(2019) A Level H2 Econs Paper 2 Essay Q1

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1. According to the Competition and Consumer Commission of Singapore (CCCS), the takeover of Uber by Grab in Singapore has led to ‘a substantial lessening of competition’. This has made it harder for new competitors to enter the ride-hailing market.

Source: Adapted from Channel NewsAsia, 5 July 2018

(a) Explain one reason why consumers might be better off and one reason why consumers might be worse off from Grab’s takeover of Uber. [10]

Why consumers might be better off 

Economies of scale 

1. Upon Grab’s takeover of Uber, the combined entity will be producing at a larger level of output 

2. This will likely allow the new entity to reap economies of scale (such as technical or managerial economies of scale) which will allow the lowering of average unit costs 

3. These lower costs may be passed on down to consumers in terms of lower prices 

Less spending on advertising 

1. With significantly lesser competition, the combined entity can now opt to spend less on marketing and advertising (which does not improve the quality of the actual product) 

The cost savings can be passed on down to consumers in terms of lower prices 

Why consumers might be worse off

Lesser competition results in an increase in prices 

1. With lesser competition, Grab no longer needs to engage in price war / price competition 

2. This also gives Grab more market power to set higher prices 

   With less substitutes available, demand for Grab rides now become more price inelastic, which will lead to an increase in prices from P0 to P1 as illustrated in the figure below 

Lesser competition results in lesser innovation & choice 

1. With lesser competition, Grab / other firms in the market will engage less in non-price competition (e.g. Rewards system, more comfortable rides, technological innovations) 

2. Consumers lose out due to lack of innovation and choice 

(b) Discuss the potential benefits and problems that are likely to be experienced by new competitors considering entering the ride-hailing market dominated by Grab. [15]

Potential benefits 

Lower sunk costs required for entry 

1. The ride-hailing market initially had very high barriers to entry in the form of sunk costs towards investment in research and development in technological tools & data/psychological analysis 

2. Tech start-ups with new products typically spend large sums of money developing technology as well as investing on research in areas such as data analysis to convince consumers to ‘buy-in’ or subscribing to the products. 

3. These sunk costs are greatly reduced as such technology, once developed, has a reduced cost of acquisition compared to creation.  

4. New competitors also do not need to spend vast of moneys on advertising / educating consumers on how to use such products. 

Potential problems 

Existing brand loyalty 

1. Incumbent firms may have already built up some form of brand loyalty e.g. through rewards programme where consumers can earn points for taking rides and exchange these points for discounts or goods. Consumers may also be familiar with the user interface deployed by incumbent firms and may be reluctant to ‘relearn’ or ‘switch’ to new firms. 

Economies of scale enjoyed by incumbents 

1. Incumbent firms may enjoy existing economies of scale through their large level of output produced – for example, they may be able to negotiate for cheaper rentals / purchase prices for vehicles for their drivers which may bring down costs and therefore pricing  

2. New firms may not be able to compete in terms of pricing due to the different cost structures 

Conclusion & Evaluation 

1. There are significant barriers to entry which may be hard for new entrants/competitors to dismantle. 

2. Even so, many new start-ups presently enjoy strong funding from VC firms and may choose to contest these barriers to entry. 

3. Certain barriers such as technological advantages that existing incumbents enjoy may be possible to overcome. 

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