Carson Bell and Renee Dohr own the only two firms in the United States that sell a unique herbal vitamin supplement that has no close substitutes. They plan a secret meeting at the National Zoo in Washington, DC, to form a cartel in order to increase
their profit. a . How do they determine the price of their good? b. Do Carson and Renee have an incentive to cheat on their agreement with each other? Explain. c. How could Carson or Renee cheat?
a . They should behave as if the industry is monopolized and select the price and output combination that
would maximize the monopoly's profit.
b. A firm in a cartel can increase its profit if it cheats on the agreement and produces more than the
agreed amount. Therefore, Carson and Renee each have an incentive to cheat, causing their cartel to
break down.
c. They may try to cheat by selling output under different brand names or labels, or by invading restricted
markets by giving secret price concessions to other firms' customers.
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