Go-Fast and Interweb are two firms in an oligopoly market for internet broadband services. These two firms have 90% of the market share in the market for internet broadband services in Country Z. The table below shows possible profit outcomes for each firm for various combinations of pricing decisions. What will be the likely outcome if the two firms were able to collude and fix prices?

Question

BlackTom AI · Accepted Answer

Collusion lets the two firms act like a single monopolist and choose the price combination that maximizes their total (joint) profits, so they will pick the price pair that yields the highest combined payoff.

Relevant concepts: oligopoly payoff matrix, joint-profit maximization under collusion, and comparison of payoff sums. The table gives profits for each pricing combination. Compute total profits for each outcome:
- Both charge high price: Go-Fast $50M + Interweb $50M = $100M total.
- One charges low while the other charges high: the low-price firm gets $70M and the high-price firm gets $5M, so $70M + $5M = $75M total (this can occur in either asymmetric way).
- Both charge low price: $10M + $10M = $20M total.

Step-by-step reasoning:
1. List the possible outcomes and their combined profits (shown above).
2. Colluding firms choose the outcome that maximizes joint profit: $100M > $75M > $20M, so both charging the high price is best for the cartel.
3. With a binding collusive agreement to fix prices high, the natural division shown in the payoff cell is that each firm receives $50M. That is the payoff associated with both charging high.

Why the correct answer is correct: the collusive objective is to maximize total industry profit. The payoff cell for both charging high explicitly states each firm earns $50M, and this cell yields the highest combined profit ($100M), so collusion leads to that outcome.

Why other options are incorrect:
- Options (a) and (d) (70/5 splits) describe unilateral deviation outcomes where one undercuts a high price; these yield lower joint profit ($75M) and are not the collusive choice.
- Option (c) (both earn $10M) corresponds to mutual low pricing, which gives the lowest joint profit ($20M) and thus would not be chosen under collusion.

Conclusion: therefore, the likely collusive outcome is that both firms will earn $50 million profit, which matches answer b.

类似问题

Which of the following business tactics are ways that firms in an oligopolistic industry attempt to legally collude?

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value?

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