Question

Little Kona is a small coffee company that is considering entering a market dominated by Big Brew operating as an ologopolist. Each company's profit depends on whether Little Kona enters and whether Big Brew sets high price or a low price. If the two firms could collude and agree on how to split the total profits, how would they and consumers benefit from that decision?

Answer 1

If the two firms are colluding each other, then they will make a Nash equilibrium. It is the only outcome when both the firms are not cheating each other. The big brew charge the high price and little krona stay outside the market and split the profit accordingly. If little Kona is producing another output, then it will become a collusive oligopoly.

The collusion generally results in higher prices and low-quality products. The collusion will improve production efficiency of the firm, and it will benefit the consumers, and they will get more products at a lower rate.