Pricing and Output Decisions in an Oligopoly
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
a. Calculate the industry output and market share at the current price of $2,400, 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 $2,200. 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?
In an oligopoly, if a firm cheats and sells more, the increased sales of one firm will be noticed quickly by the other firms. This is due to effect of the increasing market share of one firm which will reduce market share of other firms. Therefore, if one firm sells more, the other firms will realize a reduced market share.