Market Failure: Market Power (DP IB Economics: HL)

Text A, Paragraph 1
A few large firms in the energy sector are currently facing scrutiny due to their significant market power. These firms have a long history of dominating the market, allowing them to influence various aspects of pricing and access to resources. Over the years, smaller companies have found it difficult to enter or compete in this space, raising concerns about whether such dominance limits innovation or consumer choice. Regulatory bodies are investigating potential anti-competitive practices in the sector.

Define the term market power as indicated in bold (Text A, paragraph 1).

Text E, Paragraph 2
Restaurants in the city are part of a market that resembles monopolistic competition. Each restaurant offers a slightly different menu or atmosphere to attract specific customers, yet they all serve similar types of food. Some restaurants rely on their reputation for quality, while others compete on price or location. Despite the similarities, these differences give restaurants the ability to draw in loyal customers who are willing to pay more for their preferred dining experience. The competition among restaurants is based on more than just food; branding and customer experience also play major roles.

Describe how market power is exercised in monopolistic competition, as found in (Text E, paragraph 2).

Text C, Paragraph 4
The sole supplier of public transportation in the city is a monopoly. This company has the ability to control fares and adjust routes based on demand, ensuring that it maximises its profits. However, there has been ongoing debate about whether such a system truly benefits the public or if it prioritises profit over service quality.

Outline how profit maximisation occurs in a monopoly, as found in (Text C, paragraph 4).

Text D, Paragraph 2
The smartphone market is often described as an oligopoly. Firms tend to be global giants, and each one invests heavily in research and development to maintain its position. Despite the fierce competition, they tend to follow each other's pricing strategies closely. New entrants face significant challenges due to the scale of operations that the existing firms enjoy, making it hard to break into the market.

State two characteristics of an oligopoly as found in (Text D, paragraph 2).

Text F, Paragraph 1:
To address concerns over price increases in the energy sector, the government has announced new regulations to oversee the pricing practices of the national electricity provider, which operates as a monopoly. These interventions are designed to protect consumers from excessive charges and ensure fair access to essential services. Consumer advocacy groups continue to push for more transparency in how prices are set.

State two ways governments intervene in monopoly markets, as found in (Text F, paragraph 1).

Text D, Paragraph 3
Government regulators have started monitoring the actions of firms in the oligopoly that controls much of the media industry. These companies are responsible for the vast majority of television and radio broadcasting. There have been concerns that some firms may engage in anti-competitive practices, such as price-fixing or limiting access to certain content providers. In response, regulators are implementing new policies to ensure that these companies do not misuse their dominant position, and to promote a more competitive and fair marketplace for both consumers and smaller media firms.

Outline one form of government intervention in oligopolies, as found in (Text D, paragraph 3).