Which of the following conditions makes a cartel difficult to maintain over time?

• A. Firms have perfect information about each other's actions.
• B. There are many firms in the market.
• C. All firms produce identical products.
• D. There are significant barriers to entry.

Answer: (B)

Verified step by step guidance

1. Understand what a cartel is: a group of firms that collude to restrict output and raise prices to increase their joint profits.
2. Recognize that maintaining a cartel requires cooperation and trust among firms to avoid cheating (e.g., secretly lowering prices or increasing output).
3. Analyze how the number of firms affects cartel stability: with many firms, it becomes harder to monitor and enforce agreements, increasing the incentive to cheat.
4. Consider the role of perfect information: if firms have perfect information about each other's actions, it is easier to detect cheating, which helps maintain the cartel.
5. Evaluate other factors like product homogeneity and barriers to entry: identical products and high barriers to entry generally support cartel stability by reducing competition and new entrants.