What happens to the market outcome if cartel members cheat on the collusive agreement?
A) Price declines, but firm-level quantities remain the same because the firms act like price takers.
B) Price and quantity revert to the single-seller monopoly equilibrium outcome.
C) Other firms raise prices so that the average market price remains unchanged.
D) Price declines and quantity increases toward the perfectly competitive equilibrium.

Question

Quizplus · Accepted Answer

Cartel members work together to restrict output and raise prices. If some members cheat and increase their output, they will push down the market price. This will lead to a prisoner's dilemma situation for the remaining cartel members, causing them to increase their output to gain a greater share of the market. As a result, the overall quantity will increase towards the perfectly competitive equilibrium, and the price will decline.

What Happens to the Market Outcome If Cartel Members Cheat