section b short case study & section c drq

7/24/2019 Section B Short Case Study & Section C DRQ

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Section B: Short Case study (15 marks) (1hour)


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a) Explain why Apple in 25 mi!ht ha"e #een considered to #e a monopoly in di!ital playersand di!ital downloads$ %&'

Note: In your answers, you have to state the characteristic of a monopoly very explicitlybefore elaborating with evidences.

Characteristics o a

monopoly

E"idences

Single seller:100% market share and thefirm is the industry

From para 1, Apple had a share of 63 per cent for its iPod in the Smarket and in the !orld markets, it had an "3 per cent share forlegal digital do!nloads#

$learly, Apple does not enoy the theoretical monopoly# &o!e'er, inpractice it enoys monopoly po!er (ecause it has a large proportionof the market and the rest of the market is highly fragmented#

)t is considered a *near monopoly#

ni+ue product due to high(arriers to entry:o close su(stitutes - !henfirm charges a high price,consumers cannot turn to

alternati'es#

.here are significant (arriers of entry to (oth iPod and i.unesmarket#

Para /, Apple has de'ised a simple to use, iconic mustha'e product!hich other manufacturers ha'e to date found impossi(le toreplicate# ith i.unes, it has a simple to use piece of soft!are !hich

allo!s digital do!nloads only to iPods#

#) *sin! a monopoly dia!ram+ explain how Apple succeeded increasin! its proits ten,old+mainly throu!h sales o i-ods+ #etween 2. and 25$ %&'

State Apple !as a(le to increase its profits tenfold (ecause demand for its iPod product

increased enormously#Ela(orate !itheconomic analysis

Apple did it (y creating the *iconic mustha'e2 in people and also !orked !ith recordingcompanies for legal do!nload# .hese increased the demand for iPods significantly#.his can (e sho!n in the a(o'e diagram !hen A and 4 increase# 5utput increasedfrom 0 to 1, price increased from P0to P1and total re'enue increased from 0P0A0to0P171# .otal costs increased from 0$080 to 0$191 and profits increased fromP0$08A to P1$197#

Eemplify !ithe'idences from/ata

)n /00;, Apple sales !ere more than dou(le those of /003 (ut profit increased from


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(c) /iscuss whether Apples strate!y o char!in! hi!h prices or its i-od was in its #estlon! term interests$ %3'

Yes-erspecti"e or e"aluation: Best interests4ncrease proits

hesis: 6es it is in its #est interests Anti,thesis: 7o it may not #e in its #est interests

State Apple can earn high re'enue andprofits through charging high prices#

State Apple may not (e a(le to increase profitsthrough charging high prices#

Ela(orate!itheconomicanalysis

emand for iPod is priceinelastic#&ence (y increasing price, +uantitydemanded falls less thanproportionally, and total re'enueearned (y Apple increases# &ence,e'en (y charging high prices, Apple2sre'enue remains high, !hichcontri(utes to supernormal profits#

Ela(orate!itheconomicanalysis

.he danger is that a competitor !ill (ringout a ri'al product !hich is easy to use asthe iPod and is much lo!er in priceB .hiscould lo!er the demand for iPod !hich inturn reduces re'enue of Apple#

ith such close su(stitutes, there is apossi(ility that other (rands !ill leapfrogiPod in terms of sales in digital players#

emand for iPod may (ecome less priceinelastic and charging higher prices maylead to fall in re'enue, !hich could reducethe profits earned (y Apple#

Eemplify!ithe'idencefrom /ata

Profit !as


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Section C: /ata esponse 8uestion (72& n 1) (1 hour)

he 0arket or Su!ar in the *9

(a) (i) Comparethe E* price o su!ar with the world price o su!ar o"er the period

shown$ %2'

ith reference to Fig 1

Similarity: 85.& prices eperienced a falling trend# D1E

/ierences (1 o the 2):.he price is / 3 times higher than the !orld price# D1E5.he price is much more sta(le compared to the !orld price !hich is much more 'olatile# D1E

Note: To gain full marks, must have similarity and difference. !ap at mark for "differences. #ut there are instances when there is indeed no similarity, " differences willbe acceptable.

$tudents may think that it is a good idea to write %there is fluctuation in the price overthe period& as an answer for a trend 'uestion. !aution that real world data usuallyinvolves fluctuations and not to single it out as a point to highlight. This case is anexception as the contrast between the volatility and the relative stability is great.

