Theme 3 case studies

Question 1

contestability case study

Answer 1

Online music downloads:
- low barriers to entry/exit: cheap to develop an app online and low costs involved - just paying to use the music

Question 2

mergers case study

Answer 2

1. Horizontal Merger - Expedia Travel Booking:
   - 2015, Expedia bought Orbitz World for $1.34bn (over 1 billion)
   - increase its market share, increased access to customers globally and remain competitive
2. ** Conglomerate Merger - BT merges with EE**
   - BT, a landline operator, bought EE, a mobile network
3. ** Backword Vertical Merger – Nutella acquires Oltan**:
   - 2014, Nutella acquired hazelnut producer Oltan as price of nuts spiked due to poor weather conditions
   - Oltan one of world’s leading companies in production with revenues of more than $500 million
   - acquisition = reduce nutella’s cost/ensure supply of good quality hazelnuts

Question 3

demergers case study

Answer 3

1. ** Vertical demerger of Ebay and PayPal**:
   - 2015, split and cost hundreds of millions of pound
   - originally Ebay bought PayPal but now PayPal bigger/stronger
   - splitting benefited both firms: Paypal could expand to other sites beyond Ebay and now more sites use it - benefit to consumers
2. Conglomerate demerger of Whitbread and Costa:
   - 2018, Whitbread sold Costa to Coca Cola for £3.9bn to allow firm to focus on growth of Premier Inn by using money to reduce debt, cut costs
3. Horizontal demerger of Lloyds and TSB:
   - 2013 split

Question 4

Rising cost of production

Answer 4

Rising cocoa prices:
- last decade steadily increasing
- prices per kg increased from $11 in 2010 to over $15 today shrinking profit margins
- resulted in businesses shrinking size/switching to cheaper ingredients or focusing on premium products
- or integrated vertically, e.g Nutella and Oltan to reduce costs

Question 5

collusion

Answer 5

Airlines:
- British Airways and Virgin 2004-2006
- 2007, BA fined £270m for illegal price-fixing arrangements with Virgin on long haul flights
- colluded on extra price of fuel surcharges in response to rising oil prices
- between 2004 and 2006, surcharges on air tickets rose from £5 to £60 per ticked

Question 6

price discrimination

Answer 6

1. Second degree price discrimination:
   - charge different prices depending on qty consumed/timing of purchase
   - e.g Ryanair/Easyjet charge less, further in advance flight booked
   - gives airlines advantage of knowing how full flight will be/cashflow prior to flight
   - also close to flight, demand more inelastic
2. Third degree price discrimination:
   - firm splits a market based on differing PED
   - e.g Vue cinemas and National rail who charge adults/students different prices

Question 7

gov intervention and competition

Answer 7

1. Energy Market:
   - 2014 Ofgem questioned if enough competition in UK energy market as structure allowed big companies to be both generators of electricity and suppliers to household, also questions about tacit collusion
   - 2016, CMA found customers paying £1.4 bn a year more than in a fully competitive market
   - CMA set out reforms to increase competition, e.g support price comparison sites, temporarily cap prices for customers

Question 8

government intervention and mergers

Answer 8

Sainsbury’s Merger with Asda:
- 2018 CMA investigate proposed merger - combined market share greater than 28%
- blocked in 2019 due to concerns about reduced competition and potential price increases for consumers