Suppose all of the firms in an industry form a cartel and succeed in raising the price to the monopoly level by reducing output.Any single firm will find that it can increase its profits by cheating on the cartel agreement.

Question

Quizplus · Accepted Answer

If all firms in an industry form a cartel and successfully raise the price to the monopoly level by reducing output, any individual firm would have an incentive to cheat and increase its output, since it can sell more at the higher monopoly price and earn more profits. This is known as the incentive to cheat problem in cartel formation.

Suppose All of the Firms in an Industry Form a Cartel