Competitive vs Non-Competitive Markets: Monopoly and Oligopoly

Three dials, not one

It is tempting to think a market is competitive when the businesses in it are trying hard. Economics asks a colder question. Whatever anyone intends, what shape is this market, and what does that shape make likely? Three things settle it. How many producers are there. How different are their products from one another. And how easily could a new producer join. Think of those as three dials rather than a checklist, because they move independently, and the markets worth thinking about are the ones where they disagree. A market can have many producers whose products are all slightly different. It can have very few producers and yet be easy to enter, which changes everything about how those few behave. By the end of this module you should be able to look at any market, read the three dials, and say what is likely to follow for the people buying, the people producing and the people working in it.

The words this spec uses

Five terms, and these are the ones your examiner uses. The first three are the dials; the last two are names for what you find at one end.

Sort the markets

Which dial does most work

A market currently has only three producers, all making good profits, and a new producer could set up easily. What does the ease of entry make likely?

• New producers will be drawn in by those profits, and competition will push the profits down
• Nothing, because with only three producers the market is concentrated whatever else is true
• The three producers will raise prices further, since they can
• The three producers will be forced to combine into one

How producers behave

The same businesses would act differently in each of these markets, because the shape of the market changes what is available to them.

What market power does

Select the TWO likely consequences of one producer holding substantial power in a market.

• Prices for consumers can be higher than they would be with more producers
• There is less pressure on the producer to improve the product or cut its costs
• The total number of products available across the whole economy must fall
• The producer is legally required to lower its prices once it becomes dominant

Words your spec does not use

Worth knowing before you revise from anything you did not get from your teacher. This specification talks about competitive markets and non-competitive markets, and it names monopoly and oligopoly. That is the whole vocabulary. If you read about perfect competition, or monopolistic competition, or a spectrum of market structures with firms drawn as price takers, you are reading material written for a higher-level course. None of it is wrong, but none of it is what you are being examined on, and reaching for it in an answer tends to produce something that sounds impressive and does not address the question asked. Your examiner wants the three factors applied clearly to the market in front of you. Read the dials, say what follows, and say who it affects.

Why the profits fall

In a market that is easy to _____, high profits act as a signal. New producers arrive, the number of producers _____, and buyers gain more places to go. To keep customers, producers compete, and prices are pushed _____. The profits that attracted the newcomers are therefore competed _____. Where entry is difficult, this whole process cannot start, which is why profits are likely to stay _____ in a concentrated market.

The claim that assumes too much

Three of these statements follow from the economics. Select the ONE that claims more than the market structure can support.

• Where entry is easy, high profits are unlikely to last for long.
• A producer facing no real alternatives for its buyers has more room to raise its price.
• A market with only one producer always charges the highest price it possibly can and always neglects quality.
• Where products are nearly identical, buyers are likely to choose on price.

The chain that closes the gap

Put the stages in order to show how easy entry brings profits down in a market.

• Existing producers in the market are earning high profits
• Those profits are visible to producers outside the market
• Because entry is easy, new producers begin supplying
• Buyers now have more producers to choose between
• Competition pushes prices down and the high profits are competed away

Consumers, producers and workers

Exam questions on this topic usually ask about the impact of a market structure, and the specification names three groups. Most answers cover two of them. Here is a paragraph covering all three, about an imaginary market with one dominant supplier. For consumers, having no real alternative removes the pressure that would otherwise hold the price down and keep the product improving, so they are likely to pay more for something that changes less. For producers, the dominant supplier gains, since profits are not competed away, but any smaller producer already in the market faces a rival it cannot easily undercut, and a would-be entrant may not get in at all. For workers, the effect runs through choice of employer: where one business dominates a market, the people with the skills that market needs have fewer places to take them, which weakens their position even before anything is said about pay. That last group is the one candidates leave out, and it is a third of what the question asked for. Notice too that the paragraph does not claim the outcome is certain. It says likely, and explains why.

Build the causal sentence

Assemble a sentence that explains rather than asserts.

The side people forget

A market that once had many producers is now dominated by one. Thinking only about the workers with the skills this market needs, what is the most direct effect of that change?

• They have fewer employers to choose between, which weakens their position
• Their skills become worthless, since only one business now needs them
• More workers will be hired, because a dominant producer is larger
• Nothing changes for workers, since market structure only concerns buyers and sellers of the product

Judge the market

You are given a description of a market and asked to assess it. Take the decisions in order.

• You are told the market has hundreds of producers. What do you still need to know?
• You learn the products are nearly identical and entry is easy. What follows for prices?
• A second market has only four producers, but entry is easy. How should you describe it?
• You are asked who is affected in the second market. What is the complete answer?

Advising on a market

Think of a market you know something about, or describe one. Assess how competitive it is and explain what follows. Do not use any figures you cannot support.

• Describe the market briefly, then read each of the three factors in turn
• Say whether you would call it competitive or non-competitive, and which factor decided it
• Explain what the ease or difficulty of entry means for how long any high profits would last
• Explain the likely effect on consumers, giving a reason rather than only a description
• Explain the likely effect on producers already in the market
• Explain the likely effect on workers with the skills that market needs
• Finish with a judgement, phrased as what is likely rather than what is certain