Solutions to Collusion Vs. Self-Interest-1

Introduction

Collusion Vs. Self-Interest -1

Collusion Versus Self-Interest
Duopoly outcome with collusion: Each firm agrees to produce Q = 170, earns profit = $6,800.
If Vodafone reneges on the agreement & produces Q = 360, 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 = 350, determine each firm's profits.

Collusion Versus Self-Interest -2
P	Q
$0	1000
$5	900
$10	800
$15	700
$20	600
$30	500
$40	420
$50	300
$60	200
$70	100

Solution:

Collusion Vs. Self-Interest -2

Collusion Versus Self-Interest -2
If both firms stick to agreement, each firm's profit = $6,800.

If Vodafone reneges on the agreement & produces Q = 360: Market Quantity = 700, P = $15 Vodafone 's profit = 360 × ($15 − 10) = $1,800, Vodafone 's profits are lower if it reneges.

O₂ will conclude the same, so both firms renege, each produces Q = 350: Market Quantity = 700, P = $15 Each firm's profit = 350 x ($15 – 10) = $1,750

Collusion Versus Self-Interest 2
P Q

$0 1000

$5 900

$10 800

$15 700

$20 600

$30 500

$40 420

$50 300

$60 200

$70 100

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