Case Studies - Theme 3 Economics

Question 1

Example of firm growth (economies of scale):

Answer 1

Tesco has grown to having over 6,500 stores in 12 countries. This enables Tesco to take advantage of economies of scale such as lower purchasing costs and greater bargaining power with suppliers.

Question 2

Example of firm growth (economies of scope):

Answer 2

Unilever can use the same research and development teams and manufacturing facilities to produce a wide range of products, such as Knorr soup, Lipton tea, Dove soap, and Axe deodorant. This allows the company to spread its fixed costs over a larger number of products, resulting in cost savings and increased profitability.

Question 3

Example of firm growth (market share):

Answer 3

Facebook is the dominant social media platform with over 2.9 billion monthly active users worldwide.

Question 4

Example of the principal-agent problem:

Answer 4

In 2016, it was revealed that Wells Fargo employees had opened millions of fake bank accounts without customers’ knowledge or consent in order to meet aggressive sales targets set by senior management.
The executives prioritising short-term profits and stock performance over the interests of the shareholders and customers

Question 5

Examples of public sector organisations:

Answer 5

NHS, BBC, local authorities like Westminster City Council.

Question 6

Examples of private sector organisations:

Answer 6

For profit vs not for profit: Patagonia - profits are donated to climate causes which amount to around $100m a year.

Question 7

Example of organic growth:

Answer 7

Lego introducing new product line, such as Lego Technic, Lego Duplo, and Lego Friends, to appeal to different age groups and interests. Lego also leveraged its brand to create partnerships with popular franchises like Star Wars, Harry Potter, and Marvel, creating licensed sets that generated significant interest and revenue.

Question 8

Example of forward integration:

Answer 8

In 2017, Amazon bought Wholefoods for $13.7 bn. This is forward integration as it gives Amazon the 460 Whole Foods outlets as places to sell its products or have customers pick them up.

Question 9

Example of horizontal integration:

Answer 9

In 2015, AstraZeneca acquired ZS Pharma for $2.7bn. It gave them access to new compounds and was a long term deal intended to strengthen a specific sector of their business.

Question 10

Example of conglomerate integration:

Answer 10

Uncommon now, but was popular in the 1960s and 1970s.

Question 11

Example of a niche market:

Answer 11

Vivobarefoot is a UK-based footwear company that specialises in minimalist shoes. It has a limited target audience but has built a loyal customer base.

Question 12

Example of demergers (diseconomies of scale):

Answer 12

Hewlett-Packard (HP) split into two companies in 2015: HPE and HP inc. HP had grown through a series of acquisitions, which led to the company becoming too large and unwieldy to manage efficiently. Around 30,000 employees were laid off as a result of the split, as the companies sought to reduce redundancies and improve efficiency.

Question 13

Example of demergers (focus):

Answer 13

In 1997, Pepsi announced a demerger of its Pizza Hut, KFC and Taco Bell restaurants to focus on competition with Coca Cola. This was welcomed by shareholders as the restaurants had failed to live up to expectations.

Question 14

Example of profit maximising firm:

Answer 14

Tech firms like Apple, so that they can use the money to reinvest and be dynamically efficient.

Question 15

Example of revenue maximising firm:

Answer 15

Amazon follow an objective of revenue maximisation, with revenue nearing £120bn in 2015 but profit staying relatively stable. Their aim is to dominate the market.

Question 16

Example of sales maximising firm:

Answer 16

Netflix and Spotify follow the objective of sales maximisation, as they are attempting to increase the size of their businesses.

Question 17

Example of profit satisficing firm:

Answer 17

While Ben & Jerry’s is a profitable company, their business objectives are not solely focused on maximising profits. Instead, they strive to balance their social and environmental values with their business objectives. By doing so, they aim to create a positive impact on society while also generating profits.

Question 18

Example of a firm who specialises and use the division of labour:

Answer 18

Automobile manufacturers, like Ford.

Question 19

Example of a firm that experiences external economies of scale:

Answer 19

Airline industry - through improved infrastructure, increased availability of skilled labour and innovation.

Question 20

Example of an X-Inefficient firm:

Answer 20

Any state-controlled entity. e.g. NHS and United States Postal Service (USPS)

Question 21

Example of dynamic efficiency:

Answer 21

70% of all investment in the UK is funded by retained profit.

Question 22

Example of a firm which innovates its products, leading to allocative efficiency over time:

Answer 22

Apple did not pay a dividend to its shareholders for almost 20 years until 2012, instead they decided to reinvest their supernormal profits into product innovation. Examples include: iPhone, iPad, Air-pods, Mac etc.

Question 23

Example of a firm which innovates its process, leading to productive efficiency over time:

Answer 23

Tesla - “Gigafactory” concept, which involves building large-scale production facilities that are optimised for efficiency and cost-effectiveness.

