Cartel Theory of Oligopoly Essay

A reliance is defined as a group of watertights that gets together to take a shit widening and price decisions. The conditions that give rise to an oligopolistic foodstuff argon in addition conducive to the socio-economic classation of a pact in particular, cartels tend to devise in markets where there are a few(prenominal) firms and to each one firm has a significant share of the market. In the U.S., cartels are illegal however, internationally, there are no restrictions on cartel formation. The organization of petroleum-exporting countries (OPEC) is perhaps the best-known guinea pig of an international cartel OPEC components meet regularly to decide how much anoint each member of the cartel will be allowed to produce. Oligopolistic firms join a cartel to increase their market power, and members work together to determine jointly the level of output that each member will produce and/or the price that each member will charge.By working together, the cartel members are able to behave resembling a monopolist. For example, if each firm in an oligopoly sells an undifferentiated product like oil, the demand curve that each firm faces will be horizontal at the market price. If, however, the oil-producing firms form a cartel like OPEC to determine their output and price, they will jointly face a downward-sloping market demand curve, just like a monopolist. In fact, the cartels profit-maximizing decision is the same as that of a monopolist, as Figure 1 reveals.The cartel members contain their combined output at the level where their combined marginal tax revenue equals their combined marginal cost. The cartel price is determined by market demand curve at the level of output chosen by the cartel. The cartels profits are equal to the area of the orthogonal box labeled abcd in Figure 1 . Note that a cartel, like a monopolist, will choose to produce less output and charge a higher price than would be found in a perfectly competitive market.Once establis hed, cartels are difficult to maintain. The problem is that cartel members will be tempted to cheat on their agreement to delimitate production. By producing more output than it has agreed to produce, a cartel member can increase its share of the cartels profits. Hence, there is a built-in incentive for each cartel member to cheat. Of course, if all members cheated, the cartel would cease to earn monopoly profits, and there would no longer be some(prenominal) incentive for firms to remain in the cartel. The cheating problem has plagued the OPEC cartel as well as other cartels and perhaps explains why so few cartels exist.