Cartel

A cartel is a coordinated agreement between firms to set output (or price) so as to maximise joint profit — effectively acting as a single monopolist. With $N$ symmetric firms and linear demand, the cartel-optimal industry output is $Q^M = (A-c)/2$, split equally as $q_i = (A-c)/(2N)$. Cartels are jointly optimal but unstable: each firm has a strict unilateral incentive to deviate (produce more than its quota), the same logic as a Prisoner's Dilemma.

When to use

Cite cartel reasoning whenever the question asks whether firms could profitably coordinate. The exam follow-up almost always asks why this is unstable — the answer is the dominant-strategy structure: cheating gives a one-shot gain larger than the share of the cartel profit. Sustaining a cartel requires repeated interaction (the Folk Theorem with credible punishment), explicit contracts (illegal in most jurisdictions), or a regulator-led equivalent.