Being part of a cartel is generally good for a firm because it can reduce output while increasing prices and profits.Yet most cartels have failed.Why is this the case?
A) Cartels lack a dominant strategy.
B) As the cartel becomes more profitable,competition increases.
C) Cartel members dislike having to equally share profits.
D) Each member of the cartel faces an incentive to cheat and produce more,while all of the other members honor the agreement.
E) Cartel members eventually go out of business.

Question

Quizplus · Accepted Answer

Each member of the cartel has an incentive to cheat and produce more than the agreed-upon output level, which can increase their profits. However, if all members of the cartel do this, the cartel falls apart as output increases and prices decrease. This is known as the prisoner's dilemma and is the primary reason why most cartels ultimately fail.

Being Part of a Cartel Is Generally Good for a Firm