Tutorial 23 - Section F (Case Studies)

7/24/2019 Tutorial 23 - Section F (Case Studies)

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HWA CHONG INSTITUTION Year Two H2 Economics 2014

Chapter 2!" #icroeconomics III $ Theor% o& the 'irm ( #ar)et Str*ct*re

Section '" Case St*+% ,*estions &or -.oc) Test 2 re/ision

,*estion 1 $ HCI -T2 2010 ,2

Is there room &or protectionism

Etract 4" In+ia #aintains Sense o& Optimism an+ Growth

While most of the world grapples with a crippling financial crisis and a recession, optimism reigns inmuch of India as its economy continues to grow. India’s trillion-dollar economy remains a relativebright spot, some say, in part because the country’s bureaucracy and its protectionist policies havekept it insulated from the fallout of the global downturn.

India’s fast-acting central bank, which still has room to trim interest rates, has helped ease capitalflows, while the government has stepped in with stimulus spending and tax cuts.

In some regions of the country, the good economic times are not just a distant memory. he marketcapitali!ation of the "tate #ank of India recently surpassed that of $itigroup, a fact heralded by thelocal media. India added %&.' million cellphone users in (anuary, a record. )olls-)oyce recentlyintroduced a new model of its *hantom $oupe in India, and #+W opened a showroom in elhi.

What fueled India has not changed, "anjay hawan, president and chief operating officer of /ricent,said in an interview. India’s youthful population, domestic demand and business innovation arehelping to carry the country, some economists say. he country is still attracting investors and striking

deals.

0owever, most optimistic forecasts have not taken into account outsourcing and the millions of peoplein India who rely on remittances, or cash sent from relatives working abroad. India receives more than123 billion a year in remitted money, the most of any country. "ome areas, like the state of 4erala, areexpected to be hit especially hard by the loss of construction jobs in the +iddle 5ast. "ome predictedeconomic growth for 23%3 to shrink to 2.67.

/dapted from New York Times, +arch 2, 2338

Etract " China -*i.+s Hi3h Wa.. to G*ar+ Ener3% In+*str%

$alling renewable energy a strategic industry, $hina is trying hard to make sure that its companiesdominate globally. (ust as (apan and "outh 4orea made it hard for etroit automakers to compete inthose countries 9 giving their own automakers time to amass economies of scale in sheltereddomestic markets 9 $hina is shielding its clean energy sector while it grows to a point where it cantake on the world.

$hina has built the world’s largest solar panel manufacturing industry by exporting over 8& percent of its output to the :nited "tates and 5urope. #ut when $hina authori!ed its first solar power plant thisspring, it re;uired that at least <3 percent of the e;uipment be made in $hina. It has surpassed the

Hwa Chon3 Instit*tion A.. 5i3hts 5eser/e+ T*tor6s Cop%

%

http://topics.nytimes.com/top/news/international/countriesandterritories/india/index.html?inline=nyt-geo

http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/business/companies/bayerische_motoren_werke_ag/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/science/topics/solar_energy/index.html?inline=nyt-classifier

http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/business/companies/bayerische_motoren_werke_ag/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/science/topics/solar_energy/index.html?inline=nyt-classifier

http://topics.nytimes.com/top/news/international/countriesandterritories/india/index.html?inline=nyt-geo





:nited "tates as the world’s largest market for wind energy, building wind farms using extensive low-

interest loans from state-owned banks.

$hina was willing to invest heavily in renewable energy industries, even though wind and solar energycosts are higher than for coal, precisely because it helps the $hinese economy. In addition, $hina’spolicies will help address global warming. $hinese-owned companies would increase their share of the $hinese market by an additional %3 or 23 percentage points this year. hat would give themalmost three-;uarters of the domestic market, compared with a ;uarter for 5uropean and /mericancompanies 9 the reverse of the ratio four years ago.

/dapted from New York Times, (uly %', 2338

Etract 7" When 8rotectionism is a 3oo+ thin3

+ost public discussions of free trade treat protectionism as a dirty word. he recent debates on the=orth /merican >ree rade /greement ?=/>/@ and current debates on the Aeneral /greement onariffs and rade ?A/@ are a case in point. *rotectionism to economists usually means protectingan inefficient, la!y and often monopolistic national industry against really efficient foreign competitionto the detriment of consumers. his kind of protectionism is economically inefficient and should beresisted.

his does not mean, however, that protectionism is always bad. o the contrary, there are importantinstances in which protectionism is an essential precondition even to economic efficiency. he mostfundamental rule of economic efficiency in a market economy is that the full costs of producing aproduct must be included in its price. here must be no subsidies.

When the environmental costs of producing a product are passed on to the larger society, thisconstitutes a form of subsidy by the society to the producer. When a country re;uires thatenvironmental costs be internali!ed in prices, this is a step toward greater economic efficiency.0owever, when a country with policies that support this form of economic discipline engages in freetrade with one that does not, the tendency will be for more and more production to shift to the latter.

>ree trade also has enormous conse;uences for the standards a society chooses for itself that mustbe treated separately from ;uestions of pure economic efficiency. "tandards regarding the distributionof income exemplify the issue. /fter =/>/ was signed the laboring class, which in the :nited "tatessuffered a seventeen percent decline in real wages.

/dapted from http://www.globalpolicy.org

Ta9.e 2" In+ia

S*9:ect ;escriptor 200 2007 200< 200= 200> 2010? 2011? 2012?

Arowth in Aross domesticproduct at constant prices ?7@ 8.2 8.< 8.' B.C &.B <.< <.' <.3

Inflation ?7@ '.C 6.2 6.' <.C %3.8 %C.2 &.& '.%$urrent account balance ?7 ofA*@ -%.C -%.% -%.3 -2.2 -2.% -2.2 -2.3 -2.3


2





#udget balance ?7 of A*@ -'.3 -C.C -2.6 -&.8 -6.& =/ =/ =/

D 5stimated value

Ta9.e !" Sin3apore

S*9:ect ;escriptor 200 2007 200< 200= 200> 2010? 2011? 2012?Arowth in Aross domesticproduct, constant prices ?7@ B.6 <.B <.2 %.' -2.3 &.B &.C &.%

Inflation ?7@ 3.& %.3 2.% 6.& 3.2 2.% %.8 2.3

:nemployment rate ?7@ C.% 2.B 2.% 2.2 C.3 2.< 2.6 nEa

$urrent account balance ?7 ofA*@ 22.3 2'.8 2B.6 %8.2 %8.% 22.3 22.' 22.B

D 5stimated value "ourceF International Monetary Fund

,*estions

a@ :sing able 2 and able C,

i@ $ompare the trend of India’s current account balance ?7 of A*@ to that of "ingapore’s for theperiod 233& to 2338. G2H

ii@ 5xplain the likely change in the value of India’s currency for 23%3 23%2. G2H

b@ /ccount for the difference in estimation of India’s A* growth in 23%3 in able 2 and 5xtract '. G'H

c@ iscuss and compare the impact of the global recession on "ingapore and India. G<H

d@ 5xplain the possible economies of scale enjoyed by the renewable energy industry in $hina. G'H

e@ In light of the data, to what extent is protectionism justifiedJ G%3H


C





S*33este+ Answers

a@ Usin3 Ta9.e 2 an+ !i@ Compare the tren+ o& In+ia6s c*rrent acco*nt 9a.ance B o& G;8@ to that o& Sin3apore6s &or the perio+200 to 200> D2

ifferenceF India’s current account is in a +e&icit while "’pore’s current account is a s*rp.*s ?%m@.

"imilarityF #oth initially experienced improvement followed by a worsening of their respective current accountbalances ?%m@.

Comments:• Did not use the appropriate terms to describe current account balance i.e. used positi!e "or surplus and

negati!e "or de"icit.

• #tudents used the words decrease instead o" worsening $ note: a decrease in surplus is %worse& than be"ore

while a decrease in de"icit is an impro!ement.

• 'onceptually at least o!er a relati!ely short period o" ( years: ) "all in de"icits indicates an impro!ement and

a rise means worsening* "or "all in surpluses indicates worsening and a rise means an impro!ement.+owe!er a persistent and ballooning surplus is also undesirable. There is no alarming sign o" #, surplusesballooning in the gi!en data.

• -Depro!e is not a legitimate word and is not the opposite o" impro!e 0hile dispro!e is indeed the opposite

o" pro!e as in you can try to dispro!e a hypothesis you should use words like worsen or deteriorate as theopposite o" impro!e

ii@ Ep.ain the .i)e.% chan3e in the /a.*e o& In+ia6s c*rrenc% &or 2010 $ 2012 D2

#ased on the improving current account ?7 of A*@, India’s exchange rate ought to appreciate. his is due to

the increase in demand of rupee as demand for exports increase and a fall in supply of rupee as demand for imports fall.

ata evidenceF he most relevant indicator is the #K*. 0owever, in this instance, only the current account isavailable.

+ay accept any possible reasons found in data.%. /lthough current account ?as 7 of A*@ improves, current account might worsen as there is A* growth.his means that demand for imports may have increased and exports fallen, demand for IndiaLs currency hasdecreased and supply of IndiaLs currency increased, depreciation of currency.2. he lowered inflation in India signals a more stable economy bringing in more >Is, demand for currencyincreases, leading to an appreciation of IndiaLs currency

Not accepte+"

• There is Economic Growth in In+ia the% wi.. +eman+ &or imports hence s*pp.% o& c*rrenc%

increases an+ +epreciation BNee+ to +isc*ss re.ati/e 3rowth rates@

• A &a.. in in&.ation rate res*.te+ in cheaper eport prices an+ hi3her eport re/en*e an+ th*s hi3her

+eman+ an+ appreciation o& r*pees BNee+ to +isc*ss re.ati/e in&.ation rates@

1m &or correct reason 1m &or correct pre+iction 0m i& st*+ent on.% 3i/e pre+iction an+ incorrect reason

Comments:• cannot distinguish between internal !s e1ternal !alue o" currency

• assuming go!ernment inter!ention on the e1change rate


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9@ Acco*nt &or the +i&&erence in estimation o& In+ia6s G;8 3rowth in 2010 in Ta9.e 2 an+ Etract 4 D4

"tate the difference ?%m@Fhe projected growth in Table 2 $ 3.34 ?I+>’s prediction@In 51tract 6 last paragraph some predicted India&s growth to shrink to 2.74 in 2898.

ifference in the growth rate predicted depends on the etent o& importance o& the eterna. sector on In+ia

5xtract ' says India is dependent on o*tso*rcin3 Ba&&ects In+ia6s eports@ and remittances Ba&&ectsCons*mption@. With the weakened global demand, outsourcing to India may decrease hence affecting India’sgrowth through M and less remittances will mean less ability of the Indians to consume affecting $.

