Assume you are the manager of Yabba Cable Company, which provides commercial communication services to the town of Canyon Lake, Texas. Because of licensing restrictions in the market, only your company and two others (Dabba and Zabba) are allowed to operate in this market. The three companies decide to form a cartel and divide the market shares such that each company will provide services that will maximize its profits. The licensing restrictions allow each company to sell as much as it wants at a price ceiling of $2,400. You have the following output and MC data for each company:
Output MC ($)
Q Yabba Dabba Zabba
1,200 2,700 2,800 2,900
2,200 2,600 2,500 2,700
3,200 2,400 2,300 2,500
4,200 2,200 2,200 2,300
5,200 2,300 2,400 2,400
6,200 2,400 2,700 2,500
1. Calculate the industry output and market share at the current price of $2,400, assuming the prices are stable and unlikely to change.
2. Assume the current prices in the market are challenged by the regulatory agency, resulting in a new maximum price of $2,200. How will this change the industry output and market share for each company?
3. Is there any incentive for any company to cheat under either of the conditions in tasks a and b? Why or why not?
Solution is attached as MS Word file also.
a. Calculate the industry output and market share at the current price of $2,400, assuming the prices are stable and unlikely to change.
Each company will select a output level such that marginal cost is less than Marginal revenue (equals to price in this case) for profit maximization/loss minimization.
In case of Yabba, it will choose a output level of 6200 units because marginal cost is equal to marginal revenue at this level.
In case of Dabba, it will choose a output level of 5200 units because marginal cost is equal to marginal revenue at this level.
In case of ...
This solution provides methodology calculations and explanation to find out the market share of the given firms at different price levels.