Distinguish between perfect competition and monopolistic competition.

Using real-world examples, discuss the impact of large firms having significant market power.

Marks should be allocated according to the paper 1 markbands for May 2022 forward, part A.

Answers may include:

• Terminology: monopolistic competition, perfect competition
• Explanation: that perfect competition is characterised by many firms, free entry and exit, homogeneous products and perfect knowledge, whereas monopolistic competition is characterised by many firms, free entry and exit and product differentiation; and the impact of these features on the two markets with regard to pricing power, long-term economic profits and allocative efficiency
• Diagram: use of a perfect competition diagram and/or a monopolistic competition diagram.

N.B. A maximum of [6] should be awarded for responses that confuse monopoly with monopolistic competition.

Marks should be allocated according to the paper 1 markbands for May 2022 forward, part B.

Answers may include:

• Terminology: market power
• Explanation: of the impact of significant market power in terms of the monopoly and oligopoly models
• Diagram: showing monopoly/collusive oligopoly (significant market power)
• Synthesis (discuss): the advantages and disadvantages of significant market power in terms of economies of scale, including natural monopolies, abnormal profits to finance investment in R&D and innovation; the possible welfare loss, the risks in relation to price, output and consumer choice, the possibility that such firms may pursue goals other than profit maximization
• Examples: real-world examples of large firms that have significant market power.

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

N.B. It should be noted that definitions, theory and examples that have already been given in part (a), and then referred to in part (b), should be rewarded.

This question was generally well attempted, with candidates usually able to offer a well explained account of the key assumptions behind each market structure. Diagrams were usually used effectively to enable distinctions to be made between the two structures.

Although they are not specifically asked for in part (a) questions, many candidates were more comfortable in using examples to explain the differences, particularly to explain monopolistic competition. It was noted that some candidates struggled to provide a clear answer and that was often because they were confused with what monopolistic competition was. A significant number thought that the question was referring to a monopoly.

Good responses acknowledged that the question must allude to monopoly and oligopoly market structures and were able to develop a substantive response in which they were able to utilize real-world examples in order to develop the synthesis appropriate to the discussion. Good candidates also displayed a good level of knowledge and factual data in relation to the examples they offered, enabling greater depth to the synthesis provided.

Some candidates took the question as an opportunity to examine government responses to market power, which misreads the question.