edexcel a level economics essay plans

How to write essays for Edexcel A-level Economics

In this post I outline the key requirements for each section (mainly B and C) in papers 1 and 2 for Edexcel A-level Economics A. This is the advice I give to my tuition students to help them achieve improved grades.

From years as an economics tutor and from reading through the examiner’s reports, I have picked up students’ typical mistakes and good general approaches for A-level Economics students.

For an online course on economics exam technique, check out this link here:

For sample answers to 25 mark questions, check out the link below:

Here the total marks – 25

So ideal timing – ideally you would get this section done the quickest, for example around 15 minutes or even quicker. 

Note there is no need to say much about the structure here. It is important to be succinct with short answer questions. 

Also with questions asking to draw a graph, make sure to label axes, lines  and equilibria correctly.

Section B 

Now this section requires the knowledge, application and analysis (KAA) skills as well as the evaluation skills. 

Total marks – 50. Note this is half the marks of the paper for papers 1 and 2.

Here the ideal timing – 60-70 minutes. Note you may want to spend some time reading here.

Below, this table shows the mark allocation for each question.

To summarise, the more marks allocated to analysis or evaluation, the more you need to write. You should remember this table when doing exam questions.

Breakdown of Section B by question

First the 5 mark question. Answer the question quickly and use the extract to support your answer. Keep it succinct, at most an extended paragraph. No evaluation required.

Next the 8 mark question. Here 6 marks for KAA, 2 for evaluation. A good general structure is 2 KAA paragraphs and 2 short evaluative comments (or 1 evaluative comment well developed). See page 24-25 of this examiner’s report for a good example, though the evaluation could be even shorter as the examiner’s report notes: here .

Now for the 10 mark question, 6 marks for KAA, 4 for evaluation. The difference between the 8 and the 10 mark question is the extra marks for evaluation. Again 2 KAA paragraphs but now 2 developed evaluative comments.

For the 12 mark question, 8 marks are for KAA and 4 for evaluation. For the 12 mark question, we need 2 more detailed KAA paragraphs, ideally one where a diagram is being used and explained, and 2 developed evaluative comments. To find a response that received full marks, see pages 27 to 28 on the examiner’s report here .

Finally for the 15 mark question, there are 9 marks for KAA, 6 for evaluation. For this we need 2 KAA paragraphs, ideally with at least one diagram where possible. Note these explanations should be deep with more than one chain of analysis per paragraph. The two evaluation paragraphs should be well explained.

Typical Mistakes in Section B

From students essays I have observed, typical mistakes in section B include:

• Often overwriting;
• Specifically spending too much time on 8 and 10 mark questions. This is often to the detriment of 12, 15 mark questions and the 25 mark question in section C;
• Conversely leaving parts or whole questions blank due to not understanding the question or time constraints;
• Also missing one or more of the criteria – application, analysis or evaluation.

Section C – 25 Mark Essay

Finally for the section C essay, total marks – 25 

Here the ideal timing – 35-40 minutes.

So for the 25 mark essay, the mark allocation is 16 marks for KAA, 9 for evaluation.

Now regarding the structure different teachers have different recommendations on the structure of this question. The simplest way is to:

• First, have a short introduction with one/two key definitions;
• Then two extended KAA paragraphs each with multiple chains of analysis, at least one (if not two) graphs in the analysis;
• Between these KAA paragraphs, two extended evaluation paragraphs with extended chains of analysis;
• Finally there should be a conclusion that directly answers the question, justifies the answer and relates back to the context.

In addition for an example essay that scored in the top bands is on pages 56-60 in this examiner’s report here .

Any spare time you should use to make your answers more complete, filling in any gaps left. This exam is often quite tight for time. So please do practise in timed conditions.

Further Reading

Next, a key criterion for doing well is using examples from the real economy. Tips on how to score application marks for Edexcel Economics A-level:

To practise your essay technique on practice papers, you are welcome to look into the practice papers here:

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Edexcel A-Level Economics | Every 25 Marker

AS 20 Markers

In 2015 a report by Public Health England recommended the imposition of a 20% tax on the sale of soft drinks that contain high levels of sugar. Evaluate the likely microeconomic effects of such a tax . (June 2017)

‘Revenue maximisation is a more realistic business objective than profit maximisation for many businesses.’ To what extent do you agree with this statement? Refer to an industry of your choice in your answer. (June 2017)

