Section A: Case study question [30m]

A New Way Ahead

Table 1 - Singapore Hotel Statistics
Hotel rooms
Average room rate (S$)
Hotel room revenue (S$ m)
Visitor arrivals ('000)

2006

2007

2008

2009

2010p

30,686

30,087

32,000

na

164.4

201.7

245.2

1,503.9
9,751.0

1,857 6

2,102.2

32,709
190.6
1,507.4

0,1 1 6.1

9,682.7

10,776.4

10,284.5

na
na

Note: Figures for 2010p are forecasted numbers

Source: Singapore Tourism Board

Table 2 - Number and classification of Hotels in Singapore

Type of Hotels
Number
Classifications

tNote:

International & Luxury Hotels

Business & Shopping Hotels
Budget Hotels'

42

5 - stars

50

4 - stars
1 - 3 stars

53

The nu
Fragrance Hofel has 21 hotels in Singapore

otels.
Source Booking com 1996

2010 & budgetsingaporehotels com

Extract 1: New types of hotels in Singapore

Millennium & Copthorne Hotels, a market leader in the hospitality industry in Singapore,
has officially opened its new studio-inspired chain here. Chairman Kwek Leng Beng
said at the launch of the firm's first Sfudio M outlet yesterday that he intends to
introduce a "real budget hotel" that "nobody has seen", although there are no firm
details yet. The price of land will be one factor that will influence the firm's plans, but Mr
Kwek believes the concept is sound. He added that ideal locations would be outside of
the central area, unless the Government could give shorter leases with lower premiums
for centrally located land sites. The firm's main event yesterday was the launch of the
Sfudio M Hotelin Robertson Quay. lt is aimed at young travellers who want designertype, quality accommodation at affordable prices. "This is not a five-star hotel," Mr Kwek
said, but it fills "the gap between a good four-star and a budget hotel" and could be
viewed as "limited service. with a twist".

Adapted from The Straifs 77mes. 18 June 2010

Extract 2: Fight between luxury hotels in the USA

With the summer travel season upon us, hotel companies are vying for travellers'
dollars by ramping up their loyalty rewards programs, even trying to one-up each other
in their offerings. lnterContinental Hotels Group (lHG), with a chain of internationally
accfaimed hotels globally, came out this week with its latest Priority Club Rewards deal:
a "Points & Cash" program that allows members to redeem night stays with a

combination of cash and loyalty points accumulated from previous stays. And just last
week, Hilton Hotels Group, a similar international and luxury hotelier, announced it
would be giving away complimentary Live Nation concert tickets to Hilton "HHonors"
members who register and stay at a Hilton hotel before Sept. 30.
While most hotel companies increase their loyalty program offerings in time for summer,
this year's deals seem to be coming more frequently as hotels scramble for market
share during the recession. For example, when Starwood Hotets Group, another
international hotel group announced a deal in January for a preferred-guest program
that allows people to use points to bid on special events, including suite tickets to the
American /dols tour, /HG countered the next quarter with all-access passes to the Major
League ,Baseball All Star game. And Marriott International matched Hilton's noblackout'-date policy in the first quarter.
Adapted from adicle by Maya Meineft, 30 Jun 2009, htto://industrv.bnet.com

Extract 3: Tried and tested way

While discounts on room rates is the most frequent strategy used, marketing
approaches such as focusing on particular market segments and distribution channels
are considered by hotel operators to be the most effective to maintain service levels and
long{erm brand loyalty. Hotels can increase their revenues by charging premium prices
to the less price-sensitive market segments and at the same time charging discounted
prices to the more price-sensitive market segments. Adding a time element, price
discounts can be given for early bookings, group bookings as well as stays during offpeak days and hours.

