The cartel

Consider a town in which only two residents, Hubert and Kate,own wells that produce water safe for drinking. Hubert and Kate canpump and sell as much water as they want at no cost. For them,total revenue equals profit. The following table shows the town'sdemand schedule for water.

Price	Quantity Demanded	Total Revenue
(Dollars per gallon)	(Gallons of water)	(Dollars)
4.20	0	0
3.85	40	154.00
3.50	80	280.00
3.15	120	378.00
2.80	160	448.00
2.45	200	490.00
2.10	240	504.00
1.75	280	490.00
1.40	320	448.00
1.05	360	378.00
0.70	400	280.00
0.35	440	154.00
0	480	0

Suppose Hubert and Kate form a cartel and behave as amonopolist. The profit-maximizing price is

per gallon, and the total output is

gallons. As part of their cartel agreement, Hubert and Kateagree to split production equally. Therefore, Hubert's profitis

, and Kate's profit is

.

Suppose that Hubert and Kate have been successfully operating asa cartel. They each charge the monopoly price and sell half of themonopoly quantity. Then one night before going to sleep, Hubertsays to himself, "Kate and I aren't the best of friends anyway. IfI increase my production by 40 gallons, I can increase my profiteven though her profit goes down. I will do that startingtomorrow."

After Hubert implements his new plan, the price of water  to

per gallon. Given Kate and Hubert's production levels, Hubert'sprofit becomes

and Kate's profit becomes

.

Because Hubert has deviated from the cartel agreement andincreased his output of water by 40 gallons, Kate decides that shewill also increase her production by 40 gallons.

After Kate increases her production, Hubert's profit becomes

, Kate's profit becomes

, and total profit (the sum of the profits of Hubert and Kate)is now

.

Note that Hubert and Kate started by behaving cooperatively.However, once Hubert decided to cheat, Kate decided to cheat aswell. In other words, Kate's output decisions are based on Hubert'sactions.

This behavior is an example of?