In September 2016 the government approved the building of an £18 billion nuclear power station, Hinkley Point C, which will supply 7% of UK electricity for up to 60 years. The power station is funded by Chinese and French investment. Evaluate the likely private costs and external costs involved in such major power station construction projects. Use an appropriate externalities diagram in your answer. Evaluate the likely private costs and external costs involved in such major power station construction projects. Use an appropriate externalities diagram in your answer. (June 2018)

In July 2016 Apple’s share of the UK market for smartphones was 38%. Evaluate whether such a high market share for one company is in the consumer interest. Use appropriate diagrammatic analysis in your answer. (June 2018)

In July 2017 it was announced that only a third of the BBC’s 96 top earning presenters were women and that its seven highest-paid presenters were all men. According to the High Pay Centre, in 2018, UK chief executives can earn 120 times more than the average full-time worker earning £28 758. With reference to an industry of your choice, evaluate why wage differences exist within the UK labour market. (June 2019)

In October 2017 Scania, the Volkswagen-owned truck maker, was fined €880 million (£771 million) by the European Commission for colluding with five other truck manufacturers over a 14-year period. The firms had agreed to coordinate prices after experiencing additional costs of meeting emission regulations. With reference to an industry of your choice, evaluate why some firms engage in collusive behaviour. (June 2019)

The International Energy Agency has predicted that oil use by cars will peak in 2025 because of the increasing number of drivers switching to electric vehicles. Evaluate the likely microeconomic consequences of consumers shifting from vehicles powered by fuel obtained from oil to electric-powered vehicles. (June 2020)

‘Amazon.com, the giant online retailer, has too much power.’ It uses its market power to put a squeeze on publishers, in effect driving down the prices it pays for books. If a publisher refuses, Amazon may take action by ‘delaying their delivery, raising their prices, and steering customers to other publishers’. Evaluate the likely costs of a monopsony operating in a market such as book retailing. (June 2020)

The national living wage, the minimum wage for 25-year-olds and over, is expected to rise to more than £10.50 an hour in 2024 compared with £8.72 in 2020. The wage does not apply to the UK’s self-employed and ‘gig economy’ workers. Some economists said the increase was ambitious. Business groups warned that employers in sectors such as social care could be hit hard. In large parts of the north of England the living wage has already reached two-thirds of local median earnings, said Professor Shackleton. Evaluate the disadvantages of a significant increase in the national living wage on a specific labour market, such as that for social care workers. (June 2021)

In many industries, such as banking, health insurance, internet search engines, pharmaceuticals, social media and telecommunications, there have been increases in market concentration. Evaluate the possible consequences for business decision making of increased market concentration. Refer to industries of your choice in your answer. (June 2021)

Evaluate the likely costs of a monopsony operating in a market such as book retailing. (June 2021)

Evaluate the disadvantages of a significant increase in the national living wage on a specific labour market, such as that for social care workers. (June 2021)

‘Tradable permits are less effective than taxation in reducing carbon emissions.’ To what extent do you agree with this statement? (Specimen)

Evaluate the likely microeconomic impact of an increase in the UK national minimum wage. (Specimen)

Tesla held an 82% market share of the electric vehicle market in the United States during the first half of 2020. Evaluate whether a monopoly is likely to operate efficiently. Refer to at least one monopoly of your choice. (Specimen )

Some occupations in the UK are facing large labour shortages. Hard-to-fill vacancies include qualified chefs, software engineers, construction workers and qualified nurses. Evaluate the factors that might influence the supply of labour in an occupation of your choice. (Specimen)

Since the global financial crisis of 2008 there have been over 5 700 increases in tariffs, quotas and administrative controls on international trade. Evaluate the likely effects of an increase in protectionism on the economy of a developing country of your choice. (June 2017)

Global oil prices fell from a 2008 peak of $147 a barrel to $27 in 2016. Evaluate the likely macroeconomic consequences of a significant fall in global oil prices. (June 2017)

In 2016 the UK Chancellor of the Exchequer announced that the government would spend an extra £23 billion on innovation and infrastructure over the following five years. Evaluate the likely economic effects of this planned increase in government expenditure. (June 2018)

The British pound fell by over 10% to a 30-year low against the US dollar after the UK voted to leave the European Union. To what extent will this depreciation impact on future economic growth in the UK? (June 2018)