Cm for relevant evidences and linking to economic analysis.

Comments:• Mere summary o" 51tract 6 without usage o" economic model i.e. Did not link outsourcing to or

remittances to ' $ no econ "ramework will result in loss o" marks.

• ;se N<I) to e1plain but not according to the 51tract&s intention

• ,rowth in ,D< at constant prices does not take into account in"lation hence the growth rate in Table 2 is

higher than the prediction gi!en in 51tract 6==

c@ ;isc*ss an+ compare the impact o& the 3.o9a. recession on Sin3apore an+ In+ia D=

Intro+*ctionhe impact of the global recession has both similar and different impacts on "ingapore and India, namely onA*, current account, employment and inflation.

-o+% BUse +ata 200<F200>@

Compare the +ata Acco*nt &or the +i&&erence *sin3 econ concepts an+ casemateria.

G;8India’s A* growth fell to (.>4 in 288? but therea"ter is predicted to rise to more than 34.#&pore&s ,D< growth was negati!e in 288? butis predicted to pick up in 23%3, slower thanIndia.

It seems that "’pore is more 9a+.% a&&ecte+ bythe crisis than India.

his is because of the different characteristics of the twoeconomies. "’pore is far more dependent on trade for growth thanIndia as can be seen by the 4 that 'urrent )ccount balance "ormso" ,D<. This means that the 9a.ance o& tra+e B-OT@ is o& ahi3her wei3htin3 in the A; &or Sin3apore6s than in In+ia

'ontrasting this to India where her -youth"ul population domestic demand and business inno!ation are helping to carr% theco*ntr% $ attracts ';Is

/lso, many Indians work abroad and remit cash home, whichcould be driving +omestic cons*mption at home.

C*rrent acco*nt"’pore’s current account balance "ell drastically by almost 984 "rom the peak o" 2>.74 o" ,D< in 288> to 9?.94 in 288? which accounted "or the negati!e ,D< growth. India&s current account balance has always been negati!ewhich does not affect growth as it is aninsignificant portion of A*.

"ingapore’s current account balance is hit more than India mostlikely due to a &a.. in 9a.ance o& tra+e B-OT ie F#@ an+ this isespecia..% tr*e when Sin3apore6s eports are 3enera..%incomeFe.astic and thus when income of top trading partners fall,the ;uantity demanded falls more than proportionate.

+oreover, India is well insulated by its protectionistic policieswhich see) to re+*ce # so that A; is 9o.stere+


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Unemp.o%ment rate

"’pore’s unemployment rate also rose to C7 in2338. his is demand deficient unemploymentwhich is related to the negative A* growth.

=oteF =o data for India.

India is very reliant on outsourcing, which is dependent on foreign

firms. he crisis which affects other countries could result in +=$sreducing their outsourcing to India and reduce the employment ofIndians abroad. hat would reduce domestic $ in India andultimately affect domestic employment.

In&.ation B200<F200>@Inflation rose in India while "ingapore’s fellfrom 6.&7 to 3.27.

In 233<, the inflation was most likely due to costFp*sh in&.ationdue to high oil and food prices. #ut when the crisis fully kicked in,not only did it bring down the price of oil and food, it also result in.ower A; &or Sin3apore an+ th*s 9rin3in3 the in&.ation rate+own si3ni&icant.% /s for India, given the stron3 +omestic+eman+ an+ pro9a9.% more s*pp.% 9ott.enec) in&.ation ratecontin*e+ to 9e hi3h

Note" Can+i+ates sho*.+ *se A;FAS +ia3ram to i..*strate the impact o& crisis on Sin3apore an+ In+ia Itis incorrect to +raw A; o& In+ia an+ A; o& Sin3apore in one +ia3ram with the same AS

Conc.*sionAenerally, there is a negative impact on both "ingapore and India but it is more severe in "ingapore esp. on her A* and current account due to her dependency on trade as an engine of growth while India has a relativelylarger domestic market.

N% 5xplanation of how global recession impact "ingapore and India separately %-CN2 Aave a contrast between the impact of global recession impact "ingapore vs India with some

reference to case material'-6

NC Aave a contrast between the impact of global recession on "ingapore vs India with excellentreference to case material and defend with economics concepts.

B-<

?cannot an3.e ar3*ment on po.icies

Comments:• were not able to identi"y the correct data "or use $ recession was in 288>@288?

• use more own knowledge than the case material especially "or #ingapore Atrade B 61 our ,D<C

• 0hen there is global recession it causes prices o" raw materials to go up and #ingapore being hea!ily

dependent on imports will su""er "rom import price push in"lation==

• i"ting "rom case without using )D/)# model to e1plain why #ingapore will su""er more than India as a result

o" the global recession

• #ome students compared what was likely to happen instead o" using the data to discuss what really

happened

• 'ompare the e""ects o" policies AF< M< E protectionismC instead o" the recession on the 2 ctys

•'ompare the use o" policies in the 2 countries $ India can use F< M< E protectionism but #ingapore canonly use e1change@rate centred M< $ to impro!e the economy a"ter the recession


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+@ Ep.ain the possi9.e economies o& sca.e en:o%e+ 9% the renewa9.e ener3% in+*str% in China D4

The contet is In+*str%

Eterna. economies o& sca.e are the correct concept as these are costs sa/in3s accr*e+ to &irms whenthe in+*str% epan+s

$oncentration Aood infrastructure e.g. Industrial *ark especially to cater to firms in this industry.=etwork of supporting industries to provide services to the main industry e.g. banking servicesO industries tosupply key inputs or raw materials.)eady pool of skilled or trained workersInformation - "haring of ) P findings via rade publications

0owever, some marks will be awarded for internal economies of scale but the marks will be capped.

Internal economies echnical, marketing, financial, risk-bearing and administrative Q managerial.

5xamplesechnical 5conomies due to )esearch 5K" Narger budget for research is spread out over larger outputNarge production plants for solar panels give rise to speciali!ation of labour and gains from indivisibilities.

Comments:• Failed to realie the most rele!ant 5G# are e1ternal rather than internal 5G#.

• Merely stating 2 5G# and no elaboration.

• ,a!e general e1amples with no re"erence to the renewable energy market. #ome could not e!en e1plain

generic 5G# correctly.

• ,a!e reasons "or why 'hina may enHoy 5G# instead o" e1plaining the sources o" 5G#

• Ne!er link 5G# to "all in unit cost.

• 'on"usion o!er "inancial 5G# and protectionism: #tudents e1plained that the go!ernment gi!es cheap loans

as a "orm o" "inancial economies. This is cannot be accepted as it is a protectionistic measure adopted by the 'hinese ,o!ernment to help the industry.

e@ In .i3ht o& the +ata to what etent is protectionism :*sti&ie+ 10

Intro+*ctionefine protectionism.I shall be using the date to discuss whether protectionism is justified.

-o+%

8rotectionism is :*sti&ie+Correct #ar)et 'ai.*re

• It helps to address 3.o9a. warmin3 in $hina, hence itcorrects market failure which arises due to negativeexternalities. ?5xtract &, para C@

• It allows internali!ation of external costs by the producer,through the imposition of taxes. ?"tudents are expected touse the "+#E"+$ model@. Without protectionism,governments would be hesitant to impose taxes onproducers to correct market failure, as that would makethem less competitive compared to foreign products which

8rotectionism is *n:*sti&ie+Ine&&icienc%It encourages complacency and inefficiency amongproducers. ?5xtract 6, para %@

$onsumers suffer in terms of higher prices andpoorer ;uality of goods. "olar energy industry in$hina may not develop a comparative advantage ifthey become complacent and inefficient. heremay also be incorrect identification of the solarenergy industry as one with potential $/.


B





are not taxed. ?5xtract 6, para 2 Q C@

E/a.*ati/e comments"axation has problems such as difficulty in measuring 5+$ soit is not a long term solution.

In&antFin+*str% ar3*mentIt is a strate3ic in+*str% as it has huge potential to bringabout economic growth to the country.

/s compared to :" and 5urope, the renewable energyindustry can be considered as an in&ant in+*str% /n infant-industry is a newly established or sunrise industry withpotential $/ and huge potential to bring about economicgrowth to the country. ?5xtract &, para %@

If it develops a comparati/e a+/anta3e, in the long run due toability to enjoy 5K" consumers will be better off in terms of lower prices and better ;uality products.

Wi+enin3 Income +isparit%>ree trade causes a worsenin3 o& income +istri9*tion /fter the signing of the =/>/, the laboring class in the :" suffereda fall in wages. his is because labour intensive goods whichcan be produced by +exico floods the :" market andcompetes with :" made labour intensive goods. ?5xtract 6,para &@

J*.nera9i.it% to eterna. shoc)s*rotectionism has helped insulate the Indian economy againstthe subprime crisis. Kn the other hand, "A economy with itsopen trade policy is highly vulnerable to external shocks.

8ro.on3e+ str*ct*ra. *nemp.o%mentNow wage workers in the :" should be retrained totake on jobs in other industries. Knly a short termsolution, ultimately protectionism makes firms lessefficient and workers has no incentive to retrain toe;uip themselves with more relevant skills

In+ia Stron3 economic per&ormanceIndia is less affected by the crisis is due to itsstrong domestic demand and may not be due tothe protectionism. /s a result, to use protectionismto spur economic growth is not justified.

Conc.*sion*rotectionism may be justified as a short-term measure under certain circumstances.0owever, it can never be a good justification in the long run under any circumstances because it will breedcomplacencyO inefficiency and most importantly invites retaliation from trading partners which will result in a Rnowin’ situation for all countries concerned. Instead, the government should use supply-side policies to developnew areas of $/ or enhance the productivity of the industries.

N% 5xplains the arguments for and against protectionism in a general manner %-C

N2 5xplains the arguments for and against protectionism with some references made to the casematerial+ax ' if one sided

'-6

NC Aood, balanced analysis based on the case material B-<5% :nexplained stand on whether protectionism is justified %52 )easoned stand on the whether protectionism is justified 2

Comments:• Insu""icient use o" case material students ga!e arguments "or and against protectionism based on lecture

notes instead.


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• Didn&t grasp the idea in the e1tract. 5.g. protectionism is Husti"ied to internalie e1ternality.


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,*estion 2 $ N200< ,n 2 B1 ho*r@

S*permar)et +e/e.opment an+ competition

Etract 4" China6s s*permar)ets present eport opport*nit%

)ising incomes and an expanding urban middle class are setting the stage for $hina’s developmentas a family market for imported goods. :ntil recently, many foreign exporters considering the $hinesemarket were discouraged after encountering a fragmented market made up of thousands of old-stylefamily owned shops, open-air markets and inefficient systems for the distribution of imports. he goodnews for food suppliers is that supermarketisation is transforming $hina’s food sector into a modernretail system. +odern supermarkets and hypermarkets retail formats nearly non-existent in $hina in

the early %883s have now captured an estimated C37 of the urban food market and are growing atrates of over C37 annually. $hinese supermarkets grew from just one outlet in %883 to approximately63 333 stores by 233C.

