zero are rare, and those below zero practically never occur. The Internet and other technologies are changing this situation fundamentally. For many digital businesses the marginal cost of an additional product unit is often zero or close to zero – for example adding a new subscriber to a streaming service such as Netflix.

We’ll now cover three interesting scenarios where these effects can be observed.

Negative prices from oversupply

At the European Power Exchange the number of hours with negative electricity prices has increased from 15 hours in 2008 to 211 hours in 2019. Last year, the power producer paid the buyer a (negative) price per megawatt hour for almost ten days. The buyer received the electricity plus money. How can this be explained?

In this case, even when demand for electricity is low, stopping production is not possible.  In order to be able to produce on days with positive prices and make a profit, the producers must subsidize the electricity on days with negative prices.

With the negative oil prices we are currently observing, we encounter the same conditions. It is more advantageous for the oil producer to pay the buyer something in addition than to interrupt production or rent expensive storage capacities.

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Negative interest

Interest is nothing other than the price of money. Negative interest rates were first observed in Denmark in 2012. Today they have become a widespread and much discussed topic. In some cases we have seen negative interest rates on loans… so a financial institution is paying someone to take a loan!

For European banks it can be more profitable to lend the surplus money at an interest rate of -0.2% instead of depositing it at the central bank and having to pay negative interest of -0.5%. And if depositors are willing to provide the bank with money at a negative interest rate, the bank can lend this money at a negative interest rate and still achieve a positive contribution margin.

Pricing when marginal costs are negligible

In traditional transactions, from the seller's point of view, the theoretical short-term lower price limit is the marginal cost, which means that he or she only sells a product at a positive contribution margin.

That said, a price of zero is common in promotions. Free samples (for pharmaceuticals or consumer products, for instance), are widespread for new product launches. This tactic makes sense if the price of zero stimulates sales in subsequent periods.

These tactics become even more powerful for subscription services such as online news subscriptions or streaming music/video services. That is why so many offer a 30-day free trial, because once the subscription is started then future sales are almost 'automatic'.

However, the question arises why zero should be the lower price limit in this situation. With marginal costs of zero this option becomes much more attractive than with the significant marginal costs in the traditional economy.

For many digital businesses the marginal cost of an additional product unit is often zero or close to zero.

In fact, such negative prices can be observed. Commerzbank has been crediting new customers with 50 euros for a long time, which means it pays a negative price. The same applies to the voucher of the same amount that METRO Cash & Carry gave to new customers.

In its initial phase, PayPal also used negative prices. Each new customer received 20 US dollars. In China, providers of bicycle sharing services such as Mobike paid their customers to use the bikes to return them from the suburbs back to the centre of the city, where they are needed more.

Ultimately, the question is how marketing and promotional measures work compared to negative prices. Product launches are regularly supported with substantial budgets. The funds flow into instruments such as advertising, displays, promotions and discounts. A negative price can be more effective than advertising or similar measures without having to provide larger budgets.

More negative pricing as a deliberate tactic?

It is likely that we see more negative prices in the future. As we write this, the COVID-19 crisis is causing markets to experience supply and demand spikes like never before. This not only upsets the traditional short-term equilibrium but will also have some lasting effects to customer buying behaviour and their appetite for risk.

Will negative prices be used by new entrants as a way to disrupt established markets? To arrive at an optimal outcome, the effects of promotional measures and negative prices must be quantified. In the Internet age, it can be expected that investments in negative prices will increasingly pay off in the future.

Professor Hermann Simon is founder and honorary chairman of Simon-Kucher & Partners, the world’s leading price consultancy. Mark Billige is Chief Executive Officer of Simon-Kucher & Partners.

During Monday trading, price of West Texas Intermediate (WTI) crude oil fell from $18 to -$38 per barrel, the first time in history that the US oil benchmark has fallen into negative territory, resulting in cases where buyers were paid to accept oil.

Stewart Gickman, an analyst at CFRA Research, described the price shock as “off-the-charts wacky”, having “overwhelmed anything that people could have expected.”

