8.

Pilgrim’s Pride is the second-largest chicken supplier in the US. It will pay a $107.9 million fine for price
fixing with Tyson Foods and other chicken suppliers. The firms limited production to force prices higher
and harm major customers, including KFC. Pilgrim’s Pride is thought to have gained at least $361 million
in total revenue from the collusion.
Evaluate the possible benefits of collusion to the consumers and firms.
Use a simple game theory model in your answer.

(Total for Question 8 = 20 marks)

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.

Benefits to business
• Collusion enables farmers to fix prices and limit output that wouldn’t be possible if the firms were
competing

• 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 PP1AB

• Reduces unpredictability and uncertainty in the 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

• If the profits of the firms increase, this may enable them to invest in more research and
development, leading to increase quality.

• 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

• act like a monopoly, ability to increase supernormal profit

Possible benefits to consumers

• high supernormal profit by firms may increase spending on R&D, consumers can
get variety goods and services at better quality

• More stability in the market as firms are less likely to leave the market, consumers can
get goods more easily

NB if no game theory model candidate can achieve

a maximum of level 3
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 ($107.9 million)

• 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