HookThe £900m that vanished at the petrol pump
In July 2023 the Competition and Markets Authority finished a year-long study of the road fuel market and put a number on something drivers already suspected: supermarket fuel margins had risen sharply since 2019, and motorists had paid roughly £900m extra in 2022 alone. No cartel, no smoke-filled room. What the CMA found was quieter and more interesting — Asda, historically the aggressive price-setter that dragged everyone else's pump prices down, had softened its pricing strategy after its £6.8bn takeover in 2021, and rivals simply followed the new, gentler lead.
Nobody broke the law, and prices rose anyway. That is the whole of 4.1 in one story: market power is a dial, not a switch. Where a market sits on the dial — how many rivals, how hard entry is, how closely firms watch one another — determines prices, profits and efficiency long before any regulator gets involved. This section gives you the dial itself (the spectrum), what holds firms' positions on it (barriers to entry), the strange middle zone where most of the UK economy actually lives (oligopoly), and the two tests by which economists judge the outcome (productive and allocative efficiency).
ModelThe spectrum — from price takers to price makers
Economists arrange markets along a spectrum of competition. At one end sits perfect competition: many small firms selling identical products with no barriers to entry, each firm a price taker forced to accept the market price. Nothing real is perfectly competitive, but fresh-produce wholesale markets and currency exchange come close. Next is monopolistic competition: many firms and low barriers, but differentiated products — hairdressers, cafés, takeaways — each with a sliver of pricing power built on location, reputation or a loyal regular crowd. Then oligopoly: a few large, interdependent firms — UK supermarkets, mobile networks, high-street banks. At the far end, monopoly: one dominant seller. Pure monopoly is rare (Network Rail over the national track network is about as close as Britain gets), but UK competition policy treats a 25% market share as a working monopoly — and by that standard Google, with roughly 90% of UK search, qualifies several times over.
What moves a market along the dial: the number and relative size of firms, how differentiated the product is, how easy entry is, and how well-informed buyers are. Position predicts conduct. The closer to the monopoly end, the more a firm is a price maker — and the wider the margin it can defend without losing its customers.
ModelBarriers to entry — what keeps the profits in
Supernormal profit should be self-destroying: it attracts entrants who compete it away. Barriers to entry are whatever blocks that self-correction, and they come in recognisable families. Economies of scale: building passenger aircraft demands such enormous volume to spread costs that the world supports essentially two firms, Airbus and Boeing. Sunk costs in branding: to challenge Coca-Cola you must spend billions on advertising you can never recover if you fail — the irreversibility itself is the deterrent. Legal barriers: patents give pharmaceutical firms up to 20 years of protected pricing, while banking licences and broadcast licences ration entry directly. Control of key inputs and distribution: take-off and landing slots at Heathrow have changed hands for tens of millions of pounds a pair. Network effects: Visa and Mastercard are valuable precisely because everyone already accepts them — a new card network starts life worthless.
Incumbents can also build barriers deliberately: limit pricing sets price just low enough that entry would be unprofitable, and predatory pricing — selling below cost to bankrupt an entrant — is illegal for exactly that reason. The exam logic is a chain worth memorising: high barriers → persistent supernormal profit → weak pressure on prices and costs. Whenever a data extract shows profits that refuse to erode over years, hunt for the barrier that is protecting them.
DataOligopoly — the market that watches itself
Oligopoly is defined less by counting firms than by interdependence: each firm's best move depends on how rivals will react, so strategy replaces simple price-setting. Cut price and rivals match within days — which is why petrol stations on the same roundabout show near-identical prices. Raise price alone and you lose share. That asymmetry makes prices sticky and pushes rivalry into non-price channels: loyalty schemes, own-label ranges, delivery slots, advertising.
