11.1 Cartels

Oligopolistic firms have an incentive to form cartels in which they collude in setting prices or quantities so as to increase their profits. The Organization of Petroleum Exporting Countries (OPEC) is a well-known example of an international cartel; however, many cartels operate within a single country.

Why Cartels Succeed or Fail

Typically, each member of a cartel agrees to reduce its output from the level it would produce if it acted independently. As a result, the market price rises and the firms earn higher profits. If the firms reduce market output to the monopoly level, they achieve the highest possible collective profit. As Adam Smith observed more than two centuries ago, “People of the same trade seldom meet together, even ...

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