Question 24

Example of perfect competition:

Answer 24

No example perfectly fits perfect competition, however agricultural markets and stock markets are those that come the closest.

Question 25

Example of monopolistic competition:`

Answer 25

Fast food restaurants, coffee shops, barbers

Question 26

Example of oligopoly:

Answer 26

Mobile phone manufacturers (UK - CR2: 80%) and Petrol (CR5: 67%).

Question 27

Examples of collusion:

Answer 27

LIBOR scandal – link to financial markets. LIBOR, or the London Interbank Offered Rate, was fixed because some bankers and traders manipulated the rate for their own financial gain, often colluding with colleagues at other banks to submit false rates that would benefit their trading positions.

J Sainsbury and Tesco: In 2008, the OFT fined J Sainsbury and Tesco a total of £3.7m for colluding with five other supermarkets to fix the price of dairy products. The collusion took place between 2002 and 2003 and resulted in higher prices for consumers.

Question 28

Example of price wars:

Answer 28

UK supermarkets since the entry of budget-supermarkets (Aldi/Lidl)

Question 29

Example of predatory pricing:

Answer 29

The accusation was made after Amazon offered discounts of up to 5% and free shipping on French books, which caused concern among French booksellers and publishers. In 2017, Amazon was fined 100,000 euros by the French government for violating the law, and the company was required to stop offering free shipping on books in the country. Amazon responded by increasing the price of books by 0.01 euro cent and adding shipping fees of 0.01 euro cent.

Question 30

Example of limit pricing:

Answer 30

Hard to distinguish with predatory pricing. Amazon, UK supermarkets etc. (The difference is that limit pricing stops new firms entering the market, whereas predatory pricing is meant to force firms to leave the market).

Question 31

Examples of a natural monopoly:

Answer 31

Network Rail - Network Rail is a natural monopoly because it owns and operates the UK’s railway infrastructure, which is essential for the provision of rail services and would be uneconomical for other companies to duplicate.

Thames Water - Thames Water is a natural monopoly because it is the sole provider of water and wastewater services in London and the Thames Valley, and it would be uneconomical for other firms to replicate its infrastructure and distribution network.

Question 32

Examples of a monopoly:

Answer 32

Very few ‘pure’ monopolies exist, but any firm with >25% of a market share is considered to have monopoly power by the CMA.

e.g. Tesco (27.3%), EE (26%) - (UK), Amazon.com (39.8%), Google (87.3%) - (US)

Question 33

Example of third degree price discrimination:

Answer 33

Student discounts, senior citizen railcard, peak travel/ off-peak travel.

Question 34

Example of a monopsony:

Answer 34

NHS has a monopsony of labour for healthcare professionals.

Any government vs employee situation.

However lots of these situations are bilateral monopolies (monopoly vs monopsony or trade union vs monopsony) e.g. 2022 -Heinz Kraft stopped selling to Tesco amid a pricing row.

Question 35

Examples of trade union power:

Answer 35

800,000 days lost to strikes in December 2022.

Strike action was taken by teachers, rail workers, driving examiners, bus drivers and NHS staff.

Real pay, including bonuses, fell 3.5% as wage and bonus growth failed to keep up with inflation.

Question 36

Example of the government intervention of blocking mergers:

Answer 36

In 2019, the CMA blocked the attempted merger of Sainsbury’s and Asda. Due to risks of price rises, quality falling and choice falling.

Question 37

Example of the government intervention of price caps:

Answer 37

Railways, Water

Question 38

Example of the government intervention through the promotion of small businesses:

Answer 38

The Red Tape Challenge aims to decrease regulation, particularly for small businesses. There are also schemes, such as the Enterprise Investment Schemes and Seed Enterprise Investment Scheme, which provide tax relief for people who buy shares in small companies to help them grow.

Question 39

Example of government intervention through quality standards:

Answer 39

For example, the Post Office has to deliver letters on 6 days a week to all areas and electricity generators are forced to have enough capacity to prevent blackouts.

Question 40

Example of government intervention of restrictions on monopsony power:

Answer 40

The Groceries Code Adjudicator was set up in 2013 to protect farmers.

Question 41

Example of government intervention though fines:

Answer 41

The Enterprise Act (2002) means firms engaging in these practices can be fined up to 10% of worldwide annual sales and those who organise cartels can face up to five years in prison and unlimited fines. In 2011, the 9 supermarkets in the UK were found to be fixing the price of milk and cheese products and Tesco alone was fined for £10 million.

Question 42

Example of government intervention through regulatory capture:

Answer 42

One example is the alleged capture of HMRC by Vodafone, who negotiated a tax reduction from £7bn to £1bn in 2009-10.