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Oligopoly - Explaining the Economics of Cartels I A Level and IB Economics

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC, CIE

Last updated 9 Jan 2024

Cartels are groups of independent producers who collude to set prices, production, or other business practices to achieve higher profits than they would under perfect competition.

Oligopoly - Explaining the Economics of Cartels I A Level and IB Economics

Here are some key aspects of the economics of cartels:

  • Collusion: Cartels involve producers colluding to behave as a single monopoly, setting prices above competitive levels.
  • Price fixing: Cartels often fix prices, production, or other business practices to maximize profits.
  • Market power: Cartels gain market power by reducing competition and increasing market concentration, allowing them to set prices above what they would be under perfect competition.
  • Market allocation: Cartels may also allocate markets or customers to avoid competition and maintain high prices.
  • Antitrust laws: Cartels are often illegal under antitrust laws, as they reduce competition and harm consumers through higher prices or reduced innovation.
  • Price leadership: In some cartels, one dominant firm may act as a price leader, with other firms following its price changes.
  • Cartel stability: Cartels can be unstable, as individual members may have incentives to cheat by increasing production or lowering prices to gain market share.

Why do many price-fixing cartels eventually collapse?

Price-fixing cartels often collapse due to various reasons, including:

  • Incentive to cheat: Individual members of a cartel may have an incentive to cheat on the agreement by increasing production or lowering prices to gain market share, especially if they think other members are cheating.
  • Difficulty in enforcement: It can be difficult for cartels to monitor and enforce their agreements, particularly if they operate across borders or involve many members.
  • Whistleblowing: Cartel members may blow the whistle on the cartel, either voluntarily or under pressure from authorities, leading to its collapse.
  • Competition: Cartels may face competition from outside the cartel, including new entrants or non-colluding firms, which can undermine their market power and incentives to collude.
  • Legal penalties: Cartels are often illegal and can lead to severe legal penalties, including fines and imprisonment, which can deter participation and lead to the cartel's collapse.
  • Changing market conditions: Changes in market conditions, such as shifts in demand or supply, can make it difficult for cartels to maintain their agreements and lead to their breakdown.
  • Internal conflicts: Cartel members may have conflicting interests or goals, leading to disagreements, distrust, and ultimately the breakdown of the cartel.
  • Regulatory action: Authorities may take action to investigate and dismantle cartels, including fines, sanctions, or legal action.

Overall, price-fixing cartels are often unstable and prone to collapse due to various factors, including economic incentives, legal risks, and regulatory scrutiny.

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