Solutions: Collusion Vs. Self-Interest - 2

Introduction and Brief about Solutions

This page provides answers to the set of questions on Collusion Versus Self-Interest.
This helps to get better understanding and relationships between collusion and self-interest such as the following:

Duopoly outcome with collusion

When Vodafone reneges an agreement

the case when firms renege and produce a particualt quantity

and how to determine firm's profits

The solutions provided here are related to questions in the previous link.

Exercise

Collusion Vs. Self-Interest

Collusion Vs. Self-Interest: Exercise
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.

Collusion Vs. Self-Interest: Exercise 1
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 Vs. Self-Interest 2A
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

Collusion Vs. Self-Interest - Solution
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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