Section A: Case study question [30m]A New Way Ahead

Table 1 -

Singapore Hotel Statistics

Note: Figures for 2010p are forecasted numbersSource: Singapore Tourism Board

Table 2 -

Number and classification of Hotels in SingaporeType of Hotels Number Classifications

International & Luxury Hotels 42 5 - starsBusiness & Shopping Hotels 50 4 - stars

Budget Hotels' 53 1 -

3 starstNote: The nu otels.Fragrance Hofel has 21 hotels in Singapore

Source Booking com 1996 -

2010 & budgetsingaporehotels com

Extract 1: New types of hotels in SingaporeMillennium & Copthorne Hotels, a market leader in the hospitality industry in Singapore,has officially opened its new studio-inspired chain here. Chairman Kwek Leng Bengsaid at the launch of the firm's first Sfudio M outlet yesterday that he intends tointroduce a "real budget hotel" that "nobody has seen", although there are no firmdetails yet. The price of land will be one factor that will influence the firm's plans, but MrKwek believes the concept is sound. He added that ideal locations would be outside ofthe central area, unless the Government could give shorter leases with lower premiumsfor centrally located land sites. The firm's main event yesterday was the launch of theSfudio M Hotelin Robertson Quay. lt is aimed at young travellers who want designer-type, quality accommodation at affordable prices. "This is not a five-star hotel," Mr Kweksaid, but it fills "the gap between a good four-star and a budget hotel" and could beviewed as "limited service. with a twist".

Adapted from The Straifs 77mes. 18 June 2010

Extract 2: Fight between luxury hotels in the USAWith 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 otherin their offerings. lnterContinental Hotels Group (lHG), with a chain of internationallyaccfaimed 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

2006 2007 2008 2009 2010pHotel rooms 30,686 30,087 32,000 32,709 naAverage room rate (S$) 164.4 201.7 245.2 190.6 naHotel room revenue (S$ m) 1,503.9 1,857 6 2,102.2 1,507.4 naVisitor arrivals ('000) 9,751.0 10,284.5 1 0,1 1 6.1 9,682.7 10,776.4

combination of cash and loyalty points accumulated from previous stays. And just lastweek, Hilton Hotels Group, a similar international and luxury hotelier, announced itwould 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 marketshare during the recession. For example, when Starwood Hotets Group, anotherinternational hotel group announced a deal in January for a preferred-guest programthat allows people to use points to bid on special events, including suite tickets to theAmerican /dols tour, /HG countered the next quarter with all-access passes to the MajorLeague

,Baseball All Star game. And Marriott International matched Hilton's no-blackout'-date policy in the first quarter.

Adapted from adicle by Maya Meineft, 30 Jun 2009, htto://industrv.bnet.com

Extract 3: Tried and tested wayWhile discounts on room rates is the most frequent strategy used, marketingapproaches such as focusing on particular market segments and distribution channelsare considered by hotel operators to be the most effective to maintain service levels andlong{erm brand loyalty. Hotels can increase their revenues by charging premium pricesto the less price-sensitive market segments and at the same time charging discountedprices to the more price-sensitive market segments. Adding a time element, pricediscounts can be given for early bookings, group bookings as well as stays during off-peak days and hours.

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

Extract 4: Singapore's New Integrated ResortsSingapore has been missing that "certain something" as a tourist destination. Now,finally, it may have the answer in two integrated casino-resorts - the recently openedUS$4.4 billion Resorfs World Senfosa (RWS) from Malaysian gaming giant GentingGroup and the US$S.S billion Marina Bay Sands (MBS). The two resorts - withgovernment regulations allotting less than 5% of their space for gaming - reflects anattempt to diversify Singapore's tourism base to compete more effectively withneighbouring countries. But their success depends on how consumers react to theexpected 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 traditionalgambling 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 reducedprice; 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 specificcasino- They will all receive full Room, Food & Board and have run of the casino. In return, they all paythe junket operator a certain amount of money up front.

RWS'S four hotels and shop outlets on Sentosa lsland opened January 20, with anothertwo hotefs, Equarius Hoteland Spa Villas, to be launched after 2010. The other mainattraction - 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 largestmarine life park. Apart from the 26 function rooms, a 1,600-seat theatre and a luxuryspa, 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-winscenaflo.

MBS is located in Marina Bay's prime city centre, suited for a convention-fuelleddestination. Apart from the usual hotel facilities, there will be theatres and a museumbut it is her iconic Sands SkyPa* with the signature-curved three hotel towers that willbe perceived as a must-visit property on an international level. Working with theSingapore Tourism Board on joint marketing activities, MBS has sales networks inChina, Hong Kong, Japan, Korea, Thailand, India, as well as in Europe and theAmericas that will target the markets of Southeast Asia, China, lndia, Middle East andRussia, as well as the U.S. and Europe.

