Market Power and Market Failure

What Market Power and Market Failure covers

Market Power and Market Failure is examined in Paper 1, Markets and how they work, and in Paper 3, The economic environment and business. It covers cartels, collusion and restrictive practices, monopsony, natural monopoly and power in the labour market, the implications of market failure for firms, consumers and government, promoting competition: anti-competitive practices, mergers and privatisation, regulating natural monopolies and protecting consumers and employees, the Competition and Markets Authority and EU competition policy and the benefits and costs of regulation.

The 7 subtopics

Each one has its own page.

• Cartels, collusion and restrictive practicesCartels and how they raise prices, overt and tacit collusion, restrictive practices including bid rigging and market sharing, why cartels are unstable, OPEC, why cartels are illegal in the UK, leniency programmes, the maximum fine for anti-competitive agreements, consumer losses from price fixing, and conditions that make cartels easier to run.Open →
• Monopsony, natural monopoly and power in the labour marketMonopsony power and UK examples, gains at suppliers' expense, benefits to consumers and long-run effects on supply, natural monopolies and examples, wasteful duplication of networks, falling average cost over the relevant output range, unregulated natural monopoly as market failure, monopsony in the labour market, trade unions, and monopolies of labour supply.Open →
• The implications of market failure for firms, consumers and governmentMarket failure and the three groups it affects, harm to consumers and small competitors from market power, suppliers facing monopsony, effects on tax revenue, the case for intervention, government failure, income distribution, lack of competition and long-run productivity, failure spreading between industries, and weighing the cost of intervention.Open →
• Promoting competition: anti-competitive practices, mergers and privatisationAnti-competitive practices and those competition law prohibits, abuse of a dominant position and why dominance itself is legal, horizontal and vertical mergers and why horizontal ones are blocked, grounds for blocking a UK merger, privatisation and industries privatised in the 1980s, the arguments for and against it, and deregulation.Open →
• Regulating natural monopolies and protecting consumers and employeesWhy natural monopolies are regulated rather than broken up, price cap regulation and RPI minus X with its drawback, rate of return regulation, UK industry regulators, yardstick competition, asymmetric information, UK consumer protection law and why it is needed, employee protection, the minimum wage and employer power, and the costs and productivity effects of employee protection.Open →
• The Competition and Markets Authority and EU competition policyThe Competition and Markets Authority and its functions, action against cartels, phase 1 and phase 2 merger investigations and when mergers are reviewed, market investigations and remedies, the behaviours EU competition law prohibits, EU policy for UK firms after Brexit, state aid rules, EU merger control, and scrutiny of digital platforms.Open →
• The benefits and costs of regulationThe benefits of regulating business, allocative and dynamic efficiency, regulated monopolies and their business customers, environmental regulation, the regulatory burden on small firms, regulation as a barrier to entry, the opportunity cost of competition policy, weaker investment incentives, unintended consequences, regulatory capture, judging a regulation's worth, and light-touch regulation.Open →

What you need to know

Answer each one before you reveal it.

Take Market Power and Market Failure further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Monopoly vs Monopsony

  Monopoly: a single seller supplies the whole of a market and can restrict output to hold price above cost. Monopsony: A single dominant buyer can force down the price it pays its suppliers.

• Privatisation vs Deregulation

  Privatisation: transferring a business or asset out of state ownership so that it is owned by shareholders instead. Deregulation: Removing the statutory rules that restrict who may enter a market or how firms may behave in it.

• Horizontal merger vs Vertical merger

  Horizontal merger: a combination of two firms at the same stage of the same industry, such as two supermarket chains. Vertical merger: A combination of two firms at different stages of one supply chain, such as a manufacturer and its component supplier.

Questions from this topic

Each one with the model answer underneath.

1. 1

   What is a cartel?

   Model answer

   A cartel is a group of firms that agree to act together to fix prices, limit output or share out a market between them.

2. 2

   Why is a cartel able to raise prices above the competitive level?

   Model answer

   By agreeing to restrict their total output the members behave like a single monopolist, so the market price rises.

3. 3

   Distinguish between overt and tacit collusion.

   Model answer

   Overt collusion involves an explicit agreement between firms, whereas tacit collusion is parallel behaviour with no agreement at all.

4. 4

   Give three examples of restrictive practices.

   Model answer

   Price fixing, market sharing and bid rigging.

5. 5

   What is bid rigging?

   Model answer

   Bid rigging is where firms tendering for a contract agree in advance who will win and submit deliberately uncompetitive bids to make that bid look cheap.

6. 6

   Explain market sharing as a restrictive practice.

   Model answer

   Firms agree to divide customers or regions between them and not to compete in each other's territory, so each becomes a local monopolist.

What is inside Levo

Six ways to work the same material.

Market Power and Market Failure revision questions

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

7 subtopics: cartels, collusion and restrictive practices, monopsony, natural monopoly and power in the labour market, the implications of market failure for firms, consumers and government, promoting competition: anti-competitive practices, mergers and privatisation, regulating natural monopolies and protecting consumers and employees, the competition and markets authority and eu competition policy and the benefits and costs of regulation. Each one has its own page with questions and model answers.

How is Market Power and Market Failure organised?

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