When cartel members agree to restrict output to increase the price of their product, a single member of the cartel has an economic incentive to violate the agreement by increasing its output in order to increase profits.

Question

Quizplus · Accepted Answer

This is known as the "cheating problem" in a cartel. While all members benefit from higher prices, each member has an incentive to cheat by producing more and capturing a larger share of the market. However, if all members cheat, it defeats the purpose of the cartel and the price will collapse.

When Cartel Members Agree to Restrict Output to Increase the Price