Discuss the decision by Jet2 to increase its package holiday prices

Edexcel A-Level Economics Paper 1 June 2021 Extract

With reference to the information provided, discuss the decision by Jet2 to increase its package holiday prices. (15 marks)

Paragraph 1

1. The main reason Jet2 increased their package holiday prices is because they are profit-maximisers.
2. Profit-maximisation occurs when a firm's marginal costs equals their marginal revenue (MC=MR).
3. As one of their competitors (Thomas Cook) shut down, Jet2 and other remaining firms would see an increase in market share and revenue as Thomas Cook's past customers search for close substitutes.
4. As Jet2 sees an increase in their average and marginal revenue, their profit maximisation condition changes from MC=MR1 to MC=MR2, which explains their ability to increase prices and enjoy more supernormal profits.

Evaluation

1. However, there is no guarantee that Jet2's market share actually increased as they are not Thomas Cook's only competitor.
2. Customers may have chosen to go to firms like TUI, who are actually the market leader.
3. This would depend initally depend on non-price factors such as the quality of Jet2's branding.

Paragraph 2

1. Another reason why Jet2 may have been able to increase their prices is the increased ability to collude.
2. Collusion is when firms agree to set high prices together.
3. The benefits of collusion are illustrated by the two-firm two-outcome model below.
4. The diagram shows that firms would usually not set a high price as they can be undercut and lose a lot of revenue/profit.
5. Collusion can only happen if there is high trust between the two or three firms who are involved, and this becomes higher now that Thomas Cook have shutdown.

Evaluation

1. However, collusion is still unlikely despite Thomas Cook shutting down, and this is because of the Competition and Markets Authority (CMA).
2. The CMA would monitor firms in the market to ensure they are acting in the best interest of consumers. Any sudden increases in prices could lead to an investigation, which means that firms are quite unlikely to collude.
3. If firms were caught for collusion, they would be fined heavily, meaning that they would end up earning lower profits instead of higher profits.

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