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

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Cartels Econ 425, Summer I 2008
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2 Intro b A cartel is an association of firms that explicitly coordinate its pricing or output activities. b Cartels are more likely to occur in oligopolistic markets. - It is easier to reach and maintain an agreement. b Why cartels form? b What factors make certain cartels last while others split apart? b Are cartels always bad? b What does the government do?
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3 Why cartels form? b Firms would like to form a cartel in order to increase their own profit. b 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.
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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 ). - But, there are incentives to cheat at p m (and produce q*). MR
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06-Cartels - Cartels Econ 425, Summer I 2008 Intro A cartel...

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