Use the information below to answer the following questions.
Fact 14.2.1
Two firms,FastNet and SmartCast are the only Internet providers in a city.They have identical costs and one firm's service is a perfect substitute for the other firm's service.The industry is a natural duopoly.FastNet and SmartCast decide to collude and agree to share the market equally.
-Refer to Fact 14.2.1.What is the Nash equilibrium?
A)Both firms cheat on the agreement.
B)One firm cheats and one firm complies.
C)Both firms comply with the agreement.
D)New firms enter the market.
E)Both firms charge the price that would exist in a perfectly competitive market.

Question

Quizplus · Accepted Answer

In a Nash equilibrium, each player's strategy is optimal given the strategies of the other players. In the scenario described, both firms have an incentive to cheat on the agreement to increase their own profits, assuming the other firm will stick to the agreement. This leads to a situation where both firms end up cheating as their best response to the other firm's strategy.

Use the Information Below to Answer the Following Questions