Suppose there are two firms maintaining a cartel agreement. If one firm suddenly drops its price, the other firm could interpret this as signaling

Question

Quizplus · Accepted Answer

If one firm suddenly drops its price, it could be interpreted by the other firm as under-pricing, which would violate the cartel agreement. In a cartel agreement, firms agree to maintain a certain price level to limit competition and maximize profits. If one firm deviates from the agreed-upon price, it could be seen as a signal of under-pricing and an attempt to gain market share.

Suppose There Are Two Firms Maintaining a Cartel Agreement