OCR A Level Economics: Contestable markets, integration and competition policy (H460) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions follow the OCR A Level Economics (H460) specification, Version 3.0 (June 2026), for first assessment in 2021. They cover contestable markets, integration, growth of firms, regulation and ownership, competition policy and interdependence, within Market structures in Component 1, Microeconomics (H460/01). The specification labels no content as AS or Extension. All figures are invented and illustrative.

Read the study guide and the revision notes first if needed. Also useful: the OCR Economics hub, the printable checklist and the free diagnostics.

Questions

1. State three characteristics of a perfectly contestable market. [3]

2. In Town B (illustrative) a single incumbent charges £20 with average cost £15 and sells 400 units a week. An entrant charges £18, wins the whole market and keeps its average cost at £15. The incumbent takes three weeks to react. Entry costs £4,000.

(a) Calculate the entrant’s total profit before the incumbent reacts, ignoring the entry cost. [2] (b) Calculate the net outcome if the entry cost is wholly sunk and if it is wholly recoverable. State which case is contestable. [3]

3. Explain, with reference to a diagram, why a firm in a perfectly contestable market is both productively and allocatively efficient. [5]

4. Evaluate the contribution of contestable market theory to the analysis of the behaviour of firms. [6]

5. Firm A makes 50,000 units at average cost £6.20 and firm B makes 20,000 at £6.80. After a horizontal merger the combined firm makes 70,000 units at average cost £5.60. Calculate the percentage fall in total cost. [4]

6. Identify the type of integration in each case. [3] (i) A cinema chain buys a rival chain. (ii) A brewer buys a hop farm that supplies it. (iii) A furniture maker buys a software company.

7. A manufacturer takes over the shops that sell its goods. Evaluate whether consumers are likely to benefit. [8]

8. A firm has 10% of a £60m market. A year later it has 12% of a £63m market.

(a) Calculate its revenue in each year. [2] (b) Calculate by what percentage revenue grew. [1] (c) Calculate how much of the extra revenue came from winning share rather than from market growth. [1]

9. A regulator allows a firm to raise its price by inflation minus X. Inflation is 4%, X is 2.5% and the current price is £80.

(a) Calculate the maximum permitted price. [2] (b) Explain why this rule gives the firm an incentive to cut costs. [2] (c) State one risk of the rule. [1]

10. Members of a cartel expect to gain £9m a year for three years. The chance of detection is 0.25 and the fine is 8% of annual turnover of £150m.

(a) Calculate the expected fine. [2] (b) State whether the cartel is deterred. [1] (c) Calculate the fine needed to deter the cartel. [1]

11. Evaluate the extent to which firms are interdependent. [8]

12. Evaluate the impact of regulation and ownership on the behaviour of firms. [10]

Answers

1. Three from: no barriers to entry or exit [1]; no sunk costs [1]; entrants can match incumbents’ technology and costs [1]. Also creditworthy: entrants have good information, and entry and exit are faster than incumbents’ price changes. [3] Examiner insight: Name the feature rather than describing the market as simply competitive; sunk costs is an easy characteristic to leave out.

2. (a) Weekly profit = (18 − 15) × 400 = £1,200 [1]. Over three weeks, 3 × 1,200 = £3,600 [1]. [2] (b) Sunk: 3,600 − 4,000 = −£400 [1]. Recoverable: the cost is regained, so the gain is £3,600 [1]. The recoverable case is contestable, because sunk costs deter entry [1]. [3] Examiner insight: State clearly which case is contestable and why; a correct calculation without that link leaves the economics unsaid.

3. Supernormal profit attracts hit-and-run entry [1]. So price is driven down to average cost, leaving normal profit [1]. Cost above the minimum would let an entrant undercut, so the firm must produce at the lowest point of the AC curve: productive efficiency [1]. At that point MC equals AC [1]. Since price equals AC, price equals MC: allocative efficiency [1]. [5] Examiner insight: A labelled diagram with AR meeting AC at its minimum, and MC passing through that point, supports each step. Say where the curves meet, not just that they do.

4. Contribution: it shifts attention from number of firms to barriers and sunk costs [1]; it provides a benchmark and supports policy that lowers barriers [1]. Limits: real markets have sunk costs such as advertising [1]; incumbents can respond quickly or price strategically [1]. Judgement: it is a matter of degree [1] and the theory is most helpful in markets with low sunk costs [1]. [6] Examiner insight: Evaluation credit comes from weighing the points and reaching a judgement; a list of strengths followed by a list of weaknesses leaves the weighing undone.

