In perfect cartel, do firms play a best response to each other’s quantities? if not in which direction would they like to change their output. What does this say about stability of cartels?
In a perfect cartel, firms do not play a best response to each other's quantities. Instead, they agree to restrict their output and coordinate their actions in order to maximize their joint profits.
The firms in a cartel would like to reduce their output compared to what they would produce in a competitive market. By reducing output, they are able to increase the market price for their goods and generate higher profits. This means that firms in a cartel would prefer to decrease their output levels.
This preference to decrease output indicates a potential instability in cartels. Each firm has an incentive to cheat on the agreed-upon output restrictions in order to increase its individual profits. If one firm cheats and increases its output, it can capture a larger market share and enjoy higher profits. However, such cheating actions can lead to a breakdown in cartel coordination and ultimately reduce the stability of the cartel.
Therefore, the stability of a cartel relies on the ability of firms to enforce and maintain their agreed-upon output restrictions. Factors such as monitoring mechanisms, punishment schemes, and strong incentives to cooperate are crucial for the long-term stability of cartels.