"upermarkets began developing in $hina in the early %883s, encouraged by local governments. +ulti-national chains from 5urope, (apan, 0ong 4ong and the :nited "tates provided a second major impetus in the development of the sector in the mid %883s. hey have about '37 of the sector’s salesbut domestic companies such as Nianhua and 0ualian have developed ;uickly. Nocal governmentsare actively encouraging the transition to supermarket by shutting down traditional street market andin some cases converting them into supermarkets. In 233', $hina’s +inistry of commerce announceda five-year plan to develop a rural retail network of supermarkets in small towns.

Imported foods, until recently a rarity in $hina, are now widely available in $hinese supermarkets.$hina’s growing middle class has the purchasing power to afford imported foods, but this crucialmarket segment has been kept largely out of reach of the world’s food exporters by the combination of $hina’s old-fashioned marketing system and high trade barriers. 0owever, $hina has cut tariffs,import trading licensing re;uirements and state trading monopolies as a result of its entry into theWorld rade Krgani!ation in 233%. Nower trading barriers are the first step to opening the $hinesemarket, but a competitive, efficient domestic marketing system is necessary to get imported productsfrom entry points to the $hinese consumer. hat’s where supermarkets come in.

#ource: Fred ,ale and Thomas eardon )sia Times 26 June 288(

Etract " Ket China6s retai. wars 9e3inIn keeping with the conditions for $hina’s membership of the World rade Krgani!ation, $hina has

lifted most restrictions on foreign retailers. Aone are the limits on the number of stores, rules confiningthem to large cities and regulations capping the foreigners’ stake in local ventures at 6&7. $hinaerected those hurdles to give its own companies a chance to copy the West’s big store model andthey have done so with great success. he top four retailers in the country are all run by thegovernment or local entrepreneurs. #ut the foreign companies are not far behind and they have bigplans for expansion now that the barriers have come down. *aris-based $arrefour has some 2'3stores in $hina, and plans to open as many as %&3 more this year. Its 233C sales of :" 1%.< billionmade it $hina’s fifth biggest retailer.


%3





$onsolidation is sweeping the sector, too. "hanghai #allion, which has nearly &333 stores, has won

permission to take over four rivals. #eijing’s ultimate goal is to create a small number of big playersthat will be strong enough to compete with the multinationals at home and expand overseas.

#ource: Kusiness 0eek Gnline 9> January 288(

Etract 7" S*permar)ets in the UL" a mo+e. &or China6s retai. sector Tesco ma% ha/e to se..o&& stores

esco, the :4’s biggest supermarket group, maybe forced to sell off some of its shops in what wouldbe a dramatic intervention aimed at curbing the retail giant’s dominance. here is a call for government regulators to intervene to force esco into divestment, the process of selling off stores.he :4’s top four supermarkets have a huge market share which is continuing to grow. In the next tenyears esco could have %233 smaller convenience stores in addition to its large supermarkets. /sda,one of esco’s major competitors, is poised to follow suit. en years ago supermarkets did notcompete in the smaller convenience store market. In the four years to 233', BCBB independentconvenience shops, more than 237 of the total, closed. In addition, the buying power of thesupermarkets is so great that their suppliers complain that they are forced to sell to supermarkets atvery little profit.

here is certainly a case for divestment, says the policy director at the =ew 5conomics >oundation.he market place is being strangled by the big four. 0owever, a spokesperson for esco said, I thinkthe public interest would need to be looked at in a proper manner by government regulatoryauthorities and I would hope that when they talked to us and looked at our operations in detail theywould come to the view that divestment was a bad idea.

#ource: Gbser!er 7 No!ember 288(

Ta9.e 4" Top &o*r UL s*permar)ets" share o& 3rocer% sector

"hare of Arocery"ector ?by value of

total sales@

233' ?7@ 233& ?7@

esco 2<.% C3.&

/sda %6.6 %6.B

"ainsbury %&.' %&.B

+orrisons %C.8 %%.C


%%





Etract <" S*permar)ets in Sin3apore" the &oo+ retai. sector

>or many years the food retail sector has been dominated by wet markets and general groceryshops, but this pattern is changing with the rapid expansion of modern supermarkets. =:$ >airpriceand the airy >arm Aroup are the two largest supermarkets for retail food. $old "torage and "hopn’"ave supermarket chains are subsidiaries of the airy >arm Aroup.

Wet markets still represent the bulk of sales of products such as vegetables, seafood, rice, eggs andchicken, while dedicated fruit shops still sell most of the fresh fruits. 0owever, supermarkets aregaining market share in all retail food products.

"ingapore has a significant domestic industry manufacturing a range of food and beverages, butvirtually all raw materials are imported, as there is almost no local agricultural production. "ingapore’s

multi-racial society and the presence of a large expatriate population have led to a diverse and richvariety of food types being available to customers.

#ource: )ustralian ,o!ernment: )ustrade ,uide to )ustralian 51porters 0ebpage 288(

Ta9.e " Sin3apore retai. sector" retai. sa.es in+e &or se.ecte+ t%pes o& o*t.et

ype of outletIndex at $urrent *rices ?%88BS%33@

2333 233% 2332 233C 233'

epartmentstores

%3'.C 88.8 %33.' 88.6 %3<.'

"upermarkets %2C.3 %C<.C %'B.% %&<.& %&%.%

*rovision andsundry shops

%33.6 %3'.6 %38.6 %%C.< %2C.2

otal retail sales %2<.' %CC.% %28.< %'3.8 %&<.6

#ource: www.singstat.go!.sg

,*estions

?a@ $ompare the change in retail sales in "ingapore by type of outlet between 2333 and 233'. G2H

?b@ 5xplain two reasons why supermarkets are growing so ;uickly in $hina. G'H

?c@ ?i@ escribe the type of market structure operating in the :4 grocery sector in 233'. G2H

?ii@ 5xplain how the firms in this market might compete against each other. G'H

?d@ iscuss the policy of divestment in the case of esco explaining clearly how this might affectconsumer welfare. G<H

?e@ In the light of the data provided, if you were an economic advisor to the "ingapore government,would you recommend that it should follow the example of the $hinese authorities and encouragesupermarket developmentJ (ustify your answer. G%3H


%2





S*33este+ Answers

Ba@ Compare the chan3e in retai. sa.es in Sin3apore 9% t%pe o& o*t.et 9etween 2000 an+ 2004 D2

S*33este+ answer"

"imilarityF )etail sales in "ingapore increased for all C categories between 2333 and 233'. G%mH

ifference G%mHF)etail sales for "upermarkets increased at the fastest rate by about 2C7 while that of epartment"tores at about '7.K))etail sales increased the most for "upermarkets and the least for epartment stores.

Note: Though supermarket experienced the highest increase, it does not mean the sales isthe highest. We need absolute figures to be sure.

eaching pointF :se of index nos. >or weaker classes, teachers might want to provide additionalexercise for students to try on the spot. Kne good exercise would be =ov 233< ;n ai Q aii@

Ta9.e " Sin3apore retai. sector" retai. sa.es in+e &or se.ecte+ t%pes o& o*t.et

ype of outletIndex at $urrent *rices ?%88BS%33@

2333 233% 2332 233C 233'

epartment stores %3'.C 88.8 %33.' 88.6 %3<.'

"upermarkets %2C.3 %C<.C %'B.% %&<.& %&%.%

*rovision andsundry shops

%33.6 %3'.6 %38.6 %%C.< %2C.2

otal retail sales %2<.' %CC.% %28.< %'3.8 %&<.6


%C





Ca.c*.ations"

epartment stores %3<.'-%3'.CE%3'.CD%33 S C.8C T '"upermarkets %&%.% %2C.3E%2CD%33 S 22.<& T 2C*rovision and sundry shops %2C.2 %33.6E%33.6D%33 S 22.'B T 22

Note: The base year is 199 and not !""". We need to perform the abo#e calculations to seethe $ change from !""" to !""%.

51aminer&s report:In response to this Luestion candidates simply needed to make comparati!e statements on thechanges in retail sales by type o" outlet. )cceptable comments included the "acts that sales had risen in all types o" outlet o!er the period sales had increased most in supermarkets and saleshad increased least in departmental stores. 'andidates did not do well i" they simply obser!ed thechanges rather than making comparati!e comments. ) surprising number o" candidatesmisinterpreted the data here. Many thought that sales were highest in supermarkets others that the data showed price changes in some way. 'are"ul and thought"ul interpretation o" the data wasreLuired to score both marks a!ailable.


%'





B9@ Ep.ain 2 reasons wh% s*permar)ets are 3rowin3 so M*ic).% in China D4

S*33este+ answers"

Increase in ;eman+

%. 5isin3 incomeshe increase in incomes of the middle class in urban areas, allowing them to purchase moreimported goods which are available usually in big supermarkets. hese goods are likely to bepositi/e an+ income e.astic an+ +eman+ wi.. rise more than proportionate with income

2. Go/ernment inter/entionhe $hinese government encourages supermarkets by shutting down street markets, and thusinevitably forcing consumers to shop at supermarkets and thus increasing the demand for

supermarkets.

Increase in s*pp.%

Kower tra+e 9arriers with entr% into WTO5asing on rules to set up firms in $hina and imports like grocery products, attract moreinternational firms to set up supermarkets in $hina and thus increase the supply of supermarketsin $hina.

?1m &or the i+enti&ication o& a &actor an+ a &*rther mar) &or an ep.anation

51aminer&s report:This Luestion was well answered by most candidates. Few were unable to identi"y and then

e1plain the reasons "or the de!elopment o" supermarkets in 'hina since the reasons were soclearly signposted in the te1t. Most candidates scored well although the 51aminers are lessimpressed by those who paraphrased the te1t e1tensi!ely. They pre"erred answers that weresuccinct and to the point whilst at the same time answering the Luestion in su""icient depth.

Bci@ ;escri9e the t%pe o& mar)et str*ct*re operatin3 in the UL 3rocer% sector in 2004 D2

S*33este+ answers"he market structure in the :4 grocery sector would be an oligopoly G%mH because four supermarkets dominated the market with +$)' S B'7. G%mH

Note: To &ustify 'hether the market structure is indeed oligopoly and once a table of market

shares by different firms is gi#en, it is a ()*T to calculate (C+. ()*T link (C+ to a fe' dominant firms 'hich is a uniue characteristic of oligopoly beside mutual interdependence.

51aminer&s report:This Luestion was also answered !ery well. Most candidates identi"ied the market structure asoligopolistic and Husti"ied this in terms o" the small number o" "irms controlling the large share o" the market as shown in the data.


