Marker's Comments: (a) Stronger responses made good use of economic concepts and the tools of economic analysis to explain why consumers might be better off and why they might be worse off. Stronger responses considered the impact of internal economies of scale, which lead to a fall in price and a benefit to consumers. These stronger responses also considered the impact of Grab gaining greater market share after the takeover of Uber, leading to a rise in ‘monopoly’ price and hence profits, to illustrate why consumers might be worse off. An equally acceptable approach was to consider the impact on consumer surplus. Less strong responses tended to be descriptive and often referred to effects such as the use of profits to undertake research and development to improve the quality of service to consumers.
Introduction Grab and Uber are both ride-hailing apps in the Singapore market and operates along side other ride –hailing apps such as TADA, Go-Jek and Ryde. With the two largest service provider of the ride-hailing firms merging, it might result in the consumers to enjoy the benefit of lower prices through economies of scale or even resulting in consumers suffering from the greater market dominance by Grab which resulted in a higher price.
Body 1: Explain consumers might be better off as they are able to enjoy lower prices of ride from ride-hailing app in long run due to internal economies of scale.
One of the benefit that consumers might enjoy from the takeover of Uber by Grab might be the lowering of prices of rides from these ride-hailing apps in the long run. When takeover is completed, Grab would also acquire the consumer base of Uber hence Grab’s market demand for its ride-hailing service requests would also increase. Grab would be able to enjoy Internal Economies of Scale which refers to a reduction in average costs, or cost per unit of production, because of the expansion in the production of the firm. This is only possible in the long run, as a firm is able to vary all factors of production used to produce output. Thus when there is an increase in output, from Q0 to Q1, average cost decrease from C0 to C1 as shown in Figure 1.
For example, Grab is able to enjoy managerial economies of scale which occurs as a result of specialisation at the management level. When Grab expands its scale of service provided, it is able to allocate a specialist to each managerial role since the volume of services provided would allow the firm to occupy the personnel full time. The productivity would increase as these specialists are trained in those areas, leading to greater cost efficiency. As shown in Figure 1, average cost will fall from C0 to C1 showing a movement along the LRAC.
Otherwise as Grab expands its scale of production, cost savings can be reaped in terms of lower advertising cost from larger output level thereby enjoying marketing economies of scale. Grab might incur high cost of advertising by advertising on social media websites, television and in national newspapers for the ride-hailing services but the advertising cost per unit is relatively lower as the cost can be spread over a large level of output.
With the lowering of cost of production in the long run, Grab might transfer these cost savings in terms of lower prices to their consumers who uses their services without hurting their current profit levels. Hence Grab consumers might enjoy the benefit of lower prices when Grab enjoys internal economies of scale when they expands their production.
Body 2: Explain consumers might be worse off might act like a monopoly and set even higher prices with absence of its largest competitor.
Consumers might be worse off as they suffer from higher prices when Grab takeover of Uber as these two firms are the one of the largest service providers. After the takeover, Grab would dominate the market with about 80 percent of the market share hence implies that has monopoly power and will now be able to charge a higher price.
Before the takeover, the market would likely to be more competitive with uber and Grab and other ride hailing firms in the market and Grab consumers would be able to enjoy the services priced at Pe and consumed at quantity Qe. However with the takeover, since there is a significant reduction in competition, consumer’s choice would decrease with lesser substitutes in the market and the market share of Grab increases significantly to 80 percent. This take over causes the demand curve of Grab to shift to the right from D1 to D2 and become relatively more price inelastic as seen by the relatively steeper slope of the demand curve. Under the profit-maximizing condition where rising MC=MR2, Grab will now be able to priced their services at P2 instead of Pe, hence consumers would be worse off as they now pay at a higher price as shown in Figure 2.
Consumers would also be worse off in terms of consumer surplus than if the industry is perfectly competitive. If the industry is in a perfectly competitive state, the consumer surplus would be at P1AC as consumers would be able to use the service at price P1 and Q1. However after the takeover, Grab would be able to act like a monopoly and raise prices to P2 and restrict output to Q2 thus consumer surplus is smaller now at P2BC compared to if it were in a perfectly competitive industry where consumer surplus. Hence higher prices, lower output and decreasing the consumer surplus making consumers worse off with the takeover of Uber by Grab.
Conclusion In conclusion, consumers can enjoy lower prices if Grab pass on the cost savings enjoyed through internal economies of scale or can become worse off when Grab raise prices after the takeover due to increase in market share. However, whether the consumers enjoy benefits or become worse off, depends on the action undertaken by Grab and other competitors.