Edexcel A-Level Economics A2 3.3.3 5c Interdependence of Firms Simple Game Theory Two Firm Two Outcome Model Reasons Questions

Indicative content guidance

Answers must be credited by using the level descriptors (below) in line with the general marking guidance. The indicative content below exemplifies some of the points that candidates may make, but this does not imply that any of these must be included. Other relevant points must also be credited.

Quantitative skills assessed:

QS4: Construct and interpret a range of standard graphical forms.

QS9: Interpret, apply and analyse information in written, graphical, tabular and numerical forms.

Knowledge, Application, Analysis ( 12 marks) - indicative content

Indicative content

- Definition of collusion - where firms agree to cooperate in their pricing and output policies.

- Applies where the market is an oligopoly and the firms are interdependent.

- Collusion provides the pharmaceutical companies with the ability to fix prices and limit output that wouldn't be possible if the firms were competing

- Ability for each firm to increase its supernormal profit as consumers have to pay higher prices for goods

- Collusive behaviour might increase entry barriers so enabling existing firms to increase their supernormal profits

- Barriers enable firms to restrict competition increasing revenue and profits

- Reduces unpredictability and uncertainty in the pharmaceutical market which may lead to higher levels of investment from firms/firms can save money by not competing helping to reduce costs and increase profits

- Candidates provide an appropriate diagram e.g. below

Firm B

High price

Low Price

High Price

Firm A

(collusion)

(A) $£ 8 \mathrm{~m}$, (B) $£ 8 \mathrm{~m}$

(A) $£ 1 \mathrm{~m},(\mathrm{~B}) £ 10 \mathrm{~m}$

Low price

(non-collusion)

(A) $£ 10 \mathrm{~m}$, (B) € 1 m

(A) $£ 3 \mathrm{~m}$, (B) $£ 3 \mathrm{~m}$
- Firm colluding will agree to sell at the high price, high price outcome to increase revenues
- Without collusion both firms will sell at the low price, low price outcome with lower revenues
- Collusive firms may act like a monopolist to increase supernormal profits. (May draw cost and revenue diagram)

- Super-normal profits are made at $\mathrm{PP}^{1} \mathrm{AB}$
- If the profits of the pharmaceutical firms increase, this may enable them to invest in more research and development, leading to new pharmaceutical drugs being produced
- Prices may be less volatile, making it easier for healthcare providers to plan their expenditure on pharmaceutical products
- Possible benefit to consumers is that sharing of information between firms can help with product development e.g. vaccine development, or safety data
NB if no game theory model candidate can achieve a maximum of level 3

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Displays isolated, superficial or imprecise knowledge and understanding of economic terms, principles, concepts, theories and models.

Use of generic material or irrelevant information or inappropriate examples.

Descriptive approach which has no chains of reasoning.

Level 2

4-6

Displays elements of knowledge and understanding of economic terms, principles, concepts, theories and models.

Limited application of knowledge and understanding to economic problems in context.

A narrow response or superficial, only two-stage chains of reasoning in terms of cause and/or consequence.

Level 3

7-9

Demonstrates accurate knowledge and understanding of economic terms, principles, concepts, theories and models.

Ability to apply knowledge and understanding to some elements of the question. Some evidence and contextual references are evident in the answer.

Analysis is clear and coherent. Chains of reasoning in terms of cause and/or consequence are evident but they may not be developed fully or some stages are omitted.

Level 4

10-12

Demonstrates accurate and precise knowledge and understanding of economic terms, principles, concepts, theories and models. Ability to link knowledge and understanding in context using appropriate examples which are fully integrated to address the broad elements of the question.

Analysis is clear, coherent, relevant and focused. The answer demonstrates logical and multi-stage chains of reasoning in terms of cause and/or consequence.

Evaluation (8 marks) - indicative content

- Higher prices after the agreement reducing consumer surplus

- Less choice if firms reduce output, reducing standards of living

- Exposure of illegal price fixing by the government may increase costs to the firm if they have to pay heavy fines ( £ 1.2 million)

- It negatively impacts firms trying to enter the pharmaceutical market as barriers to entry have increased

- Breakdown of trust between colluders may lead to breakdown of any collusive agreements

- Short run may be sustained but more problematic in the long run

- Lack of coordination

- New entry into the market

- Collusive behaviour resulting in more non-price competition could
increase costs of firms

Level

Mark

Descriptor

0

No rewardable material.

Level 1

1-3

Identification of generic evaluative comments.

No supporting evidence/reference to context.

No evidence of a logical chain of reasoning.

Level 2

4-6

Evidence of evaluation of alternative approaches.

Some supporting evidence/reference to context.

Evaluation is supported by a partially-developed chain of reasoning.

Level 3

7-8

Evaluation recognises different viewpoints and/or is critical of the evidence, leading to an informed judgement.

Appropriate reference to evidence/context.

Evaluation is supported by a logical chain of reasoning.