Monopsony and contestable markets Theme 3

Mark scheme, including the levels grid and indicative content

Examiner's comment

In this question, candidates were asked to assess whether the market for video game development is contestable. The 10-mark 'assess' questions require only one strongly developed point on either side of the argument. The extracts were full of useful information and candidates were able to develop good responses in the vast majority of cases. However, the confusion between competition and contestability seen in last summer’s essay question on contestability in the fragrance industry still remains. There were simply too many responses talking about competition within the industry rather than the impact of the threat of competition from outside it. In this first response, the candidate has shown some understanding of the role of barriers to entry in impacting the extent of contestability in the market. The first paragraph contains both KAA and evaluation. The KAA is rudimentary but scores Level 2. The evaluation is reasonably well substantiated and in context, so edged into Level 2. The second paragraph discusses the market structure, which is not relevant, but does link it back to the senses of brand loyalty, which will impact the extent of contestability. This analysis does achieve Level 2. There is no further evaluation. This response scored Level 2 for KAA and Level 2 for evaluation. This response scored 7/10. This second example is a very strong one, which scores full marks. The quality of the KAA is particularly noticeable, with the candidate discussing brand loyalty in the first paragraph and the start up capital required in the second. This has clearly been done very well and synthesises the information provided in the extract with impressive use of economic theory. The evaluation, although not particularly extensive, was deemed sufficient to score full marks. For a 10-mark question, the evaluation only allows for four marks. The recognition of the market being more contestable 'lower down rather than higher up', in other words where cheaper games can enter the market, was considered to be a sophisticated observation. It is important in questions such as this to either implicitly or ideally explicitly, convey a clear understanding of what contestability means. It is not the extent of competition that matters but the ability for potential competition to become actualised.

Notes from the mark scheme and report

• contestability is about the threat of entry and exit, not competition among existing firms (a persistent confusion)
• sunk costs of £150 million and five years, specialist £100 000 salaries, brand loyalty
• counter: simple games and apps cost £23 000 to develop

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question, quite similar to Q6(e) from 2022, expected candidates to evaluate the level of contestability in the fragrance industry. It was asking whether the level of contestability is high or low in that particular industry. Other industries could, of course, be chosen, but the approach was fundamentally the same. This was not a popular question, and the quality of responses was significantly poorer than those seen in Q7. Many candidates did not discuss contestability. A contestable market occurs when there is freedom of entry and exit into the market. It is not the same as the existing level of competition in a market. In a contestable market, it is not the number of firms that is important but the ease with which potential competition can become actual competition. When candidates talked about the extent of barriers to entry or the extent of sunk costs they were able to access marks. However, many candidates talked about perfect and monopolistic competition and neglected to mention sunk costs or hit and run competition at all. The key takeaway from this example is to only attempt questions when the content is fully understood. This first response to the question made a reasonable attempt to address the issues surrounding contestability in the fragrance industry. there is some good context and the discussion of relevant theory such as limit pricing. However, the candidate doesn't really get to grips with what contestability actually is. In this response the candidate has discussed the supermarket industry and how its barriers to entry make it oligopolistic. The evaluation is somewhat confused, hinting that the collusive equilibrium previously discussed may not be achieved because of price wars, but that this now constitutes another barrier to entry. The second KAA paragraph on limit pricing is well developed and achieved level 3 KAA. Tesco is a legal monopoly, though there are multiple large competitors, and some local monopolies. Overall, this essay mixed elements of competitiveness and contestability and struggled to fully answer the question. Overall, this response achieved bottom level 3 KAA, 10 marks, and bottom level 2 for evaluation, 4 marks, so 14 in total. Accurate understanding of theory is crucial. This question is asking whether the level of contestability in the industry is high or low. It is not asking whether the industry is competitive but whether the industry behaves as if it is competitive. This is because of the threat of potential competition becoming actual competition. If new firms can easily enter and exit the industry to compete for any supernormal profits, the industry is contestable. This second response is a much better attempt to answer the question. There is a clear definition of what contestability is. The candidate then discusses sunk coats, limit pricing, and draws a clear diagram to explain how the theory works. There are plenty of good contextual examples which illustrate the theory. There is some discussion of intervention by the competition authorities to increase contestability. A real strength of the response is the way the candidate uses clear signposting to say why their point either increases or reduces contestability. This is certainly evident when the Tesco Clubcard is discussed in the context of brand loyalty and how this constitutes a significant barrier to entry which reduces contestability. Overall, this response achieved level 4 KAA, 15 marks, and level 2 evaluation, 5 marks, giving 20 in total.

