Market Structures: Competition and Monopoly: Economics 0455 (Cambridge O Level / IGCSE)

Solenne Dairy is one of eighteen small dairy farms that sell fresh milk directly to shoppers at the weekly market in the town of Bellcourt. Each dairy sells a very similar product, and if Solenne Dairy tried to charge much more than the other seventeen dairies, most of its customers would simply buy their milk from a rival dairy stall instead.

Which type of market structure does Solenne Dairy operate in?

In the town of Aldermoor, fourteen independent hair salons compete for customers along the same high street. Each salon offers a broadly similar haircut for around $18, and salons regularly change their opening offers and styling options to attract passers-by.

In the neighbouring village of Rushcombe, a single company, Rushcombe Water Co. is the only supplier of piped drinking water to every household, under an exclusive 40-year contract that prevents any rival company from building its own water network in the village.

(a) State two characteristics of a competitive market, using Aldermoor's hair salon market as an example. [2]

(b) State two characteristics of a monopoly market, using Rushcombe Water Co.'s position as an example. [2]

(c) Explain why Rushcombe Water Co. is likely to be able to charge a higher price for water than would be charged if several water companies competed for customers in the village. [2]

Solvex Ltd is the only firm licensed to manufacture a particular type of miniature hearing-aid battery in the country of Amaris, under an exclusive 15-year patent that blocks any other firm from producing an identical battery.

Last year, Solvex sold 500 000 of these batteries at a price of $4.00 each. Its average cost of producing each battery was $3.10.

(a) Define a monopoly market. [2]

(b) Calculate Solvex Ltd's total profit from selling hearing-aid batteries last year. [2]

(c) Explain one way in which the quality or choice available to consumers of hearing-aid batteries might be reduced because Solvex faces no competition. [2]

(d) Explain one way in which Solvex Ltd's high profit from its monopoly position could benefit consumers of hearing-aid batteries in the future. [2]

Kestrel Freight is a delivery firm operating along a busy shipping lane once served by nine competing freight companies. Last year, all nine companies merged into a single business, Kestrel Freight, which now handles every consignment travelling along that lane.

Which of the following is most likely to happen now that Kestrel Freight faces no rival firm on this lane?

For many years, six independent bus companies competed on the busy route between the towns of Oakhaven and Dunmore, each running its own timetable and charging its own fare, ranging from $2.20 to $2.80 per journey, and some offering onboard extras such as free wifi or air conditioning to attract passengers. Last year, all six companies merged into a single business, RegionaLink, which is now the only operator running buses on this route.

(a) State two characteristics that made the Oakhaven–Dunmore bus market competitive before the merger. [2]

(b) Explain one likely effect of the merger on the fares that passengers pay to travel between Oakhaven and Dunmore. [3]

(c) Explain one likely effect of the merger on the choice and quality of bus services available to passengers on this route. [3]

(d) Discuss whether passengers travelling between Oakhaven and Dunmore are likely to be better off or worse off as a result of the six companies merging into RegionaLink, considering both possible benefits and possible drawbacks of this change. [4]

Brightline Mobile is the only company operating a mobile phone network on the small island nation of Corvale. Building the network of transmission towers and undersea cables needed to carry calls and data across the island cost close to $300 million, an amount that would take a new entrant many years to earn back. No other company has ever attempted to build a rival network on Corvale.

Which of the following best explains why no rival firm has entered the mobile network market in Corvale?

Riverside Market is a Saturday fruit market in the town of Elmswood. Any trader can rent a stall for a small weekly fee and start selling fruit there, and can just as easily stop renting a stall and leave if trade does not work out. More than twenty stallholders currently sell apples and pears at Riverside Market, and shoppers can walk freely from stall to stall comparing prices before deciding where to buy.

CrossFerry Ltd is the only company permitted to operate the passenger ferry crossing between Elmswood and the island of Selkirk, after winning an exclusive 25-year operating concession from the local council. No other company is allowed to bid for this crossing while the concession lasts.

(a) Identify two characteristics of Riverside Market, other than the number of stallholders, that make it a competitive market. [2]

(b) Explain how CrossFerry Ltd's operating concession acts as a barrier to entry, preventing the Elmswood–Selkirk ferry crossing from being a competitive market. [2]

(c) Explain one way in which the freedom of stallholders to enter and leave Riverside Market is likely to benefit shoppers there, compared with the position of passengers on the Elmswood–Selkirk ferry crossing. [2]

Vaxora Pharma is the only firm licensed to manufacture a particular vaccine in the country of Bellshire, under an exclusive 10-year government licence. Seven years ago, Vaxora Pharma spent $120,000,000 building a specialised vaccine plant, an amount few firms could afford to invest. A cost that has discouraged any rival from trying to enter the market during its licence.

Last year, running this large plant to produce 40,000,000 doses cost Vaxora Pharma a total of $28,000,000 in production costs, and it sold every dose to Bellshire's health service for $4.00 each.

(a) Calculate Vaxora Pharma's average cost of production per dose last year. [2]

(b) State two separate barriers to entry described in this scenario, and explain briefly why each discourages a rival firm from entering the vaccine market in Bellshire. [4]

(c) Explain how Vaxora Pharma's very large scale of production might allow it to supply vaccines at a lower average cost than several smaller competing manufacturers could achieve. [3]

(d) Vaxora Pharma sells each dose for $4.00, well above its $0.70 average cost of production. Discuss whether Bellshire's health service is likely to benefit overall from having a single monopoly vaccine supplier rather than several competing manufacturers. [3]

ParcelWay Ltd has held the exclusive licence to deliver post-office parcels across the country of Dunmoor for the past twenty years, with no rival courier permitted to compete for this business. Over the past five years, customer complaints about late deliveries have risen sharply, yet ParcelWay's delivery charge has stayed the same and the company has made no investment in newer sorting equipment.

Which of the following best explains, in economic terms, why ParcelWay Ltd might have let its delivery service decline in this way?

GridCore Ltd is the only company licensed to build and operate the network of pylons and cables that carries electricity to every town in the country of Larkspur. Building a second, complete network of pylons and cables to compete with GridCore's existing grid would cost several billion dollars and would require digging up roads and fields across the entire country a second time. No rival firm has ever proposed building a competing grid.

GridCore charges every household a fixed annual grid-connection fee, which has risen from $60 to $85 over the past ten years without any government challenge.

(a) Explain why building a second, competing electricity grid alongside GridCore's existing network might be considered wasteful for Larkspur as a whole. [2]

(b) Using this scenario, state two reasons why no rival firm has attempted to build a competing electricity grid in Larkspur. [2]

(c) Explain one way in which households in Larkspur might be disadvantaged by GridCore facing no rival grid operator. [3]

(d) Discuss whether Larkspur would be better served by having a second company build a competing electricity grid, or by continuing to rely on GridCore as the only grid operator, weighing both the possible benefits and the possible drawbacks of each option. [5]