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Pilgrim's Pride is the second-largest chicken supplier in the US - Edexcel - A-Level Economics A - Question 4 - 2022 - Paper 1
Question 4
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. Th... show full transcript
Worked Solution & Example Answer:Pilgrim's Pride is the second-largest chicken supplier in the US - Edexcel - A-Level Economics A - Question 4 - 2022 - Paper 1
Step 1
Draw a simple two firm/two outcome game theory model to show why the chicken suppliers may have colluded.
Answer
To illustrate the game theory model for the chicken suppliers, we can create a payoff matrix. Let’s denote the two suppliers: Pilgrim's Pride and Tyson Foods. The strategies available to each are either setting a High Price or Low Price. The resulting revenues in millions are based on their collusion strategies:
| Tyson: High Price | Tyson: Low Price
-------------------------|-------------------|-------------------
Pilgrim's Price: High Price | (361, 361) | (500, 200)
Pilgrim's Price: Low Price | (200, 500) | (300, 300)
- When both set a High Price, they reap the maximum profit of $361 million each.
- If Pilgrim's Pride goes for a Low Price while Tyson keeps a High Price, Pilgrim's Pride earns 200 million.
- Conversely, if Tyson drops to Low Price, Pilgrim's Pride earns just 500 million for Tyson.
- Thus, the collusion is incentivized when both maintain High Prices to maximize their returns.
Step 2
Which one of the following is most closely associated with tacit collusion?
Answer
The correct answer is D: Unspoken agreements. Tacit collusion occurs when firms indirectly coordinate actions without explicit communication or agreement, leading to cooperative outcomes that resemble formal collusion. In contrast, the other options involve overt cooperation or competitive strategies.