In a collusive agreement between two duopolists in an oligopoly, each firm has an incentive to cheat on the agreement because the firm's price
A) exceeds its marginal revenue.
B) exceeds its marginal cost.
C) is less than its average total cost.
D) None of the above answers is correct.

Question

Quizplus · Accepted Answer

In a collusive agreement, if a firm cheats by slightly undercutting the agreed-upon price, it can significantly increase its sales and profits as long as its price exceeds its marginal cost. This incentive to cheat arises because by doing so, the firm can capture a larger market share at the expense of the other firm in the collusion, leading to higher profits as long as the price remains above its marginal cost.

In a Collusive Agreement Between Two Duopolists in an Oligopoly