CARTEL
- or - cooperative oligopoly
In any market, firms have
an incentive to coordinate their production
and pricing activities
to increase their collective
and individual profits by restricting market
output and raising the market price. An association
of firms that explicitly agrees to coordinate
its activities is called a CARTEL. A cartel
that includes all firms in an industry is
in effect a monopoly, and the member firms
share the monopoly profits. Cartels are more
likely to occur when there are only a few
firms : a cooperative oligopoly. Even without
an explicit agreement, firms in a cooperative
oligopoly may coordinate their actions to
maximize joint profits.
Fortunately for consummers,
although firms have an incentive to coordinate
activities to restrict market output and raise
prices, each member of the cartel has an incentive
to "CHEAT" on the cartel agreement.
That is, each firm wants to produce more output
than is best for the cartel collectively.
As a result, cartels tend to break apart without
government intervention.
Factors that facilitate
the formation of cartels
- The ability to raise
the industry price
- A trade Association
exists
- Low expectation of
severe punishment (antitrust laws)
- Low organizational
costs
- Only a few firms
are involved in the cartel
- The industry is highly
concentrated
- Homogeneous good
is produced
- Divide the market
- Fix market shares
Factors that reduce
the existence of cartels
- Price wars
- Cheating
- Economic recession
- High economic volatility
- New entrants
But
do not forget ! |
CONSUMMERS
GAIN AS CARTELS FAIL ! |
Example
A cartel with two firms. The
market share of each firm is 50 %.
The market demand function
is : q = f(p) = - 100p + 19'500
- Price function : p = f(q)
= 195 - 0,01q
Revenue function
: R = pq = 195q - 0,01q2
- Marginal Revenue function
: MR = 195 - 0,02q
Total cost function of each
firm : TC = 0.000001q3 - 0.014q2 + 69 + 128'000
Tool
to find "Total cost function" :
Excel "Tools / Data analysis / Regression"
- Marginal Cost function :
MC = 0.000003q2 - 0.028q + 69
Results
|
Firm
1 (50 %) |
Firm
2 (50 %) |
Cartel |
Monopoly |
Demand function |
-50p+9'750 |
-50p+9'750 |
|
-100p + 19'500 |
Price function |
195 - 0,02q |
195 - 0,02q |
|
195 - 0,01q |
Revenue function |
195q - 0,02q2 |
195q - 0,02q2 |
|
195q - 0,01q2 |
MR |
195 - 0,04q |
195 - 0,04q |
|
195 - 0,02q |
TC function |
0.000001q3 - 0.014q2 + 69q + 128'000 |
0.000001q3 - 0.014q2 + 69q + 128'000 |
|
0.000001q3 - 0.014q2 + 69q + 128'000 |
MC |
0.000003q2 - 0.028q + 69 |
0.000003q2 - 0.028q + 69 |
|
0.000003q2 - 0.028q + 69 |
If MR=MC,
q = |
4'783 |
4'783 |
9'566 |
7'950 |
MR |
3.70 |
3.70 |
3.70 |
36.00 |
MC |
3.70 |
3.70 |
3.70 |
36.00 |
Market price |
99.34 |
99.34 |
99.34 |
115.50 |
Revenue |
475'143 |
475'143 |
950'286 |
918'225 |
Total cost |
247'169 |
247'169 |
494'338 |
294'175 |
Maximum
Profit |
227'974 |
227'974 |
455'948 |
624'050 |
Comparison beetwen
cartel and monopoly
|
Monopoly |
Cartel |
Gain
for consummers |
Output |
7'950 |
9'566 |
1'616 |
Price |
115.50 |
99.34 |
-16.16 |
Sources :
Modern Industrial Organization, 2nd edition, Dennis .W. Carlton , Jeffrey .M. Peroloff, Addfison-Wesley, 1994
Economie Industrielle ( traduction de la 2ème édition par Fabrice Mazerolle), Dennis .W. Carlton , Jeffrey .M. Peroloff, de Boeck Université, 1998
Cours de Microéconomie, Bernard Jaquier, Ecole Hôtelière de Lausanne, 2003
© ECOFINE - Bernard Jaquier, Professor Emeritus & Dr Honoris Causa, Lausanne, Switzerland, 2020