ACJC H2 Prelim 2024 P2 EQ3 Solutions

3 InJuly2023,GrabannounceditwasacquiringSingapore'sthird-largesttaxi operatorTrans-cab, which has a fleet of more than 2,500 vehicles. The acquisition wouldhave covered Trans-cab’staxi andcar rental business, maintenanceworkshopandfuel pumpoperations. TheStraitsTimes,25July2024(a) Explain howthemarket structureinwhichGraboperatesislikelytoinfluencehowpricesandoutputaredetermined. [10] (b) Discuss whether Grab’s acquisition of Trans-cab will benefit or disadvantagetheconsumersinSingapore. [15]2021Q3–govtinterventionontoconsumers a) ExplainhowthemarketstructureinwhichGraboperatesislikelytoinfluencehowpricesandoutputaredetermined.[10]Questionanalysis: CommandWord “Explain”–requiresstudenttoexplainthecharacteristicsofthemarketstructure(likelytobeoligopoly)andapplyittothecontextoftheride-hailingmarket.Theyshouldalsoshowtherelationshipbetweenthesecharacteristicsandpricing,outputbehaviouroftheoligopolisticride-hailingmarket.Context Ride-hailingmarketConcept Characteristicsandhowthataffectspriceandoutputdetermination Introduction:Singapore’s ride hailing market is considered to be operating inanoligopolisticmarketstructure. These are based on the different characteristicssuchasbarrierstoentry, sizeandnumberoffirms.Thesecharacteristicsinturn,affecthowpricingandoutputdecisionsaremade.Requirement 1: Explaining the characteristics of the ride-hailing market to conclude theoligopolisticmarketstructureThebarrierstoentryof thecar-sharingmarket canbehigh. Thecostbarriertoentrycanbehighduetohighfixedcoststoset upanappfor theprivatetransportservices.Aride-sharingapp must offer a user-friendly experience to both the driver and the passenger, as well asefficiencyusagewithoutlagsorerrors.● For instance, the app must enable easy ride booking/ cancellation/ pre-schedulingbooking features, real-time tracking, multiple pick-up & drop-off locations, support

multiple payment options, in-app chat or call option as part of the customer supportservices,andevenSOSPanicButtontoearnusers’ trust.Given the high fixed costs, firms in this industry would benefit frominternaleconomiesofscale which allows the firms to spread their costs over a large output. This means that theexisting firms are able to charge their services at alowerprice, that candetertheentryofnewfirmssincetheyareunlikelyabletopricetheir servicesat alower price. Moreover, giventhat the dominant firms have been in the market for some time,contrivedbarrierssuchasbrandloyaltyhavebeenestablished,makingitdifficultforanewincumbentfirmtopenetrate.Assuch, thishighbarrierstoentryhasresultedinasmallnumberoffirmsinmostcountries.For instance, in Singapore the main ride-hailing firms are Grab, GoJek, Ryde, ComfortDelgroetc. This suggest that eachfirmscanhaveasubstantial marketpresencewithstrongmarketpower. With only a fewsubstitutes in the market,demandforride-hailingserviceswouldlikelybepriceinelastic.Requirement 2: Explaining how economic theory suggests how price and output will bedeterminedintheride-hailingmarket● Explainhowtheprofit maximizingpriceandoutput isdeterminedTheobjectiveof thefirmsintheride-hailingmarketwouldbetomaximiseprofits.Todoso,thefirmwouldproduceanoutputlevel ofQ π maxwhereMC=MR,asseeninthediagrambelow.MC=MRistheprofitmaximisingcondition because whenoutput issmaller thanQ π max,the marginal revenue is larger than the marginal cost, hence it is beneficial for the firm tocontinueraisingitsproductiontogainprofits. Conversely,ifthefirmproducesatanyoutputthatishigher thanthat at MC=MR, itsmarginal cost isgreater thanthemarginal revenue,leadingto a net loss. Thus, the firmwill stop raising production when marginal cost is equals to themarginal revenue,givingrisetothemaximumprofitlevel.

