With the help of a diagram, explain how collusion between energy suppliers could affect the retail prices paid by consumers. (9)

Collusion is when firms cooperate for mutual benefit. This usually occurs in oligopoly markets such as the energy market, where a few large firms compete for market share. Collusion between energy suppliers would likely increase the retail prices paid for consumers, because of the monopoly power that oligopoly firms possess - suppliers can use their monopoly power to restrict output compared to that of a competitive market, which forces up the market price (as shown in the diagram).The point where marginal cost equals average revenue (supply equals demand) would the market equilibrium in perfect competition, giving a prevailing quantity of Qc and price of Pc. Here, the allocation of resources is optimal and the price paid by consumers is equitable, with consumer surplus equal to producer surplus. If collusion occurs, however, energy suppliers can jointly abuse their monopoly power to restrict output to Qm, which pushes prices up to Pm (where marginal cost equals marginal revenue - the profit-maximising equilibrium position). The effect is a deadweight welfare loss, because producer surplus (evidenced by supernormal profit of area PmYZC) has expanded at the expense of the consumer. This means that collusion between energy suppliers would most likely lead to lower energy output, and as a result, higher prices paid by consumers.