2022 SH2 H2 Prelim EQ2 (Suggested answer).docx

2022 NJC H2 Economics Preliminary Examination Essay Question 2 2 (a) Explain whysomeconsumer electronicsmegastoresinSingaporelikeCourtsandHarvey Norman would price match other consumer electronics megastores bycharging the same prices for same products but smaller consumer electronicsstores in the neighbourhood would not.[10] (b) Discuss whether demand or supply factors are more important in explaining thecoexistence of big businesses and small independent businesses.[15] Part (a) suggested answer Introduction ● Consumer electronics stores in Singapore operate in a oligopoly market structure. ● The megastores (i.e. oligopolies) are mutually interdependent thus would price matchother megastores. ● The smaller stores in the neighbour would not match the megastores. Body 1: Explain that some consumer electronics megastores would price match otherconsumer electronics megastores by charging the same prices for the same products. ● InSingapore’sconsumerelectronicsmarket,thereareafewdominantfirms(e.g.Courts,HarveyNorman, Best Denki, Challenger,) andeachof thesemegastoreshassignificantmarket share. ● In addition, there are high barriers to entry in the market. For example, existingmegastores enjoy tremendousbrandloyaltyviatheir respectiveloyaltyrewardprogramwherememberscanaccumulatepointswhichcanbeusedtoenjoyadditional discounts,attractive free gifts, etc. ● Furthermore, eachof themegastoresellsdifferentiatedgoodsthusthereareafewclosesubstitutes e.g. same product fromthe same brand suchasLG, Samsung, Panasonicbut each has different inhouse warranty. ● The megastores are therefore mutually interdependent. ● If a megastore reduces its price, other megastores would have to followsuit i.e. pricematch. If not, they would face a decrease in demand and profit would decrease. Body 2: Explain that smaller consumer electronics stores in the neighbourhood wouldnot price match the megastores because they do not need to and/or are unable to. ● Ontheotherhand,duetotheirsmall scaleofproduction/sales,thesmallerstoresintheneighbourhood would not price match the megastores because the former does notenjoy the level internal economies of scale (IEOS; if any) enjoyed bythemegastores.For example, thesmaller storesarelessable/ unabletoenjoymarketingeconomiesof

scalee.g. withsmaller scaleof production/ sales, advertisingcost of thesmallerstoresis only shared across a smaller amount of output / sales. Asaresult, whenfacedwiththe lowering of prices by themegastores, thesmaller storesareunabletopricematchthe lower prices due to their higher average cost. Conclusion ● In conclusion, consumer electronics megastores would price match other consumerelectronics megastores by charging the same prices for the same products due tomutual interdependency but smaller consumer electronics storesintheneighbourhoodwould not due to their inability to enjoy IEOS.

Mark schemeLevels Descriptors L38 - 10 For an answer that demonstrates knowledge, understanding, application and analysis: EXCELLEN