Consider two Internet service providers (ISPS), firm X and firm Y. If these two firms act...

 

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Consider two Internet service providers (ISPS), firm X and firm Y. If these two firms act independently (they do not engage in any collusive behavior), each firm will serve 1,000 users per month at a price of $20 and an average cost of $15. If these two firms form a cartel, each firm would serve 750 users per month at a price of $28 and an average cost of $18. If one firm charges $20 and the other firm charges $28, the lower-price firm will earn a profit of $9,000 and the high-price firm will earn a profit of $4,000. Each of the firms is now deciding whether to set the price at the price at $20 or $28. Could you predict the outcome of their pricing decisions? Explain your answer. (10 marks) Consider two Internet service providers (ISPS), firm X and firm Y. If these two firms act independently (they do not engage in any collusive behavior), each firm will serve 1,000 users per month at a price of $20 and an average cost of $15. If these two firms form a cartel, each firm would serve 750 users per month at a price of $28 and an average cost of $18. If one firm charges $20 and the other firm charges $28, the lower-price firm will earn a profit of $9,000 and the high-price firm will earn a profit of $4,000. Each of the firms is now deciding whether to set the price at the price at $20 or $28. Could you predict the outcome of their pricing decisions? Explain your answer. (10 marks)

Answer rating: 100% (QA)

In this scenario we can analyze the pricing decisions of the two ISPs firm X and firm Y using game theory specifically the concept of a duopoly The ou... View the full answer