Cambridge International as and a level Economics Ebook

Monopolistic competition: 
a market structure where 
there are many firms, diff erentiated products and few 
barriers to entry.
Oligopoly: 
a market structure with few firms and high 
barriers to entry.
Imperfect competition: 
any market structure except for 
perfect competition.
KEY TERMS
Th
e following stages can help to identify a market 
structure within this spectrum of competition:
■ 
Counting the number of firms. The larger the total, the 
closer to perfect competition.
■ 
A better guide is to use a concentration ratio to see the 
combined market share of the biggest three, four or five 
firms in the industry as a percentage of the industry total. 
This is calculated by adding the percentage market shares 
in terms of volume or sales revenue for the largest three, 
four or five firms. The bigger the percentage, the closer the 
industry will be to the oligopoly and monopoly models.
■ 
By considering how easy or diff icult it is for new firms to set 
up and how easy it is for firms to exit the industry. Barriers 
are indicative of market structures on the less competitive 
side of the spectrum.
■ 
By considering the importance of economies of scale to 
firms. The more important they are, the closer the industry 
will be to an oligopoly.
Figure 7.14
 shows a competition road map. Th
is shows 
the characteristics and some aspects of the behaviour of 
fi rms for each of the main models. In terms of a journey, it 
indicates how markets move from being fully competitive 
and allowing new entrants to join to being heavily 
protected from competition. Th
e obvious judgement might 
be ‘competition good’, ‘no competition bad’. Th
is is oft en 
true but, as we shall show, the opportunity to compete is 
invariably crucial in determining effi
ciency in a market.