Adapted from wvw.hotelmarketing, 1 Apr 2010 & decisioncraft.com 2010

Extract 4: Singapore's New Integrated Resorts

Singapore has been missing that "certain something" as a tourist destination. Now,
finally, it may have the answer in two integrated casino-resorts - the recently opened
US$4.4 billion Resorfs World Senfosa (RWS) from Malaysian gaming giant Genting
Group and the US$S.S billion Marina Bay Sands (MBS). The two resorts - with
government regulations allotting less than 5% of their space for gaming - reflects an
attempt to diversify Singapore's tourism base to compete more effectively with
neighbouring countries. But their success depends on how consumers react to the
expected imposition of restrictions by the government in the form of a 592,000
(US$1,440) annual fee or 5$100 entry fee, as well as stringent rules for traditional
gambling junkets2 to deter money laundering.
1

Black-out refers to a period of time in which special offers or items may not be available at a reduced
price; usually when places are expecting large numbers of customers, during weekends or holidays.
2

The junket operator (hired by the casino) will charter an airline to take 80 or so gamblers to one specific
casino- They will all receive full Room, Food & Board and have run of the casino. In return, they all pay
the junket operator a certain amount of money up front.

RWS'S four hotels and shop outlets on Sentosa lsland opened January 20, with another
two hotefs, Equarius Hoteland Spa Villas, to be launched after 2010. The other main
attraction - Southeast Asia's first Universal Sfudlos theme park - expected to open soon,
targets a wider family-focused audience with its theme park and the world's largest
marine life park. Apart from the 26 function rooms, a 1,600-seat theatre and a luxury
spa, it boasts a strong Food & Beverage component too. Throw in the casinos to help
'subsidize such major tourist and visitor attractions and you have a clear win-win
scenaflo.

MBS is located in Marina Bay's prime city centre, suited for a convention-fuelled
destination. Apart from the usual hotel facilities, there will be theatres and a museum
but it is her iconic Sands SkyPa* with the signature-curved three hotel towers that will
be perceived as a must-visit property on an international level. Working with the
Singapore Tourism Board on joint marketing activities, MBS has sales networks in
China, Hong Kong, Japan, Korea, Thailand, India, as well as in Europe and the
Americas that will target the markets of Southeast Asia, China, lndia, Middle East and
Russia, as well as the U.S. and Europe.
Adapted from hotelsmag.com, Thomas Steinmetz 2010

Questions

(a) i.

ii.

ldentify the year which experienced the greatest increase in

hotel room rate in Singapore.

average

Using the data and economic theory, explain why the average
rate of hotels in Singapore fell in 2009.

room

t1l

Wl

(b)

Describe the market structure of the Singapore budget hotel industry.

t3l

(c)

Explain the barriers to entry that

compete with Studio M.

a new hotel developer would face to

t4l

(d)

Using the data provided, discuss the effectiveness of price and non-price
strategies adopted by hotels in the face of competition.

t8t

(e)

Discuss the possible impact of the opening of the two integrated casino- t10l
resorts on the hotel industry and the welfare of society in Singapore.

Total:30m

Section B: Essay questions [50m]

Answer two questions.

1.

a) Examine the price elasticity of demand, the cross elasticity

of

t10l

sotve

t15l

demand and the income elasticity of demand for road usage by

private motorists in Singapore.

b) ls road pricing

the best way for the Singapore government to

the problem of road congestion?

2.

a) Explain the strengths and weaknesses of the different market l12l

structures.

b)

Using appropriate illustrations, assess the view that oligopolies

monopolies

are the most suitable market structures for

and

[13]

the

respective industries in which they are found.

3-

In 2009 the Malaysian government spent RM74 billion (4.7

%o

of GDP)

on subsidies. The bulk of this spending went to subsidising

the

production of petroleum, food and education.

Adapted from The Sun 3 June 2010

Discuss whether a government is likely to achieve the microeconomic

t25l
goals of efficiency in resource allocation and equity in distribution of
output by intervening in the manner described above.
End of paper

Section A: Case Study Question [30m]

The Health Care Industry

able 1: Total Health Care
diture as a 7o of GDP:
2003
2004
2006
2005
US
UK

15.2
8.0

Sinqapore

4.5

15.4
8.1
3.7

15.2
8.2
3.5

2007
15.7
8.4

15.3
8.2
3.3

3.1

2008
16.2

8.7
3.3

Source-' World Health Sfafnftbs 2006

2011

Table 2: GroMh in US Health Gare Costs:2010 -2011

Conrponents

Crowth

in Health Care Costs

6.1",'"

