alleryStart learning →A cartel is unstable because each member firm has an incentive to:
ACut its own output further
BRaise its price still higher
CLeave the market entirely
DDefect from the agreement
Answer & Solution
Correct answer: D. Defect from the agreement
1. Colluding firms face exactly the structure of the prisoner's dilemma.
2. The prisoner's dilemma is a scenario in which the gains from cooperation are larger than the rewards from pursuing self-interest.
3. The rewards from self-interest are nonetheless real for whoever moves first.
4. So each member gains by quietly producing more than its quota while the others hold back.
5. If everyone reasons that way the agreement collapses.
_Source: OpenStax Principles of Microeconomics for AP(R) Courses 2e (CC BY 4.0), Ch 10 'Monopolistic Competition and Oligopoly', sections 10.1-10.2_
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