In a Cournot model, the incentive to cheat on a collusive arrangement:
A)decreases with the number of firms.
B)is independent of the number of firms.
C)is prohibited by law.
D)increases with the number of firms.

Question

Quizplus · Accepted Answer

In a Cournot model, each firm produces a quantity of output based on its belief about how its competitors will behave. If all firms collude and agree to restrict output and divide the market share, each firm would produce less than they would in a non-cooperative scenario, and they would all earn more profit. However, each firm has an incentive to cheat on the collusive agreement by increasing its output level to capture more market share and earn higher profits. The likelihood of cheating increases with the number of firms in the market because each firm's output is a smaller portion of the total output, so the impact of increasing output is smaller. Therefore, the answer is D.

In a Cournot Model, the Incentive to Cheat on a Collusive