Competitive Markets

Exam code: 2281

Written by: Ashika|Reviewed by: Caroline Carroll|Updated 2 July 2026

Each firm operates in a specific market
The conditions in different markets can vary significantly and are determined by the market structure in which the firm operates
There are a range of market structures, however your syllabus only requires you to know the characteristics of two - competitive markets and monopolies
Competitive markets are those with an extremely high degree of competition
A monopoly is a market structure in which one firm dominates the market and has significant market power

The answers to the questions above determine the type of market structure in which a firm is operating in
- If a firm is selling a unique product (e.g. handmade car) it is likely operating in a monopoly market and setting high prices

There are many buyers and sellers: due to the number of market participants sellers are price takers
There are no barriers to entry and exit from the industry: firms can start-up or leave the industry with relative ease which increases the level of competition
Buyers and sellers possess perfect knowledge of prices: this assumption presupposes perfect information e.g. if one seller lowers their price then all buyers will know about it
The products are homogenous: this means firms are unable to build brand loyalty as perfect substitutes exist and any price changes will result in losing customers

Advantages and Disadvantages of Competitive Markets

Advantages	Disadvantages
Lower prices: competition causes firms to lower prices for consumers in an attempt to gain market share Better quality: firms innovate and continuously seek to improve their quality of their goods/services in order to become recognised in a crowded market More choice: more sellers equals more choice for consumers	Worse quality: in a bid to lower prices, product quality may actually deteriorate over time Too much choice: consumers may be overwhelmed and not explore the full range of market offerings, instead sticking to what they know Worker welfare: the greater the competition the greater the need to cut costs, often resulting in low wages and poor working environments

An Introduction To Competitive and Monopoly Markets