theme 3 case studies Flashcards
What are your case study examples of contestability?
- Walking bus tours
- Online music downloads
How are walking bus tours in London an example of a contestable market?
- There are very low barriers to entry - all you need is a bus or a few board signs to advertise your service - if firms are not making sufficient profit, they can easily exit the market
- The local council could introduce barriers to entry by, e.g. forcing firms to secure expensive licenses to be able to offer such tours.
How are online music downloads an example of a contestable market?
- Improvements in technology & a fall in the cost of internet = online market industry is contestable
- Consumers have the choice of purchasing physical CDs or downloading their favourite tracks from a multitude of online retailers e.g. Amazon, Spotify etc - very low barriers to enter/exit the market -> highly contestable
Example horizontal merger?
- In 2015, Expedia, bought Orbitz World for $1.34bn
- Earlier in the month, Expedia had bought another travel booking site, Travelocity, for $280m
- Expedia made the acquisitions to increase its market share, remaining competitive & boost profits
- Also gives Expedia greater access to customer info all around the world
Example conglomerate merger?
- In 2015, BT, a landline operator, bought EE, a mobile network firm, creating a communication giant covering landlines, broadband, mobile & TV
- The stock market responded positively by sending BT shares up 4.5% (highest since 2001)
- BT says that within 4 years, the deal will be saving it £360m a yr in operating costs & capital investment
- Combining the 2 businesses should be able to generate an extra £1.6bn a year in sales
Example backwards vertical merger?
- In 2014, Nutella acquired Turkish hazelnut producer, Oltan, as the price of nuts spiked due to poor weather conditions
- Oltan is one of the world’s leading companies in the production & marketing of hazelnuts with revenues more than $500 million & exporting to the EU and other important markets
- The acquisition would help reduce Nutella’s costs + guarantee the supply of good quality hazelnuts
Example vertical demerger?
- July 2015: PayPal split from eBay
- The demerger cost hundreds of millions of pounds (spending on new offices, software, etc).
- EBay bought PayPal for $1.5 billion in 2002 (forward vertical) - PayPal is now the bigger & stronger of the two companies, worth around $45 billion, with eBay valued at around $30 billion
- Splitting benefited both firms - for Paypal, acting independently, has allowed it to expand to other sites beyond Ebay, increasing revenues & profits
- Consumers have also benefited as more sites use Paypal as a payment method - convenient
Example conglomerate demerger?
- 2018: Whitbread, owner of Premier Inn Hotel chain, sold Costa to Coca Cola for £3.9bn
- Costa was bought by Whitbread in1995 for only £19m
- Whitbread said it will use the money to reduce its debt, cut costs, increase contributions to the pension fund & return a “significant majority” to shareholders
- Will also help it to expand its Premier Inn chain in the UK & Germany
Rising costs of production example?
- Rising oil prices
- Rising cocoa prices
Collusion example?
- Apple Fined for Fixing ebook Prices
- In 2014, Apple was fined $450m, for colluding with 5 major US publishers, including Penguin Group & Simon & Schuster, to fix ebook prices.
- The US Justice department believed that the collusion led to some ebook prices rising to $14.99 from $9.99.
Example third degree price discrimination?
Examples: Vue Cinemas & National Rail, who charge Adults (inelastic PED) & Students (elastic PED) different prices
- As a result, they are able to make more profits than they would if they charged both markets (students and adults) the same price
Example government intervention & merger?
- Energy market
- In 2014, OFGEM
referred the industry to the CMA for further
investigation - they believed the market was not working effectively.
& questioned whether there was enough competition in the UK Energy Market - OFGEM’s concerns included: structure of the market which allowed big companies (e.g. EDF)
to be both generators of electricity & suppliers to household; & whether their tacit collusion between energy firms existed - In 2016, the CMA found that customers had been paying £1.4bn a yr more than they would in a fully competitive market
- It also set out a wide range of reforms to increase efficiency
& competition in the UK Energy Market, e.g. the
CMA will support price comparison websites to enable consumers to identify the cheapest energy supplier; + temporarily cap
prices for customers on pre-payment meters
Example oligopolistic market
Supermarket industry
How is the supermarket industry oligopolistic?
Supermarkets & Labour (oligopoly)
- Supermarkets as Major Employers: most supermarkets pay above NMW, but not all meet the Living Wage
- Wage Pressures in 2022:
Labour shortages (lorry drivers, distribution workers). - High job vacancies, shifting wage bargaining power to workers
- Cost-cutting measures, e.g., fewer 24-hour stores, more self-checkouts - illustrates supermarket monopsony power in the labour market & the impact of rising wage pressures.
Why Aldi & Lidl Offer Lower Prices?
Cost-Saving Strategies:
- Smaller range of products, bought in bulk
- More private-label (own brand) products
- Smaller stores with lower rents & shorter opening hours
- Efficiency & Sustainability: use of energy-efficient lighting & commitment to renewable energy - shows how discount supermarkets compete using cost-leadership strategies in an oligopolistic market
Why is the water industry in England & Wales considered a natural monopoly?
- Large economies of scale and high fixed costs, making competition inefficient
- Water companies operate regional monopolies with dedicated pipe networks, meaning households cannot switch suppliers
How is the water industry regulated, and why?
- Ofwat is the regulator, ensuring fair pricing and service quality
- It sets wholesale price limits & performance targets for leakage reduction, pollution control, & water conservation
How has competition been introduced into the water industry?
- In 2017, business customers gained the ability to choose their water provider, with new entrants like ConservAqua & EverFlow. However, households remain restricted to regional monopolies.
Why might a business switch water suppliers?
- To reduce costs, improve billing accuracy, consolidate billing across locations, & access better customer service
- Some suppliers also offer water efficiency services to help meet leakage targets.
Why is the UK food delivery market considered contestable?
The market has low barriers to entry, allowing new firms to enter
- It is dominated by Just Eat, Uber Eats, and Deliveroo, but new grocery delivery firms like Getir have entered, especially in cities where costs are lower.
How do consumers and workers impact competition in the food delivery market?
- Consumers have high market power due to low switching costs & price sensitivity (high XED), leading to price competition
- However, workers have low bargaining power due to monopsony conditions, keeping wages low.
Include a real world example of a merger blocked by the CMA?
- In 2019, the CMA blocked the proposed merger between Sainsbury’s & Asda
- CMA concluded that the merger would lead to increased prices and & reduced quality for consumers
- The decision was based on an extensive investigation that included surveys, economic analysis, & consultations with stakeholders
