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a) Compare the Change in retail sales in Singapore by type of outlet between 2000 and 2004.

[2] All are increasing, but increase in supermarkets is the fastest and provision shops are the slowest. b) Explain two reasons why supermarkets are growing so quickly in China. [4] - Demand Side: o Rising incomes in China rise in demand for more superior substitutes (i.e. supermarket compared to wet markets and street stores) o Growing middle class with the purchasing power o Increased preference to buy from supermarkets - Supply side: o Government policy to shut down traditional street markets c) (i) Describe the type of market structure operating in the UK grocery sector in 2004. [2] Oligopoly. As there are small number of firms controlling the large share of the market as shown in the data. (ii) Explain how the firms in this market might compete against each other. [4]

1) Explain why price competition is not suitable for Oligopolies, leading to the use of Non-Price competition. d) Discuss the policy of divestment in the case of Tesco explaining clearly how this might affect consumer welfare. Divestment a process of selling off stores. This will introduce more competition into the retail sector. Welfare gain: Increase competition will push down prices and increase output and thus increase consumer welfare ( rise consumer surplus) New competitors may introduce new products, resulting in increase in variety, and increased consumer welfare. Welfare loss: MUST EXPLAIN THAT THERE IS A WELFARE LOSS. Forcing Tesco to reduce its size might result in Tesco losing its economies of scale. The increase in cost might drive up prices and thus lower consumer welfare. Evaluate: To clearly determine the impact on consumer welfare, more information might be required, e.g. extent of the economies of scale lost, and the planned reduction in size of Tesco. If loss of EOS > gain from increased competition, overall decrease in consumer welfare. Examiners report:

This question was generally done well, particularly by those who had a good grasp of the underlying conceptual framework. Divestment is a policy proposed in the UK to introduce more competition into the retailing sector. With more competition it would be expected that prices would fall and output would rise and that this would improve consumer welfare. An alternative argument is that divestment would reduce the size of Tesco leading to the loss of EOS and higher prices. This would result in an overall loss of consumer welfare. To score L2, necessary to show and appreciation of both possible outcomes in terms of the impact of divestment upon consumer welfare.

e) In the light of the data provided, if you were an economic advisor to the Singapore government, would you recommend that it should follow the example of the Chinese authorities and encourage supermarket development? Justify your answer.


Note: 1) Need to give a balanced view, make comparison to the case presented in China and UK 2) Apply to Singapore context 3) Evaluate and create new ideas (justify)

The data provides different policy responses of China and UK as a result of different conditions in each country. China: Encourage growth of supermarkets to: UK: Discourage growth power of supermarkets: To reduce market dominance (Evidence in Extract 6 suppliers complain that they are forced to sell to supermarkets at very little profits.) To protect consumer welfare reduce the risk of exploitation by producer. Fragmented markets, lack of EOS Lower price for consumers Provide greater variety of products Reduce inefficiency of original distribution model Evidence from Extract 4

Singapore: The conditions in China and UK do not apply to SG E.g. in China markets fragmented (loss of EOS), huge population can support more supermarkets, inefficient distribution of goods.

E.g. in UK, Rising market dominance (74.4% in 4 large firms), public interest to reduce market power. SG: Healthy competition among a few large firms, complemented by the co-existence of wet-markets and smaller scale grocers. Our populated size is small, multi-cultural, can support different retail outlet catering to the diverse needs of the population from citizens to foreign workers and expatriates. Our infrastructure is well-developed; hence distribution of goods need not be inefficient.

Conclusion: Therefore, despite the advantages of being big, there are rooms for small firms to co-exist. There is no need for government to encourage supermarket development.

Test Qn: Discuss the view that the development and operation of the Integrated Resorts should be left entirely to private enterprises but fireworks display during National Day Parade and healthcare must be provided by the Singapore government to correct market failure. [25]