2022 JC2 H2 Prelim Essay Q2 (Suggested Answers)

2. Bubbletealoversin Singaporehavethehighestspendingpowerof US$342annually, withthebubbleteaindustryearninga profitmarginof around75%.Theindustryhasenoughroomforlargerandsmallerplayerstoco-existandflourish.Theemergenceof newplayerswhoare goodat branding,supplychainandcostmanagement could pose an increasing challenge to existing local players. a) Explainhowthemarketstructureinwhichbubbleteaindustryoperateislikely to affect the firm’s pricing and output decisions.[10] b) Discussthe potentialbenefitsand problemsthat are likelyto beexperiencedbytheconsumersandproducerswiththeentranceofnewcompetitors. [15] Question Analysis:a)Explainhowthemarketstructurein whichbubbleteaindustryoperateislikelytoaffect the firm’s pricing and output decisions.[10] Command Explain how (Process)Content Structure (Characteristics) affecting the price and output of the firmsContext Bubble Tea industry (Oligopoly)Trigger Structure of bubble Tea industryEnd Price and output decision Paragraph Development: Point TheBubbleTeaindustryoperatesinanOligopolymarketstructureandthereforethemutualinterdependencecharacteristicsinthefirmresultsinpricerigidityamongthefirms,affectingtheirpricingandoutput decisions.Example BubbleTeafirmstendtonotengageinpricingcompetitionwheretheirmaincompetitivestrategiesare non-pricecompetitionin theirconsistent attempt to differentiate and diversify their products.EconomicAnalysis Mutualinterdependencebetweenthefirmsin Oligopolywouldhaveresulted in the firms experiencing a kinked demand curve where:- IncreaseinpriceaboveP1wouldbealonga|PED|>1demandcurve- Leadsto a morethanproportionatedecreasein quantitydemanded- Fall in TR

- Decreasein pricebelowP1wouldbealonga priceinelasticdemand curve where 0< |PED| <1- Leadsto a less than proportionateincreasein quantitydemanded- Fall in TR In addition, the presence of the disjoint MR also meant that:- Any changes in the MC between MC1 and MC2- Therewouldbenochangesin thePandQwherepriceandoutput would remain at P1 and Q1. Link to ATQ Giventhemutualinterdependencenatureof theBubbleTeafirms,thereisoftenpricerigidityandfirmsaregenerallyunwillingtochangeprices. Point TheBubbleTeaindustryoperatesinanOligopolymarketstructureandthe dominatingfirmsin the industrytendto havedifferentiatedproducts/strongbrandloyaltywhere0<|PED|<1comparedto thesmall firms operating in the Monopolistic Competitive Market Structure.Example LargedominatingfirmsintheBubbleTeaindustrylikeLiho,KoiandGongChahavetheirownuniquedrinksandoftentheconsumerloyaltyresultsin thepresenceof weaksubstitutesallowingthemtohave a price inelastic demand for their products.EconomicAnalysis Ability to product differentiate:- Weaksubstitutesrelativetoif thefirmswhereoperatinginanMC market structure where products are mostly homogenous- Price inelastic demand (Oli)- Poli is higher than Pmc

- TendencytochargeatahigherpricelevelasanOligopolythanthat of a firm in MC Link to ATQ Thelevelofmarketdominancewillhaveanimpactonthepricesetbythefirms,whenthedemandforthegoodismorepriceinelastic,theprice will be higher and the output will be lower. Point The Bubble Tea industry operates in an Oligopoly marketstructure where they tend to engagein non- pricecompetitionas a strategy to compete against others.Example The firms in the bubble tea industry frequently differentiates theirproduct, varying in the quality and variety of their product.E.g. Liho is known for their Cheese infused milk topping, Koidiversifies to different fruity tea dependent on season, Chi ChaSan Sen who is known for the quality tea used, especially withevery cup of tea made from controlled brewing technique,Playmade with their highly diverse toppings where their bubblescome in different flavours.EconomicAnalysis The output of the bubble tea industry is homogenous but highlydiversified.- Competitive environment has created the incentive toR&D- Supernormal profits has created the ability to R&D- Product differentiation is a common scene in the bubbletea industry.- Highly diverse and quality output in the bubble teaindustry.

