Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often
break down?
A) Most cartels do not have a dominant strategy.
B) When a cartel is profitable, the amount of competition it faces increases.
C) Members of a cartel may resent having to share their profits equally.
D) Each member of a cartel has an incentive to "cheat" on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.
Answer: D
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