Suppose two small-town video stores, store A and store B, compete. The two stores collude and agree to share the market equally. If neither store cheats on the agreement, each store will make $2,500 a day in economic profits. If only one store cheats, the cheater will increase its economic profits to $4,000 and the store that abides by the agreement will incur an economic loss of $1,000. If both firms cheat, they both will earn zero economic profits. Neither store has any way of policing the actions of the other.
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