Edexcel IAL Economics Unit 3: Evaluation of Collusive Behaviour and Game Theory

Vocabulary flashcards covering the economic concepts, game theory models, evaluation points, and case details for the Edexcel IAL Economics Unit 3 essay on the benefits and drawbacks of collusive behaviour.

Collusion

An agreement between firms in an oligopoly to restrict competition, for example by fixing prices or output.

Interdependence

A condition in an oligopoly where the decisions and profits of a few large firms directly depend on the reactions and pricing of their rivals, creating an incentive to coordinate.

Payoff Matrix

A game theory model that maps out the potential profit outcomes for firms based on their pricing strategies, demonstrating the divergence between cooperative and competitive outcomes.

Nash Equilibrium

The stable non-cooperative outcome in game theory where each firm fears being undercut, resulting in both choosing a low-price outcome (such as earning $£5\text{m}$ each) despite mutually preferring the higher-profit collusive outcome.

Cooperative Outcome

The collusive scenario in a payoff matrix where both firms agree to maintain high prices, enabling them to earn higher joint profits (such as $£10\text{m}$ each) instead of undercutting one another.

Single Monopolist Behaviour

When colluding firms act collectively as a monopoly by restricting industry output to where industry $MC = MR$ and charging a higher price, securing supernormal profit across area $P\text{–}A\text{–}B\text{–}C$.

Dynamic Efficiency (in Collusion)

The potential long-run efficiency gains achieved when firms reinvest higher collusive supernormal profits into research and development ($R\&D$), which can lower average costs ($AC$) and generate new products such as medicines and vaccines.

Information Sharing

Coordination among colluding firms regarding safety data, vaccine development, or supply problems, which can accelerate innovation and assist public institutions in budget planning.

Incentive to Cheat

The temptation for an individual firm within a cartel to secretly cut prices to gain market share and earn a higher payoff (such as $£15\text{m}$ while the rival earns $£3\text{m}$), which often causes collusion to break down into a price war.

X-inefficiency

Organizational slack and higher average production costs that occur when a lack of competitive pressure allows managers to 'enjoy a quiet life' rather than actively innovating or controlling expenses.

Kinked Demand Curve

An economic model sketching price rigidity in an oligopoly to illustrate why firms face stable prices and avoid price wars when expectations or coordination align.

Consumer Welfare Loss

The reduction in consumer surplus and creation of deadweight loss resulting from collusive agreements that artificially restrict output, inflate prices, and limit consumer choice.