Suppose there are two breakfast restaurants in your college town, Waffle Kingdom and Flip’s Flapjacks, and they decide to operate collusively as a cartel. If both restaurants abide by the cartel’s agreement, then each will earn $100,000 in profit. If both restaurants cheat on the cartel’s agreement, then both will earn $25,000 in profit. If one restaurant cheats and the other abides by the agreement, then the cheater will earn a profit of $150,000 while the firm that abides by the agreement will have a loss of $12,500.