5. Old total cost = 50,000 × 6.20 + 20,000 × 6.80 = 310,000 + 136,000 = £446,000 [1]. New total cost = 70,000 × 5.60 = £392,000 [1]. Saving = £54,000 [1]. Percentage fall = 54,000 ÷ 446,000 × 100 = 12.1% [1]. [4] Examiner insight: Show both totals before dividing. Use the old total as the base for a percentage fall.

6. (i) Horizontal [1]. (ii) Vertical backward [1]. (iii) Conglomerate [1]. [3] Examiner insight: For vertical integration, state the direction as well as the type.

7. Forward vertical integration [1]. Benefits: removes a retail margin, so lower price is possible [1]; closer control of quality and service [1]; economies from coordinated stock and distribution [1]. Risks: the manufacturer may refuse to supply rival shops, reducing choice [1]; market power may raise prices [1]. Judgement: it depends on the strength of competing manufacturers and whether the market is contestable [1], so consumers benefit if rivalry forces the savings to be passed on [1]. [8] Examiner insight: Keep the answer on consumers. Points about shareholders or workers may be true but do not answer the question as set.

8. (a) Year one: 0.10 × 60 = £6.0m [1]. Year two: 0.12 × 63 = £7.56m [1]. [2] (b) (7.56 − 6.0) ÷ 6.0 × 100 = 26% [1]. [1] (c) At constant share, revenue would be 0.10 × 63 = £6.3m, so share gain explains 7.56 − 6.30 = £1.26m [1]. [1] Examiner insight: Give units (£m) with each figure; mixing percentages and millions in the same line is easy to misread.

9. (a) Permitted rise = 4 − 2.5 = 1.5% [1]. Price = 80 × 1.015 = £81.20 [1]. [2] (b) The price can rise by less than inflation, so costs must grow more slowly to keep the margin [1]; any cost saving beyond X is kept as extra profit [1]. [2] (c) Any one: firm cuts quality or investment; regulator lacks information; regulatory capture [1]. [1] Examiner insight: Part (b) asks about incentive, so tie the answer to what the firm keeps rather than only restating the rule.

10. (a) Fine = 0.08 × 150 = £12m [1]. Expected fine = 0.25 × 12 = £3m [1]. [2] (b) Total gain is 3 × 9 = £27m, far above £3m, so the cartel is not deterred [1]. [1] (c) Fine needed = 27 ÷ 0.25 = £108m, which is 72% of turnover [1]. [1] Examiner insight: Include the probability of detection; a comparison of gain with the fine alone overstates deterrence.

11. Interdependence means one firm’s decisions affect rivals [1]. It is high in oligopoly, where few firms must anticipate reactions [1]. It is low in perfect and monopolistic competition, where many firms act independently [1]. Even a monopoly may be constrained by potential entrants if the market is contestable [1]. All firms are linked through suppliers, customers and labour markets [1]. The degree depends on number of firms, product differentiation and barriers [1], and on how the market is defined and the time period [1]. Judgement: interdependence is a matter of degree, strongest in concentrated markets with similar products [1]. [8] Examiner insight: Reach a reasoned conclusion on extent. Describing each market structure without a comparison leaves the question of how far unanswered.

12. Ownership: private owners usually pursue profit [1]; public bodies may pursue welfare or political targets [1]; principal-agent problems can weaken cost discipline in either [1]. Regulation: a price cap changes incentives to cut cost [1]; quality standards protect consumers [1]; information gaps and capture reduce effectiveness [1]. Context: effects depend on how competitive the industry is and how costly entry is [1]; over time a strict cap may reduce investment [1]. Judgement: regulation matters more where competition is weak, while ownership shapes objectives everywhere [1], and the best outcome combines clear incentives with monitoring [1]. [10] Examiner insight: Cover both regulation and ownership, and use an industry context of your choosing to ground the argument; a one-sided answer leaves half the command unaddressed.

Where marks are usually lost

• Saying a contestable market needs many firms.
• Citing low barriers without mentioning sunk costs.
• Claiming allocative efficiency without showing price equal to MC.
• Giving profit figures without the entry cost and the reaction time.
• Using the later value as the base when finding growth.
• Describing integration without stating the direction of vertical integration.
• Treating every merger as harmful, or every cost saving as passed on.
• Ignoring the probability of detection in a deterrence calculation.
• Evaluating regulation or ownership without a judgement.

Next steps

• Revise with the revision notes and the study guide.
• Go to the OCR Economics hub and the checklist.
• Try all the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

OCR, A Level Economics (H460) specification, Version 3.0 (June 2026), first assessment 2021. Component 1, Microeconomics (H460/01).