RI 2022 H2 Y6 Common Test - Examiner's Report

ECONOMICS Higher 2 Syllabus 9757 Examiner’s Report Year 6 Common Test 2022 Raffles 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

Y6/9757/CT/2022 2 © RI 2022 [Turn Over ECONOMICS Y6 H2 Common Test 2 2022 Paper 9757/02 Paper 2 Question 1 1. The degree of competition within an industry depends on a number of factors.  a. Using examples, explain possible factors that have caused some markets to become more competitive. [10] b. Discuss whether innovation is the best strategy for a firm seeking to increase its profits. [15] Part (a) Introduction • Link “more competitive” to increase in the level of competition → increase in the number of firms in the industry, fall in market share of firms and market power. • Some important factors are government intervention and advancement of technology. Other possible factors include globalization, shift in culture towards greater risk taking and greater availability of market information to both producers and consumers Factor 1: Government intervention may cause markets to become more com petitive. • Government can reduce monopoly power and market share of large firms through lowering the barriers to entry in many industries. • Reduce legal barriers to entry (BTE) by issuing more licenses to more firms to operate, for example, the Spore government issued more licenses in various industries such as those in telecommunication, power distribution and public transport (bus). These industries were previously dominated by one or two firms and in recent years, the number of firms in each industry has risen subs tantially and the incumbent firms’ market power has fallen, leading to the industry becoming more competitive. • Reduce man-made BTE by implementing anti-trust laws to prevent predatory and anti- competitive behaviour of large firms thus ensuring fairer and greater competition. For example, in 2005, Competition and Consumer Committee Singapore (CCCS) was set up to eliminate or control practices which have adverse effect on competition in Singapore. It has the power to enforce against unfair practices like ab use of dominance, anti -competitive mergers and agreements in industries which might lead to reduction in number of firms and increased market share. For example, it intervened to prevent a potential dominance and lack of competition situation when a few diagnostic and laboratory services in the medical sector were bought over by a major player. It put in place measures to ensure fair practice to allow new entrants to compete in that sector  more firms, lower market share  more competitive. • With lower BTE, the entry of new firms would lead to increase in the number of firms in the industry and reduce the market share of the incumbent firm as illustrated in diagram below, assuming the market size remains constant. • As demand of incumbent firm falls and becomes more price elastic due to the increase in

Y6/9757/CT/2022 3 © RI 2022 [Turn Over the number of competitors, AR and MR curves shift inwards from AR1 to AR2 and MR1 to MR2 respectively and become gentler. The profit-maximising equilibrium output of firm fall from Q 1 to Q 2  and thus the market share of firms falls, making the market more competitive. Factor 2: Advancement in technology can reduce BTE, allow more firms to enter and reduce market share of incumbent firms and cause markets to become more com petitive • Technology advancement in communications and information– allow business units to be set up with low startup costs, eg through online selling, promotion and advertising  reduces BTE in terms of startup costs. • Such technology also allows extensive reach to broader and even overseas markets  higher level of production/sales at lower unit costs  again reduces BTE (link to lower AC). • For example, online fashion apparel business units have mushroomed because they can start small and at low cost (going online and engaging in social -media marketing)  retail fashion apparel on the whole have become highly competitive because of these new entrants. Factor 3: Other possible factors • Any example of any significant fall in the cost of production in industry  lower average cost lower startup cost – for instance the lowering of factor input prices, the lowering of rent. • Availability of information for new producers due to greater information flow - production know-how easily available because of information technology and ease of replicating production methods, example in the bubble tea sector. (This point might be linked to advancement of IT factor too) • More information easily available to consumers about the pricing and quality of goods and services  lower consumer loyalty of incumbent firms, reduce BTE  lower mkt power. • Shift in culture and more appetite for risk-taking among young entrepreneurs in society. Mark Scheme: Knowledge, Application, Understanding, Analysis L1 • Little / non-existent use of economic theory / answer that is largely descriptive knowledge with little or no economic terminology applied. • An answer that does not show that meaning of question is understood 1 – 4 L2 • At least 2 factors explained. • Some gaps in explanation - depth lacking in some areas / use of examples and economic terminology could be improved. 5 - 7

Y6/9757/CT/2022 4 © RI 2022 [Turn Over L3 • Answer has sufficient depth and economic terminology is well used to demonstrate rigour; good use of examples. • At least 2, if not 3 factors (must include govt intervention) well explained and developed using appropriate examples. 8 - 10 Examiners’ Comments (part a) - This question was poorly done by most students because the question requirement was not well grasped. Many students simply wrote all that they knew about the features that affect the level of competition in each market structure. Others wrote about how firms in different markets behave in a more competitive manner and engaged in price and non- price competition. Relatively few were able to explain factors, that have in recent years, led to an increase in the number of firms and subsequently a fall in firms’ market share in some markets. - The use of examples is needed in this question, not just because the question specifically asked for these, but also because they are critical to a rigorous explanation here. For scripts which have interpreted the question requirement accurately, most have quoted good examples of government measures to reduce BTE, leading to increased competition, namely increase in the number of firms and lower market share of the firms. However, those who suggested privatization did not score because they were not able to explain how that led to lowering of BTEs and increased number of firms in the market. Privatisation of state- owned companies per se without allowing more firms to enter a market does not necessarily lead to greater competition in a market. A monopoly is still a monopoly whether state owned or private owned. Part (b) Approach: Students are required to discuss innovation as well as other strategies which may increase the profits of firms. Other strategies may include advertising and marketing, superficial product/service differentiation, price discrimination etc. Scope of strategies should be wide to cover those which increase TR and reduce AC.  Thesis: Explain how innovation may increase revenue and reduce cost to maximize profits.  Anti-thesis: Limitations of innovation to increase profits and proposal of at least 1 other strategy which might better increase profits of firms.  Evaluation – Compare the strategies, make judgement and provide any other possible relevant insights. Thesis: Innovatio