Exercise-2 on Collusion Vs. Self-Interest: Solutions

Duopoly outcome with collusion: Each firm agrees to produce Q = 170, earns profit = $6,800.
If Vodafone reneges on the agreement & produces Q = 250, what happens to the market price? And Vodafone's profits?
Is it in Vodafone's interest to renege on the agreement?
If both firms renege and produce Q = 250, determine each firm's profits.
P Q
$01000
$5900
$10800
$15700
$20600
$30500
$40420
$50300
$60200
$70100




Solution:
If both firms stick to agreement, each firm's profit = $6,800.
If Vodafone reneges on the agreement & produces Q = 250: Market Quantity = 420, P = $40 Vodafone 's profit = 250 × ($40 − 10) = $7,500, Vodafone 's profits are higher if it reneges.
O2 will conclude the same, so both firms renege, each produces Q = 250: Market Quantity = 500, P = $30 Each firm's profit = 250 x ($30 – 10) = $5,000
P Q
$01000
$5900
$10800
$15700
$20600
$30500
$40420
$50300
$60200
$70100





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Date of last modification: 2019