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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

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! rise.

Cheating

MC

AC

pk

D

pe

qm

qk

Qk

Qe

qe

Cartels


Cartels1
Cartels rise.

MC

AC

Firms have an incentive to cheat on the cartel agreement

pk

D

pe

qm

qk

Qk

Qe

qe

Cartels


Cartels2
Cartels rise.

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 rise.

  • Cartels are per se violations of the Sherman Act.

Cartels


Anti trust law1
Anti-Trust Law rise.

  • 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 rise.

  • 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 rise.

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

Cartels


No honor among thieves
No Honor Among Thieves rise.

  • 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 rise.

  • 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 rise.

  • 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 rise.

  • Drug Cartels are well known

  • They solve the problem of cheating with violence.

Cartels


Cartels
End rise.

©2005 Charles W. Upton

Cartels