Notes from the mark scheme and report

• contestability is about ease of entry and exit (sunk costs), not the number of firms or existing competition
• many answers never discussed contestability
• limit pricing
• report: "the quality of responses was significantly poorer than those seen in Q7"

Mark scheme

Examiner's comment

This question on monopsony turned out to be very topical, with the whole issue of public sector wage setting headlining in the news during the spring and summer of 2023. Many candidates did well on this question, though a minority scored full marks. To score the knowledge marks candidates had to have a sense of the public or private sectors of the economy. Another knowledge mark could be achieved by recognising the process of wage determination or an understanding of monopsony. The analysis mark required an explanation of why public sector pay lagged behind that of the private sector. Finally, the application mark was achieved by either using the stem or the chart above 5(a). This response achieved full marks for the understanding of monopsony and of the private sector, then the application mark for 90% of nurses working in the NHS. The analysis mark was awarded for the explanation of 'nowhere else to work'. Again, candidates are strongly encouraged to use the stem or other supporting material to gain any available application marks. In this example there was just the one mark for application. This example shows no application of the data. The candidate scores the knowledge marks for the understanding of monopsony and a second knowledge mark for the understanding of the private sector health care. The analysis mark is achieved through the explanation of very few alternative employers.

Notes from the mark scheme and report

• the state is a near-monopsony employer of nurses (over 90% in the public sector) with few alternative employers, so it can hold down pay (national pay scales, pay freezes, budget constraints)
• use the stem or the pay index for application

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question concerned contestability and the majority of candidates responded well to the key concept of looking at barriers to entry and exit. Where candidates underperformed, responses tended to confuse contestability with competitiveness. To obtain Level 3, candidates had to ensure they applied the theory to the coffee shop market. Candidates could argue either way whether the market was contestable or not, and vice versa. As always on level-based answers the mark scheme is indicative and provides the most obvious and most likely answers. In this response, the first part argues that it is contestable over two- sides but does not directly address barriers to entry and exit so achieves Level 2 for KAA. This is then evaluated by arguing that small independents cannot achieve economies of scale as evidenced by 2% profit margins indicating problems with contestability and thus securing Level 2 evaluation. The second point is better evaluated as it argues that again the market is contestable, but this is due to low sunk costs and so achieves L3 for KAA, with good reference to independents. The candidate expands the response by evaluating the use of Greggs heavy sunk costs involved with advertising as not contestable and achieving Level 3ev. Overall, this response secures L3 and L2e+ = 7+4e. This response is awarded 11 marks of a total of 15. Allow yourself thinking time to address your understanding of the key concept and to plan out a relevant answer. Feeling your way through an answer risks an overlong first paragraph which lacks a precise understanding of the key concept. Whilst this can be addressed later on it can bring about time management issues. Practice relating the key concept in the question to the data provided. This is a well-written answer to this question, particularly in terms of logical and coherent chains of reasoning in both KAA and Evaluation. The first point shows precise knowledge and understanding and whilst making effective use of the data, the candidate applies the concept well to the basics of setting up a coffee store. The price setting power of Costa as a barrier to entry makes again good use of the data but it would have been better to refer to limit pricing. The second point is based well in evidence and theory, and it is well evaluated as well as counter evaluated. Overall, this response achieves Level 3 for KAA and Level 3 for evaluation = 8+5e. This response is awarded 13 marks of the 15 marks available. In application, try to apply yourself to the context of the question, in this case, the practicalities of opening a coffee shop. Imagine yourself problem solving as an economist. Contexts are often chosen that are relatable to you.

