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No.

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Paper Reference (complete below)

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Candidate No.

Examiners use only

Paper Reference(s)

6354

Edexcel GCE

Team Leaders use only

Economics
Advanced
Unit 4 Industrial Economics
Monday 26 January 2004 Afternoon
Time: 1 hour 15 minutes
Materials required for examination
Answer book (AB8)

Items included with question papers

Nil

Question
Number

Leave
Blank

Section
A

11
12

Instructions to Candidates
In the boxes above, write your centre number and candidate number, your surname, initial(s) and
signature.
The paper reference is shown at the top of this page. Check that you have the correct question paper
and write the paper reference for which you have been entered.
Answer ALL questions in Section A in the spaces provided in this question paper.
For each question there are five suggested answers: A, B, C,D or E.
When you have selected your answer to the question, write the chosen letter in the box provided.
You can only offer one answer to each question.
After making your selection you should offer an explanation of why you have made that choice
Your explanation may include a diagram.
Answer ONE question from Section B in the answer book provided.
Additional answer sheets may be used.

Information for Candidates

There are 16 pages in this question paper. All blank pages are indicated.
The total mark for this paper is 80. The marks for the various parts of questions are shown in round
brackets: e.g. (2).

Advice to Candidates
You are advised to divide your time equally between Section A and Section B.
You must ensure that your answers to parts of questions are clearly numbered.
You will be assessed on your ability to organise and present information, ideas, descriptions and
arguments clearly and logically, taking into account your use of grammar, punctuation and spelling.
Printers Log. No.

P17538B
W850/S6354/57570 8/8/8/3/

*P17538B*

*P17538A*

This publication may only be reproduced in accordance with Edexcel copyright policy. Edexcel Foundation is a registered charity. 2004 Edexcel

Total

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SECTION A
Answer ALL questions in this Section.
You are advised to spend approximately 35 minutes on this Section.
You are encouraged to use a diagram in your explanation where appropriate.
1.

The following chart shows percentage market shares in the mobile phone market in 2001.

One-to-One
One-to-One
22% 22%

Orange

Orange
28%
28%

Vodafone
Vodaphone
24% 24%

BT Cellnet
BT
Cellnet
26%
26%

Which of the following statements is true for this market?

A

The market is nearly perfectly competitive because each firm has nearly equal market
share.

The market is characterised by monopolistic competition because each firm produces

mobile phones with different characteristics.

The market has a high concentration ratio.

The market is perfectly contestable.

Tacit collusion is unlikely in this industry.

Answer
(1)
Explanation
............................................................................................................................................
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............................................................................................................................................
............................................................................................................................................
(3)
(Total 4 marks)

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Q1

2.

An advantage of using the RPI minus X method of regulating a privatised monopoly is that
it allows the firm to
A

raise prices by less than mortgage interest payments

keep supernormal profit achieved by additional efficiency improvements

raise the prices of goods the firm does not export

make only normal profit

do no more than break-even.

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Answer
(1)
Explanation
............................................................................................................................................
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............................................................................................................................................
............................................................................................................................................

(3)
(Total 4 marks)
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Q2

3.

Which of the following characteristics will hold for a firm in long run equilibrium under
monopolistic competition?
Efficiency

Profit

Allocatively efficient

Normal

Allocatively inefficient

Supernormal

Productively efficient

Normal

Productively efficient

Supernormal

Productively inefficient

Normal

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Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
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Q3

4.

Leave
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The diagram below shows a firm producing at output Q1.

AC

MC
AR=MR

Q1

Output

Which of the following applies to such a firm?

Market Structure

Profit

Perfect Competition

Normal

Perfect Competition

Supernormal

Monopoly

Normal

Monopolistic Competition

Normal

Monopolistic Competition

Supernormal

Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
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Q4

5.

A profit-maximising monopolist experiences an increase in demand. If the firm faces

constant average costs, this will lead to
A

lower output and lower supernormal profit

higher output and lower supernormal profit

lower output and higher supernormal profit

higher output and higher supernormal profit

output and supernormal profit remain unchanged.

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Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
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Q5

6.

In which of the following is the practice of price discrimination least likely to be possible?
A

Sales of milk in supermarkets.

Airline travel.

Railway travel.

Surgical operations paid for outside the NHS.

Sales of cars in European countries.

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Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
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Q6

7.

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A firm producing hand-built sports cars faces the following costs:

Total Output of Cars
100
101
102

Total Costs
800,000
806,000
813,000

The data illustrate that

A

if marginal costs are rising they must be above average costs

average costs are equal to marginal cost at the minimum of marginal cost

if marginal costs are rising they may be below average costs

for this firm, marginal cost is falling over the indicated range of output

for this firm, average costs are rising over the indicated range of output.

Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
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Q7

8.

The 1998 Competition Act gives the Office of Fair Trading the power to fine firms up to 10%
of annual turnover if they abuse a dominant market position. Which of the following actions
by the directors of a company would be against the public interest and therefore be likely to
attract such a fine?
A

The pursuit of socially responsible objectives.

The adoption of allocatively efficient pricing policies.

Causing unemployment by closing a factory as a cost-cutting measure.

Focusing on increasing sales in the European market.

Forming price fixing agreements with other firms.

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Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
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Q8

9.

