The table below shows the payoff (profit) matrix of Firm A and Firm B indicating the profit outcome that corresponds to each firm's pricing strategy (where $500 and $200 are the pricing strategies of two firms).Table 12.2

-In order to survive, cartels must be able to enforce contracts. However, when a cartel is trading in an illegal commodity:
A)it can use the judicial system to enforce contracts.
B)it relies on altruism of members to enforce contracts.
C)it is inherently stable because the market is underground.
D)violence becomes a means of contract enforcement.
E)authorities are effective in preventing the trade.

Question

The table below shows the payoff (profit) matrix of Firm A and Firm B indicating the profit outcome that corresponds to each firm's pricing strategy (where $500 and $200 are the pricing strategies of two firms).Table 12.2
 
-In order to survive, cartels must be able to enforce contracts. However, when a cartel is trading in an illegal commodity:
A)it can use the judicial system to enforce contracts. 
B)it relies on altruism of members to enforce contracts. 
C)it is inherently stable because the market is underground. 
D)violence becomes a means of contract enforcement. 
E)authorities are effective in preventing the trade.

Quizplus · Accepted Answer

When a cartel is trading in an illegal commodity, it cannot use the judicial system to enforce contracts or rely on the altruism of its members to enforce contracts as they may not trust each other fully. Additionally, the market being underground does not make it inherently stable because there can be internal conflicts among members. Therefore, violence becomes a means of contract enforcement in such cases.

The Table Below Shows the Payoff (Profit) Matrix of Firm