Suppose the market for home-grown peppers in the town of Smallville is comprised of two farmers. Suppose the two farmers try to collude. Explain why their collusion might not be successful

Answer 1

The two farmers might try to determine the equilibrium price and quantity of peppers that a monopolist would charge and produce, respectively. If they could collude to produce the monopoly output and charge the monopoly price, jointly they would earn the highest profits. But if one farmer attempts to sell a slightly higher quantity at a slightly lower price, she might earn higher profits than if the other farmer holds to the previous agreement to reduce quantity to the monopoly level. Because the other farmer probably has the same idea that she does, both farmers are likely to sell a bit more, which will lower the market price and reduce each farmer's individual profits.