Three of Africa’s main trading blocs have agreed to form the Tripartite Free Trade Agreement (TFTA). This will create one of the world’s largest free trade areas, stretching across 26 countries with a combined GDP of around £1trillion. Evaluate the effects of the growth of trading blocs such as the TFTA on global trading patterns. (June 2019)

Japan’s budget deficit for 2017/18 is expected to be 4.6% of GDP. Its national debt is forecast to increase to above 250% of GDP by 2019. Evaluate the impact of a large fiscal deficit and national debt on a country’s economy. (June 2019)

In 2018, the United States Government cut the corporation tax rate (tax on company profits) from 35% to 21%. Income tax rates for US citizens were also reduced: for example, the top rate of income tax was cut from 39.6% to 37%. Evaluate the likely impact of cutting tax rates as a policy to increase economic growth. (June 2020)

In terms of income distribution and wealth distribution Brazil is one of the most unequal countries in the world. Its income Gini coefficient is 0.449 and it is ranked number 2 in the world for its wealth inequality. Evaluate possible economic causes of income and wealth inequalities within a country such as Brazil. (June 2020)

The European Central Bank introduced a new round of quantitative easing (QE) in March 2020, purchasing up to €750 billion of assets. The objective of this QE was to reduce the serious risks to the effectiveness of monetary policy resulting from a significant recession. The European Central Bank’s target for inflation remains at ‘below but close to 2%’. Evaluate the effectiveness of quantitative easing during ‘a significant recession’. (June 2021)

It has been estimated that if climate change led to the world’s temperature rising 2.5°C compared to the temperature in 2010, then global GDP per capita would be 15% lower by 2100. If temperatures rise by 4°C compared to the temperature in 2010, then by 2100 global GDP per capita would decline by more than 30%.. Evaluate the potential trade-offs between environmental protection and other macroeconomic objectives. (June 2021)

Both China and the United States have been gradually increasing the tariffs imposed on each other’s exports as their trade dispute continues. The IMF estimated that the trade dispute between China and the United States would reduce global GDP growth by 0.8 percentage points by the end of 2020. Evaluate the likely impact of an increase in protectionism on the global economy. (June 2022)

With global economic growth slowing and inequality rising, the case against globalisation is strengthening. But there are also many benefits to globalisation. Global trade and international trade agreements allow countries to focus on their strengths and share expertise, as well as reducing risk through diversification. Evaluate the likely impact of globalisation on the global economy. (June 2022)

In 2012, it was estimated that Japan’s national debt was equal to 214.3% of its GDP, and Greece’s national debt was equal to 161.3% of its GDP. Evaluate the likely impact of measures which a government could take to reduce the economy’s national debt. Refer to a developed economy of your choice in your answer. (Specimen)

Over the past 25 years, income inequality has been increasing in many developed countries. For example, from 2007 to 2011 Spain’s Gini coefficient rose by 6.0 percentage points, and Ireland’s by 6.6 percentage points. Evaluate the factors which may have caused this increase in income inequality. Refer to a developed economy of your choice in your answer. (Specimen)

With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of policies that could be used to stimulate economic growth and development in Chile. (June 2017)

With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic impact on Chile’s economy of changes in the level of investment. (June 2017)

With reference to the information provided and your own knowledge, evaluate the likely microeconomic and macroeconomic influences on the UK’s international competitiveness. (June 2017)

With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of a government policy of cutting public expenditure rather than raising taxes as a means of reducing a fiscal deficit. (June 2017)

Evaluate the microeconomic and macroeconomic factors that may influence Starbucks’ decision whether to expand in a particular country. (June 2018)

With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects of increased UK demand for coffee at branded coffee shops. (June 2018)

With reference to the information provided and your own knowledge, evaluate the microeconomic and macroeconomic effects on Indonesia of the volatility of prices of commodities such as coal. (June 2018)

Evaluate the likely microeconomic and macroeconomic effects of the supply-side policies recently introduced in Indonesia. (June 2018)

Evaluate the microeconomic and macroeconomic effects of increased government spending on education to promote healthy eating in the UK. (June 2019)

Evaluate the likely microeconomic and macroeconomic effects of imposing a tax on HFSS foods. (June 2019)

Evaluate the microeconomic and macroeconomic factors, apart from access to credit and banking, influencing growth and development in Mozambique. (June 2019)

Evaluate the likely microeconomic and macroeconomic effects of relatively high inflation rates in many African countries. (June 2019)

Evaluate the likely microeconomic and macroeconomic effects of a rise in interest rates in Turkey. (June 2020)

