Why do firms in an oligopoly find it difficult to cooperate and not cheat on a cartel agreement?
What will be an ideal response?
Firms in an oligopoly have large market shares. When they change their output or price, the firm affects not only its own revenue and profit but also the revenue and profit of other firms. For example, if a firm cheats on a cartel agreement by lowering its price, it will capture a larger market share. The competitors' total revenue and profit decrease, but the cheating firm's profit increases. If the firms cooperate, they could act like a monopoly and have the maximum joint profit but each firm has the temptation to cheat and produce more than its share. This temptation is strong because cheating will increase the cheater's revenue and profit substantially.
You might also like to view...
Assume that foreign capital flows from a nation increase due to political uncertainly and increased risk. If the nation has highly mobile international capital markets and a fixed exchange rate system, what happens to the quantity of real loanable funds per time period and the nominal value of the domestic currency in the context of the Three-Sector-Model? a. The quantity of real loanable funds
per time period rises and nominal value of the domestic currency falls. b. The quantity of real loanable funds per time period falls and nominal value of the domestic currency remains the same. c. The quantity of real loanable funds per time period rises and nominal value of the domestic currency remains the same. d. The quantity of real loanable funds per time period rises and nominal value of the domestic currency rises. e. There is not enough information to determine what happens to these two macroeconomic variables.
The risk premium of a financial asset is the:
A. additional price that must be paid for riskier investments. B. rate that compensates for risk. C. rate that compensates for the risk of inflation. D. same as the discount rate.