In the early days of cell phones (1981-1994), the US government decided that it was best to have only two firms in each market (a special form of oligopoly called a duopoly). Suppose the goal of the government is to maximize consumer surplus. a. Why would

a. The government decided to have only two firms in each market because it believed that this would promote competition and ultimately lead to lower prices for consumers. While colluding may be a concern, it is difficult for two firms to maintain a collusion agreement for long periods of time due to the potential for one firm to defect and gain a competitive advantage. Additionally, if the firms did collude, the government could take legal action to prevent this behavior and enforce antitrust laws to promote competition. b. Allowing an oligopoly may further the goal of maximizing consumer surplus because it can lead to lower prices than a pure monopoly market. While a pure monopoly market would result in the highest price for the monopolist, the introduction of a competitor in the form of a duopoly can decrease the price charged by each firm in order to compete for customers. The price that maximizes consumer surplus is where the demand curve intersects with the marginal cost curve (where marginal benefit equals marginal cost). In the case of a duopoly, each firm would set their price at this intersection point in order to maximize their profits while still offering a competitive price to consumers. This results in a lower price for consumers than what they would face in a monopoly market.