Question

Suppose you are hired as a manager at a telecommunications company called ITEL. ITEL’s

competitors are MTN and ZAMTEL. ITEL decides to increase its prices hoping that this would

lead to an increase its profits. However, MTN and Zamtel do not follow suit.

a) As manager of itel, explain using economic theory the relationship between ITEL, MTN and

ZAMTEL and why MTN and ZAMTEL behaved in such a manner.                      

b) Would it be wise for ITEL to enter into an informal collaboration with MTN and ZAMTEL?

Suppose you are hired as a manager at a telecommunications company called ITEL. ITEL’s

competitors are MTN and ZAMTEL. ITEL decides to increase its prices hoping that this would

lead to an increase its profits. However, MTN and Zamtel do not follow suit.

a) As manager of itel, explain using economic theory the relationship between ITEL, MTN and

ZAMTEL and why MTN and ZAMTEL behaved in such a manner.                      

b) Would it be wise for ITEL to enter into an informal collaboration with MTN and ZAMTEL?

Answer 1

a) It appears that the three companies form an oligopoly, i.e., a market with a few number of suppliers controlling the supply. The price is not a given for an individual firm like it is in a perfect competition and the firms have influence over it. However, if one firm raises the price and the others don't follow, the firm that raised its prices will lose its market share to the competition. And this is what has happened in this case.

b) It won't be prudent to enter into an informal collaboration as it is in contravention to the anti-trust laws as it amounts to price-fixing which is detrimental to the consumers' interest.