Which of the following outcomes is a consequence of collusion breaking down?

When collusion among firms breaks down, one significant consequence is the initiation of a price war. In a collusive agreement, firms typically work together to set prices at a certain level with the intention of maximizing joint profits. They avoid competing aggressively, which helps to maintain stability in pricing strategies and avoids drastic changes in the market.

However, when that collusion is disrupted—due to external factors or internal disagreements—firms are motivated to regain their market share or increase their profitability. This leads them to cut prices in order to attract customers away from competitors. As each firm lowers its prices to compete for market share, a price war can ensue. Such wars typically result in falling prices and can reduce profits for all involved firms, highlighting the competitive nature of the market when cooperation ceases.

The other outcomes mentioned, such as stability in pricing strategies, increased product differentiation, and enhanced market share for all firms, are unlikely as consequences of a breakdown in collusion. Stability is replaced by volatility, product differentiation does not inherently follow from collusion breakdown, and typically, only a few firms may significantly increase their market share at the expense of others during a price war, rather than all firms benefiting equally.