An agreement between the dominant firm and the fringe members to keep output low often breaks because:
A)the fringe firms usually appropriate a larger share of the profits.
B)the agreement is not self enforcing.
C)the dominant firm usually appropriates a larger share of the profits.
D)both have an incentive to charge a higher price for their output.

Question

Quizplus · Accepted Answer

The agreement is not self-enforcing, meaning there is no mechanism to ensure that both parties will adhere to the agreement. As a result, one party may be tempted to cheat and increase their output to earn more profits, which can cause the agreement to break. The other options are not always true and may depend on the specific circumstances of the agreement.

An Agreement Between the Dominant Firm and the Fringe Members