Presented to:

Dr/ Ahmed Mabrouk

Prepared by:
1-May Sabry Emira
2- Yomna Yousry
3-Ahmed Yousry
4-Ahmed Mostafa

2016
Contents
1. WATER................................................................................................................................................3
2- STARHUB CASE.............................................................................................................................5
3- ELECTRICITY..................................................................................................................................8
4-CHINA'S POWER SHORTAGE.................................................................................................10
5- CITI-GROUP...................................................................................................................................12
1. WATER

(a) How do you expect the price-elasticity of the demand for water to vary with the total
annual consumption of the household?

 price elasticity of demand for water is -0.20 to -0.40.

 This means that the elasticity of demand is relatively inelastic.
 in monopoly when we produce at higher quantity elasticity decrease and when we
produce at lower quantity (conservation) elasticity will increase

(b) Who benefit relatively more from a flat fee? Poor or rich households?

I think rich house hold

Because rich households expected to have more water consumption so if both (poor & rich) pay
the same fee rich will benefit more, but when we relate fees to consumption I think rich will pay
more even it’s decreasing unit prices

(c) Considering that a large proportion of residential users face a flat fee or even
decreasing unit prices, do you think that the price elasticity of residential demand is under
or over estimated?

The price elasticity of water is nearly realistic:

Because price elasticity of water demand is relatively inelastic ,as water has no substitutes so it’s
expected to have EP range from 0 to 1 which is estimated

Also industrial sector can conserve water by using other substitute or techniques to reduce cost
of water when price increased so EP value expected to be slightly more than residential which
is the case.
(d) What are the implications of your answer in (c) for raising the prices as conservation
policy?
1- raising the price will lead to a decrease inthe consumption with a lower –but considerable-
rate.
2- the total revenues will increase.
3- water suppliers should apply volume based pricing policy
2- STARHUB CASE

A. Identify changes in demand and costs (fixed and marginal costs relative to the number
of subscribers) arising from StarHub’s acquisition of the EPL rights.

1- The demand for StarHub cable TV raised as the subscriber base has shown an increase by 4%
and reached to 504,000 customers at the end of December 2007.
Because the market transferred to monopoly and star hub broadcast EPL exclusively

2- The fixed cost would increase be US$160 Millionwhich was paid by StarHub initially to win
the bid to broadcast EPL forSingapore.

3- marginal cost for each additional unit (subscriber) will decrease after acquisition . as they
don’t have to pay additional cost of royalty any more.

B. Which of the changes in(a) would be relevant to StarHub’s pricing of cable TV services?
- Additional 160 million of fixed cost is the most relevant because starhub raised its prices
to cover this additional fixed cost and to achieve profit from becoming monopoly .
- Also reducing marginal cost by removing royalty costs helped starhub to set suitable
price and to achieve more profits.

C. Do you think that, prior to the 2007 price increases, StarHub’s prices had maximized
profits?
No.
 Before 2007 , demand on starhub was lower and marginal cost was higher than after they
acquire EPL So prices hadn’t maximized profits.
 After acquistion demand increased and marginal cost decreased and they become
monopoly and price setter so ARPU increased by 6%. And they can compensate
160million by increasing number of subscribers.
D. From the view point of a content provider like ESPN which receives a per- customer
royalty from a cable TV operator, explain the moral hazard to which the cable TV
operator is subject.

Moral Hazard problem occurs in situations where one party is ready to take more risk as the
burden of that risk falls on the other party. In the above case, the moral hazard problem would be
faced by the cable TV operator because ESPN is sponsored by the cable TV operator by paying
the channel per customer royalty. Therefore, in case if there is any problem faced by the viewers
of ESPN channel, then it would be the responsibility of the cable TV operator to resolve that
issue as customers would complain to the cable TV operators only and not to the ESPN channel
provider.

E. From the viewpoint of EPL, explain how a lump-sum bid would resolve asymmetry of
information between EPL and cable TV operators.

Usually asymmetry of information arises when one party has better or more Timely information
than the other party in a transaction.

In the above case, asymmetry of information between EPL and cable TV Operators arises
because cable TV operators were under impression of higher Profits to be earned once they win
the bid but sometime the exact number of Current and expected cable TV operators subscribers
is unknown for EPL During the transaction, which makes the monthly or annually royalty fee
risky for EPL.

