Suppose that Bill and Steve are duopolists in the smartphone apps industry.At the beginning of the year, the two agree to work jointly as a monopoly, producing the monopoly level of output and the monopoly price for their apps.Halfway through the year each app firm is seriously considering breaking this agreement.Given these facts, what's likely to happen next?
A)Both Bill and Steve realize that their best outcome is to maintain the agreement.
B)Both Bill and Steve will break the agreement, the profits each of them will fall.
C)Both Bill and Steve will break the agreement, and each sees an increase in profits.
D)Both Bill and Steve will break the agreement, output of apps goes up and prices rise.

Question

Quizplus · Accepted Answer

In a duopoly, if both firms decide to break a collusive agreement to act like a monopoly, they will likely increase their individual outputs to capture more market share, leading to a fall in prices due to increased competition. This increased competition typically reduces the profits for both firms compared to the profits they could secure under the collusive agreement.

Suppose That Bill and Steve Are Duopolists in the Smartphone