13

Perfect competition and monopoly

Exam practice (p. 144)

1 Other ways that supermarkets can compete include:
l convenience, e.g. extended opening hours, internet shopping, home deliveries
and self-service automated checkouts
l quality, e.g. customer service
l variety, e.g. the availability of different branded products
l mass-media advertising and promotions, e.g. coupons and vouchers
l customer loyalty schemes
l added services, e.g. free car parking facilities, supplementary service providers
(such as a petrol station, car wash, dry cleaning, photo developing, florist, post
office services).
Award up to 2 marks for each clearly identified and explained non-price
competition used by supermarkets to a maximum of 6 marks.
2 Arguments to suggest that supermarkets do operate in competitive markets
include:
l Supermarkets use a range of pricing strategies to compete, including discounts,
coupons, loss-leaders (items sold below their cost of production, to entice
customers) and multi-buy deals.
l They also use an extensive range of non-pricing strategies to compete.
l Customers may have plenty of choice, even between the large supermarket
chains such as Walmart, Carrefour and Tesco.
However, it can be argued that:
l In many countries only a few supermarket chains dominate the industry thus
limiting the degree of competition.
l There are huge barriers to entry in the industry, which also limits the extent to
which supermarkets operate in competitive markets.
Award 12 marks for a brief answer that shows limited understanding.
Award 34 marks for a balanced answer with a good level of understanding.
Award 56 marks for a balanced and justified answer, addressing the extent to
which supermarkets operate in competitive markets.
3 Whether customers benefit from the competitive strategies used by supermarkets
depends on several factors, including whether the supermarkets:
l collude to act as a monopoly, thus limiting any real benefits to customers
l deliberately try to mislead customers by using confusing pricing strategies,
e.g. the 600g jar of mayonnaise priced at 3.49 is priced at almost exactly the
same amount per gram as the 400g jar priced at 2.35
l adopt an ethical position, e.g. pre-packed fruits and vegetables can be priced
very differently to loose varieties of the same produce
l create business closures (e.g. local bakeries, butchers, florists and fish
mongers), thus causing unemployment
l act in the best interest of the public, e.g. lower prices resulting from economies
of scale.
Accept any other reason why consumers benefit from the competitive strategies
used by supermarkets.
Award 13 marks for a brief answer that shows limited understanding.

Cambridge IGCSE and O Level Economics Hodder & Stoughton 2013 1

 13 Perfect competition and monopoly

Award 56 marks for a balanced answer with a good level of understanding.

Award 78 marks for a detailed, balanced and justified answer, addressing the
extent to which supermarkets operate in competitive markets.

Exam practice (p. 145)

1 Barriers to entry are the obstacles that firms face when trying to establish
themselves in a new market. Examples include: high set-up costs, government
regulations, and the market dominance and customer loyalty of existing firms.
2 Advertising expenditure can act as a barrier to entry because smaller firms trying
to enter the market will not be able to compete with the larger, more established
firms. For example, only large firms would be able to afford the average cost of
a 30-second advert during the Super Bowl at $4 million per advert. In addition,
effective advertising of the existing firms is likely to lead to brand recognition and
customer loyalty. This can create further barriers to entry.
Award 12 marks for a brief answer that shows limited understanding.
Award 34 marks for a balanced answer with a good level of understanding.

Exam practice (p. 146)

1 Price discrimination is used by firms, such as theme parks, that charge different
prices to different customers for essentially the same product.
2 Theme parks use price discrimination in a number of ways:
l Age adults pay an admission price of $28 whereas children pay only $14, and
pensioners get in for free.
l Demographics families pay $75 (saving $9).
l Customer loyalty adult annual pass holders pay $75 for all-year entry
whereas single entry adults would pay $84 for only three visits ($28 3).
l Group discounts large groups may qualify for a small discount on the
entry price.
l Time theme parks might also choose to charge more during peak periods,
such as the weekends or summer holidays.
Accept any reasonable response that is explained in the context of theme parks.
Award 12 marks for a brief answer that shows limited understanding.
Award 34 marks for a good answer with appropriate reference to price
discrimination.
Award 56 marks for a detailed and justified answer of how theme parks use
price discrimination.

Activity (p. 149)

1 Students own answers.
2 Students own answers this really depends on the specific industry and country
that is being investigated.
3 A two-sided argument would need to be provided, taking into consideration
whether the monopolist acts in the publics best interest, e.g. the market power
of the tobacco firms in the UK means they create huge barriers to entry whilst
producing demerit goods but is it better to have competition in such an
industry?

Cambridge IGCSE and O Level Economics Hodder & Stoughton 2013 2