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Question 3. Use game theory to explain why cartels are hard to maintain even without government crack downs. (20%) Question 4

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Answer: formations of the cartel US further there is no legal system to execute the rules of Flipkart the feature of the oligopoly market. There are few firms in the market and these firms can form the cartel to increase the profits of members. Profit is maximized by restricting the levels of the outputs and increasing the price level. But there is a strong incentive to follow the practice of cheating to increase the profit by the member firms.

Following are the causes of failure of cartel:

  • There is very strong incentive to cheat the other member firms. Single firm can increase its profit by deviating from the agreed output or price level.
  • There is no other legal enforcement mechanism to implement the rule of cartel.
  • Cheating by one member in the cartel lead to the retaliation by the other members as well.
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