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

• 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

Question 4

Example horizontal merger?

Answer 4

• 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 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

Question 9

Rising costs of production example?

Answer 9

• Rising oil prices
• Rising cocoa prices

Question 10

Give 2 examples of collusion.

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
• 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

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

Case study: government intervention & competition?

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

Question 13

Example oligopolistic market

Answer 13

Supermarket industry

Question 14

How is the supermarket industry oligopolistic?

Answer 14

• 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

Question 15

Supermarkets & Labour (oligopoly)

Answer 15

• 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.

Question 16

Why Aldi & Lidl Offer Lower Prices?

Answer 16

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

Question 17

Why is the water industry in England & Wales considered a natural monopoly?

Answer 17

• 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

Question 18

How is the water industry regulated, and why?

Answer 18

• Ofwat is the regulator, ensuring fair pricing and service quality
• It sets wholesale price limits & performance targets for leakage reduction, pollution control, & water conservation

Question 19

How has competition been introduced into the water industry?

Answer 19

• 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.

Question 20

Why might a business switch water suppliers?

Answer 20

• 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.

Question 21

Why is the UK food delivery market considered contestable?

Answer 21

• 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

Question 22

How do consumers and workers impact competition in the food delivery market?

Answer 22

• 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.

Question 23

Include a real world example of a merger blocked by the CMA?

Answer 23

• 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

Question 24

Give a real-world example of government intervention & competition?

Answer 24

• 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

Question 25

How much do Google spend on R&D a year?

Answer 25

$9bn

Question 26

How much does the NHS spend on admin?

Answer 26

£2.8bn

Question 27

Give a stat for helping small businesses as a method of government intervention to promote competition.

Answer 27

99.9% of UK businesses are SMEs