AQA A-Level Economics: Market Structures and Competition

Read the following extract and answer the question that follows.

The following extract was written for this exercise.

The UK domestic broadband-router market is dominated by a single manufacturer, Helvar Networks, which supplies the routers fitted as standard by most internet providers. A small group of challengers sells alternative routers directly to households, but switching is rare because providers bundle a Helvar unit into every contract. Helvar holds a commanding share of the market by value and earns profits well above those of its rivals. Industry analysts note that Helvar has raised its prices steadily for three years while its rivals have held theirs flat, and that the firm spends a far larger sum on research and development than the rest of the market combined, recently launching a router with markedly faster wireless speeds. Consumer groups argue that households pay more than they would in a competitive market and that genuine choice is limited; Helvar replies that only its scale and profits make its heavy investment in new technology possible.

Firm	Market share by value	Average price per router (£)	Operating profit margin (%)
Helvar Networks	62	85	28
Crendon Devices	14	60	9
Aldermoor Tech	11	58	7
Others (combined)	13	55	5

Question: Evaluate the view that the dominance of a single firm such as Helvar Networks in the broadband-router market is against the interests of consumers. [25 marks]

A bumper global harvest raises the market price of a homogeneous agricultural commodity. An individual farm supplying a tiny share of this perfectly competitive market finds that, at the new higher price, it is earning more than normal profit.

Explain how a firm operating in perfect competition can earn supernormal profit in the short run with the help of a diagram. [15 marks]

A monopoly supplier of bottled mineral water from a unique spring restricts the quantity it sells in order to keep its price high, producing less than would be sold if the market were competitive.

Analyse how a monopolist restricting output below the competitive level creates a welfare loss with the help of a diagram. [9 marks]

Brightling Pharma is the monopoly supplier of a patented medicine. The table shows the price (average revenue) and average total cost at several levels of output. The firm produces at its profit-maximising output of 30,000 units.

Output (units)	Price = AR (£)	Average total cost (£)
10,000	70	52
20,000	60	44
30,000	50	38
40,000	42	40

Calculate Brightling Pharma's total revenue, total cost and supernormal profit at its profit-maximising output of 30,000 units. (6 marks)

Farms growing a homogeneous arable crop operate in a perfectly competitive market. After a period in which a high market price let existing farms earn supernormal profit, new growers enter the industry.

Explain why a firm in perfect competition earns only normal profit in the long run. (5 marks)

The table shows the share of total sales held by each firm in the UK market for a household appliance.

Firm	Market share (%)
Calderfield	35
Westmere	25
Othenby	15
Penhallow	10
Smaller firms (combined)	15

Calculate the four-firm concentration ratio for this market, and state what it indicates about the market structure. (4 marks)