Cartels
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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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Cartels

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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


Collusion

If the firms collude to cut output, price and profits will rise.

Collusion

MC

AC

pk

D

pe

qk

Qk

Qe

qe

Cartels


Profits from collusion

If the firms collude to cut output, price and profits will rise.

Profits from Collusion

MC

AC

pk

D

π

pe

qk

Qk

Qe

qe

Cartels


Cheating

But if the firm cheats it will do even better!

Cheating

MC

AC

pk

D

pe

qm

qk

Qk

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


Cartels

End

©2005 Charles W. Upton

Cartels


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