Types of Markets: Competition & Monopoly
Microeconomic Decision Makers · 2 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 4% of your exam marks.
New emphasis in the 2027 syllabus; the characteristics, advantages and disadvantages of competitive and monopoly markets are examined directly (diagrams are not required). Guidance based on specimen materials.
A competitive market is one in which many firms compete to sell a similar product, so no single firm can control the price. Each firm has to accept roughly the price set by the market as a whole.
Characteristics of a competitive market
- A large number of firms, each with a small share of the market.
- Similar products, so consumers can switch easily between sellers.
- Freedom of entry and exit — new firms can join the market when profits are attractive, and leave when they make losses.
- Price competition — because buyers can switch, no firm can charge much more than its rivals.
Effect of many firms on price, quality, choice and profit
| Feature | Effect in a competitive market |
|---|---|
| Price | Lower — firms compete on price, and consumers can switch to a cheaper rival, so prices are kept close to costs. |
| Quality | Higher — firms must keep improving to win customers from rivals. |
| Choice | Wider — many firms offer a range of products to suit different needs. |
| Profit | Lower per firm — competition limits how much each firm can charge above its costs. |
Advantages of competitive markets
- Lower prices for consumers, because firms undercut one another and consumers can switch between producers.
- Better quality and more innovation, because firms must improve to keep customers.
- More choice — a greater variety of products, and products that meet different needs (for example, cars designed for older drivers).
- Efficiency — the pressure to keep costs down forces firms to use resources well, and consumer power is high because buyers can influence the market by switching.
Disadvantages of competitive markets
- Small firms may miss out on economies of scale. With many firms each producing a small quantity, none may be large enough to enjoy the lower average costs that a big producer can reach. Average costs, and therefore prices, can end up higher than they would be with fewer, larger firms.
- Less funding for research. Small firms making low profits may have fewer funds to invest in improving quality or developing new technology.
- Wasteful duplication. Many firms doing similar things (advertising, distribution) can duplicate effort and resources.
Discuss whether consumers benefit from more firms competing in a market
What comes up: an 8-mark "Discuss whether or not consumers would benefit from more firms competing in the [named] market."
Write (why they would benefit): more competition can raise quality; prices may be lower because consumers can switch between producers; there is more choice and greater variety, with products meeting different needs; consumers gain greater power to influence the market.
Write (why they might not benefit): some firms may be too small to gain economies of scale, so average costs and prices may be higher; fewer, larger firms might have more funds to invest in quality.
Watch out: both sides must be developed and a judgement reached; a one-sided answer is capped at Level 2 (maximum 5 marks). The economies-of-scale point is the key counter-argument the mark scheme rewards.