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Unformatted text preview: by the cartel, while everyone else abides by the rules, there is a quick profit for you. .. BUT either they will all follow suit and also exceed their quotas, or they will get nasty and bring you to heel by using the threat of market power (This was the approach taken by De Beers and by the Saudis in OPEC for many years). The point is that successful long lasting cartels are relatively rare. .. this tells us that the tendency is for cheating to undermine the cartel (the Nash outcome). EG profit is max for industry at Q2, so set each firm a quota of q2 MC ATC P2 P1 Q2 Q1 q2 q1 q3 Initial profit from abiding by quota is cross hatched area. If you cheat it increases by the yellow shaded block. If EVERYONE cheats you all end up back where you started making normal profits at P1q1...
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- Spring '11
- OPEC, Inverse demand function, free entry