Which of the following statements is TRUE?
I. The gain in profit from cheating on a cartel agreement is greater if there are more firms in the cartel.
II. In a cartel, compliant firms will earn rising profits as cheating firms lower prices by expanding output.
III. If a firm cheats on a cartel agreement, the loss in profit to the compliant firm will be smaller in a two-firm cartel than a four-firm cartel.

Question

Quizplus · Accepted Answer

I. True, because with more firms in the cartel, the individual impact of one firm cheating (by secretly lowering prices or increasing output) is spread across more firms, making it easier for the cheating firm to capture a larger share of the market without being immediately detected or significantly impacting the market price.III. True, because in a two-firm cartel, the non-cheating firm loses a significant portion of the market to the cheating firm, impacting its profits more severely. In a four-firm cartel, the loss is distributed among more firms, reducing the impact on any single compliant firm.

Which of the Following Statements Is TRUE