The Incentive to Cheat When a monopolist increases quantity from Q0 to Q1 it gets all of the revenues from the new sales (the green area) but it also bears all of the losses from the lower price on old sales (the red area). The red plus green area is equal to marginal revenue (see Chapter 11).
When a single firm in a four-firm cartel increases quantity from Q0 to Q1 it gets all of the revenues from the new sales (the green area), but the fall in price is spread across all firms in the industry in proportion to their sales so the cartel member loses only the much smaller red area. The cartel member, therefore, has a much larger incentive to increase output than does the monopolist.
When a single firm in a four-firm cartel increases quantity from Q0 to Q1 it gets all of the revenues from the new sales (the green area), but the fall in price is spread across all firms in the industry in proportion to their sales so the cartel member loses only the much smaller red area. The cartel member, therefore, has a much larger incentive to increase output than does the monopolist.