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Fact 15.2.1
Two firms, FastNet and SmartCast are the only Internet providers in a city. They have identical costs and one firm's service is a perfect substitute for the other firm's service. The industry is a natural duopoly. FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 15.2.1. Which of the following actions maximizes the industry's economic profit?

Question

Quizplus · Accepted Answer

Colluding and complying with the agreement to share the market equally allows both firms to earn a higher economic profit than if they were to compete aggressively. If both firms cheat, they risk triggering a price war that will drive down profits for both. If one firm cheats, the other firm will likely retaliate, causing the same outcome. If new firms enter the market, the industry will become less of a natural duopoly, which may lead to lower profits. Setting prices as if in a perfectly competitive market is not a realistic option for a natural duopoly. Compliance with the agreement to share the market equally maximizes the industry's profit.

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