The sugar industry in Canada is effectively a duopoly with two large firms competing with each other for market share. Suppose the two firms collude and successfully restrict joint output to that of a profit-maximizing monopolist. As a result, they each realize an increase in their profits. Why would this collusive agreement be difficult to sustain?
◦ Because the firm with the lower long-run average costs will be able to capture all sales, driving the second firm out of the market.
◦ Because each firm has an incentive to break the agreement by further restricting output in order to increase the price, thereby increasing their own profits.
◦ Because a non-cooperative outcome is inevitable in which output is further restricted and each firm's profit is reduced.
◦ Because each firm has an incentive to break the agreement by increasing output in order to increase their own profits.
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