General lnflation

2.8"1o

Health Care Price lncreases Above lnflation

1.6"h

Cost Shiftirrg

31.39i

Higher P ricecl Technologi

25.0%

es

Recltrced Provide r Competition

43.8"h

1.7"ir

lncreased Utilization
.Aging

19.1"i,

Lifestyle

17.6"i,

New Treatnrenti

35.3"2i,

Nltrre IntensiveDiagr-rosticTesting/Defensivel4edicine

17.6oi,

Source. PricewaterhouseCoopers esflrnafes

Extract 1: Bigger and better

competitors

- America's big hospital groups will continue to gobble up

The US health care system, arguably the most market-oriented in the world, is probably the most
inefficient: it costs the US government over 15% of its GDP which does not even provide medical
coverage for everyone. Yet the US Congressman Paul Ryan believes there is nothing that the
free market competition cannot fix. He has proposed shifting government health care provision
for the elderly and adults with permanent disabilities to private health care providers by 2022,
which would then cap government's cost.
Prices in the markets for televisions, cell phones, clothes and major appliances have declined
over time. But health care is different whereby the consumer is at a disadvantage. We're really
good at picking out the most suitable of four available cereals or cars to meet our needs but not
when it comes to health care. How qualified are you to evaluate the thousands of doctors in the
area where you live? lt's also hard to shop for an orthopedic surgeon after you've just broken
your leg. Leaving health care provision to the free market may mean that people who cannot
afford it will just die. The industry has enjoyed pricing power that ought to be attracting
companies into the business. Instead, there have been mergers and acquisitions, which account
for the rising costs.

Mergers and acquisitions are nothing new in the industry as they carry the benefit of economies
of scale. The rationale for joining a larger chain is simple. lt means better access to capital for
renovation and expansion, better management and
importanfly
more bargaining
-groupl
- mostRelativety
powgr when negotiating treatment prices with health insurers.
physician
small
joining
are
the ranks of national provider conglomerates and demanding premium rates for their
services. In fact, the number of physicians involved in mergers and acquisitions has increased
eight-fold from2007 to 2010.
Big hospitals are able to perform many laboratory tests in large, automated facilities, requiring
large capital investment but promising considerable economiei of scale for common, routinized
tests. Such high fixed costs as well as expertise and a good reputation are deemed barriers to
entry and contestability. Since hospital laboratories are part of hospital global budgets, there are
strong incentives for these big hospitals to out-source testing that incurslower costs.

In addition, the implementation of the "Obamacare" health reforms requires hospitals to invest

heavily in technology even as the government cuts payments for treatments due to the widening
budget deficit. Hospitals will increasingly have to demonstrate the quality of their services. Small
hospitals may struggle to meet such demands while bigger groups will be better equipped.

Nevertheless, growing larger may bring its own challenges such as problems of control and
coordination within different departments. Capital renovation also means rising medical costs.
For instance, using a robot for a heart bypass operation reduces the patient's relovery time by
third but it raises the hospital bill substantially. Patients are usually unaware of the increase
cost due to the use of the robot, since their insurance pays the bills, Also there's no competitive
pressure to lower costs, as Intuitive Surgery is the only company that makes a surgical robot.
Big drug companies are pouring money into clinical trials for all kinds of new drugs and making

big money for as long as patent protection lasts. Americans hate to be denied any kind o1
treatment. Dying patients understandably place a high value on life, so they are willing to pay
more for treatment- America's propensity to pay encourages investment in iesearch, thls d'rug
companies will be able to recoup their investment in America while other countries take a free
ride. Yet, this means that these companies can charge steep prices for their drugs.

ln the long run however, mergers and acquisitions are expected to produce increases in
efficiencies for hospital providers that may be passed along to patients in lower or moderated
rates. Furthermore, such consolidations help to remove excessive competition that may interfere
with greater cooperation in research and development among hospital providers.
Adapted from: Various sources 2008

2011

Extract 2: Making prescription drugs more affordable

ln an effort to make prescription medicine more accessible and affordable for people across the
country, U.S. Congressman Sherrod Brown today introduced a bill that would use market
competition to reduce the high cost of prescription drugs. Brown_said his proposal would
implement product licensing of patents on essential medicines whose high pricesare detrimental
to public health. Competitors would be permitted to market new drugs before the patent expires,
paying the patent holder a fee for that privilege. Although patients witl benefit from some $26
billion of drugs that is expected to lose patent protection in 2011, 50 per cent of drugs still remain
under patent protection beyond 2014.