Evaluate the microeconomic and macroeconomic impact of large infrastructure projects such as the building of a third airport in Istanbul. (June 2020)

Evaluate possible microeconomic and macroeconomic policies which could be used to improve UK competitiveness. (June 2020)

Evaluate the microeconomic and macroeconomic effects of a decline in the literacy and numeracy skills of a country’s young workers. (June 2020)

Evaluate the microeconomic and macroeconomic factors which determine the number of firms in an industry. Refer to HCWs or another industry of your choice. (June 2021)

Evaluate the microeconomic and macroeconomic effects of increased government intervention in an industry. Refer to HCWs or another industry of your choice. (June 2021)

Evaluate the microeconomic and macroeconomic factors which are likely to determine the rate of economic growth in Germany relative to other developed economies. (June 2021)

Evaluate the microeconomic and macroeconomic impacts of ‘a much more expansionary fiscal policy’ (Extract C line 23) on the German economy. (June 2021)

Evaluate the microeconomic and macroeconomic effects of a depreciation of the pound. Refer to restaurants or other food delivery services in your answer. (June 2022)

Evaluate the microeconomic and macroeconomic effects of significant increases in the minimum wage. Refer to restaurants or other food delivery services in your answer. (June 2022)

Evaluate the microeconomic and macroeconomic effects of decreasing interest rates in Kenya, or another developing country of your choice. (June 2022)

Evaluate the microeconomic and macroeconomic strategies that could be used to promote development in Kenya, or another developing country of your choice. (June 2022)

With reference to the information provided and your own knowledge, evaluate the possible microeconomic and macroeconomic effects on the UK economy of a decision by the government to encourage fracking. (Specimen)

With reference to the information provided and your own knowledge, evaluate the possible microeconomic and macroeconomic effects on the global economy of lower energy prices. (Specimen)

With reference to the information provided and your own knowledge, evaluate the likely microeconomic and macroeconomic effects of the imposition of ‘price controls’ (Extract E, line 8) in Argentina. (Specimen)

With reference to the information provided and your own knowledge, evaluate the likely microeconomic and macroeconomic effects of the 23% devaluation of the Argentine peso. (Specimen)

Edexcel A-Level Economics Past Papers

This section includes recent A-Level Economics and AS Economics past papers from Pearson Edexcel. You can download each of the Pearson Edexcel A-Level Economics past papers and marking schemes by clicking the links below. Scroll down to find papers from previous years.

Economics A (9EC0): Pearson Edexcel A-Level Past Papers June 2023

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper     -      Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper     -      Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper     -      Download Mark Scheme

Economics A (8EC0): Pearson Edexcel AS-Level Past Papers June 2023

Paper 1: AS - Introduction to Markets and Market Failure (8EC0/01) Download Past Paper     -      Download Mark Scheme Paper 2: AS - The UK Economy - performance and policies (8EC0/02) Download Past Paper     -      Download Mark Scheme

Economics B (9EB0): Pearson Edexcel A-Level Past Papers June 2023

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper        -      Download Mark Scheme Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper      -      Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper      -      Download Mark Scheme

Economics A (9EC0): Pearson Edexcel A-Level Past Papers June 2022

Economics B (9EB0): Pearson Edexcel A-Level Past Papers June 2022

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper      -      Download Mark Scheme Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper     -      Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper    -      Download Mark Scheme

Economics A (9EC0): Pearson Edexcel A-Level Past Papers November 2021

Economics B (9EB0): Pearson Edexcel A-Level Past Papers November 2021

Economics A (9EC0): Pearson Edexcel A-Level Past Papers November 2020

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper    -      Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper    -      Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper    -      Download Mark Scheme

The above papers are labelled June 2020

Economics A (8EC0): Pearson Edexcel AS-Level Past Papers November 2020

Paper 1: AS - Introduction to Markets and Market Failure (8EC0/01) Download Past Paper    -      Download Mark Scheme Paper 2: AS - The UK Economy - performance and policies (8EC0/02) Download Past Paper    -      Download Mark Scheme

The above papers are labelled June 2020  

Economics B (9EB0): Pearson Edexcel A-Level Past Papers November 2020

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper    -      Download Mark Scheme  Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper    -      Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper    -      Download Mark Scheme

Economics B (8EB0): Pearson Edexcel AS-Level Past Papers November 2020

Paper 1: AS - Markets, Consumers and Firms (8EB0/01) Download Past Paper    -      Download Mark Scheme  Paper 2: AS - The Wider Economic Environment (8EB0/02) Download Past Paper    -      Download Mark Scheme

