Microeconomics · Hard · 18 marks
EO past paper: 2026 International Final, Microeconomics paper
FRQ Scenario 1. Supermarket Oligopoly
The Mergers and Monopolies Commission of the country of Tarauslia investigated the supermarket sector of the country, revealing that the market share of the supermarkets in the country changed considerably between 2014 and 2024.
Market share (%) 2014 2024 The Duper Market 42 62 Eat and Drink 33 38 Fond Joe’s 20 0 Little local 5 0 Total 100 % 100 % \begin{array}{lrr} \text{Market share (\%)} & \text{2014} & \text{2024} \\ \hline \text{The Duper Market} & 42 & 62 \\ \text{Eat and Drink} & 33 & 38 \\ \text{Fond Joe's} & 20 & 0 \\ \text{Little local} & 5 & 0 \\ \hline \text{Total} & 100\% & 100\% \end{array} Market share (%) The Duper Market Eat and Drink Fond Joe’s Little local Total 2014 42 33 20 5 100% 2024 62 38 0 0 100%
(a) Calculate the two-firm concentration ratio (CR₂) for 2014 and 2024. Show your calculations. [1] mark (b) Calculate the Herfindahl-Hirschman Index (HHI) for 2014 and 2024, then calculate the change in the HHI between the two years. Show your calculations. [2] marks (c) Using your answers from parts (a) and (b), explain how market concentration and market power changed between 2014 and 2024. [3] marks (d) Define contestability. If Tarauslia's supermarket industry were highly contestable in 2024, explain what this suggests about the ability of Duper Market and Eat and Drink to abuse their market power. [3] marks (e) Additional information: The Mergers and Monopolies Commission concludes that Duper Market and Eat and Drink are colluding. The firms have increased prices by a much greater percentage than supermarkets in other countries facing similar production costs and market conditions.
True or False: Firms in a collusive oligopoly maximize individual firm profits. Explain your answer. [1] mark (f) Draw a fully labelled diagram of a collusive oligopoly, indicating joint profit-maximizing price, output, and economic profit area. (Type your answer: describe the diagram in words, naming the axes, curves, shifts and areas.) [4] marks (g) Recommend two policies the Mergers and Monopolies Commission could use to reduce the abuse of market power in this industry. Explain how each policy would improve competition and total welfare. [4] marks
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