Cambridge International AS and A Level Economics: Market structures and barriers (9708)

This guide covers outcomes 7.6.1, 7.6.2, 7.6.3 and 7.6.5 of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. Topics 1 to 6 are AS Level content and topics 7 to 11 are A Level content. This unit is A Level content only, so it is not examined at AS Level, and the AS content is assumed knowledge. Every firm, market, country and figure below is invented and illustrative.

Use it with the revision notes and the practice set. Find your gaps with the free diagnostics, tick off outcomes on the course checklist and see the rest of the course on the Cambridge A Level Economics hub. For AS background on how markets work, see the price system study guide. How firms perform and compete in each structure is outside this unit.

What this unit covers

Outcome	What you must be able to do
7.6.1	Describe perfect competition and imperfect competition: monopoly, monopolistic competition, oligopoly and natural monopoly
7.6.2	Explain each structure by number of buyers and sellers, product differentiation, freedom of entry and availability of information
7.6.3	Explain barriers to entry and exit: legal, market, cost and physical
7.6.5	Define and calculate the concentration ratio

7.6.1 and 7.6.2: the structures

A market structure describes how a market is organised. Economists classify it by four features: how many buyers and sellers there are, how far the product is differentiated, how free entry is, and how much information buyers and sellers have. Perfect competition is the benchmark at one end. Imperfect competition covers every other structure, because each departs from the benchmark in at least one way.

Feature	Perfect competition	Monopolistic competition	Oligopoly	Monopoly
Sellers	Very many, each tiny	Many	Few, large	One
Buyers	Very many	Many	Many	Many
Product	Identical (homogeneous)	Differentiated	Identical or differentiated	One product with no close substitute
Entry and exit	Completely free	Fairly free	Restricted by barriers	Blocked by barriers
Information	Perfect: everyone knows prices, costs and quality	Imperfect: buyers cannot easily compare	Firms know rivals but not their reactions	The seller knows more than buyers
Price control	Price taker	Some	Considerable	Price maker, limited by demand

Read the table as degrees, not boxes. Markets sit along a spectrum, and the label you give depends on how you define the market. A single bakery in a village is a monopolist of bread there but one of many sellers of food across the region. Say which market you mean before you classify it.

Perfect competition. No single buyer or seller can influence the price, so each firm is a price taker. The product is homogeneous, so buyers have no reason to prefer one seller. Entry and exit are free, and everyone has perfect information. No real market meets all of these conditions, so it is a benchmark, not a description.

Monopoly. A pure monopoly is the only seller of a product with no close substitute. In practice, a firm with a very large share of a market is often said to hold monopoly power. Barriers to entry keep rivals out.

Monopolistic competition. Many firms sell products that are similar but differentiated by brand, quality, location or service, such as the hairdressers or cafes in one town. Because each product is slightly different, each firm has some control over its own price. Entry is fairly easy, which limits how far that control goes.

Oligopoly. A few large firms dominate the market and barriers to entry are significant. The key feature is interdependence: each firm must think about how rivals will respond before it acts. Products may be identical (cement) or differentiated (mobile phones).

Natural monopoly. In a natural monopoly the market is best served by one firm, because one firm can supply the whole market at a lower average cost than two or more firms. The cause is very large fixed costs, often a network such as pipes or rails, so the long-run average cost curve is still falling at the output the whole market demands. In words: the LRAC curve slopes downward across the whole range of the market demand curve, so any output split between two firms raises average cost.

Worked example: why one firm is cheaper

Country A has a water network with a fixed cost of 600,000 cu a year and a variable cost of 2 cu per unit. Market demand is 200,000 units.

One firm:  AC = 600,000 / 200,000 + 2 = 3 + 2 = 5 cu
           total cost = 600,000 + 2 x 200,000 = 1,000,000 cu
Two firms: each makes 100,000
           AC = 600,000 / 100,000 + 2 = 6 + 2 = 8 cu
           total cost = 2 x (600,000 + 200,000) = 1,600,000 cu

The second firm adds a second set of pipes, so total cost rises by 600,000 cu, which is exactly one extra fixed cost. Duplicating the network is wasteful, so natural monopoly is a case where one seller is more efficient on cost. The risk is that the single seller uses its power over price, which is why such markets are often a concern for governments. Government responses to this risk belong to the intervention topics, not to this unit.

7.6.3: barriers to entry and exit

A barrier to entry is anything that makes it harder or costlier for a new firm to enter a market than it was for existing firms. Barriers explain why a market stays concentrated.

Type	What it is	Examples
Legal	Rules that stop or limit entry	Patents and copyright, licences, a government-granted exclusive right, safety regulation, a legally protected franchise
Market	Actions or advantages of existing firms	Strong brands and loyal customers, heavy advertising, exclusive deals with suppliers or retailers, threat of price cuts (predatory or limit pricing)
Cost	The cost of entering or competing	High start-up and sunk costs, economies of scale enjoyed by large incumbents, difficulty raising finance
Physical	Natural or geographic limits	Control of an essential raw material, a scarce site, an isolated location, a limited supply of a key resource

The types overlap. A patent is legal, but it also gives the owner a cost advantage. When you answer a question, name the type, explain the mechanism, then say what it does to entry.