%&





cii@ Ep.ain how the &irms in this mar)et mi3ht compete a3ainst each other D4

S*33este+ answers"

• 2m for explaining why firms will use non-price competition rather than price due to mutualinterdependence ?$ambridge highlighted many candidates left out this point@

• 2m for elaborating on non-price competition ?link it to increasing in demand and reduce*5@

• >irms in this market would choose to engage in nonFprice competition due to m*t*a.

inter+epen+ence.• here are only a few firms under oligopolistic market structure and thus each firm has to

ta)e into acco*nt the actionsreactions of other firms and as a result, there is priceri3i+it%.

• If an oligopolistic firm increases price, other firms will not follow and it will lose its

consumers to the competitors, and ;uantity demanded will fall more than proportionateleading to a loss in revenue. If it reduces price, other firms will respond by reducing their prices as well and the ;uantity demanded will increase less than proportionate and resultin lower revenue for all.

• 0ence, oligopolies will more likely engage in non-price competition.

• hey would compete through advertising in the media to create increased brandrecognition for their supermarket.

• hey would also attract new clients and retain existing clients through special promotionsand marketing strategies by having lucky draws or having a system that recogni!ecustomer loyalty so as to increase +eman+ &or their pro+*cts.

• #y offering services that are uni;ue to their consumer base such as free home deliveriesfor senior citi!ens, phone-in or online orders, they would also ens*re that +eman+ &or their pro+*cts are more price ine.astic.

51aminer&s report:In response to this Luestion candidates showed knowledge o" the ways in which "irms compete in oligopoly but these were o"ten described rather than e1plained. The kinked demand cur!e was o"ten introduced together withthe statement that it deterred "irms "rom competing on price. This usually led on to a description o" types o" non@

price competition such as ad!ertising or special promotions or types o" collusi!e beha!iour. 0hat was o"tenlacking here was the underlying e1planation o" why these types o" competition arose in this type o" market. Thereason is the mutual interdependence or ri!al consciousness caused by the "ewness o" the "irms in the market.

)lthough this could be in"erred "rom the kinked demand cur!e diagrams that were usually pro!ided it was !ery o"ten only implied rather than e1plained.


%6





B+@ ;isc*ss the po.ic% o& +i/estment in the case o& Tesco ep.ainin3 c.ear.% how this mi3hta&&ect cons*mer we.&are

Note: This is a typical -igher /rder *kills0 uestion. *o it should be 'ritten in a form of -miniessay0.

The style and approach 'ould be similar to 'riting an 2W3some essay using thesis, anti thesis and synthesis for structure.

Genera. #ar) Scheme &or =m HOS ,*estions"

K! E.a9orate BEten+ to inc.*+e ana.%sis@ /nalyse use relevant theory to aid explanation /pply place explanation in context of evidence from the data#alanced view

(ustified conclusion

< $ =

K2 Conso.i+ate BA++ some +etai.s $ app.ication@5xplain the economic concepts more in depth.$larify give examples from data with more elaboration$onsider both sides but lopsided=o justified conclusion.

4 $ 7

K1 Lnow.e+3e5eco3nise B;escription@Identify the key theory without explanation orEand key evidence withoutexplanationKutlineF give a list of relevant factors$onsider % side no evidence of discussion.

1 $ !

Tips" Use SE!;S6

StateElaborate with economic analysisEvaluateExemplify with evidences from;ataStand

51aminer&s report:This Luestion was generally done well particularly by those who had a good grasp o" theunderlying conceptual "ramework. Di!estment is a policy proposed in the ; to introduce morecompetition into the retailing sector. With more competition it 'ould be expected that prices'ould fall and output 'ould rise and that this 'ould impro#e consumer 'elfare. 2n

alternati#e argument is that di#estment 'ould reduce the si4e of Tesco leading to the lossof economies of scale and higher prices. This 'ould result in an o#erall loss of consumer 'elfare. *imilarly, 'ith lo'er profits, Tesco 'ould be less able to engage in research and de#elopment and again consumers 'ould be disad#antaged. To score in e!el 2 on thisLuestion it was necessary to show an appreciation o" both possible outcomes in terms o" theimpact o" di!estment upon consumer wel"are. The mark awarded within the band was dependent upon the Luality o" the answer in terms o" technical grasp and the range o" issues considered.

G<H


%B





Intro+*ction

- he policy of divestment arose because there is increasing concentration of market power for supermarkets as they start operating small convenience stores, leading to the closure of manyindependent smaller stores.

- In addition new firms may not be able to enter the market as the current large supermarket chains havea cost advantage over independent convenience stores.

- I shall be discussing how the policy of divestment in the case of esco explaining clearly how this mightaffect consumer welfare.

-o+%

Thesis $ ;i/estment in the case o& Tesco wi.. ha/ea positi/e impact on cons*mer we.&are5xplain the gain in consumer surplus when morecompetition is introduce ?using a diagram comparing*$ vs monopoly@

- $omparing the price and output of a highlycompetitive firm to one with monopoly power,price is lower since **$ U *+ and output is higher since V*$ V+.

- /rea *+**$ab is gain in consumer surplus whenmore competition is encouraged

Note: 5n the explanation, make it clear that the 6C model is used only as a theoretical benchmark. 5t does not represent the real supermarket. The

purpose is to highlight the benefits of introducing more competition to a market that is dominated by either one or fe' sellers. 5t does not imply that thenumber of sellers has got to be small and many.Thus, instead of saying if there is perfect competition, it is best to say if there is 7morecompetition8 or 7if the market is morecompetiti#e8.

Antithesis $ ;i/estment in the case o& Tescowi.. ha/e a ne3ati/e impact on cons*mer we.&are

- #y setting up convenience stores in theseareas, the larger supermarket chains have a

cost advantage over independentconvenience stores due to their ability to reapsubstantial 5K".

- he divestment for esco ?selling off of their convenience stores@ actually will result in lessof ability to reap 5K".

- his may then lead to higher prices ?*% to *2@due to increase in cost of production for escowhen it could not enjoy the same amount of 5K"

- >all in 5K" reaped from V% to V2

>all in profits for esco after divestment could alsolead to a fall in )Q expenditure, leading to a lossin consumer welfare.

8ossi9.e increase in /ariet% o& 3oo+s an+ser/ices impro/ement in cons*mer retai.eperience

Etent o& impro/ement in cons*mer retai.eperience

>all in profits for esco after divestment could also


%<

3 V2 V

%

*2

*%

/)+)

+$%S ""*$

+$

+

output

*riceErevenueEcosts ?1@

outputV*$

3 V+

*+

a

**$

b

/)+)

*riceErevenueEcosts ?1@+$

+S ""

*$





With increased in competition, supermarkets such asesco might may to increase the variety of goods soldin the existing outlets to retain or even increase their market share.

lead to a fall in )Q expenditure, perhaps in the retailexperience ?e.g. self check-out countersO onlinegrocery shopping platform, leading to a loss inconsumer welfare.

EJ" Howe/er i& it a..ows &or other eistin3s*permar)ets to earn hi3her pro&its .ower -TEs&or new p.a%ers the o/era.. cons*mer retai.eperience ma% not worsen

Stan+ Binc.*+e K5 ana.%sis@

he extent of improvement in consumer welfare depends on the no. of stores that are sold andhence how it affects its market dominance. /s esco is a dominant firm with market share of about C3.&7 in 233&. 5ven with divestment, esco is likely to be able to have substantial buyingpower and ability to reap marketing economies of scale. 0ence the overall price is likely to falland output is likely to increase, resulting in increase in consumer surplus.

With increased in competition, esco is also unlikely to reduce expenditure to improve consumersretail experience to capture greater market share with existing outlets. 0ence, variety of goodssold in the market is likely to increase.-NC ?6-<@ 5xcellent explanation with economic analysis using diagrams where appropriate.

#alance view and synthesis.N2 ?'-&@ show understanding of divestment and will explain why it could either raise or

lower consumer welfareN% ?%-C@ show understanding of divestment but will only explain one possible outcome in

terms of consumer welfare

Be@ In the .i3ht o& the +ata pro/i+e+ i& %o* were an economic a+/isor to the Sin3apore3o/ernment wo*.+ %o* recommen+ that it sho*.+ &o..ow the eamp.e o& the Chinesea*thorities an+ enco*ra3e s*permar)et +e/e.opment P*sti&% %o*r answer

D10

Note: There is not much e#idence in the case material. This uestion reuires certain o'nkno'ledge to do 'ell.

State Intro+*ction Bc.ari&% what the China 3o/ernment is +oin3 ( the criteria&or assessin3 whether Sin3apore sho*.+ &o..ow s*it@he $hina government is encouraging supermarketisation and closing downtraditional street markets. Whether the "ingapore government should followsuit would depend on the economic situation in "ingapore.

A+/anta3es o& +e/e.opin3

s*permar)ets ( China6s rationa.e

Compare it with the S6pore

sit*ationEp.ainEemp.i&%With ;ata

- he $hinese authoritiesencouraged supermarketisationbecause the e1isting retail system was inefficient and inadeuate for the developmentof the economy.

- Arowth and moderni!ation of theretail market also lackeddirection as the ownership of

- he existing situation for "ingapore is ;uite different fromthat of $hinaLs.

- "ingapore is made up of a verysmall area with a good network of road for distribution of goodsre;uired in the retail market.

- $urrently, "ingapore already hasC dominant local supermarket


%8





these small shops was largely in

the hands of individual families.

chains, namely =:$, $old

"torage and "hop = "ave co-existing with wet markets stores?which complement thesupermarkets@ and a dwindlingnumber of neighbourhoodprovision shops.

E.a9oratewithECONO#ICSana.%sis

COST (5EJENUEa+/anta3es

Kne solution to these problems is toreplace them with a few largesupermarkets.

COST a+/anta3e"uch supermarkets would also be ina better position to handle thepaperwork and the distributionnetwork for imports S can reapinterna. EOS

5laborate on 2 internal 5K" reapedby supermarkets

5EJENUE a+/anta3eNarge supermarkets will more likelyto have higher revenue andresources to engage in activities thatfurther increase its demand.

hey can engage in advertisement to

establish their brands and createbetter awareness amongstconsumers, introduce new, more andbetter products, install self-paymentmachines to speed up payment. /llthese aim to make shopping atsupermarket a better, faster andmore convenient experience ascompared to traditional shops. /ndwhen consumers deem it as a better substitute, the +eman+ wi..increase leading to more revenue.

/t the same time, the demand willalso be more price inelastic and soeven if the supermarkets charge ahigher price, ;uantity demanded willfall less than proportionate andrevenue will increase.

- /s the industry is dominated by Clarge supermarkets, they arereaping 5K" and revenueadvantages.

