CCEA A Level Economics
CCEA A Level Economics A2 1 Contestable Markets and Competition Policy Exam Questions
Free CCEA A Level Economics revision for A2 1 Contestable Markets and Competition Policy: what you need to know, common mistakes and exam-style questions with answers. Covers contestable markets, sunk costs, UK and EU competition policy, the CMA, regulators, nationalisation and privatisation.
Practise A2 1 Contestable Markets and Competition Policy with past papers
Once you have learnt this topic, find the A2 1 Contestable Markets and Competition Policy questions in real CCEA A Level Economics past papers and mark them with the mark scheme. Doing lots of real questions is the quickest way to learn how examiners ask about each idea.
About CCEA A Level Economics A2 1 Contestable Markets and Competition Policy
This topic closes Unit A2 1: Business Economics by asking how markets can be made to work in consumers' interests. Contestable market theory argues that the threat of entry, rather than the actual number of firms, disciplines behaviour, so you need to explain perfectly contestable markets, sunk costs and hit-and-run entry. Competition policy then covers how the UK and EU deal with monopolies, mergers and anti-competitive practices, the role of the Competition and Markets Authority and industry regulators, methods such as price caps and performance targets, and the arguments over nationalisation and privatisation. CCEA extended questions often ask you to evaluate regulation or privatisation of a specific industry.
What you need to know
- Contestable markets A market is contestable when entry and exit are free and costless. Even a monopoly in a contestable market will price close to average cost because supernormal profit would attract hit-and-run entry.
- Sunk costs Costs that cannot be recovered on leaving the market, such as advertising or specialist equipment. High sunk costs reduce contestability.
- UK competition policy The Competition and Markets Authority investigates mergers, abuse of a dominant position and cartels. A firm with 25% or more of a market can be investigated. Cartel members can be fined up to 10% of worldwide turnover.
- EU competition policy The European Commission deals with anti-competitive agreements, abuse of dominance, large mergers and state aid that affect trade between member states.
- Regulation Industry regulators such as Ofgem and Ofwat use price caps (e.g. RPI - X), performance targets and quality standards for natural monopolies and privatised utilities.
- Nationalisation and privatisation Privatisation transfers ownership to the private sector to improve efficiency through the profit motive and competition. Nationalisation brings industries into public ownership to protect strategic services and the public interest. Each has risks of inefficiency or market power.
Common mistakes in A2 1 Contestable Markets and Competition Policy
- Defining a contestable market by the number of firms; contestability depends on ease of entry and exit.
- Confusing sunk costs with fixed costs; not all fixed costs are sunk.
- Assuming regulation always works; regulatory capture and poor information can lead to government failure.
- Saying privatisation automatically creates competition; a privatised natural monopoly needs regulation.
Try three A2 1 Contestable Markets and Competition Policy exam-style questions
1. Explain why the threat of new entry may lead an incumbent monopolist to keep prices low. (4 marks)
Show the mark scheme answer
In a contestable market barriers to entry and exit are low; supernormal profit would attract hit-and-run entrants; who could undercut the incumbent and leave without sunk cost losses; so the incumbent sets price close to average cost, earning near-normal profit.
2. Explain how an RPI - X price cap works. (4 marks)
Show the mark scheme answer
The regulator allows prices to rise each year by the rate of inflation minus X percent; X reflects expected efficiency gains; firms can keep extra profit if they cut costs faster than X; so it gives an incentive to improve efficiency while protecting consumers.
3. Evaluate the case for privatising a state-owned rail network. (10 marks)
Show the mark scheme answer
Profit motive may improve efficiency and reduce X-inefficiency; access to private investment; less burden on taxpayers; but natural monopoly elements need regulation; risk of underinvestment in safety; fragmentation and coordination problems; social benefits such as rural services may be cut; regulatory capture; conclusion depending on regulation and franchise design.
A2 1 Contestable Markets and Competition Policy FAQs
What does CCEA A Level Economics A2 1 Contestable Markets and Competition Policy cover?
Contestability and sunk costs, UK and EU competition policy, the Competition and Markets Authority, industry regulators and price caps, and nationalisation and privatisation.
Which unit is this topic examined in?
It is in Unit A2 1: Business Economics, a 2 hour paper with short-answer questions, a case study and an open response question chosen from two.
How do I use contestability in evaluation?
When judging a concentrated market, ask how easy entry and exit are. Low sunk costs and few barriers mean even a dominant firm may behave competitively, so intervention may be less necessary.
