(2024) A Level H2 Econs CSQ 1 Suggested Answers Outline (Draft)
Note: This is a draft outline, did it in 40 minutes, have not yet checked through, so please use with care.
Will revise at a later date.
CSQ1
a. Both the forecast total retail grocery sales and the online sales increased between 2021
to 2026.
Online sales increased by a greater extent than the forecast total retail grocery sales.
b. Can discuss the following factors to explain why demand for online shopping will
increase
Change in taste and preferences (due to the pandemic)
Mobile devices now can be easily used to order groceries (change in size of the market)
c. Oligopolies: Few large firms, high barriers to entry, mutual interdependence
Evidence 1: Figure 1 from Extract 1 shows that a few large firms dominate the industry with 4 firm concentration ratio of 67.9% (can also use 5 firm concentration ratio)
Evidence 2: There are high barriers to entry to enter the supermarket industry. Extract 1 talks about how supermarkets control their supply chains, which restricts their suppliers from supplying other supermarkets (inferred)
Evidence 3: Extract 1 talks about how Tesco and Sainsbury runs price match schemes, which evidence of mutual interdependence (when one firm lower prices, other firms also lower prices)
Evidence 4: Extract 2 shows example of price leadership by Tesco
Select any above 2 to discuss
d. Possible reason 1: Supermarkets seek to control their supply chains in order to raise barriers to entry. They can prevent access by new entrants to their suppliers, making it more difficult for new entrants to obtain inventory. The high barriers to entry can ensure that supermarkets continue to make supernormal profits in the long run.
Possible reason 2: This is known as vertical integration, which can allow supermarkets to enjoy internal economies of scale, lowering their AC. This will increase profitability for supermarkets doing so.
Pick any one above
e. Why should intervene
If Sheng Shiong and DFI were to merge, they will have a combined market share of
48.1%.
This will significantly increase the market power of the new merged entity. The degree of competition in the industry will now significantly decrease.
Demand for the new firm will increase, and become more price inelastic as there are less substitutes available ((AR and MR curve will shift right, become more steep).
Prices will increase for consumers.
Why should not intervene
The merged firm can enjoy internal economies of scale. The economies of scale will allow firms to charge lower prices (can show this with a diagram)
Evaluative conclusion
According to Extract 4, CCS should intervene when merged entity has market share of at least 40%, merged entity has market share of between 20% and 40% and the post merged combined market share of 3 largest firms is at least 70%.
The potential Sheng Shiong and DFI merger will satisfy these above criteria for CCCS to intervene.
In addition, opportunities for economies of scale to be reaped is not a certainty (there may be difficulties in integrating businesses)
f. Price competition may be a way to raise revenue
Price competition may be considered by supermarkets as a way to gain market share. Firms like Amazon Fresh have been known to aggressively cut prices (and also offering free deliveries) in order to obtain market share in their early days.
The mutual interdependence characteristic of oligopolies would mean that other supermarkets will also similarly cut prices, resulting in either no gain in revenue or even potentially fall in revenues. (explain in-depth here)
This would thus, not be a recommended strategy to raise revenues.
Ev: Firms may still opt to do so, as they can force smaller firms to shut-down, and therefore they are able to consolidate/increase market share over time, and this can allow them to raise prices in the future.
Non-price competition as an alternative
Given that the mutual interdependence characteristic of oligopolies, it is better for supermarkets to engage in nonprice competition. They can opt to carry out product differentiation (e.g. sell more premium products) to increase total revenue.
Product bundling
Tapping onto the understanding of cross elasticity of demand, fuel/petrol can be seen as a complement to groceries. By lowering the price of fuel, supermarkets can attract customers to topup fuel at a supermarket and purchase groceries at the same time. When prices of fuel decrease, demand for groceries will increase, thus increasing total revenues.