- he number of independently-owned neighbourhood provisionshops has been declining over theyears. In fact, many shop-keepershave opted to be a part of afranchise such as 5con +inimartto enjoy more 5K" sincepromotions of sales andadvertising is done by thefranchiser.

/s a result, there is no urgent needfor the government to intervene.

In fact, for "ingaporeans, the declineof neighhbourhood shops would meanfewer choices for consumers.

he supermarket way of running aconvenience store would rule outpossibility of special re;uest thatcould be accommodated by an owner who knows the client and is in aposition to act on his re;uest e.g. tobring in a brand of a commodity ?e.g.a special brand of dog food@ in small;uantity.

Ep.ainEemp.i&%With ;ata

Kne other reason why $hina hasconsolidated the supermarketindustry is to gain comparativeadvantage in that industry to allowthose firms to compete in world

+ay not be the case in "ingapore assupermarkets are more to serve thedomestic market.


23





market.

E/a.*ation he cost savings between supermarkets and neighbourhood shops are stillnot substantial since there is more marketing 5K" rather than technical 5K".$onsumers are willing to pay slightly more in neighbourhood shops for theconvenience they offer. "o, supermarketism actually reduces consumers’welfare.

Note: *aucer shaped +2C for coexistence of big and small firms.S%nthesisStan+

- >rom able &, we can see both supermarkets and provision and sundryshops increased healthily by 22-2C7 even when there is no governmentintervention.

- /s the economic advisor for "ingapore, I would say that "ingapore hasdifferent needs from those of $hina in terms of supermarket developmentand should not follow suit.

- I would recommend a non-intervention approach, allowing both the largefirms and the small firms to operate simultaneously.

- :ltimately, in the long run, market forces would allow only the fittest firmthat is most cost efficient to survive.

- he neighbourhood provision shops that survived would be those thathave a niche market where the demand curve is more price inelasticwhile the supermarkets will continue to compete among themselves to bemore cost efficient.

- =onetheless, if the supermarkets indeed become too monopolistic andthere are evidences of consumer exploitation, there many be a need tofollow the :4 model of divestment instead.

NC ?6-<@ *rovide a balanced view and include both the advantages and disadvantages of further supermarket development with economic analysis. hese will beconsidered in the context of the "ingapore economy.

N2 ?'-&@ *rovide both advantages and disadvantages but then to be lopsided. 5xplanationstill lacks economic analysis.

N% ?%-C@ Kne-sided and discuss only the advantages or disadvantages of supermarketdevelopment andEor there will be limited reference to the "ingapore economy.his level may be characteri!ed by a no of descriptive points drawn from the data.

52 ?2@ make a recommendation based upon a sound examination of the costs andbenefits for the "ingapore economy of further supermarket development. 5xpect

comparisons between "ingapore and $hina and :4.5% ?%@ make a recommendation but only the costs and benefits are considered. here

may be points made that are not based upon evidence. here will be only limitedcomparison with $hina.

3xaminer0s report:

This Luestion ga!e candidates the opportunity to consider the arguments "or and against supermarkets in the #ingaporean conte1t. The data pro!ided two e1amples o" di""erent go!ernment policies towards supermarket de!elopment. In 'hina go!ernment policy has been toencourage supermarket de!elopment in a !ariety o" ways. In the ; the go!ernment is


2%





considering a policy to reduce the market power o" supermarkets. 'andidates were Luestioned onthese opposing approaches in the earlier Luestions. The reasons "or the di""ering approaches to

policy are clearly related to the di""ering conditions in 'hina and the ;. 'learly whether "urther supermarket de!elopment was appropriate "or #ingapore depended on the circumstances in#ingapore. )n appreciation o" this was essential "or a success"ul answer here. #ome candidatesdid !ery well. They considered the data pro!ided as a whole and recognised the underlying themes and issues. For e1ample it was clear "rom the data that the reason that the 'hinesego!ernment encouraged supermarket de!elopment was that the distribution o" goods in 'hina isine""icient. This was because o" the "ragmented market. This could hardly be applied to #ingaporewhere the wet markets appear to complement other retail outlets. #uccess"ul answers considered such issues in an analytical "ramework. ,ood candidates pro!ided a thought"ul conclusion a"ter summarising the issues "rom a #ingaporean conte1t. The less success"ul approaches simply

pro!ided a "ew arguments "or and against supermarkets with little re"erence to #ingapore. Theseapproaches were usually descripti!e and "ailed to grasp the rele!ant themes inherent in the data.They tended to "ocus upon a limited section o" the data and "ailed to consider the data as a whole.

These tended to be awarded a mark in the lower le!el and o"ten they scored "ew marks "or e!aluation

,*estion ! $ HCI -T2 2010 ,1

5ecent +e/e.opments in Air Tra/e.

Etract 1" The -i3 Green ;i.emma

=o one disputes that flying causes carbon emissions, as well as other conse;uences such as noisepollution for those who live near airports. /ccording to the 2336 "tern )eport, flying accounts for %.B7of all global greenhouse emissions but power stations account for a massive 2'7 and other formsof transportation ?shipping, train and road@ for %2.C7. /t the same time, there are benefits from flying

for example, tourism worldwide employs around 2C3 million people and generates <-%37 of worldA*. >lying is not always the worst choice environmentally, and it is very complex to analyse howdifferent forms of transport compare, though it is suggested that flying is generally about nine timesworse than taking the train and three times worse than a car with two passengers.

o counter this problem, 5uropean governments have started trading carbon permits to limit amountof emissions into the atmosphere. "ingapore also takes a very serious stance to maintaining asuccessful global deal in the reduction of carbon emissions. 0owever, "ingapore is a Xgeographically

disadvantaged countryX that depends highly on the external sector. he need to travel by air hassignificantly increased with the rising affluence of the people and the growing amount of businessdone between "ingapore and the rest of the world.

#ource: The Gbser!er July 288> andMF) press release %#ingapore )nnounces 'limate 'hange Target& 82/92/288?

Chart 1" Sin3apore6s Car9on ;ioi+e Emissions 1>>0 $ 200<


22





+t S +illion tonneO t S tonne

#ource: Ministry o" the 5n!ironment and 0ater esources the National 'limate 'hange #trategy and the #ingapore Department o" #tatistics


2C





Etract 2" Ana.%sis o& the 3.o9a. air.ine in+*str%

he airline industry in most countries globally has been deregulated such that entry barriers for newentrants are lower. /irlines are now free to negotiate their own operating arrangements with differentairportsO enter and exit routes easilyO and set fares and flight volumes according to market conditions.5stablished airlines hold the monopoly over time slots for landing and take-off at certain airports,making it harder for new airlines to infiltrate.

In an era when airlines are losing billions of dollars amid volatile fuel prices and a pullback inspending, every carrier is looking to cut costs and increase scale, without having to change prices.Nimited by restrictions on mergers with foreign airlines and waiting for someone else to make the nextmove, airlines are now seeking to expand their alliances and trying to extend synergies within current

partnerships.

he three major alliances -- "tar, "kyeam and oneworld -- are global networks of carriers that allowmembers to streamline costs while sharing revenue.

)evenue in the /sia-*acific region has grown by 8.67 in 233< to reach 1%3%.% billion. *assenger traffic also grew by %%.<7 in 233< to reach a volume of &26.C million passengers. /nalysts attributemuch of this increase to the airlines using the internet to enhance the booking of tickets online. heinternet has increased the competitiveness of the airline industryO allowing consumers to compareprices across airlines prior to booking. Kthers say that the internet has aided the airlines in achievinggreater revenues through the practicing of price discrimination.

#ource: )dpated "rom Datamonitor December 288? and )irline alliances becoming the new mergers , euters 27 Feb 2898

Ta9.e 1" Top 4 Air.ines in AsiaF8aci&ic 5e3ion

"hare of /sia-*acific /irline Industry?by value of total revenues@

233B7

233<7

(apan /irlines 2'.%C 2%.C2

/ll =ippon /irways %&.62 %'.22

Vantas /irways %C.B' %C.C<

"ingapore /irlines %%.%% %%.%6

#ource: Datamonitor December 288?


2'





Etract !" KowFcost epansion

>ull service carriers everywhere are struggling to stay afloat, with (apan /irlines succumbing tobankruptcy only last month. In contrast, the regionLs low-cost airline sector is bu!!ing with passenger growth and expansion plans. he underlying drivers of the boom for low-cost carriers appear to be inplaceF rapid growth in gross domestic product and gradual route liberalisation, which allows airlines tofly to more destinations.

>or the moment, many of the /sian no-frills carriers are declaring profits. /ir/sia booked a net profit of )+1%C3m ?:"1CBm@ for the ;uarter to "eptember, and $ebu *acific posted net income of %.<bnpesos ?:"1C<m@ for the first half of 2338. iger /irways, partly owned by "ingapore /irlines, says itmakes money from the low-cost operation out of "ingapore in spite of rising fuel costs. "uch carriersundercut prices at major airlines by using aircraft more fre;uently, packing in more seats, selling

tickets directly via websites rather than travel agents and cutting in-flight services.

#ource: The Financial Times February 2898

,*estions

?a@ ?i@ >rom $hart %, compare the trend of "ingapore’s carbon dioxide emissions and carbondioxide emissions per capita from %883 to 233B.

G2H

?ii@ "tate a reason for the difference observed in ?a@?i@. G%H

?iii@ 5valuate measures that the "ingapore government can adopt to deal with the allegednegative externalities of air travel.

G<H

?b@ :sing 5xtract C, analyse how the market for air passenger travel in /sia *acific has changed. G'H

?c@ 5xplain how the internet has affected the ability of the airlines to practice price discrimination. G'H

?d@ ?i@ he /sia-*acific airline industry has been described as oligopolistic. What evidencein the data supports thisJ

G%H

?ii@ iscuss how the firms in the airline industry might compete against each other andhow this might affect the society.

G%3H

Ba@ Bi@ 'rom Chart 1 compare the tren+ o& Sin3apore6s car9on +ioi+e emissions an+ car9on D2


2&





+ioi+e emissions per capita &rom 1>>0 to 200<

• "imilarityF -oth are increasing

• ifferenceF Howe/er , the $K2 emissions increase at a &aster rate than $K2 emissions per capita

Note for tutors:3mphasise the use of 'ords like -both0 for similarity, -connecting 'ord such as ho'e#er for contrast and remind the -rate of change0 is usually a good 'ay to sho' difference..

?%@?%@

Bii@ State a reason &or the +i&&erence o9ser/e+ in Ba@Bi@ D1

"ince $K2 emissions per capita rises slower than $K2 emissions, this mean that populationin "ingapore over the time frame must have increased at a slower rate than increase in $K2

emissions.

Note for tutors:C/ ! emissions per capita C/ ! emissions ; population.

