Firm A and Firm B are two rival airlines that serve similar routes around the world. The payoffs to the two airlines are shown in Figure Q4(b). Assume Firm A and Firm B decided simultaneously considering entry into a new market. If neither enters, both earn zero. If both enter, they both lose 100. If one firm enters, it gains 50 while the other earns zero.

Assume Firm A and Firm B collude to set the level of price and quantity in the industry. By colluding, they are acting as a monopoly.

Evaluate the consequences of Firm A and Firm B collusion when an oligopoly market becoming a monopoly market.

Figure Q4 (b): Firm A and Firm B payoffs Firm B Do Not Enter Enter Enter -20 Firm A 10 50 Do Not 40 O Enter O O