In 2011, three firms (Firm A, Firm B, and Firm C) were selling cellular phone service for a price of $40 per month in Hershey, Pennsylvania. Each firm serviced 100 cellphone customers; thus, all firms together serviced a total of 300 customers. Assume marginal cost is 0 (zero) for all firms and thus total revenue is equal to total profit. In 2012, Firms A and B continued to service 100 customers, but Firm C now serviced 150 customers; thus, all firms together serviced a total of 350 customers. All firms now charge $30 per month. Due only to the price effect, profits for each firm decline by $1,000. Due only to the output effect, profits for both Firm A and Firm B did not change, and profits for Firm C increased by $1,500. It was in Firm C's interest to increase output because:

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Firm C increased its output by 50%, leading to a quantity effect of 50% x $3,000 = $1,500. However, due to the price effect, all firms' profits were reduced by $1,000 each, resulting in a total price effect of $3,000. Firm C's share of the price effect is only 150/350 x $3,000 = $1,286, while Firm A and Firm B each experienced a price effect of $857. Therefore, Firm C realized only $1,000 of the total $3,000 price effect ($286 less than its share), but it realized the full $1,500 of the total quantity effect. Hence, it was in Firm C's interest to increase output.

In 2011, Three Firms (Firm A, Firm B, and Firm