ECO8Competitive and Non-competitive Markets: Monopoly and Oligopoly
3.1.5.1 Identifying market structures
Market structures: what makes markets different
Market structure: the features of a market that affect how firms behave and perform.
AQA uses three features to tell structures apart: the number of producers, how far products are differentiated (made to seem different), and ease of entry for new firms.
At one end is a competitive market with many firms. At the other is monopoly, with one dominant firm. Oligopoly, with a few large firms, sits in between.
Competitive markets and oligopoly or monopoly are also called competitive and non-competitive (or concentrated) markets.
From competitive to non-competitive: the features that set market structures apart
Exam tipAQA only uses competitive market, monopoly and oligopoly. Some videos teach ‘perfect competition’ and ‘monopolistic competition’: you don’t need them.
Market structure
The features of a market, such as the number of firms, that affect how firms behave and perform.
Product differentiation
Making a product seem different from rivals’ products, for example through branding or design.
Ease of entry
How easy it is for a new firm to start selling in a market.
3.1.5.2 Competitive markets
Competitive markets: the features
Competitive market: a market where many producers compete with each other to supply goods and services.
Many small firms: each has a tiny share of the market.
Similar or identical products: buyers can easily switch from one seller to another.
Low barriers to entry and exit: it is cheap and easy for new firms to start up, or to leave.
Price takers: no single firm can set the price; it has to accept the market price set by demand and supply. If it charged more, buyers would go elsewhere.
Good information: buyers and sellers can easily compare prices and products.
Low profits: competition keeps prices close to costs.
Examples: market stalls selling fruit, window cleaners in a town, many online sellers of phone cases.
Exam tipOn ‘State two features’ questions, students often give features of the opposite type of market. Check: many firms, low barriers, similar products, price takers. Two answers that are just opposites of each other (e.g. ‘many firms’ and ‘not few firms’) get 1 mark.
Competitive market
A market where a wide variety of producers compete with each other to supply goods and services.
Price taker
A firm that must accept the market price because it is too small to influence it.
Homogeneous products
Products that are identical or nearly identical, whoever makes them.
3.1.5.2 The impact of competitive markets on price and choice
How competition affects price, choice, quality and profit
Lower prices: if one firm charges more, customers switch, so firms keep prices low.
More choice: many firms means many options, styles and places to buy.
Pressure on quality and service: firms try to win customers by being better, not just cheaper.
Efficiency: firms must keep costs down to survive; inefficient firms lose customers and close.
Why profits are lower: rivalry pushes prices down towards costs, and if profits are high, new firms enter easily (low barriers), adding supply and pushing prices down again.
How producers operate: they accept the market price, keep costs low, and look for small ways to stand out, such as location or service.
Exam tip‘Explain why profits are lower in a competitive market’: link it to low barriers to entry. High profits attract new firms, which pushes prices and profits back down.
Efficiency
Producing output at the lowest possible cost, without wasting resources.
Barriers to entry
Things that make it hard for a new firm to join a market.
3.1.5.2 The economic impact of competition on consumers, producers and workers
Competition: winners and losers
The spec asks about three groups. Always say which group you mean.
Competition usually helps consumers most, but it isn’t all good news, even for them.
Group
Benefits of competition
Drawbacks of competition
Consumers
Lower prices, more choice, better service
Small firms may miss out on economies of scale, so prices may not be as low as they could be; cost-cutting can lower quality
Producers
Pressure to be efficient and to improve
Low profits; less money to invest in new products or growth; many firms close
Workers
Many possible employers to choose from
Firms keep wages low and push for high output to keep prices down; jobs may be less secure
Exam tipRead the question’s group carefully. AQA’s examiners said many students ‘missed the important words “to consumers”’ and wrote about firms instead.
Consumers
People who buy and use goods and services.
Producers
Firms that make goods or provide services.
3.1.5.3 Non-competitive markets
Non-competitive markets: the features
Non-competitive market: a market dominated by one firm or a small number of firms.
Few large firms (oligopoly) or one dominant firm (monopoly).
High barriers to entry: new firms find it hard to get in.
Price makers: the big firms have enough market power to influence the price.
Differentiated products: firms make their brand seem different, so customers are less willing to switch.
Less information: customers may find it hard to compare prices and deals.
High profits: higher prices plus low costs from economies of scale.
Feature
Competitive market
Oligopoly
Monopoly
Number and size of firms
Many, small
A few, large
One, large
Product differentiation
Low: similar products
High: strong brands
High: a unique product with no close substitute
Barriers to entry
Low
High
High
Profit
Low
High
High
Exam tipAQA counts a monopoly’s product differentiation as high: its product has no close substitute, so it is as different from the alternatives as a product can be. In one multiple-choice question the monopoly was the firm with few rivals, hard entry and high differentiation. Only about a third of students chose it; most picked low differentiation.
Non-competitive market
A market dominated by one firm or a few large firms, with high barriers to entry.
Price maker
A firm with enough market power to set or influence the price.
Market power
A firm’s ability to influence the price in its market.
3.1.5.3 The meaning of monopoly
Monopoly
Monopoly: a market where a single firm dominates. A pure monopoly is the only seller (100% of the market).
AQA’s vocabulary also says a firm with more than 25% market share is said to have a legal monopoly. AQA’s mark schemes accept a single firm, a 100% share, more than 25%, or a dominant firm.
The monopolist is a price maker: customers have few or no close substitutes.
