Figure 114

Price/Output Determination for a Cartel

Horizontal summation of the MC curves for each firm gives the cartel's MC curve. Output for each firm is found by equating its own MC to the industry profit-maximizing MC level.

Firm A Firm B industry

Price and Price and Price and cost ($) cost ($) cost ($)

