The desire to increase profits may cause firms to cheat on an agreement reached by a cartel.

Question

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Cartels are formed to restrict competition and increase prices by coordinating the actions of member firms. However, each firm may have an incentive to cheat on the agreement and increase its own profits. This is because a firm that cheats and increases its output can capture a larger market share and earn higher profits. The other members may not be willing to reduce their output and lose market share, as this would reduce their profits. Thus, the desire to increase profits may cause a firm to break the cartel agreement and compete aggressively with the other members, leading to an unraveling of the cartel.

The Desire to Increase Profits May Cause Firms to Cheat