Market structures

Perfect competition is a market structure with FOUR defining features:

1. Many small firms.

• No firm has market power.
• Each firm is a 'PRICE TAKER' — must accept the market price.

2. Identical (homogeneous) products.

• Consumers cannot distinguish one firm's output from another.
• No brand loyalty.
• Competition is purely on price.

3. Free entry and exit.

• New firms can enter without barriers.
• Existing firms can leave without cost.
• Long-run profits cannot be unusually high (entry would compete them away).

4. Perfect information.

• All buyers and sellers know all prices and qualities.
• No firm can charge a higher price; consumers would simply buy elsewhere.

Implications:

• Price = marginal cost (efficient).
• Output is at the maximum the market can absorb.
• No long-run economic profit (firms break even).

Real-world examples?

Almost none. Some agricultural markets approximate it — many small farmers selling identical wheat or corn. But virtually no real market satisfies all four conditions.

Why study it then? As a BENCHMARK. Real markets are evaluated by HOW FAR they depart from perfect competition.

Cambridge tip. Mark schemes for "features of perfect competition" expect ALL FOUR. Memorise them. The most-credited are 'many small firms', 'identical products', 'free entry and exit'.

Monopoly is a market dominated by ONE firm — the sole or near-sole supplier.

Cambridge typically defines monopoly as a firm with 25% market share or more. A pure monopoly (100% share) is rare; near-monopolies (e.g., a single dominant national utility) are more common.

Key features:

1. Single (or dominant) seller.

• No close substitutes.
• The firm is a 'PRICE MAKER' — sets the price rather than accepting it.

2. High barriers to entry.

• New firms blocked from entering.
• Sources of barriers:
  • High start-up costs (e.g., setting up a national rail network).
  • Patents and intellectual property (e.g., pharmaceutical drugs).
  • Government licensing (e.g., national lotteries).
  • Brand loyalty (decades of consumer habit).
  • Control of essential resources (e.g., diamond mines).
  • Economies of scale (large incumbent has cost advantage new entrants can't match).

3. Limited information / opaque pricing.

• Consumers can't easily compare alternatives because there are no alternatives.

Consequences for consumers:

Negative:

• Higher prices. Monopolist exploits absence of competition.
• Lower output. Restricting output keeps price high.
• Less choice / variety.
• Less innovation pressure (no competitive threat).

Positive (sometimes):

• Economies of scale. Larger size → lower average cost → potentially lower prices than fragmented market.
• R&D investment. Monopoly profits fund innovation (e.g., pharmaceutical R&D often dependent on patent monopoly).
• Single infrastructure. For natural monopolies (water, electricity), one firm is more efficient than many.

Government responses to monopoly:

• Anti-trust / competition law (break up monopolies).
• Regulation (price caps, quality standards).
• Tax monopoly profits.
• Open the market (deregulation, lower barriers).

Cambridge tip. Examiner reports praise candidates who acknowledge BOTH negatives AND positives of monopoly. One-sided 'monopolies are bad' answers cap at the lower bands.

Feature	Perfect competition	Monopoly
Number of firms	Many (small)	One (large)
Products	Identical	Unique
Entry/exit	Free	Blocked by barriers
Information	Perfect	Limited
Price	Set by market	Set by monopolist
Firms	Price takers	Price makers
Long-run profit	Zero (normal)	Above-normal (super-normal)
Output	High	Restricted
Allocative efficiency	Yes	No
Consumer welfare	Higher	Lower

The deadweight loss of monopoly. Because monopoly restricts output below the competitive level, society loses some valuable trades that would have happened in competition. This loss is 'deadweight' — no-one gains from it.

The R&D defence of monopoly. Patent monopolies in pharmaceuticals, software, and biotech are TEMPORARY monopolies (typically 20 years) granted to reward R&D investment. Without the patent monopoly, firms would have less incentive to develop new drugs. The trade-off: short-run high prices for long-run innovation.

Where do REAL markets sit between PC and monopoly?

Most real markets are somewhere in between — called monopolistic competition (many firms with differentiated products, like restaurants) or oligopoly (a few large firms dominating, like supermarkets or airlines). 0455 only covers the two extremes, but real-market analysis usually involves understanding intermediate structures.

Cambridge tip. Mark schemes for "compare the two structures" expect 4-5 dimensions covered (price, output, choice, efficiency, profit). Top-band answers add nuance — acknowledging that PC is theoretical and monopoly has some defences.