Measure it first with the n-firm concentration ratio — the combined market share of the largest n firms. Then recognise the two behaviours the structure makes possible. Cooperation: the temptation to collude — fix prices, rig bids, share out contracts — is built into any market where a handful of managers all know each other, which is why the CMA fined ten construction firms roughly £60m in 2023 for rigging bids on demolition contracts, and why cartel fines can reach 10% of a firm's worldwide turnover. Or war: the 2014–16 supermarket price war saw the Big Four cut prices so hard against Aldi and Lidl that industry revenue shrank while market shares barely moved. Collusion and price war are the two faces of the same structure — interdependence explains both.
Kantar's grocery share data for late 2024 put Tesco at roughly 28%, Sainsbury's at 15.5%, Asda at 12.5% and Aldi at 10%. Four-firm concentration ratio: 28 + 15.5 + 12.5 + 10 = 66%. Two-thirds of the market in four firms is a textbook oligopoly. In the exam: state the formula (sum of the largest firms' shares), add the numbers explicitly, then interpret in one sentence — 'a CR4 of 66% signals high concentration, so expect interdependent pricing and heavy non-price competition.' The interpretation sentence is the mark students forget.
MechanismObjectives and the prices that follow
Textbooks assume profit maximisation; real firms are messier, and 4.1.4 rewards you for knowing it. Revenue and market-share maximisation: Amazon ran razor-thin or negative profits for the better part of two decades while revenue compounded, because scale itself was the strategy. Survival: in the 2020 lockdowns, pricing to cover variable costs and keep cash moving beat any profit target. Satisficing: managers aim for profit good enough to keep shareholders quiet while avoiding the risk and effort maximisation would demand.
Each objective implies a pricing decision. Profit maximisers facing inelastic demand nudge prices upward — regulated rail fares rise every January for a reason. Share-chasers use penetration pricing: Aldi and Lidl entered the UK pricing well below the incumbents and let volume build the brand. Innovators use price skimming: games consoles and flagship phones launch high, harvest the eager buyers, then drift down. Incumbents defending a moat use limit pricing. Firms with separable customer groups use price discrimination — peak and off-peak rail tickets sell the same seat at very different prices because commuters cannot travel at 11am. When a question hands you a pricing decision, ask three things in order: what objective, what elasticity, what barrier?
ModelEfficiency — the scorecard for the whole spectrum
Two tests decide whether a market structure actually serves consumers. Productive efficiency: is output produced at the lowest possible unit cost? Competition enforces it, because a firm with bloated costs in a competitive market dies. Allocative efficiency: do resources flow to what consumers genuinely value, with prices reflecting the true cost of the resources used? Market power fails both tests simultaneously — a monopolist restricts output and holds price above cost (allocative failure), while the absence of rivals lets slack costs survive, a disease economists call x-inefficiency (productive failure).
The exam-winning counterpoint is dynamic efficiency: improvement over time. Supernormal profit is the war chest that funds research — the big pharmaceutical firms each spend billions a year on R&D precisely because patents promise a protected payoff at the end. A perfectly competitive market, earning only normal profit forever, could never finance a decade-long drug pipeline. So the evaluation writes itself: competition delivers static efficiency today; a measure of market power may buy innovation tomorrow. The strongest answers weigh those two against the specific market in the question rather than declaring a universal winner.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Identify market structure from conduct, not from counting firms. If the extract gives market shares, calculate a concentration ratio explicitly — formula, addition, one-sentence interpretation — because the working earns marks the adjective 'concentrated' does not. Economics B will not ask you to derive MC = MR cost-curve diagrams the way Economics A does; the marks sit in applied reasoning about a named market.
On 8- and 12-markers, build the chain barrier → market power → pricing decision → efficiency outcome, then evaluate with dynamic efficiency or contestability: is the profit funding innovation, and how easily could an entrant actually attack? Anchor the application in a dated, real investigation — the CMA's road fuel study (2023), the demolition bid-rigging fines (2023) or the blocked Sainsbury's–Asda merger (2019). Examiner reports consistently reward candidates who argue from a real case over those who reason about 'a firm' in the abstract.