2020 H2 Economics Paper 2 Essay 3: Suggested Answers
How to use these essay answers. The responses below, including the part (a) answer, are structured guides to the requirements of the question, the content, analysis and evaluation a strong answer must cover, rather than full essay prose with a written introduction and conclusion. Use them to see what to include and how to build the argument, then write it up in your own continuous prose, adding your own introduction and conclusion.
This essay explains how the oligopolistic market structure of fast food chains is likely to influence how prices are determined, then asks whether innovation is the best strategy for fast food chains seeking to increase their profits.
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Explain how the market structure in which fast food chains operate is likely to influence how prices are determined.
Fast food chains typically operate within an oligopoly, a market structure characterised by a few dominant firms with significant market power, such as McDonald's, Burger King and KFC. Oligopolies are marked by high barriers to entry and interdependent decision making, where the pricing and output decisions of one firm directly influence the others.
The marginalist principle and its complication. In an oligopoly firms aim to maximise profits by producing where marginal cost equals marginal revenue. However, because firms are interdependent, price setting is shaped by strategic considerations beyond simple profit maximisation, as each firm must account for the likely reactions of its rivals. This leads to price rigidity.
Interdependence and price stickiness. A change in price by one firm triggers reactions from others. If McDonald's lowers its price, rivals like Burger King or KFC are likely to follow to protect their market share, so firms are cautious about unilateral price changes. This is captured by the kinked demand curve model. Above the prevailing price Pe, demand is relatively elastic: if a chain raises its price, rivals do not follow, so it loses market share as consumers switch away, which discourages price rises. Below Pe, demand is relatively inelastic: if a chain cuts its price, rivals follow to avoid losing customers, so it gains little while all firms suffer lower profits, which discourages price cuts. The result is price rigidity, where firms hold prices stable and turn instead to non-price competition such as product differentiation, advertising and promotions.
Price wars and short-run pricing. Although oligopolies tend towards price stability, firms sometimes engage in price wars, aggressively cutting prices during intense competition or downturns, though these are usually unsustainable as they erode the profits of all firms. A more aggressive strategy is predatory pricing, where a dominant chain prices below cost to drive rivals out before raising prices again. Predatory pricing is risky, requires absorbing short-run losses, and is illegal in many countries as anti-competitive behaviour.
Identify the oligopoly, apply the kinked demand curve to explain price rigidity, and reference non-price competition and possible price wars.
Tests: Oligopoly, Price discrimination
Discuss whether innovation is the best strategy for fast food chains seeking to increase their profits.
- Define profit and frame innovation as one strategy to be weighed against alternatives in an oligopoly.
- Explain product innovation as non-price competition and its effect on revenue, then process innovation and its effect on costs.
- Qualify the innovation route with its costs and risks, including the chance new offerings fail.
- Set out at least one cost-reduction alternative and the mechanism by which it raises profit.
- Compare innovation with the alternatives on effectiveness and reach a supported conclusion.
This part is gated. The full model answer comparing innovation with the alternatives and the conclusion, with the diagrams and the full evaluation, is in the ETG TYS Answers book from SAP and is worked live in the TYS Crashcourse. ETG students also get the AI TYS coach that guides them through this exact question. Message the team to find out more.
Tests: Economies of scale, Oligopoly
Questions students ask
Where can I get the full worked answers to the 2020 H2 Economics paper 2 essay 3?
The full model answers, with the diagrams and the higher mark evaluation, are in the ETG TYS Answers book published by SAP and sold at Popular, and are worked live in the TYS Crashcourse. Every ETG student also gets the AI TYS coach on our learning management system, which guides you through how to tackle every essay and every case study question from the last ten years.
Are these the official 2020 A Level Economics answers?
No. SEAB sets and marks the A Level paper. These are suggested answers by Mr Eugene Toh, author of the H1 and H2 A Level Economics TYS answer keys, published by SAP and sold at Popular.
How should I use these suggested essay answers?
Treat them as a guide to the requirements of the question, the content, analysis and evaluation a strong answer must cover, not as full essay prose. Write the essay up in your own continuous prose, with your own introduction and conclusion.
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