In an oligopoly, cooperation between firms usually leads to higher profits than defecting. In spite of this, cooperation doesn't usually occur because:
I. it is illegal.
II. there is an incentive for each firm to cheat on an agreement to cooperate.
III. an oligopolistic firm will typically prefer lower profits for itself if the only way to make higher collective profits in the industry is to improve the profit position of its rivals.
A)I only
B)II only
C)I and II
D)II and III

Question

Quizplus · Accepted Answer

I and II are correct. Cooperation between firms in an oligopoly, often in the form of collusion to fix prices or output levels, is illegal in many jurisdictions as it restricts competition. Additionally, even if firms agree to cooperate, there's a strong incentive for each firm to cheat on the agreement to secure a larger share of the market and profits for itself, undermining the cooperation. III is not a primary reason cooperation doesn't usually occur; it's more about the legality and incentive to cheat.

In an Oligopoly, Cooperation Between Firms Usually Leads to Higher