(a) (ii) Explainany dierences that you ha"e o#ser"ed$ %2'

price !as a guaranteed price floor !hich is fied and controlled and as a result more sta(leD1E# .he !orld price on the other hand !as determined (y the forces of supply and demand!hich eplains the huge fluctuations D1E#5.he price is higher than !orld price (ecause of the import +uotas of sugar cane in the that raised the cost of production and thus the price# D1E 5n the other hand, the su(sidies gi'ento eports of sugar lo!ered the !orld price# D1E


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(#) (i) 4dentiytwo characteristics o BSC that su!!est that it has monopoly power$ %2'

Any / of the follo!ing though 1stt!o points are preferred:

Characteristics o monopoly -;E E"idenceGarge market share Para /: 8S$ is the sole processor of sugar (eet and enoy

a large market share of the market for refined !hite sugar#&igh (arrier to entry Para 3: )mports of sugar cane !hich is needed (y its ke

competitor .ate Gyle are limited (y +uotas and that ensure8S$ faces little competition#

A(ility to carry out predatory practice Para H: 8locking the entry of another firm into the market#

Note:

(onopoly power is different from being a monopoly. )ominant firms in an

oligopoly are assumed to have a monopoly power also.

*ossible misconceptions: the fact that #$! received a guaranteed price for its

sugar indicated monopoly power.

(#) (ii) Explainone possi#le way in which BSC may ha"e pre"ented the entry o anotherirm into the market$ %2'

Suggest a method D1E C eplain ho! it !orks in the contet of the market for sugar descri(edin the tet D1E#

Control o raw material supplies e#g# o!nership of sugar (eet plantations through(ack!ard integration# .his !ill pre'ent ri'al firms from ha'ing access to essential inputor gaining cost ad'antage through purchase of ra! material supplies at competiti'eprice# .his is also kno!n as 'ertical price s+ueeIing, !here a 'ertically integrated firm,

!hich controls the supply of an input, charges competitors a high price for that input sothat they cannot compete !ith it in selling the finished good i#e# refined !hite sugar#

-redatory pricin! policy: 8y selling (elo! cost to dri'e competitors from the market#.his is possi(le if 8S$ crosssu(sidiIe prices in a competiti'e market, there(y dri'ingout competitors and esta(lishing itself as a monopoly in that market# $rosssu(sidiIerefers to the use of profits in one market to su(sidiIe prices in another#

ueries rom students:1) BSC cannot practise predatory pricin! since there is a price loor and the !raph also does not showhu!e drop in price$PreciselyJ $harging a price lo!er than the price floor is illegal and thus 8S$ is found guilty#

.he graph !ill not sure such a drop in price as it e'er happened, it is only for a short period of time#

2) 4s "ertical inte!ration ille!al$


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G3 Ela#orate (Extend to include analysis)Nood eplanation and illustration !ith diagram on the impact on 8S$Ls profits iffree trade !ere allo!ed in the uropean sugar market#

;6

G/ Consolidate (Add some details ? application)plained impact on 8S$Ls profits !ith diagram !ith little reference to contet#

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G1 9nowled!e@eco!nise (/escription)

plained impact on 8S$Ls profits !ith diagram !ithout profits area sho!n ?nocost cur'es@ !ith no>little reference to contet#

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eform of farm policy?http:>>!!!#((c#co#uk>ne!s>!orldeurope11/16061@

- hat is $AP, ho! much it costs, !ho (enefits from it, !hat reforms are (eing planned- Students may (e interested to find out more gi'en recent crisis

Sugar Su(sidies?http:>>ne!s#((c#co#uk>/>hi>(usiness>H11"HH"#stm@ &o! much 2s sugar su(sidies cost, !hat reforms !ere (eing planned
http://www.bbc.co.uk/news/world-europe-11216061http://news.bbc.co.uk/2/hi/business/4118448.stmhttp://news.bbc.co.uk/2/hi/business/4118448.stmhttp://www.bbc.co.uk/news/world-europe-11216061


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http:@@www$reormthecap$eu@

he Common A!ricultural -olicy (CA-)needs fundamental reform# 'ery year, 5#illion ? more than & o the E* #ud!et - are spent !ithout creating significant'alue for society#

9ey /ata on the CA-2D o"erall #ud!et (European A!ricultural uarantee Fund): E* &1+1.1 million

-olicy #Gecti"es 0ain 4nstruments2DExpenditure

0arket4nter"entions

aise and sta(ilisemarket prices

)nter'ention (uyingBeport su(sidies

3,H10

CoupledSu#sidies

)ncrease production ofselected goods

Production premiaBarea payments

H,"H6

/irect 4ncomeSupport

e!ard farmersLhistoric supportentitlements

Single Farm PaymentBSingle Area Payment

31,/O;

Source: Financial eport from the $ommission to the uropean Parliament and the $ouncil on theuropean Agricultural Nuarantee Fund /00O Financial 9ear#port Su(sidies ? milllion@

2H Expenditure

otal D23

$ereals 10

Sugar and )soglucose ;01

Fruit and Qegeta(les 1O

Products of the ineNro!ing Sector 1;

