Two firms that comprise an industry have decided to engage in collusion. They intend to maximize their total collective profit, that is, to behave as a single monopolist. How should they behave?

Question

Quizplus · Accepted Answer

To maximize total collective profit as if they were a single monopolist, the firm with the higher marginal cost should reduce its output, allowing the firm with the lower marginal cost to increase its output. This approach leverages the cost efficiency of the lower-cost firm to produce more, while the higher-cost firm produces less, optimizing overall profit for the collusion.

Two Firms That Comprise an Industry Have Decided to Engage