Adapted from hotelsmag.com, Thomas Steinmetz 2010Questions(a) i. ldentify the year which experienced the greatest increase in average t1l

hotel room rate in Singapore.

ii. Using the data and economic theory, explain whyrate of hotels in Singapore fell in 2009.

the average room Wl

(b) Describe the market structure of the Singapore budget hotel industry.(c) Explain the barriers to entry that a new hotel developer would face to

compete with Studio M.

(d) Using the data provided, discuss the effectiveness of price and non-pricestrategies adopted by hotels in the face of competition.

(e) Discuss the possible impact of the opening of the two integrated casino- t10lresorts on the hotel industry and the welfare of society in Singapore.

Total:30m

t3l

t4l

t8t

Section B: Essay questions [50m]Answer two questions.

1. a) Examine the price elasticity of demand, the cross elasticity of t10ldemand and the income elasticity of demand for road usage byprivate motorists in Singapore.

b) ls road pricing the best way for the Singapore government to sotve t15lthe problem of road congestion?

2. a) Explain the strengths and weaknesses of the different market l12lstructures.

b) Using appropriate illustrations, assess the view that oligopolies and [13]monopolies are the most suitable market structures for therespective 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 theproduction of petroleum, food and education.

Adapted from The Sun 3 June 2010

Discuss whether a government is likely to achieve the microeconomic t25lgoals of efficiency in resource allocation and equity in distribution ofoutput by intervening in the manner described above.

End of paper

able 1: Total Health Care diture as a 7o of GDP:2003 2004 2005 2006 2007 2008

US 15.2 15.4 15.2 15.3 15.7 16.2UK 8.0 8.1 8.2 8.2 8.4 8.7

Sinqapore 4.5 3.7 3.5 3.3 3.1 3.3

Section A: Case Study Question [30m]The Health Care Industry

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

Health Care Price lncreases Above lnflationCost ShiftirrgHigher P ricecl Technologi esRecltrced Provide r Competition

lncreased Utilization.Aging

LifestyleNew TreatnrentiNltrre IntensiveDiagr-rosticTesting/Defensivel4edicine 17.6oi,

Source. PricewaterhouseCoopers esflrnafes

Extract 1: Bigger and better -

America's big hospital groups will continue to gobble upcompetitors

The US health care system, arguably the most market-oriented in the world, is probably the mostinefficient: it costs the US government over 15% of its GDP which does not even provide medicalcoverage for everyone. Yet the US Congressman Paul Ryan believes there is nothing that thefree market competition cannot fix. He has proposed shifting government health care provisionfor 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 declinedover time. But health care is different whereby the consumer is at a disadvantage. We're reallygood at picking out the most suitable of four available cereals or cars to meet our needs but notwhen it comes to health care. How qualified are you to evaluate the thousands of doctors in thearea where you live? lt's also hard to shop for an orthopedic surgeon after you've just brokenyour leg. Leaving health care provision to the free market may mean that people who cannotafford it will just die. The industry has enjoyed pricing power that ought to be attractingcompanies into the business. Instead, there have been mergers and acquisitions, which accountfor the rising costs.

2.8"1o

1.6"h

31.39i

25.0%

43.8"h

1.7"ir19.1"i,

17.6"i,

35.3"2i,

Mergers and acquisitions are nothing new in the industry as they carry the benefit of economiesof scale. The rationale for joining a larger chain is simple. lt means better access to capital forrenovation and expansion, better management and

-

most importanfly -

more bargainingpowgr when negotiating treatment prices with health insurers. Relativety small physician -grouplare joining the ranks of national provider conglomerates and demanding premium rates for theirservices. In fact, the number of physicians involved in mergers and acquisitions has increasedeight-fold from2007 to 2010.

Big hospitals are able to perform many laboratory tests in large, automated facilities, requiringlarge capital investment but promising considerable economiei of scale for common, routinizedtests. Such high fixed costs as well as expertise and a good reputation are deemed barriers toentry and contestability. Since hospital laboratories are part of hospital global budgets, there arestrong incentives for these big hospitals to out-source testing that incurslower costs.

