theme 3 case studies

Question 1

What are your case study examples of contestability?

Answer 1

• Walking bus tours
• Online music downloads

Question 2

How are walking bus tours in London an example of a contestable market?

Answer 2

• 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.

Question 3

How are online music downloads an example of a contestable market?

Answer 3

• Thanks to
  improvement in technology & a fall in the cost of internet, the online market industry is more contestable than ever
  2. Today, 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

Question 4

Example horizontal merger?

Answer 4

• Expedia Travel Booking
• 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

Question 5

Example conglomerate merger?

Answer 5

• 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

Question 6

Example backwards vertical merger?

Answer 6

• 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

Question 7

Example vertical demerger?

Answer 7

• 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

Question 8

Example conglomerate demerger?

Answer 8

• 2018: Whitbread, owner of Premier Inn Hotel chain, sold
• 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

Question 9

Rising costs of production example?

Answer 9

• Rising oil prices
• Rising cocoa prices

Question 10

Collusion example?

Answer 10

• 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.

Question 11

Example third degree price discrimination?

Answer 11

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

Question 12

Example government intervention & merger?

Answer 12

• 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