Cartel Arrangements

All firms in an oligopoly market benefit if they get together and set prices to maximize industry profits. A group of competitors operating under such a formal overt agreement is called a cartel. If an informal covert agreement is reached, the firms are said to be operating in collusion. Both practices are illegal in the United States. However, cartels are legal in some parts of the world, and U.S. multinational corporations sometimes become involved with them in foreign markets. Several important domestic markets are also dominated by producer associations that operate like cartels and appear to flourish without interference from the government. Agricultural commodities such as milk are prime examples of products marketed under cartel-like arrangements.

A cartel that has absolute control over all firms in an industry can operate as a monopoly. To illustrate, consider the situation shown in Figure 11.4. The marginal cost curves of each firm are summed horizontally to arrive at an industry marginal cost curve. Equating the cartel's total marginal cost with the industry marginal revenue curve determines the profit-maximizing output and the price, P*, to be charged. Once this profit-maximizing price/output level has been cartel

Firms operating with a formal agreement to fix prices and output collusion

A covert, informal agreement among firms in an industry to fix prices and output levels

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