Question

Suppose you are a manager of a firm that operates in a duopoly. Recently, the state attorney general fined you and your competitor for price fixing. In your market, firms only set prices, not total quantities to sell. From previous experience, you know your competitor has a marginal cost of $6.78. Further, your marginal costs are $6.76. The previous cartel price was $10.00, when you and your competitor were price fixing.

What price level do you now choose to maximize profits?

The answer is 6.77 but I don't understand why it has to be above my original marginal cost

Answer 1

Answer:

When there is price fixing between two competitors, if one competitor chooses to fix price it should not exceed competitors marginal cost (price) and should be above his marginal cost (price). Since, the price fixing of $10 will be fined (previous cartel price). Then, the ideal price to maximize the profit would be below the competitor's price $6.78 and above his marginal cost $6.76

Thus, the ideal price to maximize profits would be $6.77, which is above his marginal cost and below competitor price.