Assessment Task 3: Case Analyses

QUESTION 1

High-performance cars (HPCs) are automobiles with engines that generate great power relative to their weight. They boast high acceleration, speed, cornering and braking performance. But they obviously come with a very high price tag. Some people even buy them to publicly display their wealth. The Singapore economy has grown rapidly between the 1960s and 2018 with rising incomes across the island. Examine the likely consequences of rising
incomes on the Singapore HPC market and one or two related markets.

QUESTION 2

The speed limit on Singapore roads, even expressways, never exceeds 90 kmh, much less than the top speed of HPCs. But there is a road racing culture where individuals perform stunts and races on public roads, far exceeding speed limits. What, if anything should government do about the HPC market? Should such cars be banned outright? What would be the problems with such interventions?

QUESTION 3

The car industry is characterised by heavy research and development activity. This activity has a high fixed cost and can only be undertaken by large firms with significant monopoly power. Sometimes the innovations of the car industry spill over into other industries. There is also a great deal of product differentiation, with certain brands enjoying reputation and loyalty. What are the likely effects of these aspects of the industry on the market structure for HPCs? Examine this industry using the theory and models of industry structure. Should government be worried about any aspect of how an industry with this market structure will perform?

QUESTION 4

BMW is one of the world’s best known HPC manufacturers. Developing new cars is a costly, uncertain and complex process. This company would need to consider which parts of the vertical chain to outsource and which to conduct inhouse. Using the theory of the optimal boundary of the firm, discuss BMW’s make-or-buy decision for developing and producing a HPC. What stages of the vertical chain should BMW consider conducting inhouse, and which should be outsourced? Provide reasons for your findings.

QUESTION 5

Consider the following hypothetical case. Only BMW and a competitor, Mazda, are considering launching a new, niche HPC in the Asian market. The issue is what price to charge. Both new cars are very similar in performance and production cost. Analyse the interaction between the two firms using game theory. Present a payoff matrix to model the situation and analyse it for Nash equilibrium. What can either of these firms do to make their best, most-preferred outcome more likely?