2022 SH2 H2 Prelim CSQ1 (Suggested answer).docx

Question 1: A winner in the pandemic – Amazon Suggested Solution and Mark Scheme (a) Compare the relative change in the retail revenue for Amazon, Walmart andHomeDeport between2010 and 2020. [2] Similarity: All three firms have seen an increase in their retail revenue between 2010 and 2020.Difference: However, the rate of increase in theretail revenuefor thethreefirms aredifferent, withAmazon experiencing the fastest increase (2,800%), followed by The Home Depot(466%) then Walmart (90%). (b) Using a diagramand a relevant elasticity concept, explain how the Amazon’s differentiation strategy[Extract 1] may have contributed to the change in its revenue. [5]● Amazon worked on differentiating their services, for e.g. priorities were placed oncustomer feedback and service were prompt [inExtract 1] andthishastheeffect ofchanging the taste and preferences of consumer towards the services provided byAmazon.● This will lead to anincreaseindemandfor their services, c.p. asshownbytheshiftfromARo to AR1 inwhereequilibriumpriceandquantitywill increase, Figure1, andhence, increase in Amazon’s revenue as shown by the area 0PoaQo to 0P1cQ1.● Their differentiation strategy promotes customer loyalty who believes that the highstandardof servicescouldnot befoundintheservicesprovidedbytheirrivals,thatisthe service offered by Amazon is not easily substitutable, and hence, the valueofPEDfor Amazon’sserviceswill belessthanone, asillustratedbytheincreaseinthegradient of the demand curve (AR1).● With PED<1, hence, Amazon could increase the price of their products/services,leading to a less than proportionate decrease in quantity demanded. Hence itsrevenue will increase.● Diagramshowingtheincreaseindemand,fall inPED(increasegradientofARcurve)and the area of increased in revenue. (c) With reference to Extract 1, explain a source of cost advantage experienced by Amazon. [2]● Thissuggeststhat technical economiesof scale(indivisibility) canbeachievedwhenAmazontapsonthelargerwarehousingfacilitiesandprocessingcapability[Extract1]and share the high costs of capital equipment over large output (in this case, theincreasing number of users/customers), resulting in a fall in the long run average cost. (d) Identify and explain two possible barriers to entry faced by the potential competitors into thee-commerce market that Amazon is in. [3]● In the case of e-commerce market, Extract 2statesthat Amazonhaduseddataonthird-party sellers that use its market-place, which is a control of key resource, toboost sales of its own-label goods.Or● Amazon usedcritical informationtakenfromdataontheir thirdpartysellersthat useitsmarket-placetoanalyseconsumers’ preferencesandwhattheyarespendingtheirmoney on which could help Amazon increas