Paper 1: Markets and Market Failure – 2021
Explain why prices of pharmaceutical drugs supplied by a monopoly are likely to be higher than in markets
which are more competitive (9 marks).
• Monopoly diagram and analysis
• Less pressure keeps costs down in monopoly
• Explanation role patents pharmaceutical monopolies
• Explanation high development costs new drugs leading high prices, including the costs research, testing, marketing and
regulatory approval
• Explanation how very low marginal costs result in low prices once patent expires
• New, innovative drugs even more expensive to develop than previous generations of new drugs thanks to new technologies
such as personalised pharmaceuticals
• Over-reliance on one or two key suppliers for patented drugs – if they collapse, prices will increase substantially. In competitive
markets no one firm is critical to the market
Assess the view that the [oligopolistic] market structure of the pharmaceutical industry is damaging for
consumers (25 marks)
• Explanation pharmaceutical market structure
• Discussion consumer interests in this market: low/stable prices, safe and effective products, access to drugs (merit goods)
• Discussion role NHS plays acting as monopsonistic buyer pharmaceuticals in the UK, whereas in the USA and elsewhere, there
are many more buyers
• Oligopolistic nature market, small number firms typically producing each drug, opportunity for collusion/price-fixing, especially
as there is little or no branding of products.
• Monopoly power legally granted to firms in order to encourage research and development into new drugs. Advantage that new
drugs invented. Disadvantage can take 20 years lifesaving drugs become more affordable
• Ability pharmaceutical firms exploit monopoly power and inelastic demand: massively increasing prices
• Importance E of S/dynamic efficiency/productive + allocative inefficiency
• Generic pharmaceutical markets, oligopoly power lead tacit or collusive price-setting
• High levels investment R+D new drugs + treatments,
• Rising life expectancy improved survival rates, for example cancer and HIV/AIDS
• Discussion possible policies at national level may impact consumer interests, eg regulation by the CMA
• Market + government failure arguments
Explain how perfect competition should lead to outcomes which are both productively and allocatively efficient
(15 marks)
• Definitions perfect competition, productive efficiency, allocative efficiency
• Explanation assumptions perfect competition
• Explanation how and why firms forced price-takers
• Ability earn supernormal profits is restricted. Short run, perfectly competitive firms may make supernormal profit, long run
such profits eroded new entrants
• Joining market existing competitors expanding output. Contribute allocative and productive efficiency
• Explanation firms must produce output lowest point ATC curve.
• Any productive inefficiency punished by other more efficient firms selling lower price
• Explanation condition allocative efficiency (P=MC) and how/why ensured in perfect competition.
Evaluate the view that technological change tends to bring industries closer to the market structure of perfect
competition (25 marks)
• Technological change as overall process of invention, innovation and diffusion of technology or processes.
• Discussion features competitive markets in relation technological change market structure
• Recognition perfect competition unattainable ideal many sectors, one end spectrum market structures which sectors (arguably)
be guided
• Some sectors use of internet/other technological innovation hugely improved price transparency, minimising information
asymmetry and getting closer to perfect information (e.g., price comparison websites, insurance brokers)
• Some sectors, firms strengthened dominant positions: erecting barriers entry: E of S and advanced inventory systems (e.g.,
Amazon)
• Impact artificial intelligence, robotics, retention personal data markets, making markets less competitive, e.g., online customers
receiving personalised adverts
• Improvement communications led to improved information flow: markets more competitive, also led to demise of other
sectors, e.g., streaming replacing CDs and radio to an extent
• Impact technology reducing AC’s, thus potentially reducing prices
Explain why prices of pharmaceutical drugs supplied by a monopoly are likely to be higher than in markets
which are more competitive (9 marks).
• Monopoly diagram and analysis
• Less pressure keeps costs down in monopoly
• Explanation role patents pharmaceutical monopolies
• Explanation high development costs new drugs leading high prices, including the costs research, testing, marketing and
regulatory approval
• Explanation how very low marginal costs result in low prices once patent expires
• New, innovative drugs even more expensive to develop than previous generations of new drugs thanks to new technologies
such as personalised pharmaceuticals
• Over-reliance on one or two key suppliers for patented drugs – if they collapse, prices will increase substantially. In competitive
markets no one firm is critical to the market
Assess the view that the [oligopolistic] market structure of the pharmaceutical industry is damaging for
consumers (25 marks)
• Explanation pharmaceutical market structure
• Discussion consumer interests in this market: low/stable prices, safe and effective products, access to drugs (merit goods)
• Discussion role NHS plays acting as monopsonistic buyer pharmaceuticals in the UK, whereas in the USA and elsewhere, there
are many more buyers
• Oligopolistic nature market, small number firms typically producing each drug, opportunity for collusion/price-fixing, especially
as there is little or no branding of products.
• Monopoly power legally granted to firms in order to encourage research and development into new drugs. Advantage that new
drugs invented. Disadvantage can take 20 years lifesaving drugs become more affordable
• Ability pharmaceutical firms exploit monopoly power and inelastic demand: massively increasing prices
• Importance E of S/dynamic efficiency/productive + allocative inefficiency
• Generic pharmaceutical markets, oligopoly power lead tacit or collusive price-setting
• High levels investment R+D new drugs + treatments,
• Rising life expectancy improved survival rates, for example cancer and HIV/AIDS
• Discussion possible policies at national level may impact consumer interests, eg regulation by the CMA
• Market + government failure arguments
Explain how perfect competition should lead to outcomes which are both productively and allocatively efficient
(15 marks)
• Definitions perfect competition, productive efficiency, allocative efficiency
• Explanation assumptions perfect competition
• Explanation how and why firms forced price-takers
• Ability earn supernormal profits is restricted. Short run, perfectly competitive firms may make supernormal profit, long run
such profits eroded new entrants
• Joining market existing competitors expanding output. Contribute allocative and productive efficiency
• Explanation firms must produce output lowest point ATC curve.
• Any productive inefficiency punished by other more efficient firms selling lower price
• Explanation condition allocative efficiency (P=MC) and how/why ensured in perfect competition.
Evaluate the view that technological change tends to bring industries closer to the market structure of perfect
competition (25 marks)
• Technological change as overall process of invention, innovation and diffusion of technology or processes.
• Discussion features competitive markets in relation technological change market structure
• Recognition perfect competition unattainable ideal many sectors, one end spectrum market structures which sectors (arguably)
be guided
• Some sectors use of internet/other technological innovation hugely improved price transparency, minimising information
asymmetry and getting closer to perfect information (e.g., price comparison websites, insurance brokers)
• Some sectors, firms strengthened dominant positions: erecting barriers entry: E of S and advanced inventory systems (e.g.,
Amazon)
• Impact artificial intelligence, robotics, retention personal data markets, making markets less competitive, e.g., online customers
receiving personalised adverts
• Improvement communications led to improved information flow: markets more competitive, also led to demise of other
sectors, e.g., streaming replacing CDs and radio to an extent
• Impact technology reducing AC’s, thus potentially reducing prices
