Cartels-2 - Cartels A cartel is an agreement amongst firms...

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Cartels A cartel is an agreement amongst firms to coordinate prices or output. We can consider cartels as a “functioning monopolist”, meaning that although there might be several firms in the agreement; together, they may act as a monopolist. Naturally, we expect output to decrease and prices to increase. Why Cartels Form The book mentions that cartels allow for collective gain, so that a cartel takes into account the benefits to all its members. For example, if all firms coordinate output, but restrict output to a set level, then prices will increase and all firms will split the gains. Of course, the word collective gain only holds true for a well-functioning cartel. If a member of the cartel cheats, then gains are not split, and the cheating firm can obtain even more benefits. How Prices Change How do cartels increase price? First assume that firms are not cooperating and are competitive. They produce at MR = P = MC , which occurs where the demand curve meets the marginal cost curve. This results Pc. If
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Cartels-2 - Cartels A cartel is an agreement amongst firms...

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