Different market structures · A Level Economics

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Third-degree price discrimination benefits the firm but not its customers. With the help of a diagram, assess the consequences of third-degree price discrimination to both the firm and its customers.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 8 marks. AO3 out of 4 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• Third degree price discrimination will lead to some consumers losing their consumer surplus since they are paying higher prices that they would without price discrimination.

• Consumers who are charged the higher prices may feel unfairly treated, leading to dissatisfaction and potential backlash against the firm.

• Firms segment the market based on observable characteristics such as age, location, or income level, and charge different prices to each segment, leading to higher revenues than just a single uniform price.

• Third-degree price discrimination will enable firms to get higher supernormal profits.

• Higher profits by firms enable more reinvestments of profits which could lead to capturing further market share and entrance into new markets.

• Analysis of the price discrimination diagram.

AO3 Evaluation

• To price discriminate, firms need to accurately identify each consumer's willingness to pay, which may require costly information gathering and segmentation strategies, and the cost may outweigh the benefits.

• Higher levels of innovation by firms making more profits could provide consumers with more choices and better-quality products

• Some consumers will be charged lower prices and therefore get higher satisfaction – increasing accessibility of the product.

Accept all valid responses.

AO1 Knowledge and understanding and AO2 Analysis

AO3 Evaluation

Although firms in an oligopolistic market may be in competition with each other, they will find it advantageous to collude. With the help of a diagram or a pay-off matrix, evaluate this statement.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• Explanation of an oligopolistic market, with reference to the concentration ratio.

• An explanation of different types of collusion, such as tacit collusion, price- leadership, cartels.

• An explanation of how the firms are interdependent/consider other firms’ possible reactions when making pricing or output or other decisions.

• Explanation of how the kinked demand price set by price leadership

• Analysis of the kinked demand curve diagram and/or the payoff matrix.

• Payoff matrix analysis used to explain why collusion takes place.

• An explanation of how price ‘wars’ might occur.

• Analysis of a ‘monopoly’ diagram for the joint output and price when firms collude.

• Analysis of non-price/price competition.

AO3 Evaluation

• Collusive agreements are likely to break down, when firms act to maximize their own profits.

• Collusive agreements may infringe government regulations which are aimed at increasing competition.

• Cartels would need to be approved by a government agency.

• Both the kinked demand curve model and the pay-off matrix depend upon a particular set of assumptions about firms’ behavior, which may not occur in the real world.

Accept all valid responses.

AO1 Knowledge and understanding and AO2 Analysis

AO3 Evaluation

The degree of competition a firmexperiencesis determined only by the barriers to entry into its market. With the aid of diagrams, evaluate this statement. Use TableA:AO1 Knowledge and understanding andAO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• A discussion of types of barriers to entry.

• The impact of barriers to entry on market structures.

• A detailed analysis of at least 2 forms of market structure one with no barriers (perfect competition or monopolistic competition) and one with barriers to entry (oligopoly or monopoly) to include reference to product, knowledge levels, profit levels.

• Diagrams are correctly labelled and accurately drawn.

• with correct labelling and relevant reference to it/them in the answer.

• Max L2 if no diagram

• Max L2 if only one type of structure

AO3 Evaluation

• Competition is linked to the number of firms who can access a market, so the simple answer is yes because barriers to entry preventfirms entering a market.

• Perfect competition and monopolistic competition with their lack of barriers are both highly competitive.

• Competition takes place in oligopoly through product differentiation and sales and marketing.

• Monopolies are subject to limitations on their ability to exploit the consumer by the limitations of contestable markets.

• Regulation

Accept all valid responses

Describe how the market structure in which individual farmers operate is likely to differ from the market structure in which the commodity traders operate. Farmers: monopolisticcompetition (1) many sellers (1), similar product (1), no barriers to entry (1), price maker (1) Max 3 Traders: oligopoly(1) and a few sellers (4) (1) and barriers to entry (1) price maker (1) product differentiation (1) Max 3 Market structure must be correct to gain explanation marks.

With the help of a diagram, evaluate the impact on consumers and producers of an increase in market contestability.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• Market contestability should be explained by referring to how open a market might be to new competition.

• Existing factors which might limit contestability can be identified, including examples of barriers to entry, particularly high sunk costs.

• Recognition and description of the conditions that will exist when a market is not contestable. A clearly labelled, accurate diagram should be provided showing profit maximization price and output. (accept either Oligopoly or Monopoly diagram)

• Analysis should examine the impact on consumers when barriers to entry are removed. A diagram could be used to indicate that consumers might benefit from lower prices and more choice

• Analysis can be used to assess the impact of an increase in contestability on firms. It is likely that abnormal profits might be reduce.

• Analysis could also be used to indicate why contestability might create incentives for a business to reduce their unit costs by avoiding any X- inefficiencies

AO3 Evaluation

• The removal of barriers to entry and a subsequent loss of market share might mean that a firm cannot benefit from economies of scale to the same extent. It is possible that as a result of this lower prices might not be passed on to the consumer.

• The respective impact on consumers and producers will be determined by the degree of contestability introduced and how well it can be maintained.

• The type of industry will also determine whether an increase in contestability will have a positive effecton consumers and producers. For example, natural monopolies by their nature, are unlikely to become more efficient when barriers to entry are removed.

• Firms with high barriers to entry may lose the opportunity to make sufficient abnormal profits to ensure dynamic efficiency is maintained. This may lead to higher prices for some consumers.

