{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

06-Cartels - Cartels Econ 425 Summer I 2008 Intro A cartel...

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
Cartels Econ 425, Summer I 2008
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
2 Intro box3 A cartel is an association of firms that explicitly coordinate its pricing or output activities. box3 Cartels are more likely to occur in oligopolistic markets. - It is easier to reach and maintain an agreement. box3 Why cartels form? box3 What factors make certain cartels last while others split apart? box3 Are cartels always bad? box3 What does the government do?
Background image of page 2
3 Why cartels form? box3 Firms would like to form a cartel in order to increase their own profit. box3 But, are not firms already maximizing profits? - In a competitive market, a firm ignores its own effect from reducing output on the market price (if there is one); ignores the externality it has on other firms. - A cartel takes into account the benefits to all its members of the reduction in each firm’s output; externality is internalized by the cartel.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
4 Why cartels form? (2) $ q firm $ Q market q c D MC=S Q m =nq m Q c =nq c p c p c AC MC p m q* p m q m - At competitive output, cartel’s MR < MC. - It pays for the cartel to reduce output to point where MR = MC (each firm produces q m and charge p m ).
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}