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, in Nash equilibrium,

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In a Nash equilibrium, each firm, knowing the strategy of the other, has no incentive to change its own strategy. In this scenario, both firms have an incentive to cheat on the collusion agreement by producing more than the agreed amount to capture a larger market share, assuming the other firm sticks to the agreement. This leads to both firms cheating to produce more, as it maximizes their individual payoffs given the strategy of the other.

Suppose Two Firms, FastNet and SmartCast Are the Only Fast