The following table shows your neighborhood’s demand for movie streaming service

Question

The following table shows your neighborhood’s demand for movie streaming services. Assume that only two firms (Netflix and Fandango) sell in this market, that each firm offers the same quality of service, and that each firm’s marginal cost is constant and equal to $0 because of excess capacity.

1st attempt

Part 1   (0.7 point)

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Part 2   (0.3 point)

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Economists would refer to this type of agreement between Netflix and Fandango as

price leadership

collusion

diminishing marginal returns

.

Price per subscription (P) Number of customers (Q) Total revenue per month (TR) $0 10000 $0 $1 9000 $900 $2 8000 $1,600 $3 7000 $2,100 $4 6000 $2,400 $5 5000 $2,500 $6 4000 $2,400 $7 3000 $2,100 $8 2000 $1,600 $9 1000 $900 $10 0 $0

Explanation / Answer

2500 subscriptions will be sold by each firm. Note that MC = 0 so MR = 0 when TR is maximum. Hence When TR is maximum at Q = 5000, both firms would supply half of monopoly's subscription which is 2500.

This type of agreement is called collusion.

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