In the actual KT2 most students stated population increased at a "aster rate which is wrong

<elo' is a numerical example that helps you to illustrate:

'G2 emissions B 98 <opulation B ( 'G2 emissions per capita B 'G2 emissions / population B 98/( B 2

1. 5f population increases at a faster rate:

Double 'G2 emissions B 28 O1 increase in <opulation B 9( 'G2 emissions per capita B 'G2 emissions / population B 28/9( B 6/O B 9.OO

5f population increases at a faster rate, it 'ill result in a =2 in C/ ! emissions per capita. This is 'rong as the C/ ! emissions per capita is rising and not falling.

!. 5f population increases at a slo'er rate:Double 'G2 emissions B 28 (84 increase in <opulation B >.( 'G2 emissions per capita B 'G2 emissions / population B 28/>.( B 2.7>

5f population increases at a slo'er rate, it 'ill result in a gradual increase in C/ !

emissions per capita.

>. 5f both increase at the same rate, C/ ! emissions per capita 'ill be constant.


26





Biii@ E/a.*ate meas*res that the Sin3apore 3o/ernment can a+opt to +ea. with the a..e3e+ne3ati/e eterna.ities o& air tra/e.

D=

*ho' a >.! min #ideo from http:;;'''.youtube.com;'atch?#51sNa)um6( uploaded by The 2ir Transport 2ssociation @52T2A on (ay !B, !"1"

Note for tutors:

=or such igher /rder *kills uestion, remind the students to use the follo'ing steps:1. Come up 'ith the economic frame'ork.!. 5nsert e#idence from the data

2lso, looking at the marks a'arded, D marks 'arrant !> policies 'ith limitations and final &udgment. *ince this is a case study, use measures that are mentioned in the data.

2 possible frame'ork:Negati#e externality in airtra#el: 2ir and noise pollution

6ossible (easuresTrade permits @3xtract 1, para !A Taxes and more specifically, green tax<enefits and limitations <enefits and limitations

Conclusion @*uggest longterm solutionsA

S*33este+ Answers

Intro+*ction

• /ir travel gives rise to environmental costs resulting in misallocation of resources.

• Identify and explain the 2 types of negative externalities.

•

/ir pollutionF $K2 emissions that has harmful spillover effects e.g. ill effects on healthOrespiratory disease.• =oise pollutionF 0armful spillover effects e.g. those living near the airport disrupt sleepO daily

routine e.g. study.• I shall evaluate the measures the "ingapore government can adopt to deal with the alleged

negative externalities of air travel.Green or Car9on ta BHow it wor)s@ Kimitations

ax based on carbon emission from aviationfuels e.g. 1M tax per litre of fuel.

ax closed the divergence between privateand social cost of productionF i.e. bring privateand social cost into alignment. Kutcome S

social optimal output where +"$S+"#.

In view of optimal resource allocation,travelers or airlines are made to internalisethese external costs since they are notaccounted for in their private costsFpassengers ?cost of the air-ticket@Eairlines?cost of operation such as salary to cabin crewand fuel costs@.

Aovernment failureF ifficulty in measuring thepollution accurately so as to fix the tax at thesocially optimal level. echnically, it would be verychallenging to measure pollution at high altitudeinvolving the use of a common resource i.e. air space.

VuestionsF• 0hose skies e1actly are the airlines polluting=

5.g. Gnce an #I) )O38 takes o"" "rom 'hangi )irport it may be %polluting& the skies o" other countries

• +ow to clean it when air is a common

resource= )nd in this case worse it is highaltitude pollution 0ho should clean the air=#hould it be the country that has the skiesbeing polluted the airlines or the country that gets the money "rom the permits/ta1es=


2B

http://www.youtube.com/watch?v=I1sNaUuLmPM







51tract 9: Demand "or air tra!el increases withrising income e.g. by 994 in 2883. 0encemeasures that aim at curbing the airline output tomeet pollution targets will meet with severeconstraints giving the growing demand for air travel.

Kver-tax or under-tax won’t resolve the problem.Tra+a9.e permits Bhow it wor)s@ Kimitations

he permits are a form of ;uantitativerestriction and they are marketable or tradable.

he government’s job is to determine themaximum permissible efficient level of pollution ?i.e. fixed the ;uota@ and leave it tothe market to distribute the ;uotas efficientlyamongst the airlines.

5ach polluting firm must buy a permit whichgives it permission to emit a certain amount of pollution. If not, it will have to clean up thepollution.

he price of each permit will then bedetermined in the market. he higher the priceof permit, the greater the incentive for the

firms to reduce emission.

+arketable permits give airlines the incentiveto find ways to cut down emissions so thatthey can avoid having to buy the permits or they can sellEmoneti!e the unused permits toairlines who encounter difficulties cutting downtheir emission level.

ifficult to ascertain the socially optimal level of pollution in order to determine the ;uota or maxpermissible level of pollution.

$ompliance issue. >irms might not stick to the;uota. 5nforcement is re;uired. #ut, difficult tomeasure pollution accurately to determineinfringements has occurred.

)e;uire infrastructure i.e. institutionalarrangement to facilitate carbon trading.

Ne3ati/e impact"Narge airlines may use this platform as anopportunity to engage in anti-competitive acts tooo!e out smaller players buy bidding very highprice for the permits. ?"maller airlines withoutpermits will not be able to flyY@

5e3*.ations Bhow it wor)s@ Kimitations

)ules to curb pollution

5gF he regulatory body could Impose physicallimits on the number of flights to and from

airports within their jurisdiction. K) impose fuelefficiency targets on airlinesO eg. airlines musthave introduced fuel efficiency methods in &years’ time which would reduce fuel per passenger mile from their current levelsOpacked the seats per aircraft say till <37before it is allowed to take offO pilots must landthe plane more economically

"traightforward to devise, easier to understandby firms and easier to implement.

$ompliance issue e.g. monitoring and deterrence


2<





Conc.*sion

:se environmentally friendly fuel and aircraftsZ:se Areen fuels

Techno.o3ica. so.*tionN best to resolve the problem at its source. he basic source of air pollution comes from the useof dirty or fossil fuels. Aovernment can encourage the development and use of green fuels viasubsidies for ) P and adoption.

=oise pollution"imilarly government can encourage the development and use of environmentally friendly aircraftse.g. ;uieter engines. $iting airports away from residential areas e.g. $hangi /irport is located near the sea to minimi!e noise and air pollution.

5ssentially, high altitude pollution may worsen global warming which affects 5[5)\K=5. his calls

for a consolidated international effort in reducing it and thus funds will be collected to pump into ) Q to come up with more environmentally friendly aircrafts or biofuel.

?to score .e/e. ! mar)s &or this M*estion st*+ents m*st e/a.*ate 2 meas*res o& which 1 m*st 9e &rom thetet Bmar)eta9.e permits@

B9@ Usin3 Etract ! ana.%se how the mar)et &or air passen3er tra/e. in Asia 8aci&ic has chan3e+

Note to tutors:

• ighlight to students the uestion is on the -market0 of air tra#el and the correct economic frame'ork is -EE** analysis0.

• ast year, many students used -re#enuecost0 frame'ork.

• *o this uestion reuires ans'ers that shift demand and supply.

• <ase on the data, there is more air tra#el and prices are lo'er, it means there is anincrease in demand and supply but the increase in supply out'eighs demand.

• 2lso, al'ays use 'ords such as -=rom 3xtract >, para 10 to sho' the examiner you are indeed using information from the data.

D4


28





State ElaborateChan3e in +eman+ B1m@"

5xt C, para %F rapid growth in A* leads to anincrease in demand for air passenger travel

Increase in income signals an increase inpurchasing power and since air travel is anormal good, the demand rises when incomeincreases.

] - ]* and ]VChan3e in s*pp.% B2m@"

5xt C, para 2F *resence of low-cost carrierssuch as iger /irways, $ebu *acific and

/ir/sia increase the supply

"ince this means an increase in number of service providers.

]"" - ^* and ]V0owever, 5xt C, para 2F )ising fuel costs

leads to a fall in the supply of air passenger travel

"ince cost of production is higher.

^"" - ]* and ^V"tandF ?We want to show price indeed fall based on the case study@"upply must increase as increased presence of low-cost carriers outweigh the increase in fuelcosts

'ina. stan+ B1m@"Increase in s*pp.% o& air passen3er tra/e. is .i)e.% to9e more than the increase in+eman+ &or it hence price is.ower Betract 2 *n+erc*ttin3 o& prices@ an+ o*tp*t is hi3her

Bc@ Ep.ain how the internet has a&&ecte+ the a9i.it% o& the air.ines to practice price+iscrimination

D4

Note for tutors:• Fou may 'ant to perform a life demonstration on buying an online air ticket and

sho'ing -li#e0 ho' airfares change 'ithin a short timeframe.• Fou can also sho' the class the article -2irlines told to end price discrimination by

*tephen Castle0


C3

*rice

Vty

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V%

V

*%

"%

"2

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2

'i3 1" #ar)et &or air passen3er tra/e.?Dnot necessary for students to draw dig for tutors to illustrate@





• ighlight to students that this uestion reuires ! points as ans'ers G can either be

for or against the increased ability to practice 6E>rom 5xtract 2, para ',

Evidence from ;ata State and Elaborateairlines have a better idea of who their customers are

his increases in ability to practice * as itenables the airlines to have better identificationof the market those whose demand is moreprice-inelastic. 5.g. last minute booking.

more competitive market as consumers cannow compare prices more easily with theInternet

his decreases the airlines’ ability to practice* as better informed customers means harder for airlines to charge different pricing and theycan turn to cheaper alternatives lesser monopoly power.

2m "or each point and ma1 Om "or those who do not gi!e 2@sided arguments


C%





In+epen+entco*)Air.ines to.+ to en+ price +iscrimination

#y "tephen $astle Tuesday 3 June 2886

5uropeLs airlines have been forced to end price differences of up to C33 per cent offered on the same flights indifferent countries, after a six-month in;uiry into their ticketing policies.

5uropeLs airlines have been forced to end price differences of up to C33 per cent offered on the same flights indifferent countries, after a six-month in;uiry into their ticketing policies.

he announcement came at the end of an investigation by the 5uropean $ommission into the fares charged by %<5uropean airlines including #ritish /irways, /ir >rance, Nufthansa, "/", #ritish +idland, and [irgin /tlantic. #/and "/" admitted having the different ticket charges but Ailes Aantelet, spokesman for Noyola de *alacio, the 5:

transport commissioner, said all airlines had now ended the practice. X/ little bit of naming and shaming hasachieved results,X he added.

Kne example discovered was of a return flight from >rankfurt to #erlin which cost _<< ?`&8@ when purchased inAermany but _26< in #elgium. / &3 per cent differential was found in a flight between the :4 and Aermany.

