Firms may have incentives to cheat on cooperative agreements when maintaining a collusive agreement has high opportunity costs.

Question

Quizplus · Accepted Answer

When the cost of maintaining a collusive agreement becomes high, firms may feel motivated to cheat on the agreement in order to reap the benefits of operating independently. This is because the opportunity cost of adhering to the agreement may become too great, such as when market conditions change or when competitors outside the agreement become more attractive partners. In such cases, firms may be willing to risk the consequences of cheating on the agreement in order to improve their competitive position.

Firms May Have Incentives to Cheat on Cooperative Agreements When