Answer on Microeconomics Question for erum
Game theory suggests that cartels are inherently unstable, as the behavior of members of a cartel is an example of a prisoner's dilemma. Each member of a cartel would be able to make more profit by breaking the agreement (producing a greater quantity or selling at a lower price
than that agreed) than it could make by abiding by it. However, if all members
break the agreement, all will be worse off.
The incentive to cheat explains why cartels are generally difficult to sustain in
the long run. Empirical studies of 20th century cartels have determined that the
mean duration of discovered cartels is from 5 to 8 years. However, one private
cartel operated peacefully for 134 years before disbanding. There is a danger that once a cartel is broken, the incentives to form the cartel
return and the cartel may be re-formed.
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