Answer to Question #277698 in Macroeconomics for Michelle Fung

Question

Even when allowed to collude, firms in an oligopoly may choose to cheat on their agreements with the rest of the cartel. Why?

Answer 1

$Solution$

Members of the cartel may be tempted to break their agreement /cheat to limit production. A cartel member can raise its share of the cartel's earnings by producing more production than it has promised to generate. As a result, each cartel member has an inherent motive to cheat.