Cartels - IR Question

[AndrewR191]

Hello,

These True False tables are tricky. There are often statements that are deemed "too extreme" to be true, but this does not seem to be enough to make them false.

Please see the question below:

A cartel is an explicit agreement among competing firms to fix prices, marketing, and production. The goal of a cartel is to increase individual members' profits by reducing competition. Although firms in many industries have tried to organize cartels, very few known cartels have lasted for more than 4 or 5 years. The main issue is that the members of a cartel all have an incentive to cheat and cut prices just a little in order to maximize their individual profits at the expense of profits of the cartel as a whole.

Indicate the statement in the table that the given information most strongly suggests is true, as well as the statement that the given information most strongly suggests is false. Make only two selections, one in each column.

True False:
1. No cartel will last more than 100 years.
2. As long as the members do not cheat, a cartel cannot be broken.
3. An effective system for preventing members from cheating would not increase the likelihood that a cartel would survive in the long term.
4. Private cartels are not legal in most countries.
5. Cartels are inherently unstable and likely to fail in the long run.
6.It is extremely difficult for competing firms to agree to fix prices, marketing, and production in the formation of a cartel.


The answer here is #5 is True and #3 is false.

I understand why #3 is false, but why can't statement #2 be false as well?

The explanation for #2 states:

"Option B - As long as the members do not cheat, a cartel cannot be broken.

This is too strong of a statement to be inferred from "The main issue is that the members of a cartel all have an incentive to cheat and cut prices just a little in order to maximize their individual profits at the expense of profits of the cartel as a whole." There could be other issues. Perhaps new suppliers that are not part of the market enter the cartel, or perhaps the cartel’s product is made technologically irrelevant."

Doesn't this imply that statement 2 is false? Since there are multiple ways for a cartel to be broken besides the members cheating.

Any help would be great, thanks!

[tim]

This is indeed a strange type of question, and one you're not likely to see on the GMAT, at least without being much more clear cut. I'd say what's far more important to remember than the particulars of this question is the necessity of using ONLY the information supplied in the setup, without making any additional inferences. Whether or not you agree that this is a valid basis not to choose 2 as false, the important thing is that this is what the problem is *trying* to get across, and as long as you keep this general principle in mind you will be better off.