Firms' Decisions and Strategies

H2 Economics - syllabus 9570, 2026

Explain how firms compete: on price, through differentiation and innovation, by growing or colluding, and how their strategies affect consumers, rivals and efficiency.

• Four market structures

  Market structures differ in the number of firms, how similar their products are and how hard it is to enter.

• Barriers to entry and the threat of entry

  Barriers to entry protect existing firms from new rivals, so they can keep earning supernormal profit.

• Competing on price

  A price cut can win sales, but its effect on profit depends on demand, costs and how rivals respond.

• Price discrimination

  Charging different groups different prices for the same product can raise profit, if the groups have different PEDs and cannot resell.

• Product differentiation and marketing

  Making a product different from rivals' can raise demand and make it less price elastic.

• Innovation and technological disruption

  Innovation can lower costs or create new products, but it is costly and uncertain, and new technology can disrupt existing firms.

• Growth and diversification

  Firms grow to gain economies of scale and market power, and diversify to spread risk.

• Collusion

  Firms in an oligopoly may agree to limit competition, but each has a reason to cheat, and collusion is illegal.

• Stay open, shut down or exit?

  In the short run, a firm stays open if revenue covers variable cost; in the long run, it must cover all its costs.

• Efficiency: productive, allocative and dynamic

  Productive efficiency means lowest cost, allocative efficiency means producing what society values most, and dynamic efficiency means improving over time.

• Effects on consumers and rival firms

  A firm's strategy affects consumers and rivals, not just its own profit, so judge each separately.

• Consumer biases

  Consumers do not always act rationally: sunk costs, loss aversion and salience shape their choices, and firms use this.

• Social and environmental concerns

  Firms increasingly weigh their effects on workers, communities and the environment, as well as profit.

• Model essay (a): why some profits last and others vanish

  A top 10-mark answer, written in about 20 minutes, explains both cases: entry competes profit away when barriers are low, and barriers protect it when they are high.

• Model essay (b): price cut or differentiation?

  A top 15-mark answer, written in about 30 minutes, shows both strategies on a firm diagram, tests each, and judges by costs and copying.

• Case study practice: competition among ride-hailing apps

  A whole H2 case study: 30 marks, about 75 minutes in the exam. Answer every part, then compare with the suggested answers.

Original teaching notes