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

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.

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.