Economics A (9EC0): Pearson Edexcel A-Level Past Papers June 2019

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper    -      Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper    -      Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper    -      Download Mark Scheme  

Economics A (8EC0): Pearson Edexcel AS-Level Past Papers June 2019

Economics B (9EB0): Pearson Edexcel A-Level Past Papers June 2019

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper    -      Download Mark Scheme  Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper    -      Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper    -      Download Mark Scheme  

Economics B (8EB0): Pearson Edexcel AS-Level Past Papers June 2019

Economics A (9EC0): Pearson Edexcel A-Level Past Papers June 2018

Paper 1: A-Level - Markets and Business Behaviour (9EC0/01)  Download Past Paper  -  Download Mark Scheme Paper 2: A-Level - The National and Global Economy (9EC0/02)   Download Past Paper  -  Download Mark Scheme Paper 3: A-Level - Microeconomics and Macroeconomics (9EC0/03)   Download Past Paper  -  Download Mark Scheme  

Economics A (8EC0): Pearson Edexcel AS-Level Past Papers June 2018

Paper 1: AS - Introduction to Markets and Market Failure (8EC0/01) Download Past Paper  -  Download Mark Scheme Paper 2: AS - The UK Economy - performance and policies (8EC0/02) Download Past Paper  -  Download Mark Scheme

Economics B (9EB0): Pearson Edexcel A-Level Past Papers June 2018

Paper 1: A-Level - Markets and how they Work (9EB0/01)  Download Past Paper   -  Download Mark Scheme  Paper 2: A-Level - Competing in the Global Economy (9EB0/02)   Download Past Paper  -  Download Mark Scheme Paper 3: A-Level - The Economic Environment and Business (9EB0/03)   Download Past Paper  -  Download Mark Scheme  

Economics B (8EB0): Pearson Edexcel AS-Level Past Papers June 2018

Paper 1: AS - Markets, Consumers and Firms (8EB0/01) Download Past Paper  -  Download Mark Scheme  Paper 2: AS - The Wider Economic Environment (8EB0/02) Download Past Paper  -  Download Mark Scheme

Economics A (9EC0): Edexcel A-Level Past Papers June 2017

Economics A (8EC0): Edexcel AS-Level Past Papers June 2017

Economics B (9EB0): Edexcel A-Level Past Papers June 2017

Economics B (8EB0): Edexcel AS-Level Past Papers June 2017

Economics A (8EC0): Edexcel AS-Level Past Papers June 2016

Paper 1: AS - Introduction to Markets and Market Failure (8EC0/01) -  Download Past Paper  -  Download Mark Scheme  Paper 2: AS - The UK Economy - performance and policies (8EC0/02) -  Download Past Paper  -  Download Mark Scheme

Economics B (8EB0): Edexcel AS-Level Past Papers June 2016

Paper 1: AS - Markets, Consumers and Firms (8EB0/01) -  Download Past Paper  -  Download Mark Scheme  Paper 2: AS - The Wider Economic Environment (8EB0/02) -  Download Past Paper  -  Download Mark Scheme

Edexcel A-Level Economics Past Papers June 2016

Unit 1: Competitive Markets: How they work and why they fail (6EC01) -  Download Past Paper  -  Download Mark Scheme

Unit 2: Managing the Economy (6EC02) -  Download Past Paper  -  Download Mark Scheme

Unit 3: Business Economics and Economic Efficiency (6EC03) -  Download Past Paper  -  Download Mark Scheme

Unit 4: The Global Economy (6EC04) -  Download Past Paper  -  Download Mark Scheme

Edexcel A-Level Economics June 2015

Edexcel A-Level Economics June 2014

For more A-Level Economics past papers from other exam boards  click here .

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A-level Macroeconomics 20-mark essay planner / template (Edexcel)

Subject: Economics

Age range: 16+

Resource type: Other

Last updated

30 May 2022

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A simple template to help Edexcel A-level Economics students plan 20-mark Macro essays.

I ask my students to submit a completed plan with every essay.

Micro essay planner here: https://www.tes.com/teaching-resource/resource-12538333

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Essay on Oligopoly and Collusion

Last updated 3 Feb 2019

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Here is what I feel is a superbly clear and well-structured essay answer to a question on the economic and social effects of collusion within an oligopoly.

