Explain why producers in an oligopolistic market might choose to engage in non-price competition.

Evaluate the view that the use of legislation and regulation by government is the most effective way to control monopoly power.

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

Answers may include:

• definitions of oligopoly, non-price competition
• diagram of non-collusive oligopoly showing price-elastic demand above the market price and relatively price-inelastic demand below the market price and/or prisoner’s dilemma
• an explanation of how interdependence in oligopolistic markets incentivizes oligopolistic firms to keep prices stable and therefore pursue non-price competition
• examples of oligopolistic firms that pursue non-price competition.

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

Answers may include:

• definition of monopoly power
• diagram of monopoly
• an explanation of how legislation and regulation can be used to limit the pricing power of monopoly firms
• examples of a monopoly being subjected to legislation and regulation by a government
• synthesis or evaluation (evaluate).

Evaluation may include: consideration of the advantages and disadvantages of legislation and regulation; comparison of the effectiveness of regulation of prices, regulation of patents and limitations to mergers/takeovers to alternative measures such as trade liberalization and nationalization.

Examiners should be aware that candidates may take a different approach which, if appropriate, should be rewarded.

Most candidates correctly explained that when an oligopolistic firm decreases its price the other firms in the market will decrease their prices as well and hence the demand would be price inelastic below the current price, resulting in falling total revenue. Nevertheless, those same candidates too often supported their explanations by a diagram showing positive marginal revenue (which implies that the falling price results in increasing total revenue).

Most candidates explained monopoly in general terms and discussed forms of government intervention in general (such as taxation, subsidies and price ceiling) but their answers could be improved by focusing on the specific demands of the question.