Assume you are the manager of Abba Cable Company, which provides commercial comm

Question

Assume you are the manager of Abba Cable Company, which provides commercial communication services to the town of Canyon Lake, Texas. Because of licensing restrictions in the market, only your company and two others (Babba and Cabba) are allowed to operate in this market. The three companies decide to form a cartel and divide the market shares such that each company will provide services that will maximize its profits. The licensing restrictions allow each company to sell as much as it wants at a price ceiling of $2,200. You have the following output and MC data for each company:

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Output MC ($) Q Abba Babba Cabba 1,000 2,500 2,600 2,700 2,000 2,400 2,300 2,500 3,000 2,200 2,100 2,300 4,000 2,000 2,000 2,100 5,000 2,100 2,200 2,200 6,000 2,200 2,500 2,300

Explanation / Answer

a. Each firm will manufacture where MR = MC, in this case MR = 2200

So, Abba = 6000
BAbba = 5000
Cabba = 5000
Industry output = 16000
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b. Using the concept in a)
Abba = 4000
Babba = 4000
Cabba = 4000 ( MC is minimum)
Industry = 12000
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c. No, because all are operating at profit maximising levels of their own. So no incentive.

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