2024 A-Level H2 Economics CSQ1 Questions & Answers

a) Using the information in Table 1, compare the change in forecast total retail grocery sales to that for online sales in the UK between 2021 and 2026 [2].

Both changes in forecast total retail grocery sales and online sales showed an increase between 2021 and 2026. [1] The increase in online sales (20.36%) is much greater than the increase in forecast total retail grocery sales (8%). [1]

(b) Explain the two factors that are likely to determine the forecast increased demand for online shopping [4].

There is an increasing trend for online shopping due to the convenience of being able to shop from the “comfort of…own home”. Benefits like saving time and the ability to compare prices quickly drive this shift in taste and preference towards online shopping. The COVID-19 pandemic also accelerated this shift as there are more working from home and due to lockdowns and health concerns, more prefer shopping online than in physical stores. [2]

As technology continues to improve, online shopping platforms on mobile devices are becoming more user-friendly and efficient for shoppers where delivery can be rapidly fulfilled, and it is also possible to just “top up” supplies. These are product improvements that enhance the benefits of online shopping, further shifting taste and preference towards online shopping. Hence, for both reasons, the demand for online shopping is forecasted to increase. [2]

(c) Using the evidence in Extracts 1 and 2, explain two features of UK supermarkets that demonstrate the characteristics of an oligopoly. [4]

The top 5 firms in the industry controls more than 75% of the market share [Figure 1]. From Extract 1, the degree of concentration in the market has increased dramatically through a series of mergers and acquisitions, which makes each firm’s market share more dominant than before. These facts suggest a few large firms dominating the industry (Tesco, Sainsbury’s, Asda and Morrisons), which demonstrates that it is an Oligopoly. [2]

In addition, there are high barriers to entry due to extensive internal economies of scale that can be reaped by incumbents as seen in the hundereds to thousands of stores owned (Ext 2). This allows the incumbents to enjoy bulk discounts on the products they sell, lowering their unit cost of production, which enables them to offer very low prices. New entrants will lack the scale and hence unable to compete, and thus deterred from entering, which demonstrates characteristics of an Oligopoly. [2]

(d) With reference to Extracts 1 and 2, explain one possible reason why supermarkets might seek to control their supply chains [2]

The market has become even more competitive and the supermarkets do so to enjoy a “competitive edge”. By controlling their supply chains, they will have better control over costs and hence may allow them to be more price-competitive and to enjoy greater profit margins.

(e) If Sheng Siong and DFI decide to merge, discuss whether the CCCS should intervene in the merger due to adverse effects on consumers and other supermarkets in Singapore [8].

The CCCS needs to carefully weigh the potential benefits and costs of such a merger in terms of economic efficiency, consumer welfare and equity.

R1: CCCS should intervene due to adverse effects on consumers and other supermarkets.

Sheng Siong and DFI are two of the major supermarket operators in Singapore (behind NTUC FairPrice). A merger would significantly reduce the number of competitors in the retail grocery market and the merger would result in a 48.1% market share for the merged entity, which will make it the largest supermarket in Singapore. This is represented by higher demand enjoyed by the merged entity (from D1 to D2) and a more price inelastic one (steeper curve) due to fewer substitutes available. As a result, there will be greater market power, allowing the merged entity to set higher prices (P1 to P2) by restricting output (the new combined output will be less than what Sheng Siong and DFI are currently producing). Hence, there will be a fall in consumer surplus since consumers are paying more and enjoying fewer goods. This loss of consumer surplus also contributes to a deadweight welfare loss to society as allocative inefficiency increases with the restriction of output and the setting of higher prices.

(Diag showing higher and steeper Dd/AR/MR curves and the effects on Price)

Due to the greater market power, there is also potential abuse, such as controlling supplier terms as the merged entity would have greater bargaining power over suppliers, which might lead to exclusive supplier agreements, making it harder for other supermarkets to access popular products or source for cheaper alternative suppliers. This would cause other supermarkets to experience higher costs, lower revenue and lower profits, and even subnormal profits, which may cause them to shut down, in turn increasing market share and market power of the merged entity, furthering all the above adverse effects.

R2: Reasons against intervention

The merged entity could achieve greater internal economies of scale, reducing unit costs which could be passed on to consumers through lower prices, which will increase consumer surplus. This is especially likely in a competitive environment where NTUC FairPrice remains a strong rival (41.1%). As seen in Fig below, with a larger scale of production from Q1 to Q2, unit costs of production falls due to cost savings arising, for example, from bulk discounts from suppliers.

