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Cartels. What is a Cartel. A Cartel is an organization by firms to set output and prices. Why a Cartel. A Cartel is an organization by firms to set output and prices. If the firms can agree to reduce output and are successful in excluding competitors, they can increase total industry profits.

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Presentation Transcript
cartels

Cartels

Lectures in Microeconomics-Charles W. Upton

what is a cartel
What is a Cartel
  • A Cartel is an organization by firms to set output and prices.

Cartels

why a cartel
Why a Cartel
  • A Cartel is an organization by firms to set output and prices.
  • If the firms can agree to reduce output and are successful in excluding competitors, they can increase total industry profits.

Cartels

difficulties
Difficulties
  • A Cartel is an organization by firms to set output and prices.
  • If the firms can agree to reduce output and are successful in excluding competitors, they can increase total industry profits.
  • The problems are obvious.
    • Firms want to cheat
    • Firms want to enter.

Cartels

the graph
The Graph

MC

AC

A firm in competitive equilibrium.

pe

qe

Cartels

industry equilibrium
Industry Equilibrium

MC

AC

Here is the market condition.

D

pe

Qe

qe

Cartels

cartels1
Cartels

MC

AC

Firms have an incentive to cheat on the cartel agreement

pk

D

pe

qm

qk

Qk

Qe

qe

Cartels

cartels2
Cartels

MC

AC

Firms have an incentive to cheat on the cartel agreement

pk

D

Further, since p is high, other firms have an incentive to enter the business.

pe

qk

qm

Qk

Qe

qe

Cartels

anti trust law
Anti-Trust Law
  • Cartels are per se violations of the Sherman Act.

Cartels

anti trust law1
Anti-Trust Law
  • Cartels are per se violations of the Sherman Act.
  • You cannot enter into written contracts to enforce a cartel.

Cartels

anti trust law2
Anti-Trust Law
  • Cartels are per se violations of the Sherman Act.
  • You cannot enter into written contracts to enforce a cartel.
  • This makes it hard to enforce cartels

Cartels

smith and wilson
Smith and Wilson
  • Smith Hardware and Wilson Hardware agree to form a cartel.

Cartels

no honor among thieves
No Honor Among Thieves
  • Smith Hardware and Wilson Hardware agree to form a cartel.
  • Each one still has the incentive to cheat.

Cartels

anti trust law3
Anti-Trust Law
  • Smith Hardware and Wilson Hardware agree to form a cartel.
  • Each one still has the incentive to cheat.
    • Without a written agreement, how do you tell if cheating is an honest misunderstanding or deliberate cheating?

Cartels

entry
Entry
  • Smith Hardware and Wilson Hardware agree to form a cartel.
  • Each one still has the incentive to cheat.
  • And how do you prevent Home Depot from opening?

Cartels

the cali cartel
The Cali Cartel
  • Drug Cartels are well known
  • They solve the problem of cheating with violence.

Cartels

slide20
End

©2005 Charles W. Upton

Cartels

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