RI 2020 H2 Promotion Examination - Examiner's Report

ECONOMICS Higher 2 Syllabus 9757 Examiner’s Report Year 5 Promotion Examination 2020 Ra ffles Institution Nurturing the Thinker, Leader & Pioneer TEL: 65 6419 9888 ● FAX: 65 6419 9898 http://www.ri.edu.sg ● One Raffles Institution Lane, SINGAPORE 575954

Y5/9757/Promos/2020 2 © RI 2020 [Turn Over ECONOMICS Y5 H2 Promotion Examination 2020 Paper 9757/01 Paper 1 Case Study (a) (i) Explain the market structure that best represents ride -hailing services after the merger in Extract 1. [2] Suggested Answer: Identification The market structure is monopoly. Justification (Link it back to the characteristics of a monopoly) (i) There is only one dominant firm with a very high market share and the rest are small firms with insignificant shares. Evidence: “CCCS finds that Grab currently holds around 80% market share. Despite recent entry by several small players, their market shares remain insignificant.” (Extract 1) OR (ii) Very High BTE • Grab controls the factors of production i.e. the taxi drivers who are essential for its business. It would be difficult for a potential entrant to convinc e drivers to switch if the customer base of the new entrant is small. • Grab enjoys the network effect from its booking app which leads to customers remaining loyal to enjoy their rewards and shorter wait times since there are more drivers in Grab’s network compared to a potential entrant. Evidence: CCCS’s investigation found that strong network effects make it difficult for potential competitors to scale and expand in the market, particularly given that Grab had imposed exclusivity obligations on taxi companies, car rental partners, and some of its drivers. Grab’s exclusivities hamper the ability of potential competitors to access drivers and vehicles that are necessary for expansion in the market. (Extract 1) Mark Scheme - Identification – 1m - Justification - 1m Examiners’ Comments ­ Relatively well-done with most scoring at least 1m for the correct identification.

Y5/9757/Promos/2020 3 © RI 2020 [Turn Over ­ A number of students did not gain the second mark as they did not justify why it is a monopoly with links back to the characteristics of the market structure. They stopped short of mentioning that the remaining firms in the market were small and insignificant, and that there is only 1 dominant firm in the market after the merger. ­ Note that it is not good enough to say that Grab is a monopoly after the merger because it held the majority share in the market, as this can also be evidence of an oligopoly. ­ A small number did not respond to the post -merger scenario and case evidence on the market share and got the identification wrong. (a) (ii) Comment on how commuters could be affected by the merger above. [4] Suggested Answer: Consumers’ welfare could be negatively or positively impacted by the merger. Consumers would be affected firstly by the price charged but also by other factors such as quality and choice. Thesis: Negative Effects 1. Higher price • The merged firm has larger market share  demand (AR) shifts right. • There are fewer firms in the market. Grab is now a monopoly  there are fewer substitutes  PED falls and the new demand curve is steeper. • At the new profit -maximising output where MC=MR, the new profit max imising price is higher . Consumers are exploited because price charged exceeds the MC by a greater extent. • Hence they are worse off. Evidence “Effective fares have increased between 10% and 15% post -Transaction.” Extent of this: will worsen, as grab continues to erect BTE with its market dominance- “exclusives…” (Extract 1) 2. Less Choice • Since there are a fewer number of firms and Grab is a monopoly, consumers lose their sovereignty. • This could also lead lower quality of service for rides provided by Grab. Anti-thesis: Positive effects 1. Dynamic Efficiency • Higher profit from the merger gives Grab the ability to do R&D for e.g. in autonomous vehicle technology. • Consumers have better quality/more efficient travel experiences in the long-run. 2. Lower price • Grab’s expansion will enable it to enjoy internal economies of scale for e.g. in the bulk purchases of vehicles. They could pass down cost savings from iEOS to consumers through lower prices. Or

Y5/9757/Promos/2020 4 © RI 2020 [Turn Over • Process innovation over time due to dynamic efficiency might cause the LRAC/LRMC to fall leading to lower prices in the long-run. Mark Scheme - Balanced answer with use of case material and elaboration – 4m - Well explained one-sided answer – max 3m - Lack use of case evidence – max 3m Examiners’ Comments ­ “Comment” requires a balanced answer or an attempt at evaluating the thesis. There were many one-sided responses. Students need to pay attention to the command words to guide their approach to the question regardless of mark allocation. ­ The analysis on the extent of increase in prices lacked rigour. Reference should be made to the change in PED and extent of the price mark-up above the MC with a merger. ­ Some scripts looked at the outcome of a monopoly e.g. high price, P>MC as compared to P = MC, rather than the change that occurs with a merger e.g. increase in the extent of price- setting ability  higher prices ­ A number of students did not apply case evidence to support their answer and lacked application. Note that it is a case study, and you should use case material whenever possible. (b) Discuss the extent to which Uber is likely to benefit from the development of autonomous self-driving technology. [8] Suggested Answer: Assume that Uber is a profit -maximizing firm, and would like to increase profit levels as its objective  Evidence: Uber’s CEO’s goal is to get Uber to profitability by 2021 (Extract 2). Thesis: Uber is likely to benefit from autonomous technology (AT)  it could lead to higher profits 1. Lower Cost • ‘The driver represents the single largest expense in non-autonomous ride-sharing at 80% of the total per mile cost’. (Extract 2) • The removal of the driver reduces the average variable cost of the trip i.e. the payment/wage of the driver. • This will lead to a fall in both the MC and AC. • The profit-maximising output increases to Q 2 and price falls to P2 as shown in Figure 1  “by removing the driver from the equation…dramatically lower the cost of a ride” (Extract 2) , “vehicle ownership becomes obsolete” as they switch to Uber’s ride services. • Hence Uber’s profit increases as seen in the supernormal profit earned.

Y5/9757/Promos/2020 5 © RI 2020 [Turn Over Figure 1 2. Higher Revenue • AT would influence the tastes and preferences of consumers toward self-driving cars. • ‘Better indicates making the ride a luxurious experience while reducing customer wait times. To this end Uber, partnered with Volvo and Toyota to co- engineer what could be the most “opulent” self-driving ride experience on the market.’ (Extract 2) • This would i ncrease demand (AR) . The product differentiation is likely to reduce substitutability, lowering the PED and CED. • This will lead to an increase in profit-maximising price and output, TR and profit. Antithesis: Uber may not benefit from autonomous technology  Profit might not increase or it could fall 1. Safety Concerns – Fall in demand (AR) • Tastes and preferences could be affected by accidents. • The government might also regulate Uber if they deem AT to be dangerous. • ‘The most important for Uber’s ATG unit, is safety, which could make or break the company’s self- driving ambitions. Regulators could also cause delays over safety concerns.’(Extract 2) • The fall in AR due to changing perceptions of safety or unintended regulation by the government will reduce the profit maximising price and output  TR falls, profit f