Notes from the mark scheme and report

• contestability means low barriers to entry and exit and low sunk costs (renting premises and machines, Greggs entering, independents), not the number of competitors
• report: weaker answers confused contestability with competitiveness
• evaluate with brand loyalty and economies of scale of chains

Mark scheme, including the levels grid and indicative content

Examiner's comment

1a The market structure that was expected for this question was monopolistic competition, although the characteristics are so close to perfect competition that this model was fully acceptable. Many however wrote ‘monopolistic’ without the noun ‘competition’ and although it may seem generous, this was accepted if it was clear that the model being described was not in fact monopoly. - Allow perfect competition/highly competitive as the ID mark (Knowledge)- with follow on explanation to match - ‘Monopolistic’ is allowed this year for first time as shorthand for monopolistic competition but monopoly/oligopoly is not allowed - Allow low or no barriers to entry - 1 mark for the ID of model, 2 characteristics of model, 2 applications - Diagrams can be used as the analysis marks (up to 2 marks e.g. - price setting power and SNP/normal profit) Below is an exceptional answer worth full marks; This is not: 1b The reason for increased use of hand car washes during a period of lower income was best answered by using the data and the concept of elasticity. Falling income and rising demand is associated with inferior goods, but as with items such as chocolate, the luxury of a car wash might be just the thing to increase standards of living at a low expense. The other common argument used was that the HCW is cheaper than an automated service so this is an inferior good. Many commented on the low price (£5) to explain high demand, but it was important to explain why demand was rising rather than just not responding. - 2 K, 2 Ap, 2 An, 2 Ev - Allow diagrams as An: 2 An or 1Ap + 1 An - Many are confused with PED and YED - be careful when awarding - High utility is an acceptable reason - Reference to aspects of car washing is enough for data marks, e.g. the hoses/chemicals - Be careful for candidates losing track of the question - needs to link to incomes changing This only scored half marks; This was better; good reasons but no evaluation 1c - Answer needs to be about increased migration to UK (opposite in context of leaving the EU/shortage of staff as a result of the global health crisis was seen as EV, a good way to evaluate using the current economic context) - Any industry with large use of migrant workers is accepted as application e.g. - hospitality, nursing, construction - Higher demand for labour and MRP arguments are allowed if correctly explained, although MRP not required - Must have a valid diagram and reference to an industry for L3 - Some segments may not suit low skilled migrant workers e.g. - valeting and paint touch up - Accept variations on the axis if the explanation is correct e.g. - £ not wages - Do not need more than one point as long as ‘effects’ are considered within it. - A Level 3 diagram should be linked to the effect on wages (not confused with price of the product) - The question is the impact on the firm (not wider effects e.g. government budgets) - Application can be shown on the diagram or reference to ‘low skilled jobs’ This clearly starts well with a labour market diagram and a fairly good approach using a cost and revenue diagram: 1d - 1d was much less popular. Causes questions are more difficult to access than effects questions on this paper. - L4 response must have reference to an industry - Must link to the number of firms in the market This was a good attempt at a difficult question This was more typical: This scored quite poorly. It is imperative that the candidate focuses on the requisites of the question. 1e - Must be reference to a specific industry - Any forms of government intervention are allowed This scored 11/25 but this was more typical: This short answer was running out of time. There was an opportunity cost in the introduction here, and although it starts well with a valid idea and some application, this was all that was written, so it scored Level 1 3/25.

