Once a cartel determines the profit-maximizing price,
A)all members of the cartel have a strong incentive to abide by the agreed-upon price.
B)each member will face the temptation to cheat on the cartel price to increase its sales and profit.
C)changes in the output of any member firms will have no impact on the market price.
D)entry into the industry of rival firms will have no impact on the profit of the cartel.
E)entry into the industry of rival firms will raise cartel profit as long as the new firms join the cartel.

Question

Quizplus · Accepted Answer

Once a cartel determines the profit-maximizing price, each member will face the temptation to cheat on the cartel price to increase its sales and profit. This is known as the "prisoner's dilemma" in game theory, where individual self-interest conflicts with the collective interest of the group. Therefore, there is a constant risk of members deviating from the agreed-upon price, leading to a breakdown of the cartel's cooperation and the collapse of their market power.

Once a Cartel Determines the Profit-Maximizing Price