| Flipped Economics |
Name
Answer all questions. For questions 1 to 12, circle one letter.
A coffee shop chain opens twenty new branches using its retained profit. This is an example of:
| A conglomerate integration | B horizontal integration |
| C organic growth | D forward vertical integration |
Which one of the following is an example of backward vertical integration?
A a car maker buys a battery factory that supplies it
B a car maker buys a rival car maker with factories in the same country
C a car maker buys a chain of car dealerships
D a car maker buys a hotel group
A brewery buys a chain of pubs. The most likely motive is to:
A achieve technical economies of scale in brewing
B spread risk across unrelated markets
C reduce its dependence on a single supplier of hops and malt
D secure outlets for its beer and control how it is sold
The main advantage to a firm of conglomerate integration is:
A control over the supply of raw materials
B reduced risk, as losses in one market may be offset by profits in another
C lower average costs from a larger scale of production in one product
D a larger share of a single market
Before a merger, the four largest firms in a market have shares of 30%, 25%, 15% and 10%, with the rest spread among small firms. The second and fourth largest merge. The three-firm concentration ratio after the merger is:
| A 80% | B 75% |
| C 70% | D 65% |
Which one of the following best explains why many firms remain small?
A governments ban firms from growing beyond a certain size
B small firms always have lower average costs than large firms because they are easier to manage
C they serve a niche market with too little demand for large-scale production
D small firms cannot borrow money at all
A firm's average cost falls from £50 to £40 per unit after a merger doubles its output. The percentage fall in average cost is:
| A 25% | B 20% |
| C 10% | D 80% |
| Flipped Economics |
One disadvantage of growth by takeover compared with organic growth is that:
A it is always slower than opening new branches one at a time
B it cannot be financed by borrowing
C it never increases market share
D different company cultures and systems may be hard to combine
A large company splits off one of its divisions into a separate business with its own shares. This is a:
| A demerger | B hostile takeover |
| C management buy-in | D horizontal merger |
The divorce of ownership from control in a large public limited company most directly creates:
A a natural monopoly
B a principal-agent problem, as managers may pursue objectives other than profit
C diseconomies of scale
D a contestable market
A bidder offers £6.00 a share for a company whose shares were trading at £4.80. The premium offered is:
| A 20% | B 1.2% |
| C 12% | D 25% |
A merger between two firms at the same stage of production in the same industry is most likely to raise concern about:
A a fall in the firm's market share
B the loss of control over suppliers
C increased market power and higher prices for consumers
D the firm becoming too diversified to manage effectively
In 2024 the Competition and Markets Authority approved the merger of Vodafone UK and Three UK, cutting the number of mobile network operators from four to three. The companies argued that neither could afford to build a full 5G network alone and promised to invest £11 billion over eight years; the CMA attached conditions, including caps on some tariffs for three years. Each network operator also sells capacity to 'virtual' operators such as Tesco Mobile and giffgaff, which have no masts of their own. Table 1 shows illustrative figures for the operators.
| EE (BT) | O2 | Vodafone | Three | |
|---|---|---|---|---|
| Share of customers | 28% | 25% | 19% | 14% |
| Average cost per customer, £ a year | 190 | 200 | 230 | 260 |
| Using Table 1, calculate the three-firm concentration ratio before and after the merger. | [2] |
| Flipped Economics |
| Identify the type of integration involved in the merger and explain one reason why the two companies wanted it. | [4] |
| With the aid of a diagram, explain how a merger that lowers average costs could still leave consumers worse off. | [6] |
| Flipped Economics |
| Explain two reasons why a merger of this kind might fail to deliver the benefits the companies expect. | [6] |
| Evaluate the view that growth by merger and takeover benefits the owners of firms more than it benefits consumers. | [20] |
Answer on lined paper.
| Lessons, retrieval and more questions on this topic flippedeconomics.com/t/the-growth-of-firms |
| Flipped Economics |
AO1 knowledge, AO2 application, AO3 analysis, AO4 evaluation.
| Answer | Why | |
|---|---|---|
| 1 | C | Growth from within, by expanding the firm's own capacity, is organic (internal) growth; integration means joining with another firm. |
| 2 | A | Backward integration is a move towards the source of supply, earlier in the production chain. |
| 3 | D | Forward vertical integration gives a firm control of the distribution and retail of its own product. |
| 4 | B | Diversification into unrelated markets spreads risk; it offers few economies of scale because the products share little. |
| 5 | A | After the merger the shares are 35%, 30% and 15%: the three largest sum to 80%, up from 70%. |
| 6 | C | Where the market is small or personal service matters (a local plumber, a specialist bookshop), there is no scale to exploit and the owner may prefer to stay in control. |
| 7 | B | (50 − 40) ÷ 50 = 0.2, a 20% fall; 25% would be the rise measured the other way round. |
| 8 | D | Takeovers are fast but integration problems, clashes of management and overpaying for the target are the common causes of failure. |
| 9 | A | A demerger breaks a firm into separate companies, often to focus on the core business or because the parts are worth more apart. |
| 10 | B | Shareholders (principals) cannot fully monitor managers (agents), who may prefer growth, size or an easy life to maximum profit. |
| 11 | D | (6.00 − 4.80) ÷ 4.80 = 0.25, a 25% premium over the market price. |
| 12 | C | Horizontal mergers reduce the number of competitors and raise concentration, which is what competition authorities examine. |
13 (a) Using Table 1, calculate the three-firm concentration ratio before and after the merger. [2: AO2 2]
| Flipped Economics |
13 (b) Identify the type of integration involved in the merger and explain one reason why the two companies wanted it. [4: AO1 2, AO2 1, AO3 1]
13 (c) With the aid of a diagram, explain how a merger that lowers average costs could still leave consumers worse off. [6: AO1 2, AO2 1, AO3 3]
Levels: 1 to 2 for a description with a partly correct diagram; 3 to 4 for a correct diagram with the price effect explained; 5 to 6 for the cost saving and welfare loss compared and applied to the merger.
| Flipped Economics |
13 (d) Explain two reasons why a merger of this kind might fail to deliver the benefits the companies expect. [6: AO1 2, AO2 2, AO3 2]
Maximum 6: two reasons, each explained and applied to mobile networks.
14 Evaluate the view that growth by merger and takeover benefits the owners of firms more than it benefits consumers. [20: AO1 6, AO3 6, AO4 8]
| Flipped Economics |
A supported judgement might conclude that the view holds for horizontal mergers in concentrated markets without effective competition policy, where market power lets owners capture both the cost savings and a transfer from consumers; but that in competitive or well-regulated markets, and for mergers that fund investment, consumers share the gains, and since many mergers fail even for owners the outcome depends more on the market and the regulator than on the fact of the merger.
Bands, out of 20 (AO1 knowledge 6, AO3 analysis 6, AO4 evaluation 8, as WJEC marks a 20-mark question). Top band (16 to 20): a range of points developed in full chains of reasoning, supported by an accurate diagram and real examples, with evaluation that weighs the arguments and reaches a judgement that depends on stated conditions. Middle band (9 to 15): some developed chains, a relevant diagram, evaluation present but one-sided or asserted. Bottom band (1 to 8): points listed or described, little use of theory or examples, judgement missing or unsupported.
AQA: Question 14 would be a 25-mark question on your papers.
Edexcel: Question 14 would be a 25-mark question on your papers.
OCR: Question 14 would be a 25-mark question on your papers.