Assume you are the manager of Abba 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 (Babba and Cabba) 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 $2,200. You have the following output and MC data for each company:
Output MC ($)
Q Abba Babba Cabba
1,000 2,500 2,600 2,700
2,000 2,400 2,300 2,500
3,000 2,200 2,100 2,300
4,000 2,000 2,000 2,100
5,000 2,100 2,200 2,200
6,000 2,200 2,500 2,300
a. Calculate the industry output and market share at the current price of $2,200, assuming the prices are stable and unlikely to change.?
b. Assume the current prices in the market are challenged by the regulatory agency, resulting in a new maximum price of $2,000. How will this change the industry output and market share for each company??
c. 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 in MS Word Format also.
a. Calculate the industry output and market share at the current price of $2,200, assuming the prices are stable and unlikely to change.
Each company will select an output level such that marginal cost is less than or equal to marginal revenue (price in this case) for optimal output level.
In the case of Abba, it will choose an output level of 6000 units because marginal cost is equal to marginal revenue, i.e. price at this level of output.
In the case of Babba, it will choose an output level of 5000 units because marginal cost is equal to marginal revenue, i.e. price at this level ...
Solution describes the steps to calculate industry output and market share of each of the given firms.