(2020) A Level H2 Econs CSQ 1 Suggested Answers by Mr Eugene Toh (A Level Economics Tutor)

(2020) A Level H2 Econs Paper 1 CSQ Q1

a.         Four firm concentration ratio – percentage of total sales by the 4 largest firms in an industry.

Market share held by largest firm in the industry – percentage of total sales by the largest firm in the industry. 

b.         The consumption of pork has increased from 114 tons in 2007 to 134 tons in 2018, a 17.5% increase.

            Demand factor

            Any reasonable factor will do, for e.g.

1.     Increase in incomes  increase in purchasing power  increase demand for pork  increase in output

2.     Increase in size of population  increase in size of market  increase demand for pork  increase in output

Supply factor

Any reasonable factor will do, for e.g.

1.     Increase in number of sellers  increase supply for pork  increase in output

Show diagram showing an increase demand + increase in supply  showing output increase.

ci.        Consumer surplus is the difference between the price that the consumer is willing to pay and the price that the consumer actually pays.

            Producer surplus is the difference between the price that the producer is willing to sell at and the price that the producer actually sells at.

cii.       When firms collude, they essentially behave like a monopoly. This means that they will produce at a profit maximizing output where if the firms were behaving like a single monopoly and price will be set based on this output level.

            Sourced from the web (no time to draw diagrams as I’m rushing this case study out)

An example of how a diagram could be drawn would be here

             http://www.csun.edu/~hceco008/ch13a-1.doc 

d.         The ride-hailing market was an oligopoly but became more of a monopoly after the merger.

            Evidence of being an oligopoly market

1.     High barriers to entry – exclusivity arrangements as mentioned in Extract 3 prevents drivers for working for other firms (e.g. new entrants)

2.     2 large firms – with 80% of market share (Grab + Uber)

            Evidence of being a monopoly market after merger

1.     1 large firm with 80% market share

2.     Price setting ability - Ability to increase prices (10% to 15% after merger) 

e.         Why impose fines

1.     One of CCCS’s desired outcome / objective as a regulator is to protect the interest of consumers and prevent market dominance / monopoly power from harming interests of the consumer

2.     Chicken distributors were colluding which allowed them to act like a monopoly and raising prices, affecting consumer welfare

3.     Grab & Uber merger would cause significant lessening of competition, resulting in higher prices

            Fines as a way to improve outcomes for consumers

1.     Fines could act as a form of messaging and deterrent to penalize and disincentivize firms in both the ride-hailing and chicken product market from

a.     Exploiting consumers through price collusion in the case of chicken cartel

b.    Raising prices through the increased market power they have from the merger

2.     As the fines could hurt profitability, firms may be more cautious of engaging behaviour that could be construed as being anti-competitive

 

            Fines not the best way to improve outcomes for consumers

1.     At the end of the day, for example, in the case of the ride hailing market, prices have already gone up through a 10% to 15% increase in fares & in the case of the chicken product market, consumers have also borne the brunt of the price increase from the collusive behaviour

2.     A fine fundamentally does not reverse the increase in prices

3.     Neither do the penalties paid by these firms directly go back to consumers

4.     It could be argued that consumers do not significant see improved outcomes, but the fines may just have a deterrent effect on firms making outcomes worse for consumers

            Alternative ways + evaluate

1.     Reverse the merger (in the case of Grab / Uber)

2.     Require approvals for future price increases (in the case of chicken distributors)

It is important to evaluate and point out shortcomings of any ‘alternative ways’ you bring up

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