2.5 Suppose that only Regal Entertainment Group had movie theaters in Gainesville but then Cinemark Theaters entered by opening a theater downtown. As a result of Cinemark’s entry into the Gainesville market, competition for the exhibition rights to first-run films increased substantially.

This competition caused the license fees, the revenue guarantees, and the advances paid to the distribution companies to escalate dramatically.

The owners of the theaters found that competitive bidding caused their costs to rise and their profits to fall, as they had to pay unreasonable prices to the distributors. They decided to solve this problem by splitting the films and not bidding competitively.

a. Is this agreement an illegal restraint of trade? Why or why not?

b. Who suffers if the theaters reduce their costs in this way?