Competition and Market Power

What Competition and Market Power covers

Competition and Market Power is examined in Paper 1, Markets and how they work, and in Paper 3, The economic environment and business. It covers market structures across the spectrum of competition, perfect competition and what the model explains, market structure, pricing strategies and consumers, non-price competition and the limitations of perfect competition, contestability, ease of entry and barriers to entry, barriers to entry, market structure and economies of scale, concentration ratios, interdependence and tacit agreement, price discrimination, average and marginal cost, revenue and profit, contribution, business objectives and pricing strategies, productive and allocative efficiency and productivity, market orientation and interrelated markets.

The 12 subtopics

Each one has its own page.

• Market structures across the spectrum of competitionMarket structure and the spectrum of competition, the assumptions of perfect competition and price taking, pure monopoly, oligopoly, imperfect competition and an example of it, demand curves in perfect competition and monopoly, close substitutes and pricing, market power, competitive duopolies, and features shared by imperfectly competitive markets.Open →
• Perfect competition and what the model explainsPerfect competition as a benchmark, how supernormal profit is eroded and losses remove firms, normal profit, long-run price and average cost, pressure to cut costs, real markets close to perfect competition, online marketplaces, prices compared with monopoly, freedom of entry and exit, perfect information, advertising, and long-run efficiency.Open →
• Market structure, pricing strategies and consumersHow market structure limits pricing freedom, cost-plus pricing, price skimming and penetration pricing, predatory pricing as an abuse of dominance, limit pricing, loss leaders, price leadership in oligopoly, dynamic pricing, consumer gains from competition, consumer losses under a dominant firm, and ways a monopoly can benefit consumers.Open →
• Non-price competition and the limitations of perfect competitionNon-price competition and supermarket methods, oligopolists' reliance on it, advertising and demand elasticity, product differentiation and its costs, and the limitations of perfect competition: identical products, heavy investment, dynamic efficiency, perfect information, social welfare, and a static model.Open →
• Contestability, ease of entry and barriers to entryContestable markets and the threat of entry, sunk costs, hit-and-run entry, the internet and retailing, barriers to entry from product differentiation, branding and start-up costs, intellectual property and UK patents, pharmaceutical firms, and how research and technological change can raise or lower barriers.Open →
• Barriers to entry, market structure and economies of scaleHow barriers to entry shape market structure and what happens when they fall, economies of scale, internal economies including purchasing and technical, internal against external economies, the long-run average cost curve, minimum efficient scale and the number of firms, calculating average cost, economies not passed on, and scale as a barrier to entry.Open →
• Concentration ratios, interdependence and tacit agreementConcentration ratios and calculating them and market share, interpreting a high ratio and its weaknesses, interdependence in oligopoly, reluctance to cut or raise price, the kinked demand curve, price wars, tacit collusion and why regulators struggle to prove it, and the incentive to cheat on collusion.Open →
• Price discriminationPrice discrimination and its three conditions, preventing resale, separating rail customers, who pays the higher price, calculating a theatre's revenue, higher total revenue, consumer surplus under discrimination, benefits to consumers, student and senior discounts, cost-based price differences, and the need for market power.Open →
• Average and marginal cost, revenue and profitThe formula for average cost, average revenue and price, profit from totals and from averages, calculating average cost, average revenue and profit, marginal cost and marginal revenue and calculating each, why marginal revenue falls below price, and the profit-maximising output where marginal cost equals marginal revenue.Open →
• Contribution, business objectives and pricing strategiesContribution per unit and calculating it, the link between contribution and profit, break-even output from contribution, contribution and marginal cost, accepting orders below average cost, the danger of repeated low-price orders, and how profit maximisation, sales or market share, survival and social or ethical objectives shape pricing.Open →
• Productive and allocative efficiencyProductive and allocative efficiency, monopoly and allocative inefficiency, the margin and marginal decision-making, price equal to marginal cost, opportunity cost, the trade-off between productive efficiency and competition, a firm that is productively but not allocatively efficient, X-inefficiency, competition, and dynamic efficiency.Open →
• Productivity, market orientation and interrelated marketsProductivity and calculating output per worker and labour cost per unit, productivity and average cost, technology, human capital and training and why firms hesitate to train, education, management quality, market against product orientation and allocative efficiency, interrelated markets for petrol and electric cars, derived demand, and shortages spreading across markets.Open →

What you need to know

Answer each one before you reveal it.

Take Competition and Market Power further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Productive efficiency vs Allocative efficiency

  Productive efficiency: making the output at the lowest possible average cost, so that no resources are wasted along the way. Allocative efficiency: Turning out the combination of goods consumers most want, which occurs where price equals marginal cost.

• Marginal cost vs Average cost

  Marginal cost: the addition to a firm's total outlay that comes from producing one more unit. Average cost: A firm's total outlay divided by the number of units it produces.

• Predatory pricing vs Limit pricing

  Predatory pricing: selling below cost in order to drive an existing rival out of the market, after which the firm raises what it charges again. Limit pricing: Keeping what the firm charges below the level a new entrant would need to break even, so that entry is deterred.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What is meant by market structure?

   Model answer

   Market structure describes the characteristics of a market, such as the number of firms, the ease of entry and how similar the products are, which together shape how firms behave.

2. 2

   Name the four market structures that make up the spectrum of competition.

   Model answer

   Perfect competition, imperfect or monopolistic competition, oligopoly and monopoly.

3. 3

   State the four assumptions of perfect competition.

   Model answer

   There are many small buyers and sellers, the product is homogeneous, information is perfect, and there is freedom of entry and exit.

4. 4

   Why is a firm in perfect competition described as a price taker?

   Model answer

   It supplies a tiny share of a market for an identical product, so it must accept the ruling market price or sell nothing at all.

5. 5

   What is a pure monopoly?

   Model answer

   A pure monopoly is a market supplied by a single firm, which therefore faces the whole of market demand itself.

6. 6

   Describe the main characteristics of an oligopoly.

   Model answer

   A few large firms dominate the market, entry is difficult, products are differentiated, and each firm's decisions depend on how its rivals are expected to react.

What is inside Levo

Six ways to work the same material.

Competition and Market Power revision questions

What does Competition and Market Power cover in Edexcel A-Level Economics B?

12 subtopics: market structures across the spectrum of competition, perfect competition and what the model explains, market structure, pricing strategies and consumers, non-price competition and the limitations of perfect competition, contestability, ease of entry and barriers to entry, barriers to entry, market structure and economies of scale, concentration ratios, interdependence and tacit agreement, price discrimination, average and marginal cost, revenue and profit, contribution, business objectives and pricing strategies, productive and allocative efficiency and productivity, market orientation and interrelated markets. Each one has its own page with questions and model answers.

How is Competition and Market Power organised?

By the Edexcel 9EB0 specification, subtopic by subtopic, so it matches the order you are taught it in.