High barriers to entry protect it from new rivals.
Examples: the only water company supplying a region; a firm holding a patent on a new medicine; the only bus operator on a route.
Exam tipA full 2-mark definition says a single firm that dominates (or has more than 25% of) the market. ‘No competition’ alone gets 1 mark.
Monopoly
A market where a single firm dominates. AQA: a firm with more than 25% market share is said to have a legal monopoly.
Patent
A legal right that stops other firms copying an invention for a set number of years.
3.1.5.3 The meaning of oligopoly
Oligopoly: interdependence, non-price competition and collusion
Oligopoly: a market dominated by a small number of large firms.
Interdependence: each firm’s decisions depend on what its few rivals do. If one cuts its price, the others may follow, so price wars can hurt everyone.
Non-price competition: so firms often compete in other ways: branding and advertising, loyalty schemes, better quality or design, customer service, special offers and new features.
Collusion: firms secretly agree to act together, for example to fix prices or share out customers, so they behave like a monopoly. It can be explicit (an actual agreement) or tacit (unspoken, following a price leader).
Price fixing is illegal in the UK, and the Competition and Markets Authority (CMA) can fine firms that do it.
Examples: supermarkets, mobile networks, banks, airlines on many routes.
Exam tipFor ‘State two features of an oligopoly’, give oligopoly features: few large firms, high barriers to entry, interdependence, non-price competition, branding, possible collusion. Students who gave features of competitive markets scored nothing.
Oligopoly
A market dominated by a small number of large firms.
Interdependence
When each firm’s decisions depend on how its rivals are likely to react.
Non-price competition
Competing through branding, advertising, quality, service or loyalty schemes rather than price.
Collusion
When firms agree to act together, for example to fix prices, instead of competing.
3.1.5.3 The causes of monopolistic and oligopolistic power
Causes of monopoly and oligopoly power
Market power comes from barriers to entry: things that stop new firms joining and competing.
Economies of scale: big firms have low average costs, so a small newcomer can’t match their prices. (See Economies and Diseconomies of Scale.)
High start-up costs: building a network, factory or fleet costs so much that few can afford to try.
Legal barriers: patents, copyright and licences give one firm the legal right to sell something.
Branding and advertising: customers are loyal to famous brands, and a newcomer would need huge advertising spending to be noticed.
Control of supply or outlets: owning the raw materials or the shops that sell the product.
Mergers and takeovers: firms join or buy rivals, so fewer firms are left.
Exam tip‘Explain one cause of monopoly power’: name the barrier, then say how it keeps rivals out. ‘Patents’ alone is 1 mark; ‘a patent stops other firms copying the product for years, so the firm is the only seller’ is 2.
Barriers to entry
Things that could stop a firm from successfully joining a market.
Takeover
When one firm buys control of another.
Start-up costs
The money needed to set up a business before it can start selling.
3.1.5.3 The consequences of monopolistic and oligopolistic power
Consequences of monopoly and oligopoly power
There are arguments on both sides. Whether a dominant firm helps or harms people often depends on whether it is regulated and whether it passes on its lower costs.
Group
Possible drawbacks
Possible benefits
Consumers
Higher prices, less choice, poorer quality or service, little reason to improve; collusion can make prices even higher
Economies of scale can mean lower prices than many small firms could offer; non-price competition can improve quality; profits can fund new products
Producers
Little pressure to keep costs down, so firms may become inefficient; small suppliers can be squeezed on price
High profits to invest in research and new technology; can compete with large firms abroad; can push suppliers for lower prices
Workers
Where one or two firms are the main employers, they can hold wages down; fewer alternative jobs
Big, profitable firms can afford training, better pay and more secure jobs
Exam tipThe best answers to AQA’s 15-mark question on monopoly power weighed price, choice, innovation and costs, and gave a judgement such as ‘it depends on whether a regulator stops the firm abusing its power’.
Innovation
Developing new products or better ways of producing.
3.1.5.3 Monopoly and oligopoly (with quantitative skills)
Market share and how the government responds
Market share = a firm’s sales ÷ total sales in the market × 100.
Add the shares of the largest firms to see how concentrated a market is. If a few firms have most of the sales, it is an oligopoly.
Competition and Markets Authority (CMA): the UK body that investigates markets that aren’t working well for consumers, can block mergers that would reduce competition, and can fine firms that fix prices.
Regulators such as Ofgem (energy) and Ofwat (water) oversee industries with very few firms, for example by limiting prices or setting service standards.
How far the government should step in is debated: some argue regulation protects consumers; others argue it adds costs and can discourage investment.
An invented market where three firms have 82% of sales: an oligopoly
Worked exampleIn an invented market, total sales are £180 million. Firm X sells £45 million. What is its market share?
Worked exampleTotal sales in an invented market are £2,400 million. The three largest firms sell £900m, £600m and £420m. What is their combined market share, to one decimal place?
£900m + £600m + £420m = £1,920mAdd the three firms’ sales first.
£1,920m ÷ £2,400m × 100 = 80.0%Then divide by the whole market.
80.0%: the market is an oligopoly.
Exam tipDivide by the total market, not by the other firms’ sales. Check your units: if sales are in millions, keep them all in millions.
Market share
A firm’s sales as a percentage of total sales in its market.
Competition and Markets Authority (CMA)
The UK body that promotes competition: it investigates markets and mergers and can fine firms that break competition law.
Regulator
A body that oversees an industry, for example by limiting prices or setting standards.
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