In a price-fixing agreement amongst two oligopolists, each seller's best strategy would be to maintain the agreement, as it would leave both of them better off.

Question

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In a price-fixing agreement amongst oligopolists, each seller has an incentive to cheat on the agreement by slightly undercutting the fixed price to increase their market share, even though maintaining the agreement would theoretically make both better off. This temptation to cheat can make such agreements unstable.

In a Price-Fixing Agreement Amongst Two Oligopolists, Each Seller's Best