Also, StarHub is able to create an EPL monopoly in Singapore after the bid as the only cable
operator, and EPL has a lack of information during transaction about the way StarHub will
control the issue and the possible changes in cable TV operators in Singapore in the near future.
So from the viewpoint of EPL, the agreed on huge lump-sum bid helped EPL to solve that
asymmetry and have a good profit ahead.
At the same time, StarHub made a very smart move by unbundling the entire cable package into
sports and basic package so that higher prices would be paid by only the sports lovers. Therefore,
rise in the prices of sports channel will not lead to fall in the total revenue as the price elasticity
of demand of sports channel will be very low. Winning the bid allowed Starhub to create market
power so that it would be able to earn higher profits at the same marginal cost.
3- ELECTRICITY

1. Explain how the impact of a price increase on electricity consumption depends on the
price elasticity of demand?

The degree to which quantity demanded changes with changes in price,

depends onthe price elasticity of demand
Since the electricity market actually has inelastic demand, an increase in the price of electricity
would result in a proportionately smaller decrease in the quantity demanded.
So, if elasticity is 0.45 that means that if the price doubled consumption will decrease by 45%

2. The price elasticity of the Indian demand for electricity has been estimated to be -0.65
among residential users and -0.45 among industrial users. If these elasticity apply to China
as well, how will the impact of a price increase be spread between residential as compared
with industrial users?

Industrial users are less likely to change their electricity usage than residentialusers. So elasticity
is lower in case of industrial users if price increased by 10%
 resdintial consumption will decrease by 6.5 %
 industrial consumption will decrease by 4.5 %
so Industrial users would bear more of the burden of a price increase due to their lower price
elasticity .

3. Many Chinese organizations ignore the market system. For instance, they borrow money
from banks and refuse to repay, thus creating “bad debts” for lenders. Likewise, they
might consume electricity without bothering topay the power supplier. Do such
organizations cause the demand for electricity to be more or less price elastic?
When organizations refuse to pay loans or their power bills, this will cause theprice elasticity of
demand for electricity to be less elastic. As they don’t care about the price change so their
consumption will not change due to price change
4. a-How does the contract price of thermal coal affect an electric power plant's marginal
cost?

When contract prices are set for thermal coal, then the variable costs for the electric power plants
will decrease. This is because thermal coal is an input in producing electricity then, the marginal
cost will decrease with contract pricing because decreased input costs will result in lower
average total cost.

b-If the contract price were raised to 99% of the spot market price,
how would that affect the electric power plant’s?

If the contract price for thermal coal increases to 99% of the market price, then the marginal cost
of electricity production would increase. This would shift the power plant's supply curve to the
left. Using marginal cost pricing, the government would need to increase the price to equal the
new marginal cost and avoid a power shortage.
4-CHINA'S POWER SHORTAGE

(1)Explain how the impact of a price increase on electricity consumption depends on the
price elasticity of demand?

- If was there increasing on electricity consumption and the demand was Inelastic: The
increasing in the price of electricity will cause to decreasing in the quantity but a less than the
increasing on electricity consumption

-If was there increasing on electricity consumption and the demand was Elastic: The increasing
in the price of electricity will cause to decrease in the quantity buta greater
proportion of the increasing on electricity consumption.

2. The price elasticity of the Indian demand for electricity has beenestimated to be -0.65
among residential users and -0.45 amongindustrial users. If these elasticity apply to China
as well, how willthe impact of a price increase be spread between residential ascompared
with industrial users?
- The residential users have higher susceptibility to change. Because increase price elasticity.
- The industrial users have less susceptibility to change. Because decrease price elasticity.

(3)Many Chinese organizations ignore the market system. Forinstance, they borrow money
from banks and refuse to repay, thus creating “bad debts” for lenders. Likewise, they
might consume electricity without bothering to pay the power supplier. Do such
Organizations cause the demand for electricity to be more or lessprice elastic?
- They borrow money from banks and refuse to repay, thus Creating “bad debts” for
lenders.

So the price elasticity of demand for electricity will decreasing.

 (4)- (A) How does the contract price of thermal coal affect an electric power plant's
marginal cost?

-Chinese government depend on the thermal coal to produces the electricity so:

-when the Government set the price .the VC will decrease. Will lead to decrease MC.

(B)
If the contract price were raised to 99% of the spot market price, how would that
affect the electric power plants?

- The MC will increase

- When the price increased to be 99% as a contract price .the government must increase the
market price :
- New price must be = new MC
- To avoid any shortage might appear.
5- CITI-GROUP

Introduction:

 Citi was incorporated in 1988.

 Citi is a diversified global financial institution.
 Citi is the first financial services company in the U.S. to bring together banking,
insurance, and investments under one umbrella.
 It provides a broad range of financial products and services to consumers and corporate
customers globally.
 Citi has the world's largest financial services network.
 Its business covers 107 countries with approximately 2,000 offices in the world.


