Market performance, competition and concentration
Market performance, competition and concentration: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 7.6; A Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
How is a four-firm concentration ratio calculated?
What you will learn
- Compare short-run and long-run firm performance and shutdown decisions
- Analyse efficiency, contestability and competition
- Derive a competitive firm’s supply curve
- Explain collusion and use a two-player payoff matrix
- Calculate a concentration ratio
Core model and terms
Revenue curves and cost conditions shape a firm’s output and profit. In perfect competition, a price-taking firm’s short-run supply is the marginal-cost curve above average variable cost; below the shutdown price it minimises losses by producing zero. In the long run, exit is likely if price cannot cover average total cost. Imperfect-market results vary with demand, entry and strategic behaviour.
Apply and evaluate
Contestable markets may face potential entry even with few firms if entry and exit are credible and sunk costs are limited. Concentration ratio sums the market shares of the largest stated firms. In oligopoly, a payoff matrix shows how each firm’s best response depends on rivals; collusion can raise joint profit but may be unstable if each firm can gain by cheating. Judge efficiency and consumer outcomes using evidence, not labels alone.
Pause and explain
Which statement best applies market performance, competition and concentration?
Worked example
The four largest firms have shares of 31%, 24%, 18% and 12%. Calculate the four-firm concentration ratio.
Show the worked solution
- CR4 = 31 + 24 + 18 + 12
- CR4 = 85%
- The four largest firms account for 85% of sales
Answer CR4 = 31 + 24 + 18 + 12 → CR4 = 85% → The four largest firms account for 85% of sales
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Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
The four largest firms have shares of 31%, 24%, 18% and 12%. Calculate the four-firm concentration ratio.
Give me a hint
Add the shares of the largest four firms.
Compare my reasoning
- CR4 = 31 + 24 + 18 + 12
- CR4 = 85%
- The four largest firms account for 85% of sales
CR4 = 31 + 24 + 18 + 12 CR4 = 85% The four largest firms account for 85% of sales
Look for these in your work
- CR4 = 31 + 24 + 18 + 12
- CR4 = 85%
- The four largest firms account for 85% of sales
A competitive firm faces price $8, average variable cost $6 and average total cost $10. Should it produce in the short run, and what is its economic profit per unit?
Give me a hint
Compare price with AVC for shutdown and with ATC for profit classification.
Compare my reasoning
- Price exceeds AVC, so production covers variable cost and contributes to fixed cost
- Price is $2 below ATC
- It produces in the short run but earns a loss of $2 per unit
Price exceeds AVC, so production covers variable cost and contributes to fixed cost Price is $2 below ATC It produces in the short run but earns a loss of $2 per unit
Look for these in your work
- Price exceeds AVC, so production covers variable cost and contributes to fixed cost
- Price is $2 below ATC
- It produces in the short run but earns a loss of $2 per unit
An entrant can enter and exit a market cheaply with little sunk cost. Explain how this may constrain an incumbent even before entry occurs.
Give me a hint
Consider the threat of potential competition.
Compare my reasoning
- High incumbent prices can attract entry
- The threat can make customers or market share vulnerable
- The incumbent may keep price or costs lower
High incumbent prices can attract entry The threat can make customers or market share vulnerable The incumbent may keep price or costs lower
Look for these in your work
- High incumbent prices can attract entry
- The threat can make customers or market share vulnerable
- The incumbent may keep price or costs lower
Two firms each gain most by undercutting a collusive price, but both earn more if neither undercuts. What strategic problem does this illustrate?
Give me a hint
Compare individual incentives with the joint outcome.
Compare my reasoning
- Each firm has an incentive to cheat
- If both undercut, both may earn less than under cooperation
- This is the strategic tension represented by a Prisoner’s Dilemma
Each firm has an incentive to cheat If both undercut, both may earn less than under cooperation This is the strategic tension represented by a Prisoner’s Dilemma
Look for these in your work
- Each firm has an incentive to cheat
- If both undercut, both may earn less than under cooperation
- This is the strategic tension represented by a Prisoner’s Dilemma
Common mistakes
- Assuming oligopolists always collude or using a concentration ratio as proof of consumer harm without examining conduct and entry.
What can you explain now?
How is a four-firm concentration ratio calculated?
Compare with the explanation
Add the market shares of the four largest firms
The statistic reports the combined share of the largest four sellers.
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Make it stick
Before moving on, explain the central idea in market performance, competition and concentration and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.