Market structures
Key terms
Define each term.
Multiple choice
Circle the correct answer.
Which is the strongest barrier to entry protecting a monopoly?
In a competitive market, what happens when existing firms earn unusually high profits?
Worked problems
Show your working.
Measuring how concentrated a market is. An industry has total annual sales of $800 million. The four largest firms sell $260m, $180m, $100m and $60m. Calculate each firm's market share and the four-firm concentration ratio, then comment on what it suggests.
Diagrams
Draw a demand and supply diagram for a competitive industry in equilibrium. On a second diagram beside it, show what happens to price and quantity if the industry were taken over by a single monopolist that restricted output.
Answers
Monopoly: A market dominated by a single seller, protected by barriers to entry, which is able to set the price rather than accept a market price.
B. A patent makes entry legally impossible for the duration of the patent, so it is absolute rather than merely difficult. Brand loyalty, advertising and incumbency all raise the cost of entering but none prevents it, and a well-funded entrant can overcome all three.
B. Easy entry is what makes a market competitive. High profits signal an attractive opportunity, new firms enter, market supply rises, price falls and profits return towards the normal level. This self-correcting mechanism is precisely what barriers to entry prevent in a monopoly.
Step 1. Calculate each market share. Share = firm sales / total market sales x 100. Firm A: 260/800 = 32.5%. Firm B: 180/800 = 22.5%. Firm C: 100/800 = 12.5%. Firm D: 60/800 = 7.5%.
Step 2. Add them for the concentration ratio. 32.5 + 22.5 + 12.5 + 7.5 = 75%. The four-firm concentration ratio is 75%.
Step 3. Interpret the figure. Three quarters of the market is held by four firms, leaving 25% shared among all the others. This is a concentrated market, consistent with oligopoly, where firms are few enough that each must consider how rivals will respond to its decisions.
Step 4. State what the ratio does not tell you. It says nothing about how the share is distributed among the four, so a market with one firm at 70% looks the same as four firms at 18.75% each despite being very different. It also ignores whether entry is easy: a concentrated market that newcomers can enter freely may behave competitively.
Step 4 is where the evaluation marks are. A concentration ratio measures structure, not conduct, and a high ratio is evidence of possible market power rather than proof of its abuse.
The comparison is the point: the monopolist produces less and charges more. Keep the demand curve identical on both diagrams, because the change is in the supply side and the market's willingness to pay has not altered. This is the intuitive version of a comparison made precisely with cost and revenue curves at A Level.