Link to ATQ Output in the bubble tea industry is highly diverse and of highquality and variety due to the competitive environment andfrequent product differentiation. LevelDescriptors Marks3 Expectagoodknowledgeofthefactsandtheoryoftherationaldecisionmakingbyconsumers,clearevidenceoftheabilitytousethemarketstructurein thebubbleteaindustrytoexplaintheimpacton pricesandoutputwithaccuratereference to the question. Provisionof a well-balanceddiscussionwheretheimpactisonboth price and output. 8-10 2 Expectanaccuratealthoughundevelopedexplanationofthefactsrelatingto theuseofmarketstructureinthebubbleteaindustryto explaintheimpactonpricesandoutputtogetherwithanexplanationof thetheory, andevidenceofsome ability to discriminate and form elementary judgements. BUTdonotexpecta clearlogicalpresentation.Therewillnotbe muchevidenceof the abilityto recogniseunstatedassumptions,nortoexaminetheimplicationsofahypothesis,nor the ability to organise ideas into a new unity. Max 5: For one set of analysis 5-7 1 Answershowssomeknowledgebutdoesnotindicatethatthemeaningof thequestionhasbeenproperlygrasped,Basicerrorsoftheoryoraninadequatedevelopmentofanalysismaybe evident. 1-4

BubbletealoversinSingaporehavethehighestspendingpowerofUS$342annually,withthebubbleteaindustryearningaprofitmarginofaround75%.Theindustryhasenoughroomforlargerandsmallerplayerstoco-existandflourish.Theemergenceofnewplayerswhoaregoodatbranding,supplychainandcostmanagementcouldposean increasing challenge to existing local players. Explainhowthemarketstructureinwhichbubbleteaindustryoperateislikelytoaffectthe firm’s pricing and output decisions. [10] Discussthepotentialbenefitsandproblemsthatarelikelytobeexperiencedbytheconsumersand producerswith the entrance of new competitors.[15] Question Analysis: Command Discuss (Considerations of both sides of the analysis)Content Entrance of new competitors-> consumers and producers (Benefitsand Problem)Consumers: C.S, PQQVProducers: P.S, Profits (Revenue/ Cost)Context Bubble Tea IndustryTrigger Entrance of new competitors who aregood at branding,supply chainand cost managementEnd IMPACT: Benefits and Problems Consumers: C.S, PQQVProducers: P.S, Profits (Revenue/ Cost)

Paragraph Development: Point With the entrance of new competitors, consumers would benefit more asthe competition would drive down prices and improve on the quality ofoutput.EconomicAnalysis+Example Increase in competition:- Increase in number of substitutes- Demand for the bubble tea of the incumbent firms will fall sincethe share of the consumer market has to be shared among morefirms- DD0 to DD1 Consumers: Benefits- Prices charged will be lowered (P0 to P1)- Variety available to the consumers will be higher with more firmsaround- Quality of the Bubble Tea will improve with more productdifferentiation mentioned in part a)- E.g. Liho is known for their Cheese infused milk topping, Koidiversifies to different fruity tea dependent on season, Chi ChaSan Sen who is known for the quality tea used, especially with

every cup of tea made from controlled brewing technique,Playmade with their highly diverse toppings where their bubblescome in different flavours. Producers: Problems- Prices charged will be lowered (P0 to P1)- Quantity sold lowered (Q0 to Q1)- TR falls from (0P0AQ0 to 0P1BQ1)- Firms might be earning lesser profits as seen in the diagram fromthe original supernormal profit of C0P0AC to normal profit.Link toATQ Highercompetitionisoftenseentobedesirableforconsumerswhilenotsoforincumbentfirmsintheindustry, however, thisisalsodependentonthefirm’sabilitytomaintaintheconsumermarket,ifthedemanddoesnotfallsignificantlygiventhebrandingandconsumerloyalty, theimplicationsonthefallindemandwouldbelesserandproducers’impactvia the fall in TR and Profits might be lesser. However, like whatwasm