Cartels

1. Cartels Lectures in Microeconomics-Charles W. Upton

2. What is a Cartel • A Cartel is an organization by firms to set output and prices. Cartels

3. Why a Cartel • A Cartel is an organization by firms to set output and prices. • If the firms can agree to reduce output and are successful in excluding competitors, they can increase total industry profits. Cartels

4. Difficulties • A Cartel is an organization by firms to set output and prices. • If the firms can agree to reduce output and are successful in excluding competitors, they can increase total industry profits. • The problems are obvious. • Firms want to cheat • Firms want to enter. Cartels

5. The Graph MC AC A firm in competitive equilibrium. pe qe Cartels

6. Industry Equilibrium MC AC Here is the market condition. D pe Qe qe Cartels

7. If the firms collude to cut output, price and profits will rise. Collusion MC AC pk D pe qk Qk Qe qe Cartels

8. If the firms collude to cut output, price and profits will rise. Profits from Collusion MC AC pk D π pe qk Qk Qe qe Cartels

9. But if the firm cheats it will do even better! Cheating MC AC pk D pe qm qk Qk Qe qe Cartels

10. Cartels MC AC Firms have an incentive to cheat on the cartel agreement pk D pe qm qk Qk Qe qe Cartels

11. Cartels MC AC Firms have an incentive to cheat on the cartel agreement pk D Further, since p is high, other firms have an incentive to enter the business. pe qk qm Qk Qe qe Cartels

12. Anti-Trust Law • Cartels are per se violations of the Sherman Act. Cartels

13. Anti-Trust Law • Cartels are per se violations of the Sherman Act. • You cannot enter into written contracts to enforce a cartel. Cartels

14. Anti-Trust Law • Cartels are per se violations of the Sherman Act. • You cannot enter into written contracts to enforce a cartel. • This makes it hard to enforce cartels Cartels

15. Smith and Wilson • Smith Hardware and Wilson Hardware agree to form a cartel. Cartels

16. No Honor Among Thieves • Smith Hardware and Wilson Hardware agree to form a cartel. • Each one still has the incentive to cheat. Cartels

17. Anti-Trust Law • Smith Hardware and Wilson Hardware agree to form a cartel. • Each one still has the incentive to cheat. • Without a written agreement, how do you tell if cheating is an honest misunderstanding or deliberate cheating? Cartels

18. Entry • Smith Hardware and Wilson Hardware agree to form a cartel. • Each one still has the incentive to cheat. • And how do you prevent Home Depot from opening? Cartels

19. The Cali Cartel • Drug Cartels are well known • They solve the problem of cheating with violence. Cartels

20. End ©2005 Charles W. Upton Cartels