Business Analysis Midterm

ADESOYE ADENIJI
202023877

1. How can you describe, define and analyze the Berlin Rental Market?
The Berlin market is an Oligopoly market because larger proportion of the houses are
owned by few private groups – developers while very few social houses are owned by the
government. A rational mind will still want to enquire to know what category of Oligopoly this
market falls? In my view, I want to assume that the market is a Bertrand Oligopoly. My reasons
are as follows: First, we all agree that the number of rental companies (developers) is few
relative to the number of tenants seeking apartment. The developers also build these apartments
(buildings) at constant marginal cost; what may constitute variations in building costs are the
varying innovations that may be adopted in the architectural designs of the buildings but the cost
of sand, cement, water, etc., used for the construction are the same. Also, though not clearly
stated in the article, firms engage in price competition and that should be one of the reasons
behind the introduction of rental cap. Moreover, the tenants seeking apartments have perfect
information and barriers to entry exist.
Porter 5 Forces is an effective tool to analyze Berlin Rental Market
1. Threats of new entrants
To guide against the threats of new entrants, rental companies in Berlin are building economies
of scale to lower fixed cost per unit. This is why a company like Deutsche Wohnen, owns
approximately 115,000 flats across the city. As we know that when there are economies of scale,
increasing the size of flats decreases the minimum average cost. These developers are also
innovative and continually building capacities and spending money on research researches to
remain afloat in the market.
2. Bargaining Power of Suppliers
In this case, the developer is the supplier. Tremendous shortage of social houses owned by the
government has fortified the bargaining power of developers. The game is now a take-it or leave-
it approach in the Berlin housing market. The moment the developers realized a legislation is not
in their own interest, they in turn take a step that adversely affect the tenants. They might decide
not to rent at all or even build at all adding more to the housing problem in Berlin. The power of
the landlord is so enormous that he can decide to seek buyers for an apartment and not willing to
rent at all. Increased apartment-hunting has made it possible for the landlords not to be contented
with little incentives. No wonder Michael Voigtländer said “There is a lack of housing in Berlin.
That lack of housing won't be solved if the rents are capped”
 3. Bargaining Power of Buyers
In a way, the rental companies have penetrated the Berlin market and have wisely depressed the
bargaining power of the tenants in Berlin. The aftermath of this is the growling noise for rent
cap, break up, etc. It is obvious that tenants in Berlin are paying higher than they are willing to
pay, the landlords are exploiting them. A way of supporting the buyer of buyers is what Zado
suggested that “by freezing existing rents, the city could help prevent massive increases until an
influx of new apartments stabilises the market.”
4. Threats of Substitute Products
The shortage of social houses has made this factor not a threat to the developers at the moment.
Because the marginal cost are the same and the goods are homogenous, the cost of rentals any
developers will be willing to accept are almost the same, giving the tenants less choices to
choose between alternatives.
5. Rivalry among the existing competitors
The influx of new people to Berlin has contributed to housing shortage in Berlin. With increased
demand higher than supply, competitive rivalry among developers becomes insignificant.
Question 2
From what we learned, would the proposed 5-year rent freeze work? Ans: NO
The proposed 5-year rent freeze won’t work because there is shortage already and the population
in Berlin is increasing. The introduction of rent freeze will not alter the statics of the market – the
5-forces will remain the same.
Question 3
Do you have any proposals of your own to solve the problem at hand? YES

A good option is to limit the power of the suppliers by making cheaper apartment available in
Berlin by new competitors. A good threat to the developer is the government. If the government
can saddle itself with the responsibility of providing low-cost housing to the people of Berlin,
surely, the developers will redress.
The government should control the influx of foreign investors whose aim is to invest to reap
undue profit for a longer period of years. The case of tenants protesting the sale of apartments as
revealed in the article is a result of the unscrupulous activities of foreign investors. To be more
elaborate, developers often buy old residential buildings previously occupied by the middle class
forcing the low income earners to evacuate the buildings. The developers afterwards spend a lot
of money to modify these buildings to higher standard such that the middle class will no longer
be able to afford paying for the rent of such building, thus, making the building affordable by
fewer individuals who are earning higher income. Since demand is higher than supply, there will
always be tenants to pay for such apartment. The old middle-class occupiers will have to settle in
a cheaper location – outskirt - outside Berlin subjecting them to wasteful time in daily traffic
before reporting to their various place of work.