ECON 3200 Study Guide - Midterm Guide: Ebay, Product Differentiation, Kraljevi Ulice

• School: York University
• Department: Schulich School of Business
• Course: ECON 3200
• Professor: Andrey Stoyanov

Document Summary

In a cartel, each firm will have an incentive to cheat on their quota. If a single firm cheats on the cartel agreement then the single firm can increase its profit. When a cartel forms, each firm in the industry will decrease its output to increase price in the industry. After the cartel successfully increases price, a single firm can increase its profits by increasing its quantity produced. As in figure 13. a. 4b, a firm faces a horizontal demand curve; one single firm increasing its output will not affect the price in the industry. When the cheating firm increases its output from 20 units to 30 units, the cheating firm will still receive the cartel price, but will produce a higher quantity than other firms in the cartel. With the higher quantity at the same cartel price, the cheating firm will have a greater profit than other firms in the cartel.