Question

1. Think of two firms colluding to earn monopoly profits by each agreeing to enjoy half the market share.

(a). If each firm honors this agreement, calculate each firm’s level of output and the resulting profit enjoyed by each firm.

(b). In general, when can such an arrangement be feasible, that is, when will each firm have an incentive to honor such an agreement?

2. What can you say, in general, about the Cournot-Nash equilibrium quantities and prices as the number of sellers (n) competing in the industry rises?

Answer 1

1 (a) Each Firms Level of Output need to half of the Market Demand . For Example in case the market demands 100 pieces of a product every month, each firm need to produce 50 product each in order to stay in the market.

Resulting Profit enjoyed by each firm also need to be equal to each others as only these 2 firms are operating in the market with equal shares already been decided by them.

1 (b) IN General these arrangement are feasible in case of DUOPOLY situations where there are only 2 sellers of a product are available in the market and each product is competent with the other . Thus in order to avoid unnecessary competition and marketing cost , this type of arrangement takes place. Each firm will be having to incentive to honor such arrangement when the share of each firm is equal to the other and no other strategy is been followed by either of the firm.

2. In case the no of sellers in the industry rises the Cournot Nash Equlibrium can only  be maintained when each firm will chose its quantity taking as given quantity of its rivals and all this to happen with a concept of equal for all.