/lthough the internet has revolutionised airline ticket sales, many companies still structure their systems so thattravellers have to use a website geared to their country of residence. /s personal information and credit cardaddresses have to be provided, and tickets often have to be mailed out, there is no opportunity to circumvent thesystem by using a site belonging to the same company in another country. "imilar factors have applied topurchases made via travel agents or direct from airlines salesL offices.

0owever 5: law means that companies are not allowed to discriminate between 5uropean customers on thegrounds of their place of residence.

Kf the %< airlines contacted by the commission, %6 responded, with most saying that they did not operate in thisway, and others saying they had stopped the practice. ItalyLs /litalia said that, due to its current financial crisis, itwas unable to give a proper response and Klympic /irlines of Areece failed to reply.

0owever a test by the commission confirmed that all airlines had ended the practices. +r Aantelet saidF XIn rarecases some restrictions may still exist for certain paper-based tickets, but all electronic tickets are now availablethroughout the 5: without discrimination, except - in some cases - for differences in handling fees. /s a result,price levels are now similar for all 5: residents.X 0e added that the commission would continue to monitor theairlines to make sure the problem does not return.

"teve ouble, head of news at #/, saidF XIt is an issue which we were always comfortable with and we werealways confident of the outcome.X \esterdayLs announcement also marks a successful outcome for the$ommission, which might have had difficulty making a legal case stick.

he $ommissionLs powers over airline prices are limited, although it could take action if it judged that there hadbeen a breach of 5: treaty provisions, which lay down a level playing field for business within the internal market.


C2

http://www.independent.co.uk/

http://www.independent.co.uk/





B+@ Bi@ The AsiaF8aci&ic air.ine in+*str% has 9een +escri9e+ as o.i3opo.istic What e/i+encein the +ata s*pports this

D1

+arket share +$)' has been greater than 637 over the past 2 years and thus show the presenceof a few dominant firms which is a characteristic of oligopoly.

Note to tutors:ighlight to students, usually for a uestion on oligopoly, 'hen a table 'ith market share isgi#en and it is a ()*T to calculate the (arket Concentration ration rather then using other information high barriers to entry 'hich is true for monopoly or homogeneous product 'hichis also true for perfect competition or nonprice competition 'hich is true for monopolistic competition..

2l'ays gi#e e#idence that sho's the uniue characteristics @a fe' dominant firms and

mutual interdependenceA of oligopoly.

)nless such uniue characteristics are absent in the case material, then settle for the -! nd

best0 ans'ers such as high barriers to entry, etc 'hich are still characteristics of oligopoly.

Bii@ ;isc*ss how the &irms in the air.ine in+*str% mi3ht compete a3ainst each other an+how this mi3ht a&&ect the societ%

D10

Note:=or such igher /rder *kills uestion, use the follo'ing steps:

1. Come up 'ith the economic frame'ork.!. 5nsert e#idence from the data

There are t'o parts to the ans'ers G methods of competition and impact on society. 2 1" marks uestion 'arrants a proper introduction, body and conclusion.

2 possible frame'ork:Competition in airtra#el

6ossible (ethods of Competing 6ricecut by budget airlines

5mpact on society: <enefits or costs? 2s there is price rigidity, airlines 'ill engage in

non price competition5mpact on society: <enefits or costs?

Conclusion: Which is more likely?

Intro+*ction

I will be examining how the airlines might compete against each other in an oligopolistic industry andhow this might affect the society.

-o+%5vidence from the extract includesFIncrease in contestability in the market ?extract 2 deregulation of the airline industry@

+ethods of competitionF

1 8riceFc*ttin3 9% 9*+3et air.ines as the% o&&er noF&ri..s ser/ice2 ;*e to priceFri3i+it% there wi.. 9e nonFprice competition 9% &*..F&.e+3e+ carriers


CC





B1@ 8riceFc*ttin3 9% 9*+3et air.ines as the% o&&er noF&ri..s ser/iceState and Elaborate Exemplify with ;ataE$ontextual e.gs.5e+*ce 8rice#udgetENow-cost airlines reduce airfare toraise revenue.

/ssuming demand is price elastic due tomany airlines flying the same routes, alower airfare will increase ;uantitydemanded more than proportionate andthus increase revenue.

#udget airlines have much lower costs comparedto full-fledged carriers and thus translating thecost savings to lower prices. 5.g. they can rentplanes instead of buying, buy commercial planesthat are converted from military ones, land onbudget terminal, no-frills as they do not offer meals and in-flight entertainment, save onmiddleman fee as booking are done directly atairlines via internet rather than agents

E/a.*ation"#udget airlines are able to undercut prices as they have a +i&&erent cost str*ct*re as comparedto full-fledged national carriers.

It is infeasible for national carriers to engage in a price war with the budget airlines. 5ven if theycut airfare, it is at best a short-term measure. /lso, such airfare cuts are only for a small number of passengers and they serve as publicity gimmicks rather than genuine price cut and they comewith many hidden costs. Impact on societ% B9ene&its@"

/ir travelers enjoy lower airfares and thus experience an increase in consumer surplus.

B2@ NonFprice competition 9% &*..F&.e+3e+ carriers

Note: <efore elaborating on nonprice competition, it is critical to &ustify 'hy there is no

price competition.

• /irlines would choose to engage in nonFprice competition due to m*t*a.

inter+epen+ence .• here are only a few airlines under oligopolistic market structure and thus each airline has to

ta)e into acco*nt the actionsreactions of other firms and as a result, there is priceri3i+it%.

• If an oligopolistic firm increases price, other firms will not follow and it will lose its consumersto the competitors, and ;uantity demanded will fall more than proportionate leading to a lossin revenue.

• If it engages in a price competition by reducing price, other firms will probably respond byreducing their prices as well and the ;uantity demanded will increase less than proportionate

and result in lower revenue.• 0ence, airlines will more likely engage in non-price competition.

State and Elaborate Exemplify with ;ata*roduct differentiation is done by airlines toincrease +eman+ &or their ser/ices and maketheir +eman+ more priceFine.astic with+i&&erentiate+ ser/ices.

From 51tract O: )irlines attempted to pro!idebetter ser!ice: ;se internet "or bookings $con!enient and consumers can compare

prices across airlines.

Fly to more destinations


C'





Gwn rele!ant knowledge: Ketter in@"light

ser!ices* "reLuent "lights* ad!ertising and branding.

Impact on societ% B9ene&its@"$ompetition will lead to an increase in consumer welfare in terms of better airline products suchas travelling by shorter routes that save time, more fre;uent flights and better services by cabincrew and in-flight entertainments. /ll these also encourage tourism and improve ;uality of life andexport revenue for the countries.

Impact on societ% Bcosts@"

• #ut if the non-price competition is in the form of persuasive advertising, the higher costsmay be translated to unnecessary increase in airfare.

• Worsening market failureF If air-travelling indeed increase due to non-price competition

and other factors such as rising income, air pollution may worsen as mentioned in 51tract 2 para 9 that "lying is ? times worse than taking other modes o" transport and in 51tract 2 para6 states that the passenger tra""ic grew by 99.34 in 2883 to reach a !olume o" (27.O million

passengers.

Conc.*sion

• #esides price and non-price competition, it is crucial for airlines to form alliances such as thethree major alliances -- "tar, "kyeam and oneworld which are global networks of carriersthat allow members to stream.ine costs whi.e sharin3 re/en*e

• Kverall, the society do benefit from these measures of competition in terms of cheaper airfare and lesser carbon emission when airlines are able to cut costs by using technologyand fuel-efficient aircrafts and better services especially in terms of shorter routes and safety.

• /s long as the in+*str% remains contesta9.e cons*mers wi.. stan+ to 9ene&it Societ%

as a who.e wi.. 3ain in terms o& hi3her eport re/en*e in terms o& to*rism an+ more :o9s a/ai.a9.e

NC Aood, balanced analysis based on the case material and good use of economic analysis B-<N2 5xplains the strategies of airlines using economics and with some references made to the case

material and mentions impact on society.'-6

N% escribes strategies of airlines in a general manner ?noEminimal use of economics@ and with littlereference to case materialO no or little mention of impact on society

%-C

5% /ttempts to synthesise when there are conflicting views. %52 *rovide good synthesis and a reasoned conclusion 2


C&





,*estion 4 $ HCI 8re.ims 200< ,n 1

S#5T an+ S-S Transit

Etract 1 Sin3apore #5T S%stem

"ingaporeLs mass rapid transit ?+)@ system has been known for its reliability, efficiency and comfort.It is run by two companies - "ingapore +) ?"+)@ and "#" ransit. he <8.'-km =orth-"outh and5ast-West Nines, operated by "+), began in %8<B. he =orth-5ast Nine ?=5N@ is one of the latestadditions to the +) network. Kpened in 233C, it is the first fully automated heavy rail lines in theworld and is operated by "#" ransit. he introduction of a second rail operator is an outcomeintended by the "ingapore government to inject competition.

"+) and "#" ransit have been adjusting their fares in recent years due to rising fuel price. "uchfare adjustments must be first approved by the *ublic ransport $ouncil ?*$@. /s an independentregulator of public transport fares, *$ is entrusted with the challenging mission of both safeguardingthe interest of the public and ensuring the long-term viability of public transport operators.

Ta9.e 1 #aim*m A+*.t 'are per 5i+e B2004 $ 200<@

2004 200 2007 200<

S#5T S-S S#5T S-S S#5T S-S S#5T S-S

1%.68 1%.68 1%.68 1%.68 1%.B2 1%.B2 1%.B& 1%.B&

Ta9.e 2 S#5T 'are Str*ct*re B9% comm*ter cate3or%@

'ares

A+*.t 13.66 1%.B&

Senior CitiQen 13.6&

Chi.+ ( St*+ent 13.'3 13.&3

Ta9.e ! S#5T 'are Str*ct*re B9% +istance@

;istance tra/e..e+ 'are per ri+e:p to C.2 km 13.66

C.2% km to &.6 km 13.<<" "

2<.3% km to C3.3 km 1%.B3Kver C3.3 km 1%.B&


C6





Etract 2 ;erai.ment o& Competition

here has been intense speculation of a merger between "#" ransit and "+). In its first year of operation, the =5N incurred a loss of "1C& million as the housing estates along the =5N wereunderdeveloped.

he potential of a deal between the transport operators was first floated by ransport +inister \eo$heow ong in 233C, when he said the Aovernment would not object to a merger of rail operations.With one company in charge he added, a lot of the overheads could be saved. 0e reiterated it soonafter, saying Lthat competition for certain industries doesnLt work in a small economy such as oursL andthat, commuters suffered in terms of higher =5N fares ?up to 2& cents more than on other +) lines@and greater inconvenience. In the present set-up, commuters find they re;uire more transfers to get to

their destinations because "#" ransit slashed too many of its bus services to avoid duplicating its+) services.

ransport analysts are shocked by the suggestion made by the Aovernment. hey do not see thepoint, for either operator or commuters. /ccording to them, the economies of scale would be limitedas the two rail systems are different and separated by %& years of technological know-how. +oreover,=5N commuters are also unlikely to benefit, because the higher fares are to make up for the higher cost of running the fully automated line.