• A conclusion should be attempted which examines the net benefits that might be gained by introducing more contestable markets to either/or consumers/producers

Accept all valid responses. No diagram L2 Max

AO1 Knowledge and understanding and AO2 Analysis

AO3 Evaluation

Considerwhether‘a monopolyalways operates against the interests of the consumer’. In favour of monopoly :

• Economies of scale 1, + explanation 1

• Investment in research and development 1, + explanation 1 Natural monopoly e.g. railways 1, + development 1

Max 4 Against monopoly: Loss of productive efficiency 1 + explanation 1 Loss of allocative efficiency 1 + explanation 1 Lack of dynamic efficiency1 + explanation Or: A diagram showing the loss of allocative and productive efficiency Axes/Labels 1 correct costs and revenues 1 loss of AE 1 loss of PE 1

Max 4

Max 7 for argument Conclusion: 1 essay

Subnormal and supernormal profits are only experienced in the short run and only by firms in perfect competition. With the help of diagrams, evaluate this statement.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2 Analysis

• Definition of short run, subnormal and supernormal profits.

• Statement of the conditions for perfect competition.

• Analysis of the applicability of the concepts of subnormal and supernormal profits in the context of perfect competition.

• The resolution of subnormal and/or supernormal profits to equilibrium normal profits in perfect competition in the long run.

• A relevant diagram to show the analysis.

AO3 Evaluation

• The analysis of monopolistic competition to show subnormal and supernormal profits and their resolution to normal profit.

• Monopoly analysis to show that supernormal profits may exist in the long run.

• Analysis of oligopoly to show that there may or not be subnormal or supernormal profits in the both the short run and the long run.

Accept all valid responses.

AO1 Knowledge and understanding and AO2 Analysis

AO3 Evaluation

Monopolies restrict output to raise prices and exploit consumers. With the help of a diagram, assess the extent to which a government should intervene in monopoly markets.

Use Table A: AO1 Knowledge and understanding and AO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2Analysis

• The key characteristics of a monopoly market structure should be identified.

• The aim of profit maximization should be explained and an accurately labelled supporting diagram should be provided to illustrate this situation.

• Analysis should be provided, based on a diagram, which shows the links between low output, high prices and allocative inefficiency.

• Alternative government policies to reduce the power of monopolies should be explained.

• Diagram(s) may be provided to illustrate monopoly equilibrium and/or the policy suggested.

• Analysis of how alternative types of government intervention can be used to address some of the negative outcomes associated with monopoly firms. No monopoly diagram Max L2 8 marks.

AO3 Evaluation

Accept all valid responses.

• A government can use taxation to reduce monopoly profits and control market power. However, this might reduce the incentive to invest by monopoly firms and lead to X inefficiency

• Maximum pricing might be introduced to control high prices but this might lead to shortages and/or the operation of underground markets.

• Some types of product/service can be described as natural monopolies, therefore any attempt to introduce more competition is simply likely to lead to more inefficient outcomes.

• Direct government intervention by regulation/legislation might reduce a monopoly market share but this would also make it more difficult for a monopoly to benefit from economies of scale. Hence, costs and prices might subsequently rise.

• A conclusion should attempt to examine alternative types of government intervention to try and establish the extent to which governments should intervene in monopoly markets.

Accept all valid responses.

AO1 Knowledge and understanding and AO2Analysis

AO3 Evaluation

Identify the probable market structure of the RMG industry in Bangladesh and with the help of a diagram, consider the likely effect on the level of long-run profits of firms in this industry. Identification of Monopolistic Competition 1

Diagram 3 marks: Labels and axes 1 Identification of MC=MR for profit maximisation 1 Average cost and revenue/marginal costs and revenue curves 1 Explanation of why Normal Profits 1 in long run equilibrium 1 If correct analysis but market mis-identified as monopolistically up to 5

Oligopolies are able to avoid price competition while maintaining supernormal profits in the long run. Evaluate this statement. Use TableA:AO1 Knowledge and understanding andAO2 Analysis and Table B: AO3 Evaluation to mark candidate responses to this question.

AO1 and AO2 out of 14 marks. AO3 out of 6 marks.

Indicative content Responses may include:

AO1 Knowledge and understanding and AO2Analysis

• Key characteristics of an Oligopoly market structure.

• Explanation of the kinked demand curve and price rigidity.

• Recognition that Game theory might predict stable prices through Nash equilibrium.

• Analysis of how barriers to entry might enable abnormal profits to be maintained in the long run.

• Analysis of how collusion might enable abnormal profits to be maintained in long run.

• Analysis of use of limit pricing to maintain abnormal profits in long run.

• Alternatives such as non-price competition might be used to maintain profits in long run

AO3 Evaluation

• Collusion to establish common prices is often illegal and also in some circumstances, difficult to maintain.

• It might be difficult to maintain barriers to entry if agovernment introduces legislation to promote more contestable markets.

• The extended use of limit pricing might have a significant negative impact on profitability in the short run which might reduce investment and dynamic efficiency in the long run.

• The use of non-price competition based on advertising and/or product differentiation might be costly and significantly reduce profits.

• Some Oligopolies might prefer to adopt abreak-even pricing policy in the long run to increase market share, rather than maximizing profits.

• A conclusion should be attempted which uses the precedingdiscussionto evaluate the statement under consideration

Accept all valid responses.

AO1 Knowledge and understanding and AO2Analysis

AO3 Evaluation