RVHS H2 ECONS P1 Soln

© RVHS 2018 9757 [Turn over RVHS Y6 H2 Prelim II Suggested Answer – CSQ 1 (a) With reference to Table 1, compare the change in market value of the different UK food retailers between 2018 and 2023. [2] • All food retailers are expected to see an increase in market value [1], with the market value of online retailers and discounters expected to increase by a larger magnitude compared to that of hypermarkets and supermarkets [1]. (b) Using a relevant elasticity concept, explain why “Aldi has sought to open hundreds of new shops” during the recession. [2] • Aldi is a budget supermarket which sells mainly sells canned food and value-for money products [0.5]. During the recession where income is falling, there will be a rise in demand for Aldi’s products [0.5] since they are perceived to be inferior goods (YED < 0) [0.5] compared to its rivals. As such, Aldi opened up more stores to cope with the expected rise in demand for its products, which may possibly lead to a rise in their total revenue [0.5]. (c) Explain how “peak time” pricing qualifies as a form of price discrimination. [4] • Price discrimination is defined as charging diffe rent consumers different prices for the same product not due to cost differences. Under the “peak time” pricing, price of items rise when demand is high and fall when demand is low. • This is a form of 3 rd degree price discrimination as it satisfy all the 3 conditions needed for price discrimination to be carried out [0.5]. • The different prices are not due to cost differences. This is because no matter the time that the product is being sold, the cost incurred by the supermarket such as labour costs, rental, and utilities is the same [1]. • The supermarket owners are able to segment the market according to their PED whereby during peak time, the demand for certain items tend to be higher and more price inelastic compared to off-peak. For example, there is a lack of close substitutes for chilled food and drink items during heatwaves [1.5]. • As the supermarkets operate in an oligopoly, each firm has the ability to set prices due to the market power which they possess [0.5]. • Furthermore, as items such as ice-cream, ready -to-eat sushi, and yogurt have a very specific shelf-life or best-before-date beyond which they lose their freshness, consumers who bought them at a lower price cannot successfully resell these items to other consumers for consumption at a later time. Supermarkets are thus able to prevent resale of such perishable items by the consumer [0.5]. Note to marker: Identify as 3rd degree price discrimination (0.5m), the rest of the marks (3.5m), can be flexible in how you want to allocate amongst the explanations of the 3 conditions. For e.g., if student did not explain 2 nd condition that well to score 1.5m, can allow for the marks to be channeled to another condition if he is able to explain this condition well.

© RVHS 2018 9757 2 (d) Extract 3 mentions about the merger between Asda and Sainsbury. Explain how this might affect consumer welfare. [4] Positive impact on consumer welfare i. Given fewer retailers in the market and the possibility of Sainsbury-Asda accounting for a sizeable ‘60% of the market in the future’, the merger between Sainsbury and Asda may result in the merged firm operating on an even larger scale. Thus, there is a potential for even greater economies of scale (EOS) to be reaped [0.5]. Provided Sainsbury-Asda passes on the cost-savings to consumers [0.5], this could translate into lower prices for consumers [0.5], thereby increasing consumer surplus and thus, increasing consumer welfare [0.5]. ii. With the merger and resulting larger market share, the firm may enjoy more profits [0.5]. If the firm chooses to plough back some profits to carry out research and development (R&D) or to innovate [0.5], for example, coming up with better products, automating production processes to improve productivity etc., this may translate either to lower prices or better- quality products, thereby offering consumers more choices [0.5]. If so, this improves consumer welfare [0.5]. Negative impact on consumer welfare i. The merger between Sainsbury and Asda will likely reduce the degree of competition in the market [0.5]. With the resulting larger market share, the firm has greater market power [0.5] to dictate prices or restrict output to keep prices at a certain level [0.5]. If this leads to higher prices or artificially restricted quantity of goods/ services, then consumer welfare will be adversely affected [0.5]. ii. Alternatively, the reduction in competition amongst firms [0.5] may cause the firm to be less committed to keeping costs under control or do less R&D than desired [0.5]. If this leads to higher prices or lack of improvement of service/ product quality [0.5], then consumer welfare will be adversely affected [0.5]. Note to marker: Student may explain one positive AND one negative impact on consumer welfare OR student may explain two positive impacts on consumer welfare OR student may explain two negative impacts on consumer welfare. Award 2 marks each. (e) While supermarkets such as Sainsbury have invested heavily in their online business, discounters such as Aldi have chosen to ignore it. Discuss whether Aldi should follow the example of Sainsbury and venture online. [8] Whether Aldi should follow the example of Sainsbury and venture online depends on whether the benefits of venturing online outweighs the costs incurred. Thesis: Yes, Aldi should follow Sainsbury and venture online Venturing online will enable Aldi to increase its total revenue due to the rising demand for online grocery shopping. As seen from Extract 5, “online grocery sales have skyrocketed, with the United Kingdom forecasted to become the second largest online grocery market worldwide”. Due to the rising “convenience and speed” of online grocery shopping, there is a change in taste and preference of consumers towards online grocery shopping. Venturing online will allow Aldi to tap on more consumers, possibly increasing their total revenue and hence profits, assuming no change in cost. Furthermore, Extract 5 highlighted that number of online grocery retailers has increased so with these new firms entering the market to compete for market share, it seems more of a necessity

© RVHS 2018 9757 [Turn over 3 rather than by choice that Aldi has to venture online to better capture more consumers or to at least protect their market share. Venturing online will also possibly enable Aldi to lower its average cost due its ability to reap greater internal economies of scale. As a retailer of groceries, Aldi will be able to buy the groceries from the manufacturers at a larger scale (to cater to both physical and online stores), giving them stronger bargaining power and hence obtaining the groceries at a greater discount. The lowering of average cost, assuming no change in revenue, will increase profits for Aldi. Anti-thesis: No, Aldi should not follow Sainsbury and venture online As seen from Extract 4, “Tesco, Sainsbury and others have spent hundreds of millions of pounds on sophisticated internet operations” and that “profit margins in the supermarket business are notoriously low, but even lower online”. Venturing online requires substantial cost outlay e.g. cost of setting up online platform, maintaining it as well as owning a fleet of vans for delivery as seen from Extract 4. If Aldi cannot recover these back in the form of higher total revenue, their profits may fall. In addition, the increase in total revenue from online sales may not be significant, judging from Extract 4 which states that online sales may canni balize sales at physical stores. This could simply be a case where total revenue earned from one area is simply transferred to another, resulting in no additional net increase in total revenue at all.