"ourceF /dapted from he "traits imes, "eptember 233' Q Kctober 233C

Etract ! R5ai.it%R -ites

ransport companies say the reality is that despite the privatised fronts, they are still obliged to run thecompanies like statutory boards. hey say their work is a tightrope walk between living up to private-sector performance indicators - in profit and productivity - and "ingaporeansL sky-high serviceexpectations, and a public-service providerLs responsibility to keep prices down to earth.

he fact that both "+) and "#" ransit are publicly listed companies adds a thorny third dimension.L/s any business textbook will tell you, shareholders come firstO or else, there will be a lot of yellingcome the annual general meeting,L says a senior industry source. his is worsened by the fact thattransport costs remain a flaming-hot political potato. / five-cent fare hike can translate into publicoutrage and lost votes at election time.

"ourceF he "traits imes, =ovember %3th 233C


CB





'i3*re 1 A&&or+a9i.it% Tren+ &or a T%pica. 'ami.% in Sin3apore

"ourceF *$ )eport, +ay 233&

Ba@ Bi@ "ummarise the changes in the maximum adult fare per ride charged by "+) and"#" ransit from 233' to 233B.

G2H

Bii@:sing the information provided, account for the above changes. G2H

Biii@

5xplain why pricing policies by "+) are examples of price discrimination. G'H

B9@ With the aid of a diagram, explain the losses incurred by "#" ransit from operating the=orth-5ast Nine in 233C.

G'H

Bc@ Bi@ 0ow far does the data suggest that the level of competition is raised in the +)systemJ

G2H

Bii@ he transport analysts were skeptical about the potential benefits of a merger between"+) and "#" ransit as the Leconomies of scale would be limitedL.

o what extent do you agree with the above viewJ

G6H


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Ba@ Bi@ S*mmarise the chan3es in the maim*m a+*.t &are per ri+e char3e+ 9% S#5T an+ S-S Transit&rom 2004 to 200< D2

Ta9.e 1 #aim*m A+*.t 'are per 5i+e B2004 $ 200<@

2004 200 2007 200<

S#5T S-S S#5T S-S S#5T S-S S#5T S-S

1%.68 1%.68 1%.68 1%.68 1%.B2 1%.B2 1%.B& 1%.B&

With reference to able %FIncreasing G%mHIncrement of C centsElow incrementEmodest rise G%mH

Bii@ Usin3 the in&ormation pro/i+e+ acco*nt &or the a9o/e chan3es D2

)ising trend - 0igher fuel price G%mH

Now increment - Aovernment ?*$@ regulation G%mH *ublic transport ?in this case, +)@ is a merit good Infrastructure make it accessible for all

Biii@ Ep.ain wh% pricin3 po.icies 9% S#5T are eamp.es o& price +iscrimination D4

Ta9.e 2 S#5T 'are Str*ct*re B9% comm*ter cate3or%@

'ares

A+*.t 13.66 1%.B&

Senior CitiQen 13.6&

Chi.+ ( St*+ent 13.'3 13.&3

With reference to able 2F 0igher fare for adults and concessionary rates for elderly, children and students. /dults are charged a higher price given that their demand is relatively price inelastic ?the fares wouldconstitute a small proportion of their income.

- his is an e.g. of Crd degree *. G2mH

Ta9.e ! S#5T 'are Str*ct*re B9% +istance@

;istance tra/e..e+ 'are per ri+e 'are per )m

:p to C.2 km 13.66 ∼ 13.2%

C.2% km to &.6 km 13.<< ∼ 13.38

" " )s distance AkmC↑ the "are charged per

distance↓ .2<.3% km to C3.3 km 1%.B3Kver C3.3 km 1%.B&

With reference to able CF *assengers travelling on longer distances ?or larger LblocksL@ incur a lower fareper kilometre.

- his is an e.g. of 2nd degree *. G2mH


C8





B9@ With the ai+ o& a +ia3ram ep.ain the .osses inc*rre+ 9% S-S Transit &rom operatin3 the NorthFEastKine in 200! D4

"#" ransit Xnatural monopolyX over the =5N given the huge fixed E start-up cost, the firmLs /$ and+$ curves will be continuously falling over the entire range of output. G%mH

/t profit maximising output level V5, /$ /) subnormal profit E loss ?represented by /rea /#$* 5@incurred by "#" ransit. Now demand due to low occupancy rate of the 0# flats along =5N lesspassengers. G%mH

2m for correct diagram but no penalty for drawing a R:-shaped’ /$ Q +$ as penalty will be given for wrongexplanation."tudents can also draw normal monopoly diagram as the infrastructure is actually built by N/, not the railoperator.

Bc@ Bi@ How &ar +oes the +ata s*33est that the .e/e. o& competition is raise+ in the #5T s%stem D2

Kn the one hand, the objective appears to have been met as the rail industry has now 2 players "+)and "#" ransit K) there is improvement in ;uality of service fully automated train services by =5N. G%mH

0owever, one must bear in mind that "+) runs =-" Nine and 5-W NineO while "#" ransit =-5 Nine ?from5xtract %@ each operates systems that are independent of each other as they cater to different regions of "ingapore two mutually exclusive monopolies. G%mH

Bii@ The transport ana.%sts were s)eptica. a9o*t the potentia. 9ene&its o& a mer3er 9etween S#5T an+S-S Transit as the Reconomies o& sca.e wo*.+ 9e .imite+R To what etent +o %o* a3ree with the

a9o/e /iew D7

"tatement with 5laboration and 5xemplification )ail industry huge capital outlay "ubstantial internal ?technical@ 5K" thus with a merger, the

combined company is able to further spread the sunk cost as it would be producing at a greater scale

enjoys lower per unit cost.

0owever, this is based on the implicit assumption that the technologies on which the =-" Q 5-W lines and=5N are the same, which in fact are not ?5xtract 2 *ara C@. /lso, they operate different routes so strictlyspeaking not the same kind of Rservice’.


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While a merger would allow the firm to enjoy various other types of internal 5K" ?marketing, administrativeand risk-bearing apply to context@, the cost savings that can be derived from these 5K" is limited.

$onclusionF0ence a merger between "+) and "#" ransit would bear little cost advantages.

NC Aood explanation and application on why technical 5K" may not be a good reason for lowering costs and how cost savings are indeed minimal.

&-6

N2 5xplained 5K" with some reference to context. C-'N% 5xplained 5K" with noElittle reference to context. %-2

B+@ When mar)et +ominance eists cons*mer ep.oitation is ine/ita9.e ;isc*ss whether the +atas*pports this /iew D10

Intro+*ction

+arket dominance may lead to the exploitation of consumers because of the higher price they pay and the lower ;uantity which is transacted on the market.

0owever, firms with market dominance may also enjoy economies of scale which may benefit consumers in theform of lower prices and better ;uality products in the light of competition for greater market share which entices thefirms to engage in )Q.

-o+%

Thesis" Cons*mer ep.oitation ine/ita9.e Anti Thesis" Cons*mer ep.oitation not ine/ita9.e


'%





• +onopoly power means higher fares loss

of consumer surplus.

*+$ **$

Noss of consumer surplus S area 5**$ /

"tudents can also draw normal monopolydiagram as the infrastructure is actually built byN/, not the rail operator.

• /lthough there is a rising trend for fare based on able %, it

is due to higher fuel costs and may not be due to marketdominance.• >urthermore, any fare adjustments must be approved by

*$, ensuring that the interest of the public is safeguarded C cents increment annually.

- "+) and "#" ransit are subjected to regulation ?*$@ aspublic transport is regarded as a merit good.

- hus even though fares have indeed increased, thechanges were minimal at C cents.

- *olitical reasonF R/ five-cent hike can translate into publicrage and lost votes at election time ?alternative objective toprofit maximi!ation@.

- )efer to >igure %F /ffordability trends downward Increasein fares wouldnLt hurt the consumer pockets given publictransport expenses accounts for a small proportion of atypical householdLs income ?233' &7@

E/a.*ation" 0owever, it can be argued that any fare increase,no matter how small, will have some impact on the consumers,especially on the lower-income group who depends heavily onpublic transportation to get around the island. >ig % only showsthe 7 of expenditure on public transport for a typical family. heweighting is definitely higher for lower income group.

Note: 2lso 'ith gro'ing affluence, households may ha#es'itched to'ards alternati#e modes of transportation suchas taxis.

- he higher fares charged on =5N are justified due to thehigher cost incurred.

• / case in pt is the higher =5N fares as

well as inconvenience imposed oncommuters as they are left with no Elittle choice due to the removal of substitute buses.

• he rail operators may be complacentand lack incentive to minimise cost."ervice standards may also becompromised ?e.g. waiting time@

Note: 3#idence from T2Hs sur#ey findings says other'ise I D"$ of the general public 'ere satisfied 'ith theser#ice standardsJ as 'ell as *(+THs K1%B million pro&ect toupgrade its trains.

• "ubstitute buses were removed to avoid duplication of

resources rationalisationEstreamlining of services tominimum cost minimi!e wastage of resources.

• #eing a publicly listed, "+) and "+" ransit have toRlive up to private-sector performance indicators profitsand pro+*cti/it% "ingaporean’s sky-high serviceexpectations’ this implies they have to constantlyupgrade their train and services.


'2

5

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+$

/

**$

Vty

/$+$

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$

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V

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$ostsE)evE*rice





• Crd * )aise producer surplus at the

expense of consumer surplus

• #y practicing Crd *, it is possible to supply extra

markets.• 0igher profits earned from one market ?/dults@ could

help in offsetting the lower profits from others ?"enior citi!en and "tudent Q $hild@.

Conc.*sion

he level of market dominance influences the conduct of firms in the industry. /lthough a larger degree of marketpower may lead to the exploitation of consumers, there are also instances when more market power might actuallybe beneficial instead.

>urthermore, given various government regulators and competition law present, "+) and "#" ransit would beless able to engage in activities that would exploit the consumers.

NC 5xcellent explanation of concepts and well supported with relevant evidencesO balanced view withconclusion. B-<

N2 /pplied to context but lopsided view '-6N% 5xplained why market dominance is bad for consumers with noElittle reference to context.

K)*urely lifting evidences from the passage without link to economic concepts.

%-C

52 (udgment based on analysis ?justified conclusion@ 25% +ainly unexplained judgments %

Documents

Tutorial 23 - Section F (Case Studies)