Final answer:
In this scenario, both parties are likely to collude and not cheat to avoid losses.
Step-by-step explanation:
In the scenario described, if one party receives expected residual returns and another party absorbs the expected losses, it is likely that both parties will collude.
Firm A would reason that Firm B is unlikely to risk cheating since the possibility of a small gain is not enough to induce Firm A to cheat. Therefore, in this case, it is likely that both firms will collude and not cheat.
The likely outcome is that both parties will work together and not cheat, resulting in lower profits for both firms but avoiding the risk of losing even more if the other party were to cheat.