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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 depict the scenario, we will construct a payoff matrix for Pilgrim’s Pride and Tyson Foods, where each firm can choose to set a High Price or Low Price.
| High Price | Low Price | |
|---|---|---|
| High Price | 361 (Pilgrim’s) | 500 (Tyson) |
| Low Price | 200 (Tyson) | 300 (Pilgrim’s) |
Explanation:
- Revenue Gain: Pilgrim’s Pride gains $361 million by setting a collusive high price together with Tyson Foods.
- Low Price Outcomes: If both set a low price, Pilgrim’s Pride would earn $300 million, which is less than the gain from colluding at high prices.
- Best Response: Tyson Foods, if choosing a high price expecting Pilgrim's to follow, maximizes earnings at $500 million, while Pilgrim’s payoff is still contingent upon the strategy decided by Tyson.
In summary, the collusion leads to higher overall revenues for both suppliers when setting prices together at high levels.
Step 2
Which one of the following is most closely associated with tacit collusion?
Answer
The answer is D: Unspoken agreements.
Explanation: Tacit collusion occurs when firms indirectly coordinate actions without explicit communication or agreements. It contrasts with overt sharing of information, which implies direct discussions and formal agreements. Predatory pricing aims to eliminate competition, whereas price wars are competitive practices that go against the nature of collusion.