Suppose two firms, FastNet and SmartCast are the only fast Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other's. The industry is a natural duopoly. Suppose that FastNet and SmartCast collude and agree to share the market equally. In this scenario, which of the following actions will maximise the industry's economic profit?
A) Because the firms are colluding, the profit does not change regardless of whether the firms comply with agreement or cheat on the agreement.
B) Both firms comply with the agreement.
C) One of the firms complies with the agreement while the other firm cheats, producing more than the agreed amount.
D) Both firms cheat on the agreement, producing more than the agreed amount.

Question

Quizplus · Accepted Answer

Collusion and agreeing to share the market equally allows both firms to act like a monopoly, setting higher prices and producing less, which maximizes economic profits compared to competitive outcomes.

Suppose Two Firms, FastNet and SmartCast Are the Only Fast