Eduqas A Level Economics Market Structures Exam Questions

About Eduqas A Level Economics Market Structures

Market structures is the largest part of the Eduqas microeconomics content and a favourite for Component 3 essays. It starts with the background (number of firms, barriers to entry, contestability) and business objectives such as profit maximisation, revenue maximisation and satisficing. You then analyse perfect competition, monopolistic competition, monopoly and oligopoly in the short and long run, including concentration ratios and game theory with a Nash equilibrium in a payoff matrix. The topic ends with competition policy and privatisation. Examiners reward accurate diagrams, clear links to efficiency and consumer welfare, and evaluation of whether large firms are always bad for consumers.

What you need to know

• Background and contestability Market structures differ in number and size of firms, product differentiation and barriers to entry. A contestable market has low barriers to entry and exit and no sunk costs, so the threat of entry keeps prices near competitive levels. Barriers can be structural (high start-up costs) or behavioural (limit pricing).
• Business objectives Firms may aim for profit maximisation (MC = MR), revenue maximisation (MR = 0), sales maximisation (AC = AR), satisficing (acceptable profit to keep stakeholders content) or survival. Divorce of ownership and control helps explain why managers may not maximise profit.
• Perfect competition Many firms, identical products, perfect information and free entry and exit, so firms are price takers. Supernormal profit is competed away in the long run; the long run equilibrium is both productively and allocatively efficient.
• Monopolistic competition Many firms selling differentiated products with low barriers to entry. Firms can make supernormal profit in the short run, but entry shifts each firm's demand curve left until only normal profit is made, at a point where AR is tangent to AC. It is not productively or allocatively efficient.
• Monopoly A single dominant firm with high barriers to entry (a legal monopoly in the UK is a 25% market share). It sets output at MC = MR and charges a higher price than in competition, causing a deadweight loss, but may gain economies of scale and use supernormal profit for innovation. Price discrimination is included without detailed degrees.
• Oligopoly A few interdependent firms dominate, measured by concentration ratios (e.g. a 4-firm ratio is the combined market share of the largest four firms). Firms may collude, follow a price leader or start price wars. Game theory uses a payoff matrix to find a Nash equilibrium, showing why firms may end up worse off than if they cooperated.
• Competition policy and privatisation Governments are concerned about monopoly power and mergers, so competition authorities and regulators investigate mergers, collusion and abuse of dominance, and may use price caps. Privatisation transfers state owned firms to the private sector, aiming at efficiency through the profit motive, but may create private monopolies that need regulation.

Common mistakes in Market Structures

• Drawing the monopolistic competition long run diagram with AR cutting AC. AR must be tangent to AC, so only normal profit is made.
• Setting monopoly price where MC = MR on the MR curve. Output is found where MC = MR, but price is read off the AR (demand) curve above that output.
• Stating that monopoly is always worse for consumers. Evaluate with economies of scale, dynamic efficiency from investment and the role of contestability and regulation.
• Misreading a payoff matrix. For each firm, check its best response to each choice the rival makes; a Nash equilibrium is where neither firm can do better by changing strategy alone.
• Treating privatisation as automatically raising efficiency. Without competition or regulation, a privatised firm may simply become a private monopoly.

Try three Market Structures exam-style questions