Two firms, Alpha and Beta, produce identical computer hard drives. They have identical costs, and the hard drives they produce are identical. The industry is a natural duopoly. Alpha and Beta enter into a collusive agreement, according to which they split the market equally. If both firms comply with the agreement,
A) together they will operate in a way indistinguishable from a monopoly.
B) the oligopoly will produce more hard drives than a profit- maximising monopoly would produce.
C) each firm will make zero economic profit.
D) the price of a hard drive will be equal to marginal cost.

Question

Quizplus · Accepted Answer

When firms in a duopoly or oligopoly collude to split the market and set prices, they effectively eliminate competition between them, acting as a single monopolist would. This means they will set quantities and prices to maximize joint profits, similar to a monopoly's behavior, rather than competing to drive prices down to marginal costs.

Two Firms, Alpha and Beta, Produce Identical Computer Hard Drives