What this lesson teaches
I can explain the strategies firms use to raise revenue or cut unit costs: growth, pricing, price discrimination, innovation, marketing and collusion.
Syllabus 9570, 2.2.3(a). Firms' Decisions and Strategies: Firms make decisions and engage in pricing, cost and product differentiation strategies aimed at raising revenue and/or lowering unit costs. These include:; growth, diversification and shut-down; price competition; third degree price discrimination; innovation, research and development; marketing; collusion with other firms
I can explain how current and possible competition shapes a firm's decisions.
Syllabus 9570, 2.2.3(b). Firms' Decisions and Strategies: Firms consider the existing and potential levels of competition in the industry when making decisions and engaging in strategies
I can judge how a firm's strategy affects efficiency, consumer welfare and other firms.
Syllabus 9570, 2.2.3(c). Firms' Decisions and Strategies: Impact of firms' decisions and strategies on:; efficiency (allocative, productive and dynamic efficiency); consumer welfare (consumer choice, product quality and consumer surplus); other firms (cost, revenue and profit)
Make a guess
A new ride-hailing app has better software than the market leader. Why might it still fail?
- Riders and drivers stay where most users already are.
- Apps with better software cost more to run, so its fares must be higher.
- The government bans new ride-hailing apps from entering the market.
Show the answer
Riders and drivers stay where most users already are.
Network effects are a barrier: an app is useful because many others use it. Better software alone does not attract both sides.
A whole H2 case study: 30 marks, about 75 minutes in the exam. Answer every part, then compare with the suggested answers.
This is a complete H2 case study in exam format: six parts worth 30 marks. It is about how ride-hailing apps compete, why one firm often dominates, and what governments do about it. In the exam you have 2 hours 30 minutes for two case studies, so allow about 75 minutes for this one, including reading time.
Extracts 1 and 3 describe real events in Singapore. Country R, the RideNow app and every number in Figure 1 and Table 1 are illustrative: invented for practice, not official data.
Allow about an hour. Read the data and all three extracts first. Write each answer before you open its suggested answer, and use the level descriptors below to mark the 8- and 10-mark parts.
The extracts
Extract 1: A merger in Singapore
In March 2018, Grab bought Uber's business in Southeast Asia, and Uber left Singapore's ride-hailing market. The Competition and Consumer Commission of Singapore (CCCS) investigated and found that the deal had substantially reduced competition. Fares had gone up after the merger, and drivers had little choice of platform. CCCS fined the two firms and required Grab to stop tying drivers to its platform with exclusive contracts, so that rivals could more easily attract drivers. New apps, including Gojek, entered the market over the following years. Written for these notes from public information.
Extract 2: RideNow under pressure
RideNow has been Country R's largest ride-hailing app since it bought its main rival in 2018. Because so many riders use it, drivers earn more by staying on RideNow, and because it has the most drivers, riders get cars faster. RideNow charges higher fares when demand peaks, such as on rainy evenings, and offers a monthly plan with cheaper rides for regular users. In recent years, two new apps have entered, charging drivers a lower commission and offering riders discounts. Some drivers now use more than one app at once. RideNow says it will invest in better maps and electric vehicles to stay ahead. Written for these notes; Country R and RideNow are invented.
Extract 3: Protecting platform workers
From 1 January 2025, Singapore's Platform Workers Act required ride-hailing and delivery platforms to make Central Provident Fund (CPF) contributions for younger platform workers. Platforms must also provide work injury compensation. Supporters said these workers deserve the same basic protection as employees. Platforms said their costs would rise, and some warned that fares or commissions might have to go up. Written for these notes from public information.
How the 8- and 10-mark parts are marked
Data parts (1 to 2 marks)
Point-marked. A 'describe' part gives 1 mark for the overall trend and 1 for a refinement. A 'calculate and explain' part gives marks for the working and for what the result shows.
8 marks: L2 (4 to 6)
Benefits and costs to consumers are both explained with clear chains and tied to evidence from the extracts. A top L2 answer develops both sides fully.
8 marks: L1 (1 to 3)
One-sided, or points listed without explanation, or little use of the case.
8 marks: E (1 to 2)
E2: a reasoned judgement in the context of the case that says what the answer depends on. E1: a judgement that is stated but not explained.
10 marks: L2 (4 to 7)
The case for and against regulating fares is developed with clear analysis, including efficiency, and case evidence. A one-sided answer is usually capped at about 5.
10 marks: L1 (1 to 3)
Mostly descriptive, one-sided, or not tied to the case.
10 marks: E (1 to 3)
E3: a well-reasoned judgement on whether regulation is needed, considering how contestable the market is and the alternatives, with a conclusion. E2: a reasoned judgement with less support. E1: an unsupported judgement.
| Year | 2018 | 2019 | 2021 | 2023 | 2025 |
|---|---|---|---|---|---|
| Market share (%) | 85 | 80 | 72 | 66 | 62 |
| Year | Total revenue | Total cost |
|---|---|---|
| 2021 | 400 | 460 |
| 2023 | 520 | 530 |
| 2025 | 640 | 590 |
Worked example: Is there supernormal profit?
Suppose a firm's total revenue is $900,000 and its total cost is $850,000, where total cost includes normal profit.
- Supernormal profit = total revenue - total cost, when total cost includes normal profit.
- $900,000 - $850,000 = $50,000.
- So the firm earns $50,000 of supernormal profit: more than it needs to stay in the industry.
- If total revenue equalled total cost, it would earn only normal profit.
Watch out for this
A firm with a falling market share must be earning less profit.
Market share compares the firm with its rivals. If the whole market grows, or the firm cuts costs or raises prices, its profit can rise even as its share falls.
Check your understanding
Why do network effects make it hard for a new ride-hailing app to enter?
- A new app must get a government licence for each driver before it can start.
- Riders want the app with the most drivers, and drivers want the one with the most riders.
- Building and marketing a new app costs a great deal, so few firms can afford to try.
Show the answer
Riders want the app with the most drivers, and drivers want the one with the most riders.
Right. Each side follows the other, so the largest app keeps attracting both and a newcomer struggles to start.