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Pearson Edexcel IAL Economics 3.3.3 Market structures & contestability Q

Practise market structure analysis through concentration ratios, efficiency, equilibrium diagrams, barriers to entry and firm behaviour.

Syllabus
First assessment 2019
Course
Economics YEC11
Level
A2

Exam points

  • calculate concentration ratios from market-share data and link them to market structure
  • interpret cost-revenue diagrams to compare profit, efficiency and long-run adjustment
  • evaluate barriers, collusion or price cuts using business and consumer impacts

Covered syllabus points

3.3.3.1a - concepts of: • allocative efficiency • productive efficiency • dynamic efficiency •3.3.3.2a - Calculation of n-firm concentration ratios. ratio3.3.3.2b - significance of concentration ratios3.3.3.3a - Assumptions of perfect competition. competition3.3.3.3b - Profit-maximising equilibrium in the short run and long run3.3.3.3c - short-run shutdown point3.3.3.3d - Productive and allocative efficiency in the short run and long run3.3.3.4a - Assumptions of monopolistic competition. competition3.3.3.4b - Types of product differentiation: • physical - product features • marketing -3.3.3.4c - Profit-maximising equilibrium in the short run and long run3.3.3.4d - Productive and allocative efficiency in the short run and long run3.3.3.5a - Assumptions of oligopoly3.3.3.5b - Barriers to entry and exit: • economies of scale • limit pricing • patents • branding •3.3.3.5c - Interdependence of firms: • simple game theory - two firm/two outcome model • reasons3.3.3.5d - Costs and benefits of collusion to producers, consumers, workers and governments3.3.3.5e - Price competition: • price wars • predatory pricing • limit pricing3.3.3.5f - Non-price competition: (continued) • advertising and branding • quality • endorsement •3.3.3.5g - Costs and benefits of price and non-price competition to firms, consumers, employees3.3.3.6a - Assumptions of monopoly3.3.3.6b - Barriers to entry and exit3.3.3.6c - Profit-maximising equilibrium3.3.3.6d - Costs and benefits of monopoly to firms and consumers3.3.3.6e - concept of 'natural monopoly' and its implications3.3.3.6f - Conditions necessary for third-degree price discrimination3.3.3.6g - Costs and benefits of price discrimination to firms and consumers3.3.3.6h - Productive, allocative and dynamic efficiency3.3.3.7a - Assumptions and conditions for a monopsony to operate3.3.3.7b - Costs and benefits of a monopsony to firms, consumers and employees3.3.3.8a - Characteristics of contestable markets3.3.3.8b - Implications of contestable markets for behaviour of firms on: • profitability •3.3.3.8c - Costs and benefits of contestability for firms and consumers3.3.3.8d - significance of sunk costs for contestability

3.3.3 - Market structures and contestability question 1

[Maximum number: 8]

Sources for use with Section B
The car industry

Figure 1 Percentage market share of car manufacturers in the USA, 2019

Figure 1 Percentage market share of car manufacturers in the USA, 2019

Extract A PSA Group and Fiat Chrysler merger

In January 2021 PSA Group and Fiat Chrysler agreed to merge, creating the world’s third largest car manufacturer by volume. The new firm, named Stellantis, includes well-known car brands including Peugeot, Citroen and Vauxhall from PSA Group and Alfa Romeo, Jeep and Lancia from Fiat Chrysler. The ownership of the firm is split evenly between the shareholders of PSA Group and Fiat Chrysler. As a result of this merger, Stellantis owns manufacturing plants all over the world including the Netherlands, the USA and the UK. It has an expected annual turnover of over €170 billion.

This horizontal integration is expected to benefit both firms. Each firm will benefit from cost savings by sharing production expertise and technical knowledge. It is estimated that there will be an annual cost saving of €3.4 billion from purchasing economies of scale. PSA Group has gained access to the American car market, where Fiat Chrysler already has a significant market share, with 3 000 car showrooms across the USA. Following the merger, in Q1 2021 Stellantis experienced a 25% increase in revenue as a result of an increase in car sales in the US market.

Fiat Chrysler will benefit from gaining access to PSA Group’s research and development into electric cars. This is important for the firm because demand for electric cars is increasing globally. PSA Group has developed a range of low-emission vehicles that Fiat Chrysler does not have the technology to produce. Electric cars are also important when moving into foreign markets such as China. Since 2010, the demand for electric cars in China has been rising steadily. In 2020 38% of global sales of electric cars were in China.

The shareholders of Stellantis hope that the firm will be able to compete more effectively in China, the world’s biggest car market. In 2020 PSA Group and Fiat Chrysler had a combined market share of only 1% in the Chinese car market, whereas Chinese car firms had a 40% market share. In addition, a number of other well-established firms are operating in the Chinese car market including Volkswagen, Honda and Toyota. Trying to increase market share in China may prove to be difficult for Stellantis. Good communication and clear management will be essential if Stellantis is to be successful.

Extract B Concerns over factory closures

Trade unions are concerned that Stellantis will close factories to cut costs. Unite, the UK-based trade union negotiating on behalf of the 3 000 Vauxhall employees, has requested a meeting with the head of Stellantis, to prevent possible factory closures. The skilled car workers are highly specialised. Therefore, if these factories were to close, it would be very difficult for the workers to find new jobs without training.

Question (a)

(a)

With reference to Figure 1, calculate the four-firm concentration ratio for the US car market in 2019.

[ 2 ]

Question (b)

(b)

With reference to Extract A, analyse two barriers that Stellantis are likely to experience when trying to increase market share in China.

[ 6 ]

3.3.3 - Market structures and contestability question 2

[Maximum number: 1]

The table shows the market share by value of retail sales of grocery stores in the UK. From the data it can be deduced that

StoreMarch 2016 (\%)March 2017 (\%)
Tesco28.127.6
Sainsbury’s16.416.1
Asda16.215.7
Morrisons10.510.4
Co-op6.16.1
Aldi6.06.8
Others16.717.3
A

the 3-firm concentration ratio was 50.7% in March 2016

B

the 5-firm concentration ratio was 87.3% in March 2016

C

the 3-firm concentration ratio was 49.4% in March 2017

D

the 5-firm concentration ratio was 76.6% in March 2017

3.3.3 - Market structures and contestability question 3

[Maximum number: 1]

The diagram shows the short-run costs and revenues for a farmer producing wheat in India.

Figure for Question 3.3.3 - Market structures and contestability question 3 — Edexcel A-Level Economics A2

Which one of the following is most likely to occur in the long-run?

A

Additional wheat farmers will enter the market

B

Some wheat farmers will leave the market

C

The wheat farmer will make supernormal profit

D

The wheat farmer will make a loss

All question bank results loaded