FIGURE 4 CARTELS AND THE INCENTIVE TO CHEAT
imageA cartel consisting of five firms collectively agrees to restrict total output to the monopoly output of 100 units and charges $10 per unit. If one firm chooses to cheat by increasing its output by an additional 20 units, total output increases to 120 units and price falls to $8. This results in a loss of revenue of $200, which is shared equally among the five cartel members ($40 loss per member, equal to one share of the yellow area). However, the cheating member gains $160 from the additional 20 units sold at $8 each (green area). The marginal revenue for the cheating member is therefore $160 − $40 = $120.