(I) Oligopolistic firms have an incentive to collude to increase profits. (II) Oligopolistic firms have an incentive to cheat on collusive agreements to increase profits.

Question

Quizplus · Accepted Answer

Oligopolistic firms have an incentive to collude because by colluding, they can act like a monopoly and keep prices high, thereby increasing profits. However, if one firm has an opportunity to cheat by lowering prices or increasing output, they can gain more market share and profits. This will cause other firms to retaliate by lowering prices, leading to a price war and decreased profits for all. Therefore, while cooperation can lead to higher profits, the temptation to cheat can lead to the breakdown of collusive agreements.

(I) Oligopolistic Firms Have an Incentive to Collude to Increase