Economics Micro Question HelpWatch
Extract C (lines 16-17) states ‘have the changes in the supermarket industry been for the better, and if so, for whom?’
Use the extracts and your knowledge of economics to assess whether the changes in the supermarket industry are likely to be better or worse for consumers and firms.
When oligopolistic firms collude, they are effectively acting like a monopolist. They are looking at the profit maximising price and output for the whole industry and setting output quotas accordingly. This will lead to higher prices and higher profits for firms. Because firms benefit from supernormal profits they can spend more on research and development. However, it could be argued that consumers may benefit from this investment. For example, in industries like automobile production and drug research, expensive investment is required to develop new engines and new drugs.Collusion is necessary to generate sufficient profits to finance investment. Although it means higher prices, consumers benefit in the long run because they get better quality products. However, there is no guarantee that firms will use profits for research and development into better products. They may simply give it to shareholders in the form of higher dividends. Alternatively, they may use the supernormal profits to fund predatory pricing in another market. This would be very bad for consumers.Under collusion, consumers face higher prices and a decline in consumer surplus, but they don’t benefit from any extra economies of scale. In monopoly, supernormal profit margins are justified because it is argued the monopoly is able to benefit from economies of scale which lead to lower average costs and therefore lower prices for consumers. However, in collusion, the consumer doesn’t benefit from economies of scale, but just faces higher prices.However, you could argue that collusion is essential to enable firms to survive. For example, there may be a bus industry which is struggling to survive. Without collusion one or two firms would go out of business. This would be bad for consumers because there would be less choice and less competition. Collusion may be necessary to keep the service going. Although prices may rise, this may be better in the long term because the service survives. However, there may be better ways to keep a bus industry in business. If necessary, the government could subsidise the industry. Collusion is not the best way to keep unprofitable firms in business.The merits of collusion depend on the industry in question. If the industry is already profitable, then collusion is unlikely to give any benefit to the consumer. The benefit will be the producers who gain more profit. However, in some industries collusion may give benefits to the consumer in the form of more funds for investment and better products or just enough profit to keep the firms in business.