Citigroup Chairman and CEO Sanford “Sandy” Weill reflected on a long, successful career in
which he built one of the built one of the largest and most profitable financial service
companies in the world. His strategy had always been growth through acquisition, consistently
increasing his firm’s size, product scope, and geographic range. But now he wondered: Should
he continue to expand, or should he follow the lead of many of his competitors and focus on
Citigroup’s most successful businesses?
 (a) What are Citigroup’s major businesses? Does large scale help it in some businesses? Does
small scale hurt in others? In what businesses has a broad range of products been helpful?

ach to 2001 “core income.” Global Consumer contributed half of 2001 core income. It includes
credit cards, retail banking services, mortgages, and life insurance. The credit card unit has a
dominant 18% market share in the US and generated 15% of core income in 2001. Card
penetration is lower outside North America, but Citigroup has a strong presence in Europe,
Japan, and the emerging markets (>10% market shares in Argentina and Brazil, >20% in India
and Indonesia, and >30% in Poland). Citigroup’s retail banking business is smaller, although it
has strong positions in some markets. For example, it has 2.7% of US deposits , but 12.8% of the
New York/New Jersey/Connecticut region. Similarly, the 2001 Banamex acquisition makes it the
largest bank in Mexico. Citigroup reports that it has the largest consumer finance business
globally. CitiFinancial is the leading sub-prime lender in the US, and Citigroup has substantial
and growing consumer finance businesses in Japan, Europe, and the emerging markets.
Citigroup is also a substantial player, but not a dominant one, in the US retail insurance market
through Primerica Financial Services (primarily term life) and Personal Lines (property and
casualty for individuals).

Global Corporate contributed 40% of 2001 core income, two-thirds from the Corporate and
Investment Bank

. It covers the complete range of investment banking services: debt and equity underwriting,
mergers and acquisitions advisory, brokerage, leasing, syndicated lending, structured products,
trading, foreign exchange, and so on. In the years since the merger, there has been substantial
progress in mainstream investment banking, with market share increasing from about 7% in
1998 to over 10% in 2001. The 2001 global league tables are reported in Exhibit 5. The
brokerage network is the second largest in the US, with 13,000 “financial consultants” in more
than 500 offices.
Global Transactions Services facilitates international trade and processes transactions for
corporate clients worldwide. Commercial Lines, the last line item under Global Corporate, is a
commercial property and casualty insurance business.

Global Investment Management & Private Banking contributed 10% of 2001 core income.
Travelers Life & Annuity underwrites life insurance and annuities, which are sold through
several of Citigroup’s distribution channels. The private bank provides financial services to high
net worth customers worldwide. In the US, Citigroup ranked 11th, well behind market leader
Merrill Lynch The asset management groups manage mutual funds, managed accounts, unit
trusts, annuities, and other products.

(b) Has Citigroup’s success to date reflected economies of scale and scope or some other kind
of “Sandy magic”?

the strategy remained similar to that announced at the merger (large scale, broad scope), with
perhaps greater emphasis on distribution. Weill’s letter to shareholders in the 2001 Annual
Report comments: “We have played a lead role in defining the concept of a fully diversified
financial services firm. … We have built distribution channels to every consumer wealth
segment. … In a world where value is migrating from manufacturing to distribution, and where
open architecture is becoming mainstream, our strategy has positioned us favorably to provide
multiple services to customers around the world.” There was even some evidence of successful
cross-selling, with the company reporting a doubling of cross-marketing revenues between
1998 and 2001. In addition to the scale and scope of its distribution network, the company
stressed expense discipline, acquisitions expertise, and risk management.
(c) If economies of scale and scope are important in this industry, why haven’t more firms
followed Citigroup’s strategy?

Benefits from economies of scale can be seen in the management of a company’s information
flow. The management of information is a costly undertaking. The larger the company’s
customer base and the less the cost per customer to operate a network of information gives it
economies of scale. At the core of the banking business is the need to manage huge databases
containing demographic information, transactions histories, and other vital information.

(d) Do you see a clear advantage to focusing on distribution, as Weill’s letter to shareholders
suggests? If so, how would you follow through?

Weill’s letter to shareholders in the 2001 Annual Report comments: “We have played a lead
role in defining the concept of a fully diversified financial services firm. … We have built
distribution channels to every consumer wealth segment. … In a world where value is migrating
from manufacturing to distribution, and where open architecture is becoming mainstream, our
strategy has positioned us favorably to provide multiple services to customers around the
world.” There was even some evidence of successful cross-selling, with the company reporting
a doubling of cross-marketing revenues between 1998 and 2001. In addition to the scale and
scope of its distribution network, the company stressed expense discipline, acquisitions
expertise, and risk management. Nevertheless, some skeptics remained. Morgan Stanley
analysts Henry McVey and Scott Patrick commented (April 2002): “We think that management
should continue to simplify the story into one that is predicated on Citi’s dominating a few
global businesses versus diversifying and cross-selling. … We are not convinced that cross-
selling alone moves the earnings dial.”

so there is an advantage to focus on distribution to service more customers all over the world