Question

Cooperation between coke and pepsi is difficult because each business can increase profits by:_________

a. producing less than the collusive quantity.
b. producing more than the quantity that maximizes joint profits.
c. charging less than the price that maximizes joint profits.
d. advertising more than will maximize joint profits.

Answer 1

Cooperation between Coke and Pepsi is challenged by the temptation for each to individually increase profits by producing more than the collusively agreed quantity, despite potential legal ramifications and instability of such collusion.

Step-by-step explanation:

Cooperation between Coke and Pepsi is difficult because each business can increase profits by producing more than the quantity that maximizes joint profits. When firms in an oligopoly - like Coke and Pepsi - decide on their production levels and pricing strategies, they face the temptation to form a cartel and act as a monopoly to maximize profits. However, due to the potential for greater individual profits and the fact that explicit collusion is illegal in many parts of the world, including the European Union and the United States, such coordination often breaks down. Each firm can unilaterally increase its profits by deviating from the agreed-upon collusive quantity, leading to a breakdown in cooperation.