Cartel Sets Profit Maximising Scu Economic Review

Cartel Sets Profit Maximising Scu Economic Review

Cartel Sets Profit Maximising Scu Economic Review

Hotels are accused of secretly ordering travel agents not to offer discounted rooms, according
to leaked documents. Those cutting the price of hotels beneath the secretly fixed prices are
banned from selling rooms in future. The scandal has allegedly stopped some agents
reducing the price of hotel rooms by up to 25 per cent.
The UK’s Competition and Markets Authority (CMA) started an investigation into cartel pricefixing
by hotels and travel agents which could be inflating the cost of family holidays by
hundreds of pounds. If they are found to have fixed prices, the hotel chains could be fined up
to ten per cent of their turnover, which could run into tens of millions of pounds each. The
disclosure follows similar scandals that have embroiled the airline industry which has recently
paid multi-million pound fines after admitting price fixing.
Hotels and online travel agents – which now account for the majority of sales – are suspected
of secretly agreeing a system called “rate parity”. This means rooms are sold for identical
prices by different agents and the hotels. The system is allegedly policed by travel agents
and the hotels themselves, who report any competitors selling rooms at below the “parity”
price. The discounters are allegedly then threatened with sanctions.
Ordering distributors to sell rooms at a minimum price could be a breach of legislation under
European Union and UK competition law. “Price-fixing covers any agreement or conduct
where competitors settle on fixed prices or minimum prices. They don’t need to do this
explicitly or directly,” said Jason Logendra, a competition law expert at the international law
firm Watson, Farley and Williams.
The recession following the financial crisis, which began in 2008, impacted on sales as
families tried to economise on non-essential expenditures. Slow economic growth following
the recession has also impacted on hotels.
More recently the UK hotel industry has been affected by the depreciation in the pound
sterling against currencies, including the US dollar and the euro, since the UK’s vote to leave
the EU on 23 June 2016. The vote to leave the EU at a future date has lead to lower
consumer and business confidence which is predicted to lead to lower UK growth over the
next few year, or even a recession.
Adapted (2017) from an article in The Daily Telegraph, April 2011
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Questions
Answer ALL questions below.
(The mark awarded indicates how much work you must do for a specific question).
1. Referring to the article above:
a) What is a cartel? (5 marks)
b) Using economic theory (a diagram), explain how a cartel sets profit maximising price
and output. (15 marks)
c) Relating to your answer in part (b):
i) What is meant by competition policy and why is it necessary in a market
economy? What was the outcome of the Competition and Markets Authority’s
investigation into price fixing by hotels? (10 marks)
ii) Explain why cartels have a tendency to break down. Suggest one significant
characteristic of the demand for hotel rooms that makes this more likely in this
case. (15 marks)
2.
a) On a chart, show what has happened to the UK pound (sterling) against the US dollar
between May 2016 and July 2017. (5 marks)
b) Using economic theory (diagrams), explain this change in the sterling exchange rate.
(15 marks)
c) Use a simple numerical example to explain why a depreciation of the pound is of
benefit to the UK hotel industry. (5 marks)
3.
a) Explain what is meant by a recession, and using economic theory (diagrams), explain
and illustrate how the UK’s vote to leave the EU in 2016 may lead to a UK recession
in future. (20 marks)
b) Use economic analysis to explain why the hotel industry would be particularly badly
affected by a recession, for example in comparison with the food industry.
(10 marks)