The unprecedented price drop comes as a consequence of the system of purchasing oil through futures contracts and how they work. WTI futures contracts, which require buyers to take possession of oil in May, were set to expire on Tuesday, resulting in a mass sell-off due to a lack of available space to store the oil once it is shipped.

Now that this deadline has arrived, WTI crude prices have seen the beginnings of a recovery, though they have not yet reached $0.

International prices have also slipped, with Brent crude falling more than 20% to less than $20 a barrel on Tuesday morning. The global supply disruption caused by the COVID-19 crisis has resulted in an extreme fall in demand that is likely to persist throughout April.

The impact of the coronavirus pandemic has also coincided with an oil price war between Saudi Arabia and Russia that saw both sides pledging to increase oil production to historically high levels. Though this price war has since ended, the increased supply undoubtedly contributed to the current glut.

Aaron Brady, vice president for energy oil market services at IHS Markit, described the problem to the New York Times. “If you are a producer, your market has disappeared and if you don’t have access to storage you are out of luck,” he explained. “The system is seizing up.”

The COVID-19 pandemic now dominates every aspect of business and personal life, creating enormous public health and economic challenges across the world. In addition to the large-scale loss of life, we are facing unprecedented disruption to work and business activity. Even if some sectors are bailed out, a glut of insolvencies and bankruptcies seems inevitable. But where will the axe fall? Chris Robinson, a specialist corporate lawyer at Excello Law, explains.

Global supply chains in Europe, the current centre of the pandemic, face protracted disruption as the COVID-19 crisis highlights their fragility: the failure of one link can cause extensive disruption throughout the chain. Supply chains and labour markets are often complex and unstructured, even in ordinary circumstances. But COVID-19 is extraordinary:  the myriad effects of losses created by it will be diverse, disparate and on a scale never previously seen.

Ideally, supply chains are configured with back-to-back contracts and pay-when-paid clauses that allocate the loss appropriately and proportionately across the supply chain, or to parties who are insured. But this is the exception rather than the rule. The reality is that the loss will often fall on the weakest link in the chain, the small business who has not been able to negotiate let-outs, either with their customers or suppliers. You can be liable for breach of contract, including damages for loss of profits or wasted costs, even if the failure was beyond your control.

This raises many questions, not least concerning remedies provided by the law when the performance of a contract becomes impracticable. For example, is a party liable for breach of contract if they simply cannot comply? If the contract terms provide no let-out, then (under English law) the only legal escape is the legal concept of frustration.

You can be liable for breach of contract, including damages for loss of profits or wasted costs, even if the failure was beyond your control.

A contract is frustrated if something happens after the date of the contract that is not the fault of either party that makes further performance impossible or illegal, or is so fundamental that it strikes at the root of the contract, and is beyond what was contemplated by the parties when they entered into it. Frustration ends the contract entirely, with basic rights for advance payments to be refunded and parties to be reimbursed for expenses incurred.

Circumstances arising from COVID-19 are certainly capable of amounting to frustration, but difficulties in performing, extra costs or delays would not be enough. Long-term contracts, or employment contracts, are unlikely to be frustrated.

Many contracts contain force majeure clauses, allowing the parties to suspend performance for a period of time and/or terminate the contract without liability on either side. Whether a public health emergency amounts to force majeure will depend on the wording of the clause: the situation must be beyond the control of the affected party. If compliance with Government advice is voluntary, that might not help to bring the situation within the force majeure clause. Similarly, the presence of a force majeure clause may mean that the contract is not frustrated: if the agreed terms deal with a situation, that situation will not frustrate the contract. Force majeure clauses often require formalities, such a giving notice to the other party.

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Even though the economic havoc created by COVID-19 pales into insignificance compared to the scale of human tragedy it continues to cause, the health of the economy also has a very significant impact in keeping people alive and well. As damage continues to spread throughout the economy, the losses will be uneven, affecting some a great deal more harshly than others. Much of the cost will be felt through business failures, leading to many thousands of people losing their jobs. Employees, business owners, shareholders and pension fund members will bear the cost, but not in an equitable way.

Following, we are going to explain the trends that led to this massive change and what it means for young buyers.