Such a bill is necessary because drug companies charge Americans high prices. Drug company
profits outpace those of every other industry by at least 5 per cent last year.'Drug companies
get huge tax breaks, most research and development is publicly funded, and drug firms' charge
the highest drug prices in the world. American drug companies have had it good at the expense
of people who cannot afford to pay absurdly high prescription drug prices. We must protect
public health and make essential prescription drugs more affordable," Brown said.

The legislation also would require drug manufacturers to publicly disclose information relevant to
the pricing of their drugs. This provision will allow consumers to assess the reasonableness of
drug companies' pricing. lf a drug manufacturer fails to comply with this provision, it would be
ineligible to participate in future government health care programmes.
Adapted from wvnu.affordablemedicine.org Jun 08 2010

Extract 3: Challenge to control rising health care costs

THERE is no such thing as free health care. This is a key principle that makes Singapore's
system among the most cost-effective in the world.

At a two-day Economist conference on March 30,2010, Health Minister Khaw Boon Wan said
politicians have to telt the truth and not promise free health care for all if ballooning costs are to
be controlled. In Singapore, patients know they have to shoulder part of the cost for health care
services, and thus look for value for money and do not over-consume.

With ageing populations and slower economic growth placing severe cost stresses on systems
everywhere, countries are urgently seeking health care reform. Singapore itself is not immune to
rising costs, Mr Khaw said. Though the country has kept its health care cost at below 4 per cent
of its gross domestic product (GDP) - a figure others find "amazing" - it will not stay that way
because of the ageing population here, he added.

The minister said the way foruuard lies with people having a strong sense of personal
responsibility for their own health. Older patients also need to ask if they truly require the
services of multiple subspecialists. Promoting competition among providers, publicising their
performance and making sure consumers seek value for money are some ways to do this, he
said. This is why the Ministry of Health (MOH) provides patients with information by updating the
bill sizes for the 70 most common hospital treatments on the Internet monthly, so that they can
make better choices.

ln time, MOH will provide more information, such as surgical complication rates and hospital
acquired infection rates, to patients. "A better educated and better informed population has the
potential and capacity to consciously choose healthy lifestyles, pursue disease prevention, early
detection and treatment, and to comply with doctors' instructions on managing their illness," he
said.
The one area of medicine where innovation has been rare and costs are still low is prevention. In
medicine, the low-tech solution can be the most productive. 'We could think of improving the
quality of a patient's life rather than the length, by spending more money on preventive care."
Gefting patients to lose weight, quit smoking and exercise more would go a long way towards
reducing medical costs, he said. We can start with the young by reducing the exposure of
children to marketing messages that promote foods high in saturated fats, trans-fatty acids, free
sugars or salt and reduce the use of powerful techniques to market these foods to them.
Adapted from ST Apr 03 2010

Questions

(a) (i)
(ai)
(b)

\''

ri\

(ii)
(c)

Cornpare the trend of total health care expenditure as a

three countries from 2003 to 2008.

o/o

of GDP among the

I2l

With reference to the data, explain possible reasons for rising health care costs
to consumers in many countries.

t6l

Describe the type of market structure that characterises the health care market.

l2l

Using Extracts 1 and 2, discuss whether the health care market is able to
achieve the goals of efficiency and equity.

[10]

In the light of rising health care costs, evaluate the possible measures that

governments can adopt to keep health care affordable.

[10]

lotal: 30 marks
Section B [50m]
Answer two questions.

1.

