Explain why monopoly power may be considered a type of market failure.

Examine the role of barriers to entry in making monopoly a less desirable market structure than perfect competition.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part A.

Answers may include:

• definition of monopoly power, market failure
• diagram to show deadweight loss under monopoly
• explanation that market failure in this case is a form of welfare loss, illustrated by productive and allocative inefficiency
• examples of monopoly.

Marks should be allocated according to the paper 1 markbands for May 2013 forward, part B.

Answers may include:

• definition of market structure, monopoly, perfect competition, barriers to entry
• diagram to illustrate economic/abnormal profit under monopoly in the short and long run, diagram to show abnormal profit in the short run, normal profit in the long run under perfect competition
• explanation that without barriers to entry, monopolies could not earn economic/abnormal profit in the long run, whereas firms in perfect competition can earn only normal profit in the long run because of the absence of barriers to entry
• examples of barriers to entry sustaining monopolies
• synthesis and evaluation (examine).

Examination may include: alternative reasons why monopoly may be less desirable than perfect competition, such as productive and allocative inefficiency, price and output, abuse of monopoly power.

This was usually well attempted though lower achieving responses did not successfully identify the market failure that was the point of the question. Some candidates provided a general description of the faults of monopoly with inadequate regard for what was asked. The highest achieving responses focused on allocative inefficiency and identified that as market failure.

As with part (a), lower achieving responses did not sufficiently focus on the specifics of the question and were inclined to provide a general discussion of the relative merits of perfect competition and monopoly. Higher achieving responses were able to effectively examine the question through the lens of barriers to entry as specified by the question. There was some very good use of real-life examples in these responses. It can be very effective to consider why a particular real-life example does or does not conform to the expectations of theory, this also indicates synthesis as required in the part (b) questions in this paper.