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

Consumers

• Higher prices after the agreement reducing consumer surplus

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

Firms

• 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
The definition of monopsony - a monopsony is where there is a single buyer in the market
The definition of monopsony power – where a firm has significant buying power over its suppliers

Impact on suppliers
• Lower prices for their goods because there is no-one else to sell their product to/Decreasing revenue
for the suppliers/ Lower producer surplus for suppliers that may prevent them from investing as much,
reducing dynamic efficiency
• This causes a fall in supernormal profits for the suppliers and potentially puts them out of business if
prices fall too low
• Less negotiating ability over contracts, which may prevent suppliers from being able to sell their
agricultural products to other supermarkets
• Lack of bargaining power may allow monopsonists to pass costs onto suppliers, reducing profit margins
• Increased dependence on one main customer, making them more vulnerable if that customer were to
go out of business

Impact to consumers
• Will possibly enjoy lower prices
• The increased profit may be invested into the firm to produce better products in the future.
Evaluation (8 marks)

Suppliers:
• Monopsony may offer more stable contracts guaranteeing demand for the suppliers, this may
encourage more investment and dynamic efficiency from the suppliers
• If the monopsony is socially responsible, suppliers may be paid a fair amount for their products
• If monopsony power is weak/not significant, prices might not be that different to a competitive
market
• There is often government intervention in monopsony markets that prevents the monopsony from
abusing its dominance
•Suppliers may organise into cooperatives to increase their bargaining power against the monopsony
• Businesses will attempt to find other alternative routes to market eg, farmers market or farm shop

Consumers
• there may be restrictions in supply, this will reduce output.
• Suppliers may offer low quality goods to monopsonist, this may reduce the standard of living of the
consumers as they receive low quality goods.
Knowledge, Application, Analysis (12 marks) – indicative content

• Increase in supply of labour, leading to rightward shift in supply curve, leading to fall in
wage rate in specific industries. May be illustrated by supply and demand diagram.

• Firms have greater choice of workers.

• Increase in skills of workforce, leading to higher productivity, leading to EG
• Rightward shift in productive possibility frontier / increase in productive capacity. May
be illustrated by a PPF diagram.
• Externalities resulting from immigration, e.g. external benefits to firms from higher
demand for their goods and services; external costs
• Could lead to increase in real output and fall in price level. May be illustrated by an AD /
AS diagram.

• Impact on public finances: if most immigrants secure jobs then tax revenues will
increase.
Restrict to a maximum of 9 marks for Knowledge, Application and Analysis if no diagram
provided.
Evaluation (8 marks) – indicative content

• Impact depends on education, skills and experience of immigrant workers.

• Impact depends on level of unemployment.
• Impact depends on net migration.
• Not all immigrants may be able and willing to work.
• Impact on wage rates in particular industries might not fall if demand for the
product is rising or if there is a skills shortage.
• Impact depends on elasticity of demand for labour.
• Impact on public finances depends on ratio of immigrants who are working to
dependents; and number working in the informal economy.