A few rival firms produce and supply Internet services in the fictional country

Question

A few rival firms produce and supply Internet services in the fictional country of Adanac. In this market, substantial economies of scale are present producers need to have the appropriate technology, hardware, data connections, and customer service to maintain their business. Therefore, the market for Internet service is best characterized as an oligopoly. The following graph shows the market demand conditions and long-run costs of production for individual firms in the market for Internet service. Assume all Internet service providers produce an identical product and face identical cost curves Suppose all Internet service providers successfully coordinate supply decisions to maximize profit as a cartel. Place the green point (triangle symbol) on the graph to indicate the quantity of monthly subscriptions the cartel will supply and the price it will charge. Dashed drop lines will automatically extend to both axes. Now suppose that some members of the cartel begin to "cheat" by lowering their prices in order to increase market share. Eventually, all former members become rivals, competing for customers and profit. Use the purple point (diamond symbol) to indicate the price and quantity that will prevail in the long run if all firms in the oligopoly compete with one another, and the results are as if they were in perfect competition. Dashed drop lines will automatically extend to both axes. Hint: Because the ATC curve for this industry is flat where it intersects the demand and marginal revenue curves, this is also where the MC curve intersects these curves.

Explanation / Answer

When the firms behave as a cartel, they produce a quantity where MR=LRMC. Since their LRMC=LRATC, cartel produces a quantity where MR=LRATC. This occurs when the cartel is able to sell 300,000 subscriptions at a price of $40 per subscription.

When the firms compete, each of them produce a quantity where AR=LRMC=LRATC. This implies each firm is able to sell 600,000 subscriptions at a price of $40 per subscription.

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