4ilk and 4ilk Products /O

8eef and Qeal 33

Pigmeat, ggs, Poultry and 8eekeeping /01

Processed Agricultural Products 11"
http://www.reformthecap.eu/http://www.reformthecap.eu/sites/default/files/2009%20first%20pillar.pdfhttp://www.reformthecap.eu/sites/default/files/2009%20first%20pillar.pdfhttp://www.reformthecap.eu/http://www.reformthecap.eu/sites/default/files/2009%20first%20pillar.pdf


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Source: uropean $ommission, /00O# Annees to the $ommission Staff orking ocument

Accompanying the /nd Financial eport from the $ommission to the uropean Parliament and the

$ouncil on the uropean Agricultural Nuarantee Fund /00" Financial 9ear: S$?/00O@ 136" Part ))#

Su#sidies per mem#er state in 21. ( million)

0em#er States /irect Aids -illar 2 Sum

Austria =;/ ;33 1/";

Bel!ium 61; =" 6O3

/enmark 10HO 106 11;;

Finland ;=1 /"O ";O

France ";/1 1/=O O"00

ermany ;";3 13"= =/H0

reece //1= 6=/ /"""

4reland 13H1 3;/ 16O/

4taly H3=0 1HH1 ;"11

Iuxem#our! 3= 13 ;0

7etherlands "O" 103 1001

-ortu!al 606 611 1/1=

Spain ;13O 1/"H 6H/H

Sweden ==1 /6= H=3=

*nited 9in!dom 3O"" =HO H=3=

E*,15 36=/= O163 H;"O0

Bul!aria ;"0 3O6 O=6

Cyprus ;3 /1 =;


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CJech epu#lic O0O H/H 133H

Estonia 101 113 /1H

Kun!ary 131O ;"; 1O0H

Iat"ia 1H6 1;1 /O"

Iithuania 3"0 /;H 63H

0alta ; 11 16

-oland 30H; 1";1 H"O6

omania 1/6H 13;6 /6/0

Slo"akia 3"" 3/0 =0"

Slo"enia 11H 113 /;=

E*,12 "336 ;;O; 13O30

otal H;06/ 1H=;" ;O"/1


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CA- eorm in a 7utshell

he -ro#lem E* a!ricultural taris and su#sidies distort the economy$ uropean

agriculture is not aligned !ith its comparati'e ad'antage, (ut ske!ed in fa'or of

those products that recei'e disproportional protection# orse, support to

agriculture acts like an in'isi(le ta on the manufacturing and ser'ice sectors#

he CA- harms E* trade interests$)t discredits the freetrade argument and

ser'es as a pretet for maintaining (arriers to trade in agriculture, manufacturing

and ser'ices#

he CA- is socially unair$Poor farmers (enefit little from the $AP# /0% of

recipients reap roughly "0% of the direct income support# 4ore generally, social

policies should (e targeted at the poor and not at farmers or any other sector#


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he CA- has a weak en"ironmental record$ 5nly a tiny fraction of its (udget is

spent on efficient agrien'ironmental payments, !hile en'ironmentally harmful

farming practices, such as drainage of !etlands, are still su(sidiIed#

he CA- undermines !lo#al ood security and the i!ht a!ainst po"erty$

.he su(sidiIes eports !hich disrupt production a(road# Furthermore,

in'esting in agricultural research and de'elopment, especially if adapted to

de'eloping country needs, is much more effecti'e than su(sidiIing uropean

farm income and production#

he CA- is a #urden on European inte!ration$ )t creates an image of a

(ureaucratic, nontransparent, and illmanaged # )t !astes resources that

could, if employed more !isely, con'ince uropean citiIens of the (enefits of

integration# )t nurtures a culture of national egoism that stymies rational,

efficiencyoriented decisionmaking on ependitures and (udget financing#

he pportunity .here is a good chance that the $AP !ill (e re'olutioniIed after /013 !hen a

ne! longterm (udget comes into force# .he economic crisis has left a

hea'y (urden on pu(lic (udgets, strengthening the hand of finance ministers#

.he ecolo!ical crisis re+uires su(stantial shifts from !asteful handouts to

programs that preser'e the climate, (iodi'ersity, soils, and !ater#

.he longterm trend of increasin! a!ricultural pricesand incomes !eakens the

case for incomesupporting su(sidies that do not promote the pro'ision of pu(lic

goods#

he Solution European money should only #e spent on European pu#lic !oods$ )f

agricultural policies do not ha'e positi'e effects that spill across national (orders,


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they should (e fully financed (y the mem(er states that are in a (etter position

than the to pursue local preferences !ith financial responsi(ility#

he ocus o the CA- should #e on en"ironmental o#Gecti"es, such as

(iodi'ersity protection, climate change mitigation and responsi(le !ater

management#

Accordingly, the CA- #ud!et should #e si!niicantly reduced$.he first pillar

of the $AP should (e progressi'ely a(olished and many policies under the

second pillar should (e remo'ed#

E* o"ersi!ht o national arm policies should #e stren!thened to a'oid

su(sidy payments that distort competition or hurt the en'ironment#

section b short case study & section c drq

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