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6 (a) With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains - Edexcel - A-Level Economics A - Question 6 - 2022 - Paper 1
Question 6
6 (a) With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains. (b) With reference to Figure 2 and your understanding... show full transcript
Worked Solution & Example Answer:6 (a) With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains - Edexcel - A-Level Economics A - Question 6 - 2022 - Paper 1
Step 1
With reference to Figure 1, calculate the three-firm concentration ratio for branded coffee shop chains.
Answer
To calculate the three-firm concentration ratio (CR3), we first identify the top three coffee shop chains in the UK based on the number of shops from Figure 1:
- Costa: 2681 shops
- Starbucks: 1025 shops
- Caffè Nero: 648 shops
Next, we sum the number of shops for these three chains:
Now, to find the total number of shops in the market, we sum all shops from all chains:
- Costa: 2681
- Starbucks: 1025
- Caffè Nero: 648
- AMT: 50
- Soho Coffee: 40
- Coffee Republic: 30
- Other chains: 3740
Total shops =
Finally, the concentration ratio is calculated as follows:
This indicates a very high level of market concentration among the top three chains.
Step 2
With reference to Figure 2 and your understanding of price elasticity, examine two factors that may cause significant changes in the international price of coffee beans.
Answer
Two factors that may cause significant changes in the international price of coffee beans include:
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Supply Chain Disruptions: Events such as natural disasters or political instability in coffee-producing countries can significantly reduce the supply of coffee beans. A decreased supply with steady demand leads to higher prices due to scarcity. For example, if there were a drought affecting Brazil, a major coffee producer, it could lead to a sharp increase in prices as shown in Figure 2.
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Changes in Demand: Market demand can fluctuate based on consumer preferences or global economic conditions. An increase in popularity of coffee consumption, or changes in consumer behavior, such as a trend favoring specialty coffees, can lead to higher demand. When demand increases while supply remains constant, prices are likely to rise significantly.
Step 3
With reference to Extract A, assess whether profit maximization is the case for coffee shops.
Answer
While profit maximization is often seen as the primary objective for businesses, the case for coffee shops may differ:
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Quality over Profit: According to Extract A, coffee shops might prioritize quality and customer experience over sheer profit maximization. This could be seen in strategies to improve service and product offerings instead of solely focusing on maximizing revenue.
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Market Positioning: The take-over of Costa Coffee by Coca-Cola emphasizes a focus on long-term value creation rather than short-term profits. Independent coffee shops may operate with an emphasis on community engagement, which might not always align with traditional profit maximization strategies.
Thus, while profit remains important, there is a significant suggestion that coffee shops aim for a balance between profitability and quality.
Step 4
With reference to Extract B, evaluate the degree to which coffee shop chains can achieve a competitive advantage through customer experience.
Answer
Customer experience is a critical factor in determining competitive advantage, as outlined in Extract B:
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Investing in Experience: Greggs' strategic shift to enhance coffee shop seating and the overall experience demonstrates the value coffee chains place on customer satisfaction. Such investments can help build brand loyalty and repeat business, giving them an edge in a competitive market.
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Response to Trends: By adapting their offerings to cater to consumer preferences, such as gluten-free options, as stated in the extract, coffee shop chains can attract a broader customer base and differentiate themselves from competitors.
In conclusion, while customer experience is a substantial avenue for competitive advantage, its effectiveness depends on how well the chains can integrate quality, convenience, and innovation into the overall customer journey.