2022 JC2 H2 Prelim Essay Q2 (Suggested Answers).docx

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 Th