● ExplainhowpricesaredeterminedusingtheARcurve–studentsmayalsobringintheuniquecharacteristicof oligopolistic“mutual interdependence” characteristicthat leadstopricerigidityThepricewill bedeterminedbytheARcurveat that givenoutput level of Q π maxbecauseARcurverepresentsall pointswhichconsumersarewillingandabletopay.Thus,thepriceissetatP π max. As the demand for each firm is price inelastic, this profit-maximum price would beexpected to berelativelyhigherthanthemonopolisticcompetitivefirms.(orhigherthanthemarginalcost).Animportantfactorthatdeterminespricesaremutual interdependencebetweenthefirms.Asallfirms provide similar services and have market power which is quite evenly split, each firmwouldbeveryconsciousofrival firm’sactions.Forexample,● if Grab were to lower prices, the other firms would likely follow suit to preventconsumersfromswitchingover,makingdemandpriceinelastic.ThiswouldleadtoalessthanproportionateincreaseinQtydemandedforGrab’sservice.● If Grabweretoincreaseprices,itisunlikelythatfirmswouldfollowasconsumerswouldrather sticktoother ride-hailingfirms, makingdemandpriceelastic.ThiswouldleadtoamorethanproportionatedecreaseinQddforGrab’sservice.In either case, revenue would fall. Thus, firmswouldtendtosticktopriceleadingtorigidandstablepricesintheride-hailingmarket. Other acceptable responses include: Explain how market dominance influences pricingstrategysuchaslimit andpredatorypricing Ride-hailing firms could also want to capture a larger market share by setting upcontrivedbarrierssuchaspredatoryor limit pricing. Limitpricingiswhenthedominantfirmssetapricebelow profit maximizing price and sometimes belowaverage cost, to prevent newentrantsinto the market. Predatory pricing is when dominant firms set prices belowaveragecost todrive other firms out. These are pricing strategies that the dominant firms could adopt tosecurelargermarketshareandhigherprofitsinthelongrun. Knowledge,Understanding,ApplicationandAnalysisLevel Descriptors MarksL3 ● Answeriswell developedandexplainsBOTHthecharacteristicsofthemarketstructureofride-hailingmarketsandpriceandoutputdecisionsbyfirms● Clearandaccurateuseofeconomicanalysiswithdiagrams● Relevantexamplesareprovided. 8-10 L2 ● AnswerisunderdevelopedinexplainingBOTHthecharacteristicsofthemarketstructureofride-hailingmarketandpriceandoutputdecisionsbytheoligopolisticfirms.OR 5-7

● Answeriswell developedbutonlyexplainsEITHERthecharacteristicsofthemarketstructureofride-hailingmarketORthepriceandoutputdecisionsoffirms.● Clearuseofeconomicanalysiswithfewinaccuracies● Someuseofexamples.L1 ● Answerisirrelevantinmanyparts● Limiteduseofeconomicanalysisorhasmajorinaccuracies● Limiteduseofexamples 1-4 b) Discusswhether Grab’sacquisitionof Trans-cabwill benefit or disadvantagetheconsumersinSingapore. [15]Questionanalysis: CommandWord “Discuss”–requiresstudenttoanalyseandevaluatefirm’sstrategy,inthiscaseGrab’sacquisitioncanbenefitordisadvantagetheconsumersintheride-hailingmarket.Context Singapore’sride-hailingmarketConcept Firm’sstrategiesandmarketstructure Introduction:Giventhat thereareafewnumber oflargefirmsinanoligopolisticmarketstructurewhereeachfirmhassignificantmarketshareandarelesslikelytocompeteonprice(asexplainedinparta).Firmsarelikelytocompetethroughnon-pricestrategies,inthisinstance,Grab’sattempttouseacquisition(ofTrans-cab)toexpanditsmarketdominanceandthusmarketshareinSingapore’sride-hailingmarket.WhiletheacquisitioncanleadtogreatermarketshareforGrabinSingaporeride-hailingmarket,itspotential benefitsanddisadvantagesforconsumerscanbedebatable.Requirement 1: Grab’s acquisition may benefit the consumers in the ride-hailing market byresultinginlowerpricesandhigherqualityofservices.One of the most possible benefits of Grab'sacquisitionof Trans-cabisthepotential forlowerprices/ faresasfirmenjoysloweraveragecostthroughhigherinternal economiesofscale. Withalarger market share, Grabmayenjoygreater internal economiesofscale(iEOS),lowering average cost as output expansion occurs (i.e. quantity of ride hailing servicesincreases), loweringMCandACfromMC0 and AC0 toMC1 andAC1 ). Assumingfirmspassthecost- savings to consumers, at profit- maximizing level, where MC= MR, the marketequilibriumpriceislowerthanbeforeacquisition(PotoP1 ),leadingtohigherconsumersurplus.Forinstance, (b) DiscusswhetherGrab’sacquisiti