EJC Econs N2020 H2 P1 Paper 1 and Paper 2 Suggested Answer and Mark Scheme

1 2020 A Levels H2 CSQ1 SAMS: Anti-competitive behaviour in Singapore (a) Explain one measure used by economists to assess the level of competition in an industry. [2] One measure economists can use to assess the level of competition in an industry is the market concentration ratio. The market concentration ratio is the ratio of the combined market shares of a given number of firms (usually the 4 or 5 largest firms) to the whole market size. [1] When the market concentration ratio is high, a few firms account for most of total market share. This means they are more able to control prices and erect barriers to entry, leading to lower competition. [1] (b) Using Table 1, explain two possible changes in the market for pork that could account for the difference in consumption of pork in 2018 compared to 2007. [4] As seen from Table 1, there is an increase in consumption (qty) of pork between 2007 and 2018. This could be due to either an increase demand or supply for pork. Demand factor [2]: The rise in income of Singaporeans will lead to a rise in demand for pork. With higher purchasing power, consumers are more willing and able to purchase normal goods such as pork. The rise in demand for pork would cause a rightwards shift of the demand curve causing a rise in equilibrium quantity , which indicates a rise in consumption of pork. Supply factor [2]: The advancement of technology could also result in a rise in supply for pork. New technology might lead to a lower cost of rearing pigs. The fall in production cost will lead to a rise in supply as producers are incentivised to increase production. This rise in supply of pork will lead to rightward shift in the supply curve causing a fall in equilibrium price and a rise in equilibrium quantity as consumers increase their consumption of pork. (c) (i) What is meant by ‘producer surplus’ and ‘consumer surplus’? [2] Producer surplus is the difference between the amount that a producer of a good actually receives and the minimum amount that the producer is willing and able to sell the good. This is a measurement of producers’ welfare. [1] Consumer surplus is the difference between the maximum amount that a consumer is willing and able to pay for a good and the amount that he actually paid for the good. This is a measurement of consumers’ welfare. [1] (ii) Extract 2 states that ‘collusion restricted supply in the market and contributed to price increases of certain fresh chicken products’. Using a diagram, explain how this collusion is likely to have affected the producer surplus and the consumer surplus in the market for these chicken products. [4]

2 The restricting of supply to Q1 will result in a new market supply curve SS 1, as seen in the diagram below. Equilibrium price increases (P0 to P1) and quantity falls (Q0 to Q1). [1] Consumer surplus falls from area AE 0P0 to area A BP1. [1] Producer surplus rises from area P0E0C to area P1BDC. [1] Alternative approach The restricting of supply by firms will lead to a fall in market supply causing a leftwards shift of the supply curve from So to S1. Price increases (Po to P1) and quantity falls (Qo to Q1). [1] Consumer surplus falls from area AEoPo to area AE1P1. [1] Producer surplus falls from area PoEoB to area P1E1C. [1] Diagram [1] (d) Using Extracts 3 and 4, discuss which market structure best describes the characteristics of the ride-hailing market in Singapore. [8] Introduction

3 The ride-hailing market consists of firms such as Grab and Uber. The type of market structure in which these firms are operating in can be determined by examining the features of the industry such as the presence of long -term profits, the ability to set prices, the market share of firms and the existence of barriers to entry. To determine which market structure it is, let’s examine each characteristic of the market: 1. Market share With the merger of Grab and Uber, the combined firm now holds a large market share of around 80% in Singapore (Ext 4). This makes it a single dominant firm and therefore a monopoly. The significant market share could enable the single dominant firm to enjoy a high degree of market power with price setting ability, as seen in Extract 4, where the firm is able to set prices when it increased its effective fares 10% to 15% after the merger. 2. Level of barriers to entry This is because such high degree of market power could be due to the existence of high barriers to entry into the industry. Drivers of private hire vehicles have exclusivity arrangements (Ext 3) with the combined firm, making it difficult for new entrants to enter and capture a significant amount of market share. In addition, the use of “modern technology to aid bookings” (Ext 3) could pose as a form of barrier to entry. There is a huge amount of start-up infrastructure and R&D costs incurred before production can happen. This makes it more likely for a single producer to supply the entire market and hence en joy a lower average total cost of production due to the opportunity to reap substantial internal EOS. Due to the huge capital outlay involved coupled with low average cost of production of the merged firm , this effectively bars potential entrants with insufficient capital funds. The incumbent firms then are able to protect their supernormal profits “$13 million fine was small compared with the value of the firm… is unlikely to have a large impact on their profits” (Ext 4). 3. Nature of knowledge Both consumers and rival firms have imperfect knowledge on Grab and Uber’s cost of production. This is especially so since much of the necessary infrastructure are technology-related. While the hardware costs can be estimated, the software and R&D costs ar e harder to ascertain. In addition, it is also difficult to determine the service quality standards such as the precision of location pins, as well as information on the pricing algorithm (and how peak pricing is calculated) for consumers to determine if the pricing is fair. The high degree of imperfect knowledge makes this the market to likely be either a monopoly or oligopoly. Evaluation [Stand] While high BTEs and high degree of imperfect knowledge are associated with monopoly and oligopoly, the market share is the deciding characteristic that establishes it as a monopoly. [Qn assumption ie long run outcome] Whether the ride-hailing industry in Singapore will turn into oligopoly in the long run would depend on the likelihood of the new entrants being able to capture a significant amount of market share.

4 [Arrive at the likely long run outcome with justification] The chances of it turning into an oligopoly is high due to the close monitoring and likely intervention by the CCCS which aims to increase competition in the industry. Furthermore, firms like Go -Jek which has got operations in Indonesia should be able to over come the barriers to entry due to the similarity in the type of technology used. Alternatively, [Qn assumption with justification] Whether the market structure is considered to be a monopoly or not also depends very much on the definition of the market. In Extract 4, Uber asserts that this monopoly definition was based on a very narrow definition. If one extends the definition to also include other forms of land transport such as taxis and buses, then it would not be as dominant as assessed by CCCS (much less than 80% market share). Level Descriptor Marks L2 For an answer that rigorously compares characteristics of different markets compared to monopoly and applied to the market, based on case evidence 4 – 6 L1 Identify a limited number of characteristics that affect degree of competition; limited application For an answer that has a smattering of points , with inability to examine the informatio