In addition, the implementation of the "Obamacare" health reforms requires hospitals to investheavily in technology even as the government cuts payments for treatments due to the wideningbudget deficit. Hospitals will increasingly have to demonstrate the quality of their services. Smallhospitals 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 andcoordination 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 bythird but it raises the hospital bill substantially. Patients are usually unaware of the increasecost due to the use of the robot, since their insurance pays the bills, Also there's no competitivepressure 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 makingbig money for as long as patent protection lasts. Americans hate to be denied any kind o1treatment. Dying patients understandably place a high value on life, so they are willing to paymore for treatment- America's propensity to pay encourages investment in iesearch, thls d'rugcompanies will be able to recoup their investment in America while other countries take a freeride. 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 inefficiencies for hospital providers that may be passed along to patients in lower or moderatedrates. Furthermore, such consolidations help to remove excessive competition that may interferewith 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 thecountry, U.S. Congressman Sherrod Brown today introduced a bill that would use marketcompetition to reduce the high cost of prescription drugs. Brown_said his proposal wouldimplement product licensing of patents on essential medicines whose high pricesare detrimentalto 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 $26billion of drugs that is expected to lose patent protection in 2011, 50 per cent of drugs still remainunder patent protection beyond 2014.

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

The legislation also would require drug manufacturers to publicly disclose information relevant tothe pricing of their drugs. This provision will allow consumers to assess the reasonableness ofdrug companies' pricing. lf a drug manufacturer fails to comply with this provision, it would beineligible 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'ssystem among the most cost-effective in the world.

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

With ageing populations and slower economic growth placing severe cost stresses on systemseverywhere, countries are urgently seeking health care reform. Singapore itself is not immune torising costs, Mr Khaw said. Though the country has kept its health care cost at below 4 per centof 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 personalresponsibility for their own health. Older patients also need to ask if they truly require theservices of multiple subspecialists. Promoting competition among providers, publicising theirperformance and making sure consumers seek value for money are some ways to do this, hesaid. This is why the Ministry of Health (MOH) provides patients with information by updating thebill sizes for the 70 most common hospital treatments on the Internet monthly, so that they canmake better choices.

ln time, MOH will provide more information, such as surgical complication rates and hospitalacquired infection rates, to patients. "A better educated and better informed population has thepotential and capacity to consciously choose healthy lifestyles, pursue disease prevention, earlydetection and treatment, and to comply with doctors' instructions on managing their illness," hesaid.

The one area of medicine where innovation has been rare and costs are still low is prevention. Inmedicine, the low-tech solution can be the most productive. 'We could think of improving thequality 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 towardsreducing medical costs, he said. We can start with the young by reducing the exposure ofchildren to marketing messages that promote foods high in saturated fats, trans-fatty acids, freesugars or salt and reduce the use of powerful techniques to market these foods to them.

Adapted from ST Apr 03 2010

Questions

(a) (i) Cornpare the trend of total health care expenditure as a o/o of GDP among thethree countries from 2003 to 2008.

(ai) With reference to the data, explain possible reasons for rising health care coststo consumers in many countries.

ri\\'' Describe the type of market structure that characterises the health care market.(ii) Using Extracts 1 and 2, discuss whether the health care market is able to

achieve the goals of efficiency and equity.

In the light of rising health care costs, evaluate the possible measures thatgovernments can adopt to keep health care affordable.

lotal: 30 marks

Section B [50m]Answer two questions.

1. The political turmoil in the Middle East affecting the oil market and improvements infuel efficiency of "green" cars running on alternative energy have affected the marketfor normal cars.

Using relevant elasticity concepts, assess the impact of the above developments on t25lrelated markets.

2. "Plastic bags alone make up around 2.7% of all litter by weight in Wales and it costsaround flm per year to clean up bag litter. The government's plan to introduce acompulsory charge of up to 15p per bag has however met with firm opposition fromthe British Retail Consortium."

Adapted from Westem Mail, 21 Sep 2009

(a) Account for the market failure associated with the consumption of free plastic

I2l

(b)

t6l

l2l

[10]

[10](c)

(b)

3. (a)

bags given by retailers.

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

Distinguish between the structure of the smartphone industry and thesmartphone application industry.

The entry of Starhub and M1 into the telecommunications market in Singaporehas been beneficialto society. Discuss.

End of paper

5

[101

[151

t10l

[1 s](b)

aDte 1: Per :apita consumption in U.S. (weight in pounds2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Frozen

Yoqurt 2.0 1.5 1.5 1.5 1.3 1.3 1.3 1.1 1.2 1.1

Section A: Gase study question [30m]

ble 1 Pe

Source: U.S. Depadment of Agriculture

The Frozen Yogurt Industry

Extract 1Let's YO! Yogurt is taking the frozen yogurt industry by storm, with major expansionplans for New York. With a footprint in neighbouring New Jersey, the all-natural frozenyogurt franchise known for its innovative use of in-shop social media, wilt concentrate itsexpansion 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, theLet's YO! business model is looking to improve its franchise opporiunities. lt providesinitial and ongoing training, marketing support, fixed product costs, negotiated vendorrelationships, and site selection support, among others.

