The Two-Firm Cartel Model as a Coordination Game

Analysis of a Pricing Agreement

Two competing firms, Firm A and Firm B, secretly agree to set a high price for their identical products to maximize their joint profits. However, each firm knows that if it alone were to secretly lower its price, it would capture a significant portion of the market from the other firm, leading to an even higher individual profit. If both firms decide to lower their prices, they will both end up with lower profits than if they had both maintained the high price. From an economic perspective, what is the most probable long-term outcome of this situation?

Evaluating the Societal Impact of Cartel Instability

Consumer Benefits from Cartel Instability

In a market dominated by a few large firms that have secretly agreed to keep prices high, the individual self-interest of each firm is the primary factor that ultimately aligns their behavior with the best interests of consumers.

In a market where a group of firms has secretly agreed to coordinate their actions to keep prices high, various outcomes can occur for the firms and for consumers. Match each scenario with its most likely consequence.

Imagine a group of competing firms has successfully formed an agreement to keep prices high. Arrange the following events to illustrate the logical process that often leads to the breakdown of this agreement, resulting in a benefit for consumers.

Firm's Decision Dilemma in a Pricing Agreement

Airline Pricing Strategy Analysis