Microeconomics: Theory and Applications with Calculus, 4e

14.2 Cartels

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or some contrivance to raise prices.

—Adam Smith, 1776

Oligopolistic firms have an incentive to form cartels in which they collude in setting prices or quantities 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.

Typically, each member of a cartel agrees to produce less output than it would 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 ...