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 play a best response to each other's quantities. This means that each firm will consider the actions and choices of other firms in the cartel and adjust their own output accordingly to maximize their own profits. If one firm increases their output, others will likely decrease their own output to maintain or regain market share and avoid unwanted price competition.
The ideal scenario for firms in a cartel is to collectively reduce output and maintain high prices to maximize collective profits. However, individual firms have an incentive to deviate from the agreed-upon output levels in order to increase their own profits. This is because by increasing their output, a firm can attract more customers and potentially gain a larger market share than the other cartel members, thus earning more profits individually.
This constant tension between individual incentives and collective goals makes cartels inherently unstable. The more members there are in a cartel, the more difficult it becomes to enforce the agreed-upon output levels. Even if all cartel members initially adhere to the agreed-upon quantities, there is always a risk that one or more firms will cheat and increase their output to gain a competitive advantage. This leads to a breakdown in the cartel agreement, as other firms respond by increasing their own output, thus contributing to price competition and reducing the cartel's power in the market.