ACJC H2 ECONS P2 essay Q2 (supermarket)

ACJC 2018 PRELIMS ESSAYS_SUGGESTED ANSWERS (Q2 ) 1 2. According to Euromonitor International, Singapore's grocery retail market was worth S$4.3 billion in 2016, with the online grocery retail market valued at S$96 million. (a) Distinguish the characteristics of firms operating in oligopolistic and monopolistically- competitive markets. [10] (b) Discuss how increased competition in online grocery retailing would affect the survival of traditional supermarket chains like NTUC FairPrice and Cold Storage. [15] Suggested Approach for Q2(a) • Identify the characteristics that define a market structure • For each characteristic, explain how oligopolistic firms differ from monopolistically-competitive firms • Illustrate with relevant examples how the two market structures differ in the characteristics INTRODUCTION The different types of market structure can be di stinguished by their characteristics. The basic characteristics that are useful to distinguish the different market structures are number and size of firms, nature of product, and barriers to entry. BODY 1. Barriers to entry • Barriers to entry is a characteristic to dist inguish between firms in the oligopolistic and monopolistically-competitive markets. While si gnificant barriers to entry are present in oligopolistic markets, there is relative freedom of entry into and exit out of monopolistically- competitive markets. • In the supermarket industry, strong barriers to entry exist in the form of substantial investments in basic infrastructure (e.g. stores , distribution centres and logistics networks), access to finance (e.g. to fund advertising and promotions), business management capabilities and retail expertise (e.g. managing a chain of stores, having the expertise to manage a diverse range of employees, being nimble with strategies to compete and to grow). High fixed costs involved in running a chain of stores (rentals, wages, utilities, etc.) are a major consideration for any potential entrant into the market. • On the contrary, bubble tea stores are almost anywhere and everywhere in Singapore because of the relative ease of entry. Apart from a sm all store space, the equipment, ingredients and expertise needed to run a bubble tea store are not too difficult to acquire. This is especially so in a franchising model whereby the franchiser licenses its know-how, procedures, intellectual property, use of its business model and brand, and the rights to sell its branded products and services to a franchisee. Many entrants into the bubble tea business are either franchisees or overseas ventures of big bubble tea brands from Taiwan. 2. Number and size of firms • Due to relatively strong barriers to entry, an oligopolistic market is dominated by a small number of large firms while a monopolistically-competitive market is characterised by a large number of small firms (but not as large a number as in perfect competition). • For example, traditional supermarket chains belo ng to an oligopolistic market structure. In Singapore, most of the supermarket stores belong to 3 major groups namely NTUC FairPrice, Dairy Farm International Holdings (DFI) and Sheng Siong. Leading grocery retailer, NTUC

ACJC 2018 PRELIMS ESSAYS_SUGGESTED ANSWERS (Q2 ) 2 FairPrice has a market share of 34% with 136 su permarket stores (FairPrice, Finest, Xtra) and 183 convenience stores (Xpress, Cheers) under its name. Meanwhile, competitor DFI has 126 supermarket stores (Cold Storage, Market Plac e, Jasons, Giant) and around 400 convenience stores under the 7-Eleven brand. • A good example of a monopolistically-competitive market structure is the bubble tea industry. These stores are easily found at every neighbourhood corner. There are chains like Koi, LiHo, Sharetea, Each A Cup and itea, sharing the ma rket with many other Taiwanese brands like Gong Cha, Playmade, R&B Tea, Yuan Cha, Chatime and Woobbee. As recent as Jun-July 2018, we saw new openings by Taiwanese big names, i.e. Ten Ren at ChinaTown point and TP Tea with its 24-hour bubble tea shop at Changi Airport. 3. Nature of product • We can also distinguish between oligopolistic and monopolistically-competitive firms in terms of their products. While products sold by firms in oligopolistic market structure can be either identical/homogeneous (e.g. steel) or differentiated (e.g. cars), those sold by monopolistically- competitive are generally close substitutes. • In our example of supermarket ch ains, the products sold at thei r stores are similar e.g. rice, sugar, washing detergent, toiletries, dried food, fresh produce. They are usually differentiated by the brand names and even th en, certain brands are found in all supermarkets, e.g. Royal Umbrella rice, SPIN detergent, Scotts toilet roll, etc. • In the monopolistically-competitive bubble tea market, the products are similar but not identical. For instance, the drinks come in various bases such as brewed tea (black tea, red tea, green tea, oolong, etc.), milk tea, cheese tea, fruit tea and juices. There is even one which has differentiated itself with alcohol bubble tea. In terms of toppings, bubble tea competitors have gone beyond the basic bubbles (tapioca pearls – di fferent size, colour and flavour) to a wide range including jelly, fruits, beans, pudding, jam and mochi. • Product differentiation in monopolistically-compe titive firms is usually superficial, i.e. not significant enough to eliminate other brands as substitutes. Because the different bubble tea brands are close substitutes, they have positive and high values of cross elasticities of demand. The goods perform the same basic functions but have differences in qualities (e.g. quality of tea used), style, reputation, appearance and location to distinguish them. • Supermarket chains differentiate themselves in terms of branding and services rendered. For instance, DFI (so does FairPrice) has different store formats to cater to different income groups – its Giant brand targets the lower income segment or the budget-conscious customers, Cold Storage stores target the middle to upper income group, while Market Place and Jason’s cater to the high and upper middle income customers. CONCLUSION The characteristics of oligopolistic firms result in them having a relatively more price inelastic demand than firms in monopolistically-competitive ma rkets. Differences in their characteristics in turn determine these firms’ behaviour and performance in the markets in which they operate.

ACJC 2018 PRELIMS ESSAYS_SUGGESTED ANSWERS (Q2 ) 3 MARK SCHEME FOR Q2 (a) Level Descriptors for Q2 (a) Marks L3 • Takes a comparative approach when explaining the differences between oligopolistic and monopolistically-competitive market structures • Strong grasp of economic analysis and conc eptual understanding (minor inaccuracies may still be present) • Well-contextualised and supporte d with relevant examples • Answers are well-or ganized and coherent 8-10 L2 • Explanation of characteristics but no clear distinction betwe en both market structures  CAP at 7 marks for answers without a comparative approach • Uses economic analysis but may contain some conceptual inaccuracies • Largely theoretical/rehearsed, lacking in examples • Undeveloped explanation of the char acteristics e.g. lacking in clarity 5-7 L1 • Descriptive or a mere listing of points, lacking economic analysis • Contains major conceptual errors • Largely irrelevant to the context 1-4 Suggested Approach for Q2(b) • Unpack key terms, i.e. ‘increased competition’ and ‘survival’ • Establish the relationship between online grocery retailers and traditional supermarket chains • Explain how increased competition in online grocery retailing would affect traditional supermarket chains – both negative and positive effects • Use criteria to assess the overall impact of on line grocery retaili