(Diag on LRAC showing IEOS)

In addition, as the merged entity can enjoy both larger revenue and lower unit costs, it would be able to enjoy larger profits, which could be utilised to fund innovations (as per of non-price competition). Consumers can benefit from a better quality shopping experience, increasing consumer utility.

While other supermarkets may face losses and have to shutdown, this is in a way allowing for greater economic efficiency to be achieved as the more efficient and competitive producers should remain in the market and resources “freed up” to be allocated to other goods and services.

Evaluative Conclusion

On balance, the CCCS should intervene as the proposed merger will meet BOTH conditions stipulated in Ext 4, which signals that the increased market dominance is of severe concern. Moreover, this is a market for food, a necessity, and hence there are major concerns over equity / affordability as well.

(e) Discuss whether price competition is the best way for supermarkets to raise revenue [10].

R1: How price competition could raise revenue for supermarkets.

Supermarkets could compete by selling its products at a lower price than others. This will usually result in a more than proportionate increase in quantity demanded due to the availability of close substitutes in other supermarkets and hence the demand for the good is price-elastic. This will cause the gain in TR from selling more output to be greater than the fall in revenue from charging a cheaper price, leading to a rise in Total Revenue (P x Q).

The firm could further taps into consumers’ loss aversion via a discount offered for a very limited period. More consumers could driven to act impulsively by going ahead to purchase from the supermarket with the discount and to avoid the negative emotions associated with a loss (from missing out on the opportunity to buy at a discount). Such discounted items could also draw in more customers than usual, who would then, out of convenience, purchase other goods (including those that are complementary to the discounted items), allow the firm to enjoy even greater revenue.

However, given that the supermarkets operate within an oligopolistic market structure, where a small number of large firms dominate the industry and are mutually interdependent, such price cuts may unintentionally trigger a price war. Other firms are likely to follow suit in order to defend its market share. As a result, the increase in quantity demanded would be less than proportionate to decrease in price, with TR fallin instead.

R2: How Product differentiation / Innovation could be better.

Supermarkets can differentiate themselves through quality, service, product range, and branding. Product differentiation can be real or imaginary. Real differentiation occurs when supermarkets provide tangible differences in their products or services. For example: Offering a wider selection of organic produce, specialty items, or unique private-label brands that are not available elsewhere. Superior quality of fresh produce or meat, enhanced in- store experiences, or additional services like in-store bakeries and ready-to-eat meal counters. Imaginary differentiation, on the other hand, is based on perceived differences created through branding, packaging, or marketing, even if the core product is like competitors. For instance: Supermarkets may use attractive packaging, catchy slogans, or eco-friendly branding to make their products appear superior or unique, even if the actual product is not significantly different from rivals.

If these efforts are successful, the demand for the retail service of the supermarkets will increase because consumers shift their preference towards this firm’s service and the demand also becomes less price elastic because consumers now perceive other supermarkets’ products or services to be poor substitutes. Hence there will be an increase in demand from DD0 to DD1 where AR and MR increases. This will cause an increase in total revenue from (P0xQ0) to (P1xQ1).

(Firm Diag showing Increase in TR)

However, such a strategy can be very costly as innovation and new packagings can take up alot of resources. This strategy is also tend to take up much longer time to bear fruit as they could also be alot of research, trial and error to undergo. There is also the possibility that they new range of products or packaging do not appeal to consumers and thus the strategy may backfire, resulting in lower revenue and profits instead.

Evaluative Conclusion

Ultimately, the best way is to employ both price and non-price competition.

Price competition should be implemented as a short-term tactical method to keep consumers excited about finding good deals, especially those that are more price-sensitive. However, it should be a highly limited strategy so as to prevent all-out price wars and to complement non-price competition as part of “attractions” that can be added on to advertisements promoting product differentiation.

Non-price competition through Product differentiation should be the core long-term strategy as it has much greater potential to increase revenue very substantially and without the ability of other supermarkets easily replicating, unlike in terms of price competition.

Ultimately, it also does depend on where the firm’s competitive edge lies – being highly cost-efficient versus being highly innovative in product or service offerings and being able to implement the strategies while at least earning normal profits, so that shut down conditions are not triggered.

💡 Chief Tutor’s A-Level (H2) Breakdown: 3 marks are alloted for 10 mark case study questions. Hence, one needs to be providing more evaluative points either at the concluding section or in the body of the answer. Also be very careful not to be drawing market diagrams! Firm diagrams are needed instead as the question is about firm strategy.

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