Competitive and concentrated markets
What's covered
Key facts
Competitive markets
In a competitive sector where staff are scarce, firms must offer higher wages to attract and retain workers (e.g. UK supermarket pay rises reported in February 2025).
Non-competitive markets
A cartel is an explicit agreement among firms to coordinate their actions, such as setting prices or output.
The importance of market structures on producers and consumers
Barriers to entry are factors that hinder new firms from entering a market, such as economies of scale, government regulations or patents; brand loyalty is another.
The labour market
The demand for labour is a derived demand: it depends on the demand for the goods and services that labour produces.
Competitive markets
Competition encourages firms to differentiate their products and services, widening consumer choice.
Non-competitive markets
The Competition and Markets Authority is an independent non-ministerial department that reviews mergers which could weaken competition and acts against cartels.
The importance of market structures on producers and consumers
Unique features or branding (product differentiation) can create market power, allowing firms to charge higher prices.
The labour market
Minimum entry requirements, such as long training in medicine, limit labour supply and push pay higher, creating wage differentials.
Competitive markets
Competition gives firms an incentive to improve efficiency and reduce production costs.
Non-competitive markets
Competition law prohibits collusion such as price fixing, and in the UK the CMA takes action against cartels and anti-competitive conduct.
Practice questions with answers
A taste of the 41 questions in this topic, answers marked. Sign up to practise the full set with spaced repetition.
In a highly competitive market, what usually happens to prices?
- ✓They are driven down
- •They are driven up
- •They are fixed by law
- •They are set by one firm
Which best describes an oligopoly?
- ✓A few large firms dominate the market
- •Many firms sell differentiated goods
- •Many small firms sell identical goods
- •One firm supplies the whole market
Which set of features is used to distinguish between different market structures?
- •Level of wages, interest rates, tax paid by firms
- •Number of consumers, advertising spend, firm size
- ✓Number of producers, product differentiation, ease of entry
- •Number of products, export sales, profit margins
Why is the demand for labour described as a derived demand?
- •It comes from workers choosing to supply their time
- ✓It depends on demand for the goods workers produce
- •It depends only on the wage rate firms offer
- •It is set by the government through minimum wages
Why do profits tend to be lower in competitive markets than in concentrated ones?
- •Competitive firms face higher wage bills
- •Consumers in these markets buy fewer goods
- •Governments tax competitive firms at higher rates
- ✓New entrants add supply and push prices down
Which of these is a cause of monopoly power?
- ✓A patent giving sole rights to make a product
- •Consumers having full price information
- •Free entry of new firms into the market
- •Many rival firms selling the same product
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