Compare one market run by many small sellers with the same market run by a single firm.
Our example (made-up numbers)
| Perfect competition | Monopoly | |
|---|---|---|
| Price | €4 | €7 |
| Quantity | 60 | 30 |
| Price v cost | P = MC | P > MC |
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Remember it as: Market power: higher price, lower output, a welfare loss.
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Market power is not always bad. Big firms can do some things small ones cannot.
The case for market power
Economies of scale
A huge firm's costs per unit can be far lower.
Natural monopoly
One water network is cheaper than three side by side.
Research
Profits pay for new medicines and technology.
The points to remember
- Judge market power by its results: prices, costs, innovation.
- It can be temporary if new rivals can enter.
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Where market power is abused, governments have four main tools.
Government responses
Competition law
Block mergers, break firms up, ban price fixing.
Fines
The EU fined Google €2.42 billion in 2017 for abusing its power.
Price regulation
Cap the prices of natural monopolies, such as water bills.
Government ownership
Run the industry itself, as with many railways.
Weigh each tool
| Tool | Strength | Weakness |
|---|---|---|
| Fines | Deter abuse | Too small next to the profits |
| Price caps | Protect consumers | Hard to set; less investment |
| Ownership | Run for the public good | Can be inefficient |
Quick reminder
- Axes: Costs, revenue up the side, Q along the bottom
- Curves: D = AR, MR, MC and AC
- Marks: Pm and Qm where MC = MR, the abnormal profit box and the welfare loss
- Dots with dashed lines to the axes
- No numbers, no title
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Paper 1 asked this in May 2024, as part (b) for 15 marks; November 2023 and November 2025 asked about market power and how governments respond.
Using real-world examples, evaluate the view that the existence of significant market power is always undesirable.
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See the answer broken into clear points, with guidance on how each point earns marks.
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How the 15 marks are given
| Marks | What your answer needs |
|---|---|
| 13–15 | Theory fully explained, terms right all the way through, balanced evaluation, real examples fully developed to support the argument |
| 10–12 | Theory explained, terms mostly right, evaluation mostly balanced, real examples developed |
| 7–9 | Theory partly explained, some evaluation but one-sided, examples partly developed |
| 4–6 | Theory only described, evaluation superficial, examples only named |
| 1–3 | Theory stated but not relevant, no evaluation |