Practise distinguishing price wars, predatory pricing and limit pricing from short market scenarios and cost-based clues.
Sources for use with Section B
The electric vehicle market in China
Figure 1 Market share for electric vehicle passenger sales, based on sales revenue, 2021
Figure 2 Tesla electric vehicle prices, 2022 (Yuan, 000s)
Extract A Changes in the Chinese electric vehicle market
In 2020 the Chinese Government adopted many new measures to reduce CO2 emissions, in order to meet its climate change goals by 2030. For example, the Government has increased the number of charging points and raised the tax on non-electric vehicles. The global increase in the price of fuel has also led to an increase in demand for electric vehicles. Between 2021 and 2022 the sales of electric vehicles in China increased by 83% to 5.92 million.
Extract B Tesla in China Tesla, a US-owned vehicle company, has attempted to increase its sales in China to take advantage of the increasing demand for electric vehicles. In 2019 the company opened a factory in Shanghai. It became the first fully foreign-owned vehicle manufacturer in the country. By producing vehicles in China, Tesla was able to take advantage of government 5 incentives, such as subsidies, aimed at promoting the domestic electric vehicle industry, as well as benefiting from low-cost labour. This new factory was expected to increase Tesla’s competitiveness in the Chinese market by making its vehicles more affordable for consumers. China has become a key manufacturing centre for Tesla. Its factory in Shanghai produced over 710 000 vehicles in 2022. This represented 52% of the 10 company’s worldwide output. However, production has been difficult in China. Tesla faced supply chain disruptions as a result of the global health crisis of 2020 to 2022. This resulted in a reduction in output and an increase in its costs of production. Tesla also had to pay taxes on imported components and finished vehicles. 15 In October 2022 Tesla reduced the price of several of its electric vehicles. The two main reasons for these price reductions were:; a fall in its production costs arising from government subsidies to electric car manufacturers; improved efficiency from manufacturing in Shanghai. 20 The lower prices of Tesla’s electric vehicles had a significant impact on its competitors. Domestic and other international manufacturers responded by reducing their prices for electric vehicles as they competed for market share.
With reference to the information provided and your own knowledge, discuss the impact of Tesla reducing its prices on the behaviour of other electric vehicle manufacturers.
Indicative content guidance
Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make but this does not imply that any of these must be included. Other relevant points must also be credited.
Quantitative skills assessed:
QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.
Knowledge, Application, Analysis ( 8 marks) - indicative content
Tesla has engaged in price competition
- Price competition is a type of competition where businesses compete against each other by offering lower prices for their goods or services
- Tesla has tried to attract more customers and increase market share by offering a lower cost alternative to other electric car producers
- Tesla's current market share of 12% is below that of SAIC ( 25% ) and BYD (16\%)
- Price leadership encouraged other electric car vehicle manufacturers to lower their prices
- There might be a price war in the Chinese car market
- Reward appropriate game theory matrix, supported with explanation
- Some manufacturers may use non-price competition as means of increasing their market shares e.g. advertising, branding, product differentiation
- Tesla may be using limit pricing- the reduced prices are in place to limit the profits- this may reduce the likelihood of competitors entering the market to seek profit
- Predatory pricing is where the firm prices below its AVC in order to put pressure on the competition to leave the market as they will be loss making- this may result in loss of competitors/competitors exiting the market
- Competitor may report Tesla to competition authorities for predatory pricing
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-3
Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models. Use of generic material or irrelevant information or inappropriate examples.
Descriptive approach which has no chains of reasoning.
Level 2
4-6
Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.
Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.
Level 3
7-8
Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models.
Ability to link knowledge and understanding in context using relevant examples which are fully integrated to address the broad elements of the question.
Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.
Evaluation (6 marks) - indicative content
- If electric vehicle manufacturers are able to differentiate their vehicles from Tesla they may not need to compete over price
- There may be little impact on other vehicle manufacturers if they have a strong reputation for reliability, safety and quality
- Other vehicle manufacturers in China benefit from government subsidies and low wage costs. Therefore they can also lower prices and are not significantly impacted
- If Tesla/other vehicle manufacturers experience increase in costs in the long-run they may have to increase their prices
- Lower prices may decrease super-normal profits reducing the available capital to spend on non-price competition
- Firms are interdependent and therefore they will all copy each other's non-price competition strategy
- Vehicle manufacturers do not benefit if a price war starts as they may all lose revenue, reducing the incentive to continue to reduce prices
- SAIC is in a stronger position to withstand competition from Tesla given that its market share is more than double that of Tesla
- Predatory pricing is illegal and Tesla may be fined/lose consumer confidence
Level
Mark
Descriptor
0
No rewardable material.
Level 1
1-2
Identification of generic evaluative comments.
No supporting evidence/reference to context.
No evidence of a logical chain of reasoning.
Level 2
3-4
Evidence of evaluation of alternative approaches
Some supporting evidence/reference to context.
Evaluation is supported by a partially-developed chain of reasoning.
Level 3
5-6
Evaluation recognises different viewpoints and/or is critical of the evidence.
Appropriate reference to evidence/context. Evaluation is supported by a logical chain of reasoning.