Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms cheat on the agreement so the market is the same as a competitive market,
A) each firm will increase its economic profit.
B) they will operate in a way indistinguishable from a monopoly.
C) each firm will make zero economic profit.
D) the price of a hard drive will be above marginal cost.

Question

Quizplus · Accepted Answer

In a competitive market, firms typically earn zero economic profit in the long run because entry of new firms drives prices down to the level of marginal costs. Since Alpha and Beta are cheating on their collusive agreement, they are acting more like firms in a competitive market rather than maintaining a monopoly-like situation, leading to zero economic profit.

Two Firms, Alpha and Beta, Produce Identical Computer Hard Drives