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Assume you are the manager


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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 $2,200. You have the following output
and MC data for each company:
Output MC ($)
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
A.Calculate the industry output and market share at the current price of $2,200, assuming the
prices are stable and unlikely to change.
B. Assume the current prices in the market are challenged by the regulatory agency, resulting in a
new maximum price of $2,000. How will this change the industry output and market share for each
C. Is there any incentive for any company to cheat under either of the conditions in tasks a and b?
Why or why not?
A. The industry output will be 4000+4000+4000= 12000 units because at 4000 units, each company is
maximizing its profit. The market share for each company is 33.3%.
B. If price drops down to 2000, only Abba and Babba will be able to operate and Cabba will have to shut
down operations. Abba and Babba will produce 4000 units each and will operate on a no profit, no loss
basis and will have 50% market share each.

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C. There is no incentive to cheat because if each one of these companies will try to manufacture more
product, their profitability will decline. Hence, they are already operating at profit maximizing level and
thus, one would not want to sell more quantity than the current one.

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