Part a
Assume that the iron ore production industry contains just two producers, so it is an oligopoly market. In order to maximize industry profits, it is suggested that these two companies sign an agreement and set a higher price together, thus forming a cartel model. The cartel is an agreement between competing firms to control prices or exclude entry of a new competitor in a market (Sullivan & Steven, 2003). Therefore, in this model, firms would be more likely to act as monopolists and enjoy more profits together. Then, setting marginal cost equal to marginal revenue and calculate the price and quantity, the profits will be maximized at this point .If the price discrimination is feasible, for example, Australian iron ore production industry might engage in third-degree price discrimination，charging a high price to China and charging a lower price to Europe because the demand of Chinese market might be relatively inelastic, in this case, the industry should sell the production at the point where MRC=MRE=MC for maximizing profits. If these two producers have different production costs, in the cartel model, in order to maximize profits, all products should be produced by the firm whose production costs are lower, while the other firm’s production quantity is zero. If I am a consultant working for ACCC, although this cooperation could be beneficial to the national economy, it might be harmful to consumers’ profits due to the increasing price. In addition, they might pay less attention to the technological development and have a negative effect on the long-term industrial development.

Part b
Assume that each firm simultaneously choose whether to price ‘low’ or ‘high’. The payoffs are 15 each if both choose ‘high’. If one firm prices ‘low’ and the other chooses ‘high’, the payoffs are 20 and 3 to the low-priced and the high-priced firm respectively. If both