Worked example: a cost barrier through minimum efficient scale

The minimum efficient scale (MES) is the lowest output at which average cost is at its minimum. If it is large compared with the market, few firms fit. Country B’s cement market demands 480,000 tonnes a year.

MES (tonnes)	Market size / MES	Meaning
40,000	12	Room for about 12 firms at efficient size: low cost barrier
160,000	3	Room for about 3 firms: oligopoly is likely
480,000	1	Room for one firm: natural monopoly
600,000	0.8	One firm is still below MES: costs fall as it grows

Worked example: a market barrier from limit pricing

An incumbent’s long-run average cost at its large scale is 4.00 cu. It sells at 5.00 cu, earning 1.00 cu a unit. A new entrant can make 10,000 units a year at a unit cost of 6.40 cu. Meeting the incumbent’s price, it loses 6.40 − 5.00 = 1.40 cu a unit, or 14,000 cu in total. The incumbent earns profit and still deters entry.

Barriers to exit

A barrier to exit makes leaving a market costly, so firms stay and entry looks riskier. The main source is sunk cost, spending that cannot be recovered once made. Others are redundancy payments, long contracts with penalties, and specialised assets with few other buyers. Because entrants must weigh the cost of failing, high exit barriers also discourage entry.

Worked example: sunk costs

A new firm plans to spend 900,000 cu: equipment 500,000 cu (resale value 150,000 cu), a launch advertising campaign 250,000 cu (cannot be recovered) and a lease deposit 150,000 cu (refundable).

Recoverable = 150,000 + 150,000 = 300,000
Sunk        = (500,000 - 150,000) + 250,000 = 600,000
Check: 300,000 + 600,000 = 900,000

Two thirds of the outlay is sunk, so the firm risks 600,000 cu if the entry fails. That is a cost barrier and an exit barrier at the same time.

Evaluation points. Barriers are matters of degree. A patent expires, a brand can be copied, and technology can reduce start-up costs. Barriers can also benefit consumers, for example when patent protection pays for research. Judge how high a barrier is and how long it lasts before concluding that a firm holds lasting power.

7.6.5: the concentration ratio

A concentration ratio (CR) is the combined market share of the largest n firms in a market. It is written CRn, so CR4 is the four-firm concentration ratio.

CRn = (sales of the n largest firms / total market sales) x 100

You can measure sales by revenue or by units. Use the same measure for each firm and for the total. A high figure means a few firms hold most of the market. A low figure means a market spread over many firms.

Worked example: calculating CR3, CR4 and CR5

Country C’s bread market has total sales of 200 million cu. Sales are firm A 48, B 36, C 27, D 21, E 15 and all other firms together 53 (million cu). Check the total: 48 + 36 + 27 + 21 + 15 + 53 = 200.

Shares: A 24%, B 18%, C 13.5%, D 10.5%, E 7.5%, others 26.5%
CR3 = (48 + 36 + 27) / 200 x 100 = 111 / 200 = 55.5%
CR4 = (111 + 21) / 200 x 100 = 132 / 200 = 66%
CR5 = (132 + 15) / 200 x 100 = 147 / 200 = 73.5%

CR never falls as n rises. Quote n with the ratio, because a figure without n has no meaning.

Working backwards

If CR4 is 72% and total sales are 250 million cu, the four largest firms sell 0.72 x 250 = 180 million cu, an average of 45 million cu each. If the largest sells 90 million cu, its share is 90 / 250 = 36%.

What a concentration ratio can and cannot tell you

The ratio is a quick guide to market structure. It hides how the share is divided, as this example shows.

Market	Top four shares (%)	Others (%)	CR1	CR4
P	55, 15, 10, 8	12	55%	88%
Q	22, 22, 22, 22	12	22%	88%

Both markets have a CR4 of 88%, but P has one dominant firm and Q has four equal rivals. If two of Q’s leaders merge, the shares become 44, 22, 22, and CR3 jumps from 66% to 88%. Other limits are:

• It depends on how the market is defined, in terms of product range and area.
• It ignores imports and competition from outside the country.
• It says nothing about barriers, so a high CR does not prove that rivals cannot enter.
• It is a snapshot, so the trend matters as well as the level.

Common errors

• Treating perfect competition as a real market rather than a benchmark.
• Saying a monopoly has no substitutes at all, instead of no close substitutes.
• Listing barriers without saying how each stops entry.
• Dividing by the wrong total, or mixing revenue figures with unit figures.
• Reading a high concentration ratio as proof of high prices or poor service.
• Saying a natural monopoly has high costs. Its average cost is low because one firm is large enough.

Official syllabus

This page follows the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment, outcomes 7.6.1 to 7.6.3 and 7.6.5.