Notes from the mark scheme and report

• causes of the number of firms: barriers to entry, contestability, economies of scale, regulation
• macro: economic growth, protectionism, exchange rates
• Level 4 needs micro and macro and a named industry linked to the number of firms
• report: "Causes questions are more difficult to access than effects questions"

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question drew on knowledge from 3.4.6 Monopsony, concerning a) Characteristics and conditions for a monopsony to operate and b) Costs and benefits of a monopsony to firms, consumers, employees and suppliers. For evaluation responses may have drawn on 3.6.1 d) Government intervention to protect suppliers and employees: restrictions on monopsony power of firms. Whilst a monopsony diagram was not required many responses did attempt to apply such a diagram to the context with solid chains of reasoning well applied. Weaker candidates tended to focus on Amazon as a monopoly firm and did not seem to have understood what a monopsony firm is about. There is a possibility that some centres may have not covered monopsony as Question 8 was less popular than Question 7 and on the whole responses were not as strong. This answer scores 12/25 marks. There are some elements of knowledge at the start regarding the operating of a monopsony in context, but it does not focus on the broad elements of the question and is thus not wholly convincing. The response is too short, and chains of reasoning run out. The evaluation is better with reference to the context. This answer scores Level 4 KAA and Level 3 Evaluation = 14KAA + 7Ev = 21/25. There are lots of angles in this demonstrating precise knowledge and understanding of concepts alongside being critical of the underlying assumptions made. The use of the perfectly elastic demand curve is perhaps not convincing but negative marking does not occur.

Notes from the mark scheme and report

• monopsony is a dominant buyer: costs to suppliers (lower prices, revenue, profit, possible shut-down), employees of suppliers and consumers (less choice)
• Level 4 must refer to a specific market
• report: weaker answers treated Amazon as a monopoly seller and did not understand monopsony
• Q8 answers "not as strong" as Q7

Answer

B

Mark scheme

Notes from the mark scheme and report

• a 50% market share and strong brand image are barriers to entry, so contestability is low (B)
• concentration would be high not low
• private ownership and specialisation are irrelevant

Mark scheme, including the levels grid and indicative content

Examiner's comment

This question demonstrates the importance of candidates carefully reading the question and making sure they understand precisely what is being asked of them. Far too many candidates failed to focus on food suppliers and consumers. Also key with this question was understanding the concept of monopsony, bearing in mind this was in the context of supermarket monopsony power. Low scoring responses either did not understand monopsony or confused it with monopoly and did not go beyond quoting the data. Whilst many candidates were able to use the extracts and data effectively, linking the information provided to specific economic theories would have yielded better rewards. (Dis)economies of scale were generally recognised but a failure to develop answers by referring to specific types weakened a number of arguments. However overall, candidates did well with this item achieving a mean mark of 7.73. This answer achieves a mark of 12/12. It achieves Level 3+ (8/8) and Level 2 EV (4e/4e). All reasons are relevant, explained and applied to the context rather than generic. To get to Level 3 on KAA the candidate has a clear understanding of monopsony, has done both consumers and food suppliers, has applied to the case (and also concentrated on the ‘impacts’). Weaker responses focussed on the ‘cause’ rather than impacts. Read the question carefully to ensure you meet the full demand of the question and focus on the effects rather than the cause in this case. Ensuring you understand whether the question is asking you to look at the causes or effects/ impacts is essential for exam success. This answer achieves a mark of 5/12. After accurately defining monopsony in context the candidate addresses the impact on the supplier to a borderline level 2/3 but unfortunately the analysis digresses away from answering the question in considering the impact on government. It is not clear how the diagram and its explanation answers the question but there is some coverage of the impact on consumers and their disposable income to a Level 2 standard. Unfortunately, there is no attempt to evaluate. It is essential that you practice making well-structured responses, which carefully evaluate each impact made.

Notes from the mark scheme and report

• report: many did not focus on BOTH food suppliers and consumers, or confused monopsony with monopoly
• suppliers: delayed payments, lower prices and profits, packaging and promotion costs (Figure 2, Extract A)
• consumers: lower food prices (1.7% fall) but less choice and quality
• evaluate with Groceries Code Adjudicator and supplier size

Quantitative skills: QS 9 (interpret, apply and analyse information in written, graphical tabular and numerical forms)