If new firms enter a cartel market, the cartel can either incorporate the new firms into the agreement or exclude them, but regardless of inclusion or exclusion, the probability that the cartel will survive decreases.

Question

Quizplus · Accepted Answer

The entry of new firms into a cartel market increases competition and may lead to price cutting or other actions that destabilize the cartel. Even if the cartel incorporates the new firms into the agreement, the increased number of participants may make it harder for the cartel to maintain discipline and enforce compliance with the agreement. This can ultimately decrease the probability that the cartel will survive.

If New Firms Enter a Cartel Market, the Cartel Can