1. AS Economics and Business Different market structures Unit 2B
By Mrs Hilton for revisionstation

2. Lesson Objectives
To be able to distinguish a monopoly from an oligopoly from a duopoly
To be able to discuss barriers to entry
To be able to distinguish between imperfect and perfect competition
To be able to answer a past paper question on the topic area

3. Starter If I say monopoly what do you think of?
Drugs, oil, gold, board game, Royal Mail, Coal, steel or credit cards?

4. purchasing, managerial, technical, marketing and financial
Monopoly
Monopoly exists when there is only supplier in an industry.
Royal mail
Transco monopoly on gas lines
Microsoft 90% of world’s pc operating software market
Firms gain monopoly in the long run because of barriers to entry
Legal – UK only pharmacies can sell prescription drugs by law
Resources – monopolist may be able to buy up all the resources, such as an airline buying a route, or a supermarket chain buying the only plot of land in a town where a supermarket could be built
Unfair competition – a monopolist may want to defend its position and may slash prices to deter competition
Economies of scale – average costs fall as the monopolist grows larger
EOS
purchasing, managerial, technical, marketing and financial

5. Barriers to entry
Patent – blueprints and permissions only one to produce their products
Predatory pricing – very low pricing to kill off any small firms
Invisibilities – certain goods need certain size of plant to produce e.g. Smelting
Saturation advertising – retailers will only stock products that are heavily advertised so consumers will buy them
Switching costs – costs associated in moving to a different supplier or rival operator
First mover advantage (Microsoft advantage gained over 20 years ago now every one is using it)

6. Government possible responses to monopoly
Taxes – monopolies earn abnormal profits and govt can take these away in tax (more equity in the economy)
Subsidies – govt encourage monopoly to cut prices and produce more (improve allocative efficiency)
Price controls – limiting prices that can be set e.g. Phones and railways (maximise efficiency)
Nationalisation – govt can turn it into a state owned company (unlikely and not popular after 80s) but no incentive to drive prices down and be productively efficient
Privatisation – nationalised industries sold to the private sector to increase efficiency
Deregulation – allow competitors to set up in an industry previously had legal barriers to entry, competition would drive prices down and reach allocative efficiency
Breaking up the monopolist- govt could order the break up of a monopoly
Reducing entry barriers – remove legal barriers to entry – for example the post office- open it up to competition

7. Competition and markets authority (CMA) previously called the monopolies and merger commission and then the competition commission combined with the office of fair trading
They work to promote competition for the benefit of consumers, both within and outside the UK. Their aim is to make markets work well for consumers, businesses and the economy. Non ministerial – 500 members of staff based in London
delivering effective enforcement – to deter wrongdoing, protect consumers and educate businesses
extending competition frontiers – by using the markets regime to improve the way competition works, in particular within the regulated sectors
refocusing consumer protection – working with its partners to promote compliance and understanding of the law, and empowering consumers to make informed choices

8. Oligopoly Products will be heavily branded which is a barrier to entry
Oligopoly is a market structure where there are on a few competitors (imperfect competition amongst the few)
An oligopolistic firm affects its rivals through its price and production decisions
Perfect oligopoly is where the oligopolistic firm produces a homogeneous product e.g. Petrol (does not matter which brand all basic products are the same)
Imperfect oligopoly is where products are differentiated e.g. Cars
Barriers to entry and may be collusion
Products will be heavily branded which is a barrier to entry
Oligopoly
Homogeneous products (of the same kind or alike)
Oligopoly: few businesses dominating the market such as supermarkets

9. Collusion occurs when a small number of sellers in a market co-operate with one another
This is a reaction to uncertainty and is at the expense of the consumer
Some forms of collusion such as joint product development are in the interests of the consumer
Some may enter into a cartel agreement to keep prices high to ensure all suppliers in the industry stay in business
Collusion

10. Duopoly Special type of oligopoly where there are only 2 firms
Not pure monopolies but have monopoly power
Barriers to entry

11. Imperfectly competitive market (monopolistic)
Not full competition in the market
Large numbers of small firms
Some larger firms dominate industry (e.g. Supermarkets and washing powder)
Product differentiation often occurs in imperfectly competitive markets through branding in order to add value and gain consumer loyalty
• Imperfect markets such as hairdressing have low barriers to entry and exit

12. Perfectly competitive market
Many competitors / sellers
Identical prices
Homogenous products
market structure where there are many buyers and sellers
Perfect competition has freedom of entry and exit with low barriers to entry
Consumers have perfect knowledge about prices and products from competing suppliers
Customers have a wide choice of sellers all selling the same product
Examples:
Steel
Oil
Chemicals
Copper
Farmed goods
Goods sold by ALL suppliers must be the same e.g. Wheat from 5 different farms

13. Sample question 1
Which of the following is least likely to occur in an oligopolistic market such as petrol?
A Several large firms dominating the market
B Extensive branding
C Barriers to entry
D Price competition

14. Answer question 1 Answer D price competition
The key defining characteristic of an oligopoly is that several large firms e.g. Shell, Esso, BP dominate the market (1 market) Products will usually be heavily branded (1 mark)
Branded products provides one of many barriers to entry that deter prospective rivals (1 mark)
Whilst there are price wars occasionally in oligopolies, the large firms tend to avoid damaging price competition and will rely on non-price methods of competition (1 mark) There may be collusion (1 mark)

15. Sample question 2
In an imperfectly competitive market such as hairdressing, which one of the following is most likely to occur?
A Product differentiation
B Few suppliers
C High barriers to entry
D Identical prices

16. Answer question 2
Answer A product differentiation
• Definition of imperfectly competitive market (1 mark)
• Product differentiation often occurs in monopolistic/imperfectly competitive markets through branding (1 mark) in order to add value and gain consumer loyalty (1 mark)
• Monopolistic/Imperfect markets such as hairdressing have low barriers to entry and exit (1 mark)
• It is relatively easy for businesses to set up as a hairdresser and these are usually small scale (1 mark)
• Perfect competition has identical prices, homogeneous products and many sellers (1 mark)
• Hairdressers will compete on price (1 mark) as there are plenty of alternative suppliers in a monopolistic/imperfectly competitive market (1 mark)
• Hairdressers will often advertise their services in order to raise awareness and gain customers (1 mark)

17. Sample question 3
If there are high barriers to entry in an industry such as banking it is likely that there will be
A low prices.
B low costs.
C low profitability.
D low competition.

18. Answer question 3
Need June 2009

19. Sample question 4

20. Answer question 4
• Perfect competition describes a market structure where there are many buyers and sellers. (1 mark) • Perfect competition has homogenous products Examples include foreign exchange (1 mark) • Perfect competition has freedom of entry and exit with low barriers to entry (1 mark) • Consumers have perfect knowledge about prices and products from competing suppliers (1 mark) Up to two of the marks above can be achieved alternatively by explaining distracters, e.g. • A is wrong because an oligopoly market is one which has a few businesses dominating the market such as supermarkets. (1 mark) • C is wrong because non-price competition such as advertising is a feature of imperfect competition. (1 mark) • D is wrong because high barriers to entry are a feature of monopoly or an oligopoly market. (1 mark)