ACJC Market Structure Tutorial Answers

1 ©ACJC Econs Dept/2020/Firms and Decisions Tutorial Worksheet - Answers Section :C Case Studies Questions Question 4: Singapore’s big telcos face rising competition Questions: (a) Comment if Figure 2 supports the data shown in Figure 1. [3] Suggested Response: There is a positive relationship between the mobile penetration rate and Singtel’s operating revenue because when more people sign up for mobile plans, Singtel will be selling more units of mobile plans, leading to higher revenue. Hence, Figure 2 supports the data shown in Figure 1 from 2009 to 2012 as both show an increasing trend. However, from 2013 to 2014, Figure 2 does not support Figure 1 because Singtel’s operating revenue decreased when the mobile penetration rate increased. The inverse relationship between Singtel’s operating revenue and mobile penetration rate could possibly be due to new and existing users of mobile services preferring to patronise new telcos. Note: It is also acceptable for candidates to assert that that Figure 2 generally supports the data shown in Figure 1 for time period 2009 to 2018. Mark Scheme: 1m: Giving evidence for support for time period 2009 to 2012 1m: Giving evidence for did not support for time period 2013 to 2014 1m: Provide explanation for one of the above cases (b) (i) Explain the barriers to entry a new entrant like TPG would face in the mobile network market. [4] Suggested Response: Legal BTE: One of the barriers to entry faced by a new entrant like TPG would be legal barriers. As suggested in Extract 1, there are licensing and regulatory requirements that TPG would have to meet before they are able to operate in Singapore. Financial BTE: Another type of BTE faced by TPG would be financial barriers. As mentioned in Extract 1, TPG intends to get the funding it requires to operate its business in Singapore. As such, the entry of TPG into the Singapore market is contingent on its ability to raise funds from investors to finance its capital outlay. Note: It is also acceptable for candidates to assert that there are contrived barriers to entry. Candidates who associate telcos’ strategy of cutting prices of data plans as a contrived barrier must explain the following. Incumbent telcos respond to the entry of new telcos by adopting

2 ©ACJC Econs Dept/2020/Firms and Decisions Tutorial Worksheet - Answers predatory pricing such that it forces the new entrants – when compete on the basis of price - to operate at a loss. Mark Scheme: 2m: Identify + explain each type of BTE (b) (ii) Consider why it might be a rational decision for a new firm like TPG to enter the mobile network market. [3] Suggested Response: The costs to the firm would be the cost of setting up its infrastructure in a way that satisfies the licensing and regulatory requirements. The benefit to the firm is the revenue it would earn when selling its mobile plans to consumers. While the initial costs of starting up a