EJC Econs H2 N2019 Paper 2 SAMS

1 2019 A Level Suggested Answers You should seek to attempt the Qn Analysis, identify the relevant points and construct the coherent arguments (selectively) before referring to this set of suggested answers in order to maximise your learning. Essay 1 According to the Competition and Consumer Commission of Singapore (CCCS), the takeover of Uber by Grab in Singapore has led to ‘a substantial lessening of competition’. This has made it harder for new competitors to enter the ride-hailing market. Source: Adapted from Channel NewAsia, 5 July 2018 (a) Explain one reason why consumers might be better off and one reason why consumers might be worse off from Grab’s takeover of Uber. [10] Question Analysis Approach Command Word Explain: 1) One reason why consumers might be better off 2) One reason why consumers might be worse off Question Type How characteristics/strategy of firms affect impacts on consumers Start Point Grab taking over Uber (Merger/Acquisition) End Point Consumers are better off or worse off in terms of consumer surplus, consumer choice – quality and variety Content & Context Content Market Structure – Monopoly/Oligopoly Internal economies of scale Context Ride-hailing market Sample Essay Introduction The takeover of Uber has transformed the ride-hailing market in Singapore to a less competitive one. As such, the characteristics and strategies of Grab would differ from before and this would have an impact on consumer’s welfare in terms of consumer surpl us, which is the difference between the amount consumers are willing and able to pay and the amount they actually. It would also impact consumer choice, which includes variety and quality of service provided.

2 P1: Consumers are better off – Higher Consumer Surplus Grab’s takeover of Uber will benefit consumers in terms of passing off cost savings to consumers in terms of lower prices, hence increasing their consumer surplus. Grab will now be providing ride-hailing services for ex Uber customers, which means that they have scaled up their operations. As such, Grab is able to reap internal economies of scale (IEOS), which refers to unit cost reductions that accrue to a firm as a result of expanding the firm’s scale of production. Grab can now capitalise on mar keting economies in advertisement. As the only ride -hailing firm in Singapore, it can now advertise its services across the entire island, which gives them the ability to ask for discounts from advertising companies for their bulk purchase. At the same time, with a higher capital, they are at less risk of defaulting loans. Commercial banks in Singapore will be more confident of Grab’s prospect and hence may offer Grab lower interest rates for loans. Both these instances result in cost savings for Grab. As seen in Figure 1, Grab initially produces ride -hailing services at the output level Q 1 at price level P 1 where marginal cost (MC 1) intersects marginal revenue (MR) to maximise profits. By reaping higher IEOS, it would lead to a fall in marginal cost (MC) from MC1 to MC2. Hence, Grab will now maximise profits where MR intersects MC 2, resulting in a new profit maximsing output Q2. Grab would then pass off the cost savings to consumers in terms of lower prices, P 2. As a result, consumer surplus has increased from area AP1B to AP2C, making consumers better off. P2: Consumers are worse off – Less choice and no improvement in quality of service Grab’s takeover of Uber will substantially weaken competition, making consumers worse off as they would now have less choices and they may not face an improvement in quality of ride-hailing services. As Grab has increased market power for ride-hailing services, it would have the ability to earn even higher supernormal profits in the long run. Therefore, there is no incentive for them to innovate and improve their services as they already have the majority of market share, in the process becoming dynamically inefficient. Also, since there are fewer alternative provider of ride hailing services, consumers have less choic e and continue subscribing to Grab’s services and

3 make do with whatever that is available. For example, Grab may not have the inventive to improve their app algorithm to better match drivers and riders and hence consumers may face a longer wait time. The quality of the service provided would therefore stagnate and hence consumers are worse off from the takeover. Level Descriptors Level Descriptors Marks L3 Displays full slew of skills across AO1, AO2 and AO3: • Well-developed explanation of how consumers are better off AND worse off from Grab’s takeover in terms of consumer surplus, variety and quality • Clear and coherent analysis, grounded by economic concepts, frameworks and principles • Good use of relevant examples 8-10 L2 Displays AO1 and AO2 skills: • Under-developed explanation of how consumers are better off AND worse off from Grab’s takeover in terms of consumer surplus, variety and quality. • Well-developed explanation of how consumers are better off OR worse off from Grab’s takeover in terms of consumer surplus, variety and quality. • Limited use of examples. 5-7 L1 Uneven display of AO1 and AO2 skills: • Smattering of points • Many conceptual errors • Fails to address question requirement 1-4

4 (b) Discuss the potential benefits and problems that are likely to be experienced by new competitors considering entering the ride-hailing market dominated by Grab. [15] Question Analysis Approach Command Discuss Balanced answer + evaluation Start point “new competitors entering the ride -hailing market dominated by Grab” End Point Potential benefits and problems experienced by new entrants Content Market structures Contestable markets Behaviour of a monopoly: Strategies – Limit pricing; Product differentiation and innovation Cost / revenue concepts Impact of firm’s strategies on other firms Content and Context Context Ride-hailing market dominated by Grab; Singapore Introduction Clarify “ride-hailing market dominated by Grab” and Grab’s objectives → Monopoly; entry deterrence (SR) and profit-maximisation (LR) Clarify “benefits and problems” → potential benefits in terms of revenue and problems such costs as a result of the nature of the market and strategies adopted by Grab to prevent the entry of new competitors. Approach: Revenue vs. costs experienced by new competitors who are considering entering the ride -hailing market dominated by Grab and evaluate by weighing the potential benefits and problems. Body P1 Potential benefits (High revenue compared to $0 previously) Ride-hailing mobile apps → Increase in convenience due to (1) reduction in waiting time and (2) cash-less / digital payment → High DD / AR → New competitors would expect to earn high revenue Potential benefits (Low costs) Contestable market - low barriers to entry: new competitors do not face much difficulties in entering the ride-hailing market and they enjoy the same level of access to the same resources as Grab. Low barriers to entry in terms of entry and exit costs – primarily dependent on contract labour (drivers) with no specialised skills which is readily available, easy and cheap to develop mobile app for ride-hailing, little / no advertising costs required

5 Little / no difficulties to enter the market - Grab does not have a significant advantage when c onsumers make an automatic association of ride -hailing with Grab. Thus, consumers do not have inherent loyalty / preference for any ride-hailing firm. Same level of access to resources that Grab has - enables new competitors to be able to produce ride-hailing service at costs comparable or lower than those of Grab’s. Figure 1: New competitors earning sup