'We are growing at a tremendous pace by positioning ourselves as a unique leader inthe frozen yogurt industry, unlike anything you have ieen before. We know how to setourselves apart in a niche industry. Every consumer is treated to a unique frozen yogurtexperience 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 flat-screens, closed-circuit televisions within the shop, Let's YO! provides a live, constanlyupdated feed of the company's social media networks. The teievisions allow consumersto interact with one another, post on the Let's YOI Facebook page and watch their postappear within seconds on the screen. Let's YO! has created on-going platforms thatallow 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, whereconsumers can enjoy more than B0 lines of pureed yogurt options derived from localdairy farms, and real fruit purees. Unique to the frozen yogurt industry, Let's yO! is openfor all three day parts providing the breakfast, lunch and dinner crowds with treats all-day long. Guests can choose from a variety of healthy toppings, including a fun,colourful assortment of toppings geared towards children. A coffee station feJturing aspecialty coffee brewer designed specifically for the Let's YO! chain helps customLrskick-start their day, offering cappuccinos, lattes, cafe mochas, dark brews, light brewsand decaf coffee options.

Adapted from The Wall Street Journal (MarketWatch), 12 June2O12

Extract 2Tart or sweet, toppings or plain, self-service or full-service - While the combinations atfrozen 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 "fro-yo" companies from embarking on ambitious expansion plans to capture increasinglyhealth-conscious U.S. consumers.

lBlSWorld analysts found that the recent bleak economic climate actually boded wellforufro-yo" sales. Despite low disposable income and consumer sentiment, consumersindulge in inexpensive luxuries like frozen yogurt and other comfort foods during gloomytimes.

Although frozen yogurt revenue grew 5.9% annually during the past five years, it is onlyforecasted to rise 2.4% annually for the next five years, according to estimates fromlBlSWorld report. Still, the rapid location growth could be limited in the future, IBlSWorldsaid. "The number of stores is anticipated to shrink starting in 2015, as the market forfrozen yogurt becomes overly saturated and small players struggle to remain open.Larger operations will survive, while unprofitable ones will likely consolidate operationsor exit the industry altogether," the report said.

One company that is still growing in the industry is Red Mango, which now has about160 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 since2007 in full-service stores, self-service stores and kiosks.

"The frozen yogurt market as you know is a very competitive market," Daniel Kim, thecompany's founder said. "Franchising has been a very fast and efficient way to reallyget the brand out to consumers across the country. The renewed "fro-yo" enthusiasm isa re-invention of the frozen-dessert category that is being driven by the consumer. Wedon'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 backsignificantly to its more than 600 locations. "Around three to four years ago, competitionin the frozen yogurt market really started heating up," said Greg Allison, TCBY's seniordirector of marketing, insights and innovation.

Adapted from CNBC, 23 March 2012

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

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 tosteal market share.from.FreshBerry as well as from established shops like Dairy eueen,Armadillo's, Culveds ard Cold Stone Creamery.

ili^tr:iilit3to be taken to

rrom a bank or serr-serve machines.'#:it:3 i',?,lno?n!ilt;#"1,.l:["'[:L:".",:#iilXtopping bar, including fresh fruit, cereal, ihocolate chips, nuts and coconut. Then, theypay by the gram for the total weight of their creation.

Questions

(a) (i)

(ii)

(b)

(i)

(ii)

(c)

(d)

(i)

(ii)

Adapted from Rapid City Joumal, 8 Juty 2012

with reference to Table 1, describe the trend of (per capita) t1lconsumption of frozen yogurt in the U.S. between 2000 and 200g.'Explain, with reference to the extracts, whether or not you would I2lexpect the observed trend in (a)(i) to continue into 2012.with reference to the extracts, examine the possible values ofthe price elasticity of demand for Let's yO! yogurt t3lthe income elasticity of demand for frozen yogurt. t3lldentify the type of market structure operating in the U.s. frozen t3lyogurt industry. Justify your answer.From Extract 2,"The number of stores is anticipated to shrink starting in 2015, as themarket for frozen yogurt becomes overly saturated and small playersstruggle to remain open. Larger operations will survive, whileunprofitable ones will likely consolidate operations or exit the industryaltogethe/'

Discuss the likely impact of the above on society. tglAssuming that you are the marketing manager of Red Mango, discuss t10lthe strategies that will help Red Mango compete in the frozen yogurtmarket.

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 thanthey solve."

Using examples, assess whether governments should intervene in a l25lmarket.

End of paper