Firms operating in a cartel often have a large incentive to cheat on the agreement by engaging in anti-competitive behavior, such as price-fixing, market allocation, and production quotas. While cartels may seem to benefit member firms by allowing them to coordinate prices and reduce competition, the temptation to cheat can be too great for some firms to resist.
One reason that firms in a cartel may be inclined to cheat is that there is always the risk that other firms will do the same. If one firm decides to increase production or lower prices, it can gain a significant advantage over its competitors. This can create a domino effect, as other firms scramble to match the move, ultimately undermining the cartel`s effectiveness.
Another reason why firms may be tempted to cheat on a cartel agreement is that it can be difficult to detect and enforce anti-competitive behavior. Cartels operate in secret, and their members are often unwilling to reveal their participation. Moreover, antitrust authorities may not have the resources or the evidence to uncover and prosecute collusion.
Despite these challenges, there are ways that antitrust authorities can detect and deter cartel behavior. One approach is to offer leniency or immunity to firms that come forward with evidence of collusion. This can create a race to be the first to report, incentivizing firms to break ranks and expose the cartel.
Antitrust authorities can also use fines and other penalties to deter cheating. Fines can be steep, and they can be levied on individual firms or on the cartel as a whole. By making it more costly to cheat than to comply with the agreement, antitrust authorities can discourage firms from engaging in anti-competitive behavior.
In conclusion, while firms operating in a cartel may have a strong incentive to cheat on the agreement, there are ways that antitrust authorities can detect and deter collusion. By offering leniency and imposing penalties, antitrust authorities can create a climate of compliance that benefits both consumers and the market as a whole.