RI Firms Assignment

Y5 H2 Economics 2024 T3W5 Assignment – Firms and Decisions (Part 2) – Post-Mortem 1 Businesses in the UK are still not able to cope with the dual blow of Brexit and Covid -19, and face falling profit levels. Supply disruptions remain a lingering concern, which has driven up prices of many items including petrol and a basic haircut. The Competition and Markets Authority found that high petrol prices could not be solely blamed on global factors and found evidence of weakening competition. Amidst these developments, businesses have taken various measures, with petrol retailers moving towards mergers while barbers are offering attractive discounts on their haircuts. (a) Explain whether the higher petrol price is due to collusion or other factors. [10] (b) Discuss whether lowering prices is the most appropriate strategy for firms in different industries when faced with the above challenges. [15] Part (a) Introduction • Clarify market structure petrol retailer operate in – oligopoly Elaborate briefly. i) High barriers to entry • Firms in the petrol retailing industry tend to face high natural /structural barriers which essentially arises from the differences in production and costs between the incumbents in the petrol retailing industry such as Esso and a potential entrant. These natural barriers to entry include high rental / lease of land particularly in northern parts of UK and central London areas . In addition, infrastructures such as fuel dispensers, submersible pumping systems as well as technology to adopt digitalisation to facilitate payment processes to enhance operational efficiency and improve customer experience incurs very high overhead costs → lack of financial capital/loans prevents firms from entering • Given the large scale of operation of incumbent firms such as BP, Shell and Tesco, they tend to have high minimum efficient scale (MES) of production. As such, they are fully able to exploit available internal economies of scal e to enjoy significant low unit cost of production of their petrol and consequently allowing them to price them at a competitive level. • As a result, potential entrants may find it difficult to compete effectively as they tend to operate on a relatively smaller scale and may not be able to spread the high overhead/startup costs of setting up a petrol station over the output produced, incurring a relatively higher uni t cost of production compared to the incumbent . Therefore, potential entrants may not be able to match the price of their petrol at the same level as the incumbents without incurring losses. This deters the entry of new firms since they are less able to compete on cost and may incur losses due to the significant differences in the cost conditions. ii) Few dominant firms As a result of the high barriers to entry, there are only a few large firms dominating the industry and for example, the 3-firms market concentration is re