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$6
Although firms A and B
Firm B
$12
are mutually $6 $8
interdependent, both Price
can benefit from Low $15 $8
collusion. However,
there may be incentive
A
to cheat.
B
Po
Economic
Profit
ATC
D
Q0 MR Quantity of output
Joint-Profit Maximization
If rivals charge prices lower than Po, then
the demand curve of the firm charging Po
will shift to the left as its customers turn to
its rivals, and its profits will fall.
The firm can retaliate and cut its price, too,
however, all firms’ profits would eventually fall.
Firms will choose to charge Po and
produce Qo because it is the most
profitable price-output combination.
yright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Obstacles to Collusion
Barriers to collusion beyond the antitrust
laws include:
Demand and cost differences
Number firms
Cheating
Recession
Potential entry