theme 3 case studies Flashcards
1
Q
What are your case study examples of contestability?
A
- Walking bus tours
- Online music downloads
2
Q
How are walking bus tours in London an example of a contestable market?
A
- 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.
3
Q
How are online music downloads an example of a contestable market?
A
- Improvements in technology & a fall in the cost of internet = online music 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
4
Q
Example horizontal merger?
A
- 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
5
Q
Example conglomerate merger?
A
- 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
6
Q
Example backwards vertical merger?
A
- 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
7
Q
Example vertical demerger?
A
- 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
8
Q
Example conglomerate demerger?
A
- 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
9
Q
Rising costs of production example?
A
- Rising oil prices
- Rising cocoa prices
10
Q
Give 2 examples of collusion.
A
- 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
- BA & Virgin airways
- The airlines colluded on fuel surcharges for long-haul flights between 2004–2006
- Virgin self-reported to the UK Office of Fair Trading (OFT) in 2007
- BA was fined £121.5 million
11
Q
Example third degree price discrimination?
A
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
12
Q
Case study: government intervention & competition?
A
- 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
13
Q
Example oligopolistic market
A
Supermarket industry
14
Q
How is the supermarket industry oligopolistic?
A
- Contestable oligopoly
- In recent years, the dominance of the Big 4 (Tesco, Asda, Sainsbury & Morrisons) has come under threat from the deep discounter chains headed by Aldi & Lidl
- In 2017, these two businesses had a combined market share of 10.7% in the UK - grew to 15.4% by April 2022
- Different business model based on rapid organic growth & a range of cost-strategies designed to allow them to sell at low prices
15
Q
Supermarkets & Labour (oligopoly)
A
- 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.
16
Q
Why Aldi & Lidl Offer Lower Prices?
A
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
17
Q
Why is the water industry in England & Wales considered a natural monopoly?
A
- 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
18
Q
How is the water industry regulated, and why?
A
- Ofwat is the regulator, ensuring fair pricing and service quality
- It sets wholesale price limits & performance targets for leakage reduction, pollution control, & water conservation
19
Q
How has competition been introduced into the water industry?
A
- 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.
20
Q
Why might a business switch water suppliers?
A
- 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.
21
Q
Why is the UK food delivery market considered contestable?
A
- 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
- Low sunk costs - food delivery platforms don’t usually own restaurants or even delivery fleets & many use freelance riders/drivers (gig economy) + no need for heavy investment in capital or infrastructure
- Platforms are digital → app-based systems reduce entry barriers
22
Q
How do consumers and workers impact competition in the food delivery market?
A
- 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.
23
Q
Include a real world example of a merger blocked by the CMA?
A
- In 2019, the CMA blocked the proposed merger between Sainsbury’s & Asda (combined market share would be greater than 28%)
- 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
24
Q
Give a real-world example of government intervention & competition?
A
- In 2014, OFGEM
referred the energy industry to the CMA for further investigation - believed the market was not working effectively & there wasn’t enough competition - 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, CMA found that customers had been paying £1.4bn a year more than they would in a fully competitive market
- Also set out a wide range of reforms to increase efficiency & competition in 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
25
How much do Google spend on R&D a year?
$9bn
26
How much does the NHS spend on admin?
£2.8bn
