Question (a)(i) — 4 marks
Limit pricing is a strategy where a dominant firm sets its price below the
profit-maximising level, but above its own average cost, specifically to
deter potential new entrants. The price is set at or just below the level at
which a new entrant could profitably enter the market. The existing firm
accepts lower short-run profits in exchange for protecting its long-run
market position. The key point is that the firm remains profitable — it is
not selling at a loss.
Predatory pricing is more aggressive: the dominant firm deliberately
sets its price below its own average cost, accepting short-run losses with
the explicit intention of driving existing rivals out of the market entirely.
Once competition is eliminated, the firm raises prices back up to exploit
its now-strengthened monopoly position. Predatory pricing is generally
illegal under competition law in most jurisdictions.
The key distinction is therefore one of intent and price level — limit
pricing is forward-looking (deterring future entry) and keeps prices above
cost, while predatory pricing is targeted at eliminating current rivals and
involves pricing at a loss.
Question (a)(ii) — 2 marks
There is evidence of limit pricing in the article: it states that the large
firms' "huge cash reserves mean that they could undercut possible new
entrants and prevent competition," and that "investors will be wary of
investing in possible competitors." This describes a firm setting prices low
enough to signal to potential entrants that competing would be
unprofitable — consistent with limit pricing behaviour.
There is also indirect evidence of predatory pricing intent: the article
notes that dominant firms can "expand into markets for similar products,"
suggesting they enter adjacent markets aggressively, and that new
owners "would be prepared to sell out to the dominant firms rather than
try and compete," implying rivals recognise they cannot survive a price
war — a consequence consistent with the threat of predatory pricing.
Question (b) — 6 marks
Three possible positive macroeconomic effects:
1. Economic growth and increased GDP: The five largest firms
generated combined profits of over $68 billion, with one firm alone
averaging $1.2 billion in daily sales. This enormous output contributes
directly to US GDP. As these firms grow, they invest in infrastructure, data
centres, logistics, and technology — driving capital accumulation and
increasing productive capacity. This raises long-run aggregate supply
(LRAS), supporting sustained non-inflationary economic growth.
2. Employment and income: Despite concerns about monopoly power,
large technology firms employ hundreds of thousands of workers directly
and support millions more through supply chains, platform ecosystems,
and ancillary services. Higher employment raises household incomes and
consumer spending, boosting aggregate demand and the circular flow of
income. The multiplier effect amplifies the initial injection of wages and
salaries into broader economic activity.
3. Innovation and dynamic efficiency: The article references
Schumpeter's concept of creative destruction — the idea that dominant
firms, backed by large profit reserves, invest heavily in research and
development. Technological innovation drives productivity gains across
the whole economy, not just within the firm. The Covid-19 pandemic
demonstrated this: the rapid scaling of online infrastructure allowed
millions to work and shop from home, cushioning the economic shock.
These productivity gains improve living standards and long-run growth
prospects.
Assessment: While these macroeconomic benefits are real and
significant, they must be weighed carefully. Tax avoidance — explicitly
mentioned in the article — reduces government revenue, limiting public
investment in healthcare, education, and infrastructure. The
macroeconomic gains are therefore unevenly distributed, and their net
effect depends partly on the extent to which the government can capture
a fair share through taxation.
Question (c) — 8 marks
The article claims large firm growth is bad for consumers, bad for
competition, and causes inequality. This can largely be supported by both
the evidence in the article and economic theory, though some counter-
arguments exist.
Bad for consumers:
Economic theory predicts that a monopoly or near-monopoly profit-
maximises where MR = MC, setting price above marginal cost and
restricting output below the socially optimal level. This results in a
deadweight welfare loss — consumers pay higher prices and receive less
output than under competition. The article implies these firms already
have near-monopoly power, given that "a handful of super-rich, super-
powerful companies will dominate economic activity." Furthermore, the
ability to undercut new entrants via limit pricing and to expand into
adjacent markets reduces consumer choice over time. The article also
notes one firm attempted to prevent workers joining a trade union,
suggesting a culture of prioritising firm interests over broader welfare —
consistent with exploiting consumer and worker surplus.
However, a counter-argument exists: in the short run, dominant firms may
offer lower prices due to significant economies of scale. A firm averaging
$1.2 billion in daily sales likely benefits from very low average costs,
which could be passed on to consumers. Online retail, in particular, has
historically lowered prices and increased convenience — factors the article
acknowledges were "greatly welcomed" during the pandemic.
Bad for competition:
The article provides strong evidence of anti-competitive behaviour. Limit
pricing ("undercutting possible new entrants"), investor deterrence
("investors will be wary"), and acquisition of rivals ("new owners prepared
to sell out") all describe classic barriers to entry. In theory, high barriers to
entry allow the dominant firm to sustain supernormal profits in the long
run, unlike the perfectly competitive model where profits are competed
away. The article also notes political power — the ability to "fight any
official or government intervention" — which creates a regulatory barrier
on top of economic ones. This aligns with the theory of contestable
markets: if a market is not contestable, incumbent firms face no
competitive discipline and can maintain inefficient or exploitative
behaviour indefinitely.
Schumpeter's creative destruction argument — cited positively by the co-
founder — suggests large firms drive competition through innovation
rather than price. But the co-founder himself now questions this, noting
the firms have become "the navy acting like a pirate" — using their
dominance to suppress the very creative disruption that originally justified
their growth.
Causes inequality:
The article provides clear evidence of income and wealth inequality. One
firm earns the equivalent of a full American yearly salary ($52,000) in
under four seconds. Combined profits exceeding $68 billion accrue to
shareholders, who are disproportionately wealthy. The article also notes
the firms' ability to avoid paying taxes, reducing the government's
capacity to fund redistribution through public services and welfare
spending — directly worsening inequality. Furthermore, attempts to
prevent union formation suppress workers' bargaining power, keeping
wages lower than they would be in a more competitive labour market.
Conclusion:
The article's statement is broadly supported by both evidence and theory.
The most compelling argument is the self-reinforcing nature of dominance:
large cash reserves fund political lobbying, deter competition, enable tax
avoidance, and suppress wages — all of which compound inequality while
weakening competitive markets. The one legitimate qualification is that
scale may benefit consumers through lower prices and innovation in the
short run, but this does not outweigh the long-run structural harms to
competition and distribution. The US competition authority's recognition of
"a range of potential risks" suggests even regulators accept that the
balance has shifted too far toward harm.