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Firms can increase joint profit by colluding to reduce output and raise prices. However, each firm has incentive to cheat (produce above quota). In infinitely repeated games, collusion is sustainable via trigger strategies: deviators face permanent retaliation. Stability requires that the present value of cooperation exceeds the one-time deviation gain. Discount rates and market concentration determine collusion sustainability.
From your study of Cournot competition, you know that oligopolistic firms choosing quantities independently produce more total output and earn lower profits than a monopolist would. Each firm ignores the negative externality its production imposes on rivals' revenues. A cartel is an agreement among competitors to restrict output and raise the market price toward the monopoly level, splitting the resulting higher profits among members. OPEC's oil production quotas are the classic real-world example: member countries agree to pump less oil than they individually would, keeping the price elevated.
The fundamental problem with any cartel is the incentive to cheat. When all other firms are holding output down, the market price is high — which makes it extremely tempting for any single firm to quietly increase its own production. The cheater sells more units at the high cartel price, earning extra profit at the expense of partners who are faithfully restricting output. In a one-shot Cournot game, this temptation is irresistible: the Nash equilibrium has every firm producing its best-response quantity, and the cartel agreement unravels. This is precisely the structure of a prisoner's dilemma — mutual cooperation is collectively optimal, but individual defection is privately rational.
The resolution comes from repeated games and trigger strategies, which you have already studied. If the firms interact repeatedly with no known end date, the future consequences of cheating can deter present defection. In a grim trigger strategy, all firms cooperate (restrict output) until someone deviates, after which all firms revert to the Cournot-Nash equilibrium forever. The deviator gets one period of high profit from cheating but loses the stream of future collusive profits. Collusion is sustainable when the present value of continued cooperation exceeds the one-shot deviation gain — formally, when the discount factor δ is high enough. Patient firms (high δ) can sustain collusion; impatient firms cannot.
Several factors determine whether collusion can survive in practice. Market concentration matters: with fewer firms, each firm's share of collusive profits is larger relative to the temptation to cheat, and monitoring is easier. Demand stability helps because volatile demand makes it hard to distinguish a partner's cheating from a genuine demand shock — firms may trigger punishment by mistake. Transparency of prices and quantities facilitates monitoring, which is why antitrust authorities are wary of industry practices that increase price visibility (such as advance price announcements). The discount factor captures not just time preference but also the probability the game continues — regulatory crackdowns or market entry that could end the repeated interaction effectively lower δ and destabilize the cartel. This is why antitrust enforcement focuses heavily on detecting and punishing collusion: by increasing the expected cost of getting caught, it reduces the effective discount factor and makes cartels harder to sustain.