Evaluate the view that collusion between firms in an oligopoly always works against consumer and society’s interests. Use game theory in your answer.

An oligopoly is where the industry or market is dominated by a few producers/firms with a high level of market concentration, where the component firms have a high level of interdependent decision making. Collusion can be tacit and/or explicit, and the aim of which is to achieve higher supernormal profits, with the firms as a whole achieving joint profit maximisation. Collusion between firms is harmful to consumers. This is because firms collude to raise prices, as mentioned earlier, resulting in the price level seen below. This reduces the consumer surplus available, reducing the welfare of individuals. This can often be highly regressive, if the impact of increased prices, such as with the Big Six Gas Suppliers, has a disproportionate impact on the less well off. Furthermore, because firms are working together, with internal quotas to divide up sales, there is less need to compete, resulting in less dynamic efficiency. This results in less innovation, and thus little improvement in the quality of products available to individuals. Indeed, the UK Competition and Markets Authority supports this claim, arguing that collusion can result in “reductions of output, efficiency, innovation and choice, all of which are harmful to consumers.” An example of this can be seen with Apple, who were sued by consumers for price-fixing with publishers to force consumers to over pay for e-books.

However, collusion between firms can often derive benefits for consumers. For instance, tacit collusion includes firms who monitor what other firms sell to ensure that they are matching the cheapest price in a geographical area, or who market that consumers are “never knowingly undersold” such as John Lewis. This is a case in which firms are technically engaging in tacit collusion, but which may also result in driving down of prices as firms seek to match improvements in cost efficiencies made by other firms. This is also true with products such as mobile phone contracts where it is easy to compare prices.

Collusion in an oligopoly can hugely benefit firms, which can have beneficial consequences for society. For instance, collusion between coffee growers allows small firms to push for fairer prices against more dominant monopsonistic corporations such as Starbucks. Furthermore, because these producer cooperatives like Fairtrade are often based overwhelmingly in less developed regions, this can also be useful in helping to alleviate extreme poverty. Furthermore, collusion allows for firms to lower the costs of competition, that can then be passed onto consumers. Because oligopolies exist in highly concentrated markets dominated by a few firms, there is often a huge degree of branding and differentiation that needs to take place in order for firms to stand out, e.g. with the UK retail banking industry with firms such as Barclays and HSBC. If all firms engage in marketing wars, there is no net societal benefit. However, if firms collude, they can reduce the need to fund these marketing wars, that can allow for cost savings to be passed onto consumers. Additionally, collusion allows for agreed upon industry standards, for instance with procedures in testing on humans in pharmaceutical research, which benefits both consumers and firms.

However, the extent to which this occurs depends on a few factors. Firstly, the vast majority of collusion that takes place isn’t that of poor farmers working together - oligopolies are more concentrated industries with very high barriers to entry, such as the Big Four Accountancy Firms, and pharmaceutical companies. Furthermore, the benefits that accrue from firms working together are dependent on those firms passing those cost savings onto consumers - however, if they are all explicitly colluding, they may decide to spend that money on share buy-back schemes and dividends, which may not benefit society at large. Indeed, in 2017, US firms spent more money on share buy-backs than they did on research and development. Lastly, the benefits from firms agreeing upon industry standards are likely to be very marginal given the government and regulatory bodies, such as the Financial Conduct Authority (FCA) tend to set industry standards centrally.

Conclusion:

In conclusion, the extent of the impact on consumers and firms depends fundamentally on how long the oligopoly is able to carry on collusion - we can analyse this through game theory. Assuming the following pay offs in a cartel such as OPEC, where states agree to collude to reduce production levels and benefit from a higher price:

If all firms cooperate, they will achieve £4bn revenue. However, if one firm decides to defect and to increase production while still gaining from higher prices, they will gain £5bn. The socially optimal equilibrium in this model (for firms) is to cooperate, because the total utility is greater than any other option. However, this is an unstable equilibrium: no matter what the other firm does, each agent is better off by defecting, resulting in a Nash equilibrium of Defect, Defect. Indeed, this model can be shown by how in October 2018, Iran accused Saudi Arabia and Russia of breaking OPEC’s agreement on cutting output. Thus, the effects of collusion are very much dependent on how long it is able to last.

Author: Cary Godsal (February 2019)

More resources available here on the topic of oligopoly

• Tacit Collusion
• Overt collusion
• Game Theory
• Nash Equilibrium

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