Practise evaluating collusion with a game-theory model, real market context and effects on firms, consumers, efficiency and investment.
In July 2023 the Competition and Markets Authority fined Leicester City Football Club £880000 for colluding with JD Sports. The club was found guilty of price fixing and restricting the selling of Leicester City-branded clothing in the UK.
Evaluate the likely effects of collusion on businesses and consumers in an industry of your choice.
Illustrate your answer with reference to game theory.
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.
Effects on consumers
- Economic inefficiency causing higher prices: as prices are set above competitive levels this would lead to a deadweight loss in the economy
- Price fixing leads to a fall in allocative efficiency and economic welfare and to a fall in consumer surplus
- Reduced competition resulting from collusion may limit product choices for consumers
- Pressure exerted on suppliers to maintain high input prices or engage
in collusive behaviour themselves
NB: If no reference to game theory candidate can achieve a maximum of level 3
Candidates must include effects on both businesses and consumers to achieve a level 4
Accept advantages as KAA and disadvantages as evaluation or vice versa
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
Evaluation
- Benefits are more likely to apply to businesses that collude rather than consumers because the producer surplus is rising at the expense of the consumer surplus
- Benefits to businesses may occur in the short-run only, if one or more colluding businesses break away from the agreement
- Collusion may be illegal. If caught the business may have to pay a fine and face damage to its reputation e.g. Leicester City FC having to pay £880 000
- The increase in supernormal profits of the colluding businesses may allow for greater dynamic efficiency as they have an increased ability to invest in quality and choice for consumers
- Price stability will enable consumers to plan future expenditure
- Effect on consumers depends on the value of PED. For example, if substitutes are available the impact will be reduced
- The entry of new firms into the industry may break existing collusive agreements
- Unstable market dynamics because the collusion agreement can break down at any time. When this happens, it can lead to sudden price wars
- Some forms of collusion may be beneficial to both producer and consumer e.g. R&D cost savings and efficiencies or developing improved industry standards
Mark Descriptor
0
Level 1
1-3
Level 2
4-6
Level 3
7-8