A monopoly decides to switch from an objective of revenue maximisation to one of profit

maximisation. Which one of the following will result from such a change of objective?
Price

Output

Higher

Higher

Higher

Lower

Lower

Higher

Lower

Lower

Higher

Unchanged

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Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
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Q9

10. Many consumers buy chocolate confectionery on impulse. Effective branding to make
products instantly recognisable is therefore essential. This suggests that chocolate
confectionery markets are likely to be characterised by
A

low levels of contestability

low levels of market concentration

low levels of advertising

high levels of hit and run entry into the market

high levels of failure of established products.

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Answer
(1)
Explanation
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................
...................................................................................................................................................

(3)
(Total 4 marks)
TOTAL FOR SECTION A: 40 MARKS
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Q10

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SECTION B
Answer EITHER Question 11 or Question 12.
You are advised to spend approximately 35 minutes on this Section.
Question 11.
The UK Ice-Cream Industry
James Lambert has always been a risk taker. If his latest and biggest gamble pays off,
Richmond Foods, the ice-cream company he runs, could overtake Walls as the UKs market
leader in sales terms in the 1bn a year sector in a few years time.
In October 2001 Richmond paid nearly 10m to buy Nestls ice-cream brands in the UK.
Richmonds move was a bold one. The Nestl business was losing more than Richmond was 5
making. But recent figures show that the deal appears to be paying off, with analysts
forecasting profits of 8m for the current year.
The strategy behind the acquisition involved closing Nestls factory in Telford and moving
production to Richmonds expanded and state-of-the-art plant in Leeming Bar, North
Yorkshire. This required considerable capital expenditure but gave Richmond significant 10
economies of scale the Leeming Bar factory is now the largest ice-cream plant by volume
in Europe.
The Nestl deal gives Richmond a wealth of brand names. As well as well-known ice-cream
brands such as Fab, Zoom, Mivvi and Orange Maid, it allows Richmond to develop icecreams based on Nestls confectionery brands. Richmond pays Nestl a percentage of its 15
sales for the use of the brand.
In return Richmond benefits from the huge marketing budget Nestl puts behind its
confectionery brands. This can run into tens of millions of pounds for one new product
launch. Children can already enjoy Smarties pop-up ice-creams, Rowntrees fruit pastille
20
lollies and tubs of Rolo ice-cream.
Mr. Lambert is confident that with new products providing organic growth, and the
production efficiencies coming through, Richmond can achieve his goal of overtaking Walls.
(Source: adapted from The Financial Times, 13th August 2002)
Figure 1
TheImpulse
impulseIce-Cream
Ice-CreamMarket
Market Before
before
The
Richmonds
acquisition
of
Nestls
Richmond's Acquisition of Nestl's
brands
brands

% Market Sales

70
60
50
40
30
20
10
0
Birds Eye
Wall's

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Mars

12

Nestl

Others

(a) (i) With reference to the passage, identify the type of integration involved in
Richmond Foods acquisition of Nestls ice-cream brands.
(4)

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(ii) Evaluate this method of growth for Richmond Foods.

(6)
(b) Explain why Richmond Foods might experience lower average costs by concentrating
production at the Leeming Bar plant.
(6)
(c) With reference to Figure 1:
(i) identify the market structure of the impulse ice-cream market, justifying your
answer.
(4)
(ii) assess the likelihood of price competition in this industry.
(10)
(d) Assess the significance of barriers to entry to potential new firms in this industry.
(10)
(Total 40 marks)

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Q11

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Question 12.
Competition Commission ruling on the provision of food services on trains
In early 2002, Compass Group plc acquired Rail Gourmet UK, a supplier of food services on
trains. This was referred to the Competition Commission for investigation.
Food services on trains involve getting food and drink on to trains and then selling it to
customers, either as restaurant meals or as buffet and trolley services. Train operating
companies negotiate food contracts with on-train service providers individually. Since the 5
privatisation of the railways, Rail Gourmet UK had achieved about 80% of the market. At the
time of the acquisition, Compass had only 3% of the market: a small contract with Scotrail
and the supply of on-board catering services to Eurostar.
The inquiry focused on whether the acquisition would create any barriers to entry for a
competitor wishing to provide on-train food services. It found that there had been a number 10
of new entrants to provide trolley services on trains in recent years. This is significant given
the potentially adverse consequences for efficiency of the local monopoly enjoyed by on-train
food providers. However, the enquiry found less evidence of competition to provide buffet
and restaurant-car services.
Compass Group controls about 62% of the supply of food on railway stations under a variety 15
of brand names. However, the product ranges for on-train and on-station food only overlap to
a limited extent and the enquiry considered that this was unlikely to be detrimental to
competition.
The Competition Commission concluded that the acquisition by Compass Group of Rail
20
Gourmet does not operate against the public interest.
(Source: adapted from www.competition-commission.org.uk)
(a) (i) With reference to the passage, explain why the acquisition of Rail Gourmet
UK by Compass Group was eligible for referral to the Competition Commission.
(4)
(ii) Examine two possible motives for Compass Groups acquisition of Rail
Gourmet UK.
(8)
(b) There have been a number of new entrants to provide trolley services on trains but not
to provide restaurant-car and buffet services. Examine two possible reasons for this.
(10)
(c) Illustrating your answer from the passage or from other material, explain the role of the
public interest criterion in UK merger investigations.
(8)
(d) Illustrating your answer with a diagram, assess the likely effect on two kinds of
economic efficiency of the local monopoly enjoyed by on-train food providers (line 12).
(10)
(Total 40 marks)
TOTAL FOR SECTION B: 40 MARKS
END
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Q12

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