1.  Ripple Effective

The successive cycles introduced in 1970s consist of economic houses where the property value increases first in London, this wave then goes south easy and other reasons. London always stayed at the front. However, the percentages were not always impressive.

Prices of houses in London have bee n doubled in North (Yorkshire, and Humberside).

2.  Income Growth

There have been some changes in regional prices. These are influenced by national factors like low interest rates and an increase in real incomes. The real incomes have had an impact on house prices. A 1% increase in real income will lead to a 2% increasing house prices. This is because households can afford to pay a bit more. This way, the house prices show a bit more volatility than the respective income.

3.  Supply, Demand and Other Patterns

Recently, there has been poor income growth in London. This shows that England is operating in a weak national housing environment. But it doesn’t show the regional price pattern. Internal migration patterns, supply shortages, higher demand in London also have their impact.

It's important we look closely at the southeast and see how outer London relative to inner London and South-East is as a whole. We need to focus on areas that aren’t very distant from each other. Recently, more people left London than the ones who entered it. London has attracted young people recently, but some older groups have left the city. This loss declined until 2009 but peaked once again, especially in 2016-2017.

This pattern is rather consistent and is leaving an effect on real estate prices. As a high proportion of people are leaving London to settle someone where else, there will be a fall in house prices in London as compared to the South East in the past two years.

In case if you are a young professional and looking for accommodation, you should try to find flats to rent in Edinburgh. CityLets.co.UK is a certified leading property portal that enlists properties for rent all around England. This site has been helping people finding ideal accommodation since 1999.

4.  Types of Property

The price for different types of properties increased and decreased in different patterns. Families can easily move to different locations as they can easily adjust into a different type of property.

With that said, its time we discuss the differences between prices of terraced properties in inner and outer London. This shows the inner London real estate market suffered from a drop-in value. This is once again consistency with Households moving to expensive inner regions.

5.  Investment Opportunities

Migration flow isn’t the complete story. The southeast is also suffering from shortages, but it’s time we discuss the monetary environment and low interest rates.  Housing in London is included by its role as an investment along with being a consumption good.

Investment motives for buying housing are important in other areas, but London has some special characteristics. Prices in London are more responsive to changes in interest rates than anywhere else.

Speaking of falling prices, the average flat in London costs more than £400,000. The average flat in south-east costs £200,000. Even if we ignore the massive difference, this is still beyond the resources of most first-time buyers unless they have strong additional support. In short, the price falls will unlikely to benefit first-time buyers.

With the recent monthly purchasing managers index behind us, we can look forward to this week’s Bank of England meeting and quarterly inflation report. Below Adam Chester, Head of Economics at Lloyds Bank Commercial Banking, discusses what to expect on Thursday’s meeting.

When the Bank of England meets this week, it could prove to be one of the most important policy meetings of the year.

What makes tomorrow’s update of particular interest is that it includes the annual deep-dive into the supply side of the UK economy, which has important implications for the speed and extent of future interest rate changes.

By assessing how the economy is performing in relation to its potential, the Bank can form a judgement about how much slack remains - the greater the slack, the greater the scope for demand to rise without pushing up inflation, and vice versa.

The Bank will give its verdict on whether demand is above what the economy can sustainably produce – the so-called ‘output gap’ – as well as how quickly the economy’s supply potential can rise – the so-called ‘trend rate’ of growth.

Before the financial crisis, the UK’s trend rate was estimated to be around 2.5% a year, but by last year it had dropped to 1.5%, largely down to a fall in productivity which has been blamed on Brexit uncertainty.

The Bank will also need to make a crucial judgement on how much spare capacity, if any, remains in the labour market.

A lack of slack

In last year’s update, the Bank concluded that the weakness of pay growth at that time suggested the labour market was operating with a small degree of slack. This no longer looks the case.

Over the past year, total employment has risen by over 400,000 to a new high, and the unemployment rate has dropped further – from 4.8% to a forty-two year low of 4.3%.

The latter is now below the Bank’s previous estimate of the sustainable, or ‘equilibrium rate’ of unemployment, which it put at 4.5%.

It is possible that the Bank could lower this estimate further, but to do so would likely raise eyebrows, as regular pay growth has started to accelerate – rising from an annual rate of 1.8% to 2.4% since last spring.

The Bank will also revisit its assumptions for population growth, the participation rate (the percentage of the adult population in the workforce), and hours worked.

The ageing population, declining immigration and changes in taxation and benefits will all have a bearing on this.

Overall, the Bank faces a tricky balancing act.

Arguing the case

If it is to conclude that underlying inflation pressures are likely to be benign during 2018, it needs to argue that either (i) the supply side is improving, most obviously due to rises in productivity and/or an increase in the amount of available labour; or (ii) that, for the time being, the outlook for demand is sufficiently weak.

On both counts, we suspect the Bank could struggle.

Firstly, there are no obvious signs of an upturn in productivity growth and recent increases in wage growth suggest the tightening of the labour market is starting to bite.

Second, there is little sign of any significant weakness in demand, with recent indicators confirming the economy is holding up relatively well.

Given this, we suspect the Bank will conclude that any spare capacity in the economy is continuing to be eroded.

While it is likely to cite ongoing ‘Brexit uncertainty’ as an argument for maintaining a ‘gradualist approach’ to policy, the implication is clear.

In the absence of a clear slowdown in demand, the Bank may have to raise interest rates more quickly and more sharply than either we, or the financial markets, currently anticipate.

What you might not know is that blockchain isn’t just a Bitcoin thing. Across the globe, from corporations to start ups, experts are formulating and implementing new ways of using blockchain technology to improve the way we do things; and the same goes for supply chains. Below Finance Monthly hears form Lee Pruitt, the CEO of InstaSupply, on the ways blockchain can likely better supply chains for your business.

Managing a supply chain is an operational and logistical challenge for many businesses, and the more parties involved, the more complicated it is. The ‘links’ in the average chain can sometimes span hundreds of stages and dozens of locations. Keeping everything running smoothly and effectively whilst tracking unusual or anomalous events can be very difficult.

Blockchain technology – essentially, a distributed, unchangeable cryptographically secured ledger in which transactional data is stored and updated – may provide a way to improve transparency and operational efficiency. But it has to be used effectively.

Here’s how you can use blockchain technology to improve trust, maximise efficiency, and foster better vendor relationships.

Stronger audit trails

Blockchain technology serves as a repository of transaction history. Every time a payment is made, every party is registered and recorded in exacting detail.

This effectively means that every stage of the supply chain has a strong audit trail – and this is good for your business on several different levels. From a legal and ethical standpoint, it means that you can be assured that your suppliers aren’t party to any child labour or money laundering related activity. From a logistical perspective, it means you have end-to-end visibility into how physical items are sourced, delivered and stored.

Any efficiency or productivity gaps can be quickly identified and dealt with. Any items that go missing can easily be found. Delays will become rare, if not a thing of the past.

Blockchain technology means transparent and more efficient supply chains.

Trust

When supply chains aren’t fully optimised, it’s the end customer that is ultimately let down. Elon Musk recently described supply chains as ‘tricky’ – and revealed that Tesla’s new vehicles routinely miss their delivery deadlines.

Blockchain will increase trust among consumers, and among all players in the supply chain. Using shared public IDs and ratings, a clear picture of everyone’s goods and services will be readily available: if you want to consistently deliver value to your customers, they will reward you for it; if you’re looking for trustworthy suppliers, you’ll be able to select them based on clear, real time data.

The technology will also help reduce the instances of fraud – meaning your reputation and finances will be protected.

Streamlined invoicing

Blockchain technology will make the traditional invoice redundant. All purchase orders will be recorded and rendered fundamentally unalterable as blocks on the chain: accordingly, when suppliers approve the purchase order, they have essentially made a commitment to deliver the items/services for the agreed cost and only the agreed cost. An invoice could never be issued to ask for more.

Blockchain will also improve operational performance and the bottom line. Many businesses are looking for ways to integrate these new tech solutions into their daily operations, and they are right to do so. Trust, transparency, and efficiency are qualities that are not only valuable, but in increasingly short supply in current models. Blockchain offers to provide them in abundance.