How do oligopolies and monopolies set price and output, and what are the consequences for consumers?
Oligopoly and monopoly: concentration and barriers to entry, interdependence and collusion in oligopoly, the kinked demand curve and game theory, monopoly equilibrium, price discrimination, and the costs and benefits of monopoly.
An Eduqas A520 answer to the two market structures with the most market power, covering concentration and barriers to entry, oligopolistic interdependence, collusion, the kinked demand curve and game theory, the profit-maximising monopoly, price discrimination, and the costs and benefits of monopoly power.
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What this dot point is asking
Eduqas wants you to measure market concentration, explain barriers to entry, analyse oligopolistic interdependence (the kinked demand curve, collusion and game theory), draw the profit-maximising monopoly, explain price discrimination, and evaluate the costs and benefits of monopoly power. These are the structures where firms can sustain supernormal profit, so the welfare comparison with competition is central.
Concentration and barriers to entry
Barriers to entry are what allow oligopolies and monopolies to sustain supernormal profit in the long run, unlike the competitive structures where free entry erodes it.
Oligopoly: interdependence, the kinked demand curve and collusion
Oligopolists are interdependent: one firm's best action depends on how rivals respond.
Game theory formalises this. In the prisoner's dilemma, two firms each do better by cheating whatever the other does (a dominant strategy), so both end up in a worse, competitive outcome than if they could credibly cooperate, illustrating why cartels are fragile.
Monopoly equilibrium
Price discrimination
Examples include peak and off-peak rail fares, student and adult cinema tickets, and airline pricing. Price discrimination can harm some consumers (those charged more) but can also expand access (lower prices for price-sensitive groups) and fund services that a single price could not sustain.
Examples in context
- Supermarkets and energy. A high concentration ratio and non-price competition (loyalty cards, advertising) are textbook UK oligopoly.
- OPEC. The oil producers' cartel illustrates collusion and its instability when members cheat on quotas.
- Rail and airline fares. Peak and advance pricing is third-degree price discrimination separating inelastic commuters from elastic leisure travellers.
Try this
Q1. Explain two conditions necessary for a firm to practise price discrimination. [4 marks]
- Cue. Market power to set price; ability to separate markets and prevent resale; different price elasticities of demand between groups (any two, developed).
Q2. Using game theory, explain why a price-fixing cartel tends to be unstable. [4 marks]
- Cue. Each firm has a dominant strategy to cheat and undercut to gain share, so the cooperative (high-price) outcome breaks down to the competitive one, as in the prisoner's dilemma.
Exam-style practice questions
Practice questions written in the style of WJEC Eduqas exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
Eduqas Component 2 20216 marksA market has four firms with shares of 30 per cent, 25 per cent, 20 per cent and 10 per cent. Calculate the four-firm concentration ratio and, with the help of a diagram, explain what the kinked demand curve suggests about pricing in such a market.Show worked answer →
A data-response question combining a calculation and analysis. The four-firm concentration ratio is the combined market share of the largest four firms.
Concentration ratio: . A ratio this high indicates an oligopoly (a few firms dominate).
For the kinked demand curve: draw a demand curve with a kink at the current price. Above the kink demand is elastic (rivals do not follow a price rise, so the firm loses many sales); below the kink demand is inelastic (rivals match a price cut, so the firm gains few sales). This predicts price stability: firms have little incentive to change price, and the discontinuity in marginal revenue means cost changes within a range leave price unchanged.
Eduqas Component 3 (micro) 202212 marksEvaluate the view that monopoly always harms consumers.Show worked answer →
A levels-of-response essay. Knowledge and application: define monopoly (a single dominant seller, high barriers to entry) and show on a diagram that a profit-maximising monopolist produces where , at a lower output and higher price than a competitive market, earning long-run supernormal profit, with allocative inefficiency () and a deadweight welfare loss.
Analysis: develop the consumer harms (higher prices, restricted output, productive inefficiency, possible X-inefficiency).
Evaluation: weigh the potential benefits: economies of scale (a natural monopoly may have lower costs), supernormal profit funding research and development (dynamic efficiency and innovation), price discrimination that can expand access, and the discipline of contestability. Conclude with a supported judgement, for example that monopoly can harm consumers through higher prices but may benefit them where economies of scale and innovation are large and regulation is effective.
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Sources & how we know this
- Eduqas A Level Economics Specification (A520) — Eduqas (2015)