A-Level Economics Essay: Grab’s Takeover of Uber (2019 H2 Econs Past Paper)

According to the Competition and Consumer Commission of Singapore (CCCS), the takeover of Uber by Grab in Singapore has led to ‘a substantial lessening of competition’. This has made it harder for new competitors to enter the ride-hailing market.

(a) Explain one reason why consumers might be better off and one reason why consumers might be worse off from Grab’s takeover of Uber. [10]

(b) Discuss the potential benefits and problems that are likely to be experienced by new competitors considering entering the ride-hailing market dominated by Grab. [15]

Part (a): Impact on Consumers (10 Marks)

[Point] Grab’s takeover of Uber is a form of horizontal integration, which occurs when firms operating in the same industry combine to become a single, larger firm. This can make consumers both better off (through cost savings) and worse off (through increased market power).

[Explanation – Better Off] The merger allows Grab to enjoy a larger scale of production and hence greater internal economies of scale (IEOS), leading to a fall in the unit costs of production. IEOS refers to cost savings arising from a large scale of production.

[Exemplification] For example, the combined firm can reap marketing economies of scale since only one marketing campaign needs to be implemented, and its costs can be spread out over a much larger output.

[Link] This will reduce Grab’s average and marginal costs. As shown in the diagram, both AC and MC shift downwards from AC1 and MC1 to AC2 and MC2 respectively. Initially, the profit-maximizing price is at P1, which corresponds to output Q1 where MC1 cuts MR (the profit maximization condition). After the takeover, the profit-maximizing price falls to P2, with output at Q2 where MC2 cuts MR. Since consumers pay less for their ride-hailing services than before and can enjoy more rides, there is an increase in consumer surplus of P1P2ab. Consumer surplus is the difference between the maximum price consumers are willing and able to pay and what they actually pay.

[Insert Diagram: Economies of Scale reducing AC and MC, leading to lower prices and higher output]

[Explanation – Worse Off] However, the takeover gives Grab a much greater market share. It will enjoy greater market power with a larger and more price-inelastic demand due to fewer substitutes (since Uber is gone!). As seen in Figure 2, Grab’s demand rises from AR1 to AR2, and correspondingly, MR1 to MR2. Initially, the profit-maximizing price is at P1 with output Q1 where MC1 cuts MR. After the merger, the profit-maximizing price rises to P2, with output Q2 where MC2 cuts MR.

[Link] Since consumers now face a higher price, consumer surplus falls. Although it looks like the quantity consumed has increased, this is merely because what used to be under Uber is now under Grab; the overall market quantity consumed is likely to have fallen with the price increase.

[Insert Diagram: Grab’s greater market dominance, leading to higher prices]

Part (b): Benefits and Problems for New Competitors (15 Marks)

[Point] Every firm seeks to earn economic profits (Total Revenue minus Total Cost). Thus, the potential benefits and problems for new entrants in the ride-hailing market depend on factors that increase or decrease profitability.

[Explanation – Benefits] A major benefit is that a new firm can study Grab’s services, pricing, and marketing strategies, resulting in a shorter learning curve to develop a successful business model. Because the demand is already well-established, there is little need to advertise aggressively to “sell” the idea of ride-hailing services, allowing the new firm to minimize marketing costs. Similarly, as a ready pool of drivers already exists, the new firm spends less on convincing workers to join the gig economy.

[Explanation – Benefits (Innovation)] Again, by studying Grab’s offerings, the new firm may be able to identify gaps that are not well served, such as possibly rides with pets. As a much larger firm, Grab may be less nimble and flexible to vary its offerings, and this can be a weakness that new firms can exploit. New competitors can also look into the common grouses expressed by Grab’s consumers and drivers and differentiate themselves accordingly. This could enable them to quickly capture market share from Grab, as well as attract drivers to serve under their platform.

[Evaluation – Anti-Thesis (First-Mover Advantage)] In addition, if drivers have to choose to work either for Grab or a competitor, it would be extremely difficult to see them leaving Grab since the pool of consumers using Grab’s app would be far larger. Grab may thus be said to possess a massive first-mover advantage that locks in both sides of the market.

[Exemplification] The new firm is also in a strong position to innovate. By identifying gaps in Grab’s offerings (e.g., rides with pets), new competitors can exploit the fact that a massive monopoly like Grab may be less nimble. Furthermore, the ride-hailing industry has low fixed and sunk costs; firms do not need to own a physical fleet of vehicles unlike traditional taxi firms, meaning exit costs are low if the venture fails.

[Evaluation – Problems (Anti-Thesis)] However, a new firm will find it incredibly difficult to attract consumers and drivers if there is substantial brand loyalty. Grab cultivates this through reward schemes (rebates and vouchers) and driver incentives. Grab has devoted massive funding to branding, making its demand highly price-inelastic, meaning new entrants cannot easily pull consumers away even with lower prices. In addition, if drivers have to choose to work either for Grab or a competitor, it would be extremely difficult to see them leaving Grab since the pool of consumers using Grab’s app would be far larger. Grab may thus be said to possess a massive first-mover advantage that locks in both sides of the market.

[Evaluation – Predatory Pricing] Furthermore, Grab possesses a first-mover advantage and massive financial reserves. It may engage in predatory pricing by charging fares below their marginal cost to cause competitors to suffer losses and eventually exit the market. If a new firm’s total revenue does not cover total variable costs, it will shut down even in the short run. Because Grab possesses significant IEOS, it is far more cost-competitive and can sustain these price wars longer than new entrants.

[Insert Diagram: Fall in Dd (New Firm) leading to Subnormal Profits]

[Concluding Section / Synthesis] In conclusion, Grab’s dominant position makes prospects daunting for brand-new competitors, which is likely why Uber exited the small Singapore market. However, for established foreign firms like Gojek (Indonesia), expanding into Singapore makes commercial sense. Their app is already developed, and they reap massive IEOS from their home market, allowing them to overcome the barriers to entry. Finally, government regulators like the CCCS may intervene to ensure a level playing field, such as banning exclusive driver contracts, which would heavily favor new entrants.

💡 Chief Tutor’s Tip: This essay is a perfect example of how to secure your E3 evaluation marks. Instead of just listing “pros and cons,” the conclusion synthesizes the reality of the Singaporean market: distinguishing between a brand-new startup (which will fail) and an established foreign incumbent like Gojek (which can survive). Examiners reward this high-level, context-specific application.

🚀 Elevate Your A-Level Economics Grades

Want to write such A-grade essays like this under actual exam conditions? Stop merely memorizing textbook definitions and start mastering the Singapore-Cambridge syllabus with Chief Tutor Mr. Kelvin Hong.