The political turmoil in the Middle East affecting the oil market and improvements in
fuel efficiency of "green" cars running on alternative energy have affected the market
for normal cars.
Using relevant elasticity concepts, assess the impact of the above developments
related markets.

2.

on

t25l

"Plastic bags alone make up around 2.7% of all litter by weight in Wales and it costs
around flm per year to clean up bag litter. The government's plan to introduce a
compulsory charge of up to 15p per bag has however met with firm opposition from
the British Retail Consortium."
Adapted from Westem Mail, 21 Sep 2009

(a) Account for the market failure associated with the consumption of free plastic
bags given by retailers.

3.

[101

(b) Discuss the relative effectiveness of taxation in tackling the above market failure.

[151

(a) Distinguish between the structure of the smartphone industry and the

t10l

smartphone application industry.

of Starhub and M1 into the telecommunications market in Singapore

has been beneficialto society. Discuss.

(b) The entry

End of paper
5

[1

s]

Section A: Gase study question [30m]

The Frozen Yogurt Industry
aDte
ble 11: Pe
Per :apita consumption in U.S. (weight in pounds
2000
2001
2002 2003 2004 2005
2006
Frozen
2.0
1.5
1.5
1.5
1.3
1.3
1.3
Yoqurt

2007

2008

2009

1.1

1.2

1.1

Source: U.S. Depadment of Agriculture

Extract 1
Let's YO! Yogurt is taking the frozen yogurt industry by storm, with major expansion
plans for New York. With a footprint in neighbouring New Jersey, the
all-natural frozen
yogurt franchise known for its innovative use of in-shop social media, wilt
concentrate its
expansion in New York city with plans to open 30 locations by 2013.
Opening in flexible 1,2OO to 2,000 square-foot spaces throughout key U.S. markets, the
Let's YO! business model is looking to improve its franchise opporiunities. lt provides
initial and ongoing training, marketing support, fixed product costs, negotiated vendor
relationships, and site selection support, among others.

'We are growing at a tremendous pace by positioning ourselves as a unique leader in

the frozen yogurt industry, unlike anything you have ieen before. We know how to set
ourselves apart in a niche industry. Every consumer is treated to a unique frozen yogurt
experience by indulging in their favourite frozen yogurt flavour while enjoying 6ip,
social environment," said the manager of Let's yO!
"

With Apple iPads strategically embedded into the furnishings that are hooked up to flatscreens, closed-circuit televisions within the shop, Let's YO! provides a live, constanly
updated feed of the company's social media networks. The teievisions allow consumers
to interact with one another, post on the Let's YOI Facebook page and watch their post
appear within seconds on the screen. Let's YO! has created on-going platforms that
allow fans to engage with Let's YO! through their favourite social media outlets at home.

Let's YO! features self-serve frozen yogurt flavours at a weigh-and-pay price, where
consumers can enjoy more than B0 lines of pureed yogurt options derived from local
dairy farms, and real fruit purees. Unique to the frozen yogurt industry, Let's yO! is open
for all three day parts providing the breakfast, lunch and dinner crowds with treats allday long. Guests can choose from a variety of healthy toppings, including a fun,
colourful assortment of toppings geared towards children. A coffee station feJturing a
specialty coffee brewer designed specifically for the Let's YO! chain helps customLrs
kick-start their day, offering cappuccinos, lattes, cafe mochas, dark brews, light brews
and decaf coffee options.
Adapted from The Wall Street Journal (MarketWatch), 12 June2O12

Extract 2
Tart or sweet, toppings or plain, self-service or full-service - While the combinations at
frozen yogurt ("fro-yo") stores seem endless, analysts say the industry's growth is not.
Forecasts for an increasingly crowded and competitive market have not deterred "froyo" companies from embarking on ambitious expansion plans to capture increasingly
health-conscious U.S. consumers.
lBlSWorld analysts found that the recent bleak economic climate actually boded wellfor
ufro-yo" sales. Despite low disposable income and consumer sentiment, consumers
indulge in inexpensive luxuries like frozen yogurt and other comfort foods during gloomy
times.
Although frozen yogurt revenue grew 5.9% annually during the past five years, it is only
forecasted to rise 2.4% annually for the next five years, according to estimates from
lBlSWorld report. Still, the rapid location growth could be limited in the future, IBlSWorld
said. "The number of stores is anticipated to shrink starting in 2015, as the market for
frozen yogurt becomes overly saturated and small players struggle to remain open.
Larger operations will survive, while unprofitable ones will likely consolidate operations
or exit the industry altogether," the report said.
One company that is still growing in the industry is Red Mango, which now has about
160 open locations and another 160 to 200 stores in varying stages of development.
With a focus on the health-conscious consumer, the company has serued yogurt since
2007 in full-service stores, self-service stores and kiosks.
"The frozen yogurt market as you know is a very competitive market," Daniel Kim, the
company's founder said. "Franchising has been a very fast and efficient way to really
get the brand out to consumers across the country. The renewed "fro-yo" enthusiasm is
a re-invention of the frozen-dessert category that is being driven by the consumer. We
don't think this is a category that is going to go away again," he said.
Despite Klm's conviction, the industry's biggest player, TCBY, has been on the "fro-yo"
scene long enough to see the dessert's profitability wane and rise again. Begun in 1981,
the company quickly ballooned to more than 3,000 locations before scaling back
significantly to its more than 600 locations. "Around three to four years ago, competition
in the frozen yogurt market really started heating up," said Greg Allison, TCBY's senior
director of marketing, insights and innovation.
Adapted from CNBC, 23 March 2012

Extract 3
The self-serve frozen yogurt trend sweeping inland from the coasts has taken off at
Rapid City in the U.S., where FreshBerry opened in May to the highest opening sales of
any store in its brand and continues to be the highest grossing FreshBerry store
nationwide.

With as many as three other frozen yogurt chains looking to open shops
in Rapid City,
tr-ter9 is increasing competition for consumers' dessert dollars,
as the new stores look to
steal market share.from.FreshBerry as well as from established shops
like Dairy eueen,
Armadillo's, Culveds ard Cold Stone Creamery.

ili^tr:iilit3

to be taken to

rrom a bank or serr-serve machines.'#:it:3 i',?,lno?n!ilt;#"1,.l:["'[:L:".",:#iilX

topping bar, including fresh fruit, cereal, ihocolate chips, nuts and coconut.
Then, they
pay by the gram for the total weight of their creation.
Adapted from Rapid City Joumal, 8 Juty 2012

Questions

(a)

(i)

with

reference

to Table 1, describe the trend of (per capita) t1l

consumption of frozen yogurt in the U.S. between 2000 and 200g.'

(ii)

Explain, with reference to the extracts, whether or not you

expect the observed trend in (a)(i) to continue into 2012.

would I2l

with reference to the extracts, examine the possible values of

(b)
(i)

the price elasticity of demand for Let's yO!

yogurt

(ii)

the income elasticity of demand for frozen

yogurt.

t3l
t3l

ldentify the type of market structure operating in the U.s. frozen

t3l
yogurt

(c)

industry. Justify your answer.

(d)

From Extract 2,
"The number of stores is anticipated to shrink starting in 2015, as
the
market for frozen yogurt becomes overly saturated and small players
struggle to remain open. Larger operations will survive, while
unprofitable ones will likely consolidate operations or exit the industry
altogethe/'

society.

(i)

Discuss the likely impact of the above on

(ii)

Assuming that you are the marketing manager of Red Mango, discuss
t10l
the strategies that will help Red Mango compete in the frozen yogurt
market.

tgl

Total:30m

Section B: Essay questions [50m]

Answer two questions.

1.

"Market failure cannot be effectively tackled unless its underlying causes extemalities, lack of information, and irrationality - are accurately identified
and understood."
Using illustrations from Singapore, assess the extent to which government [25]
policies have addressed these underlying causes of market failure.

2. a) Using examples, explain how a firm can enjoy economies of scale.

[10]

b) To what extent do you agree that oligopoly is the most desirable form

[15]

of market structure in Singapore?

3. "When governments

intervene in markets, they cause more problems than

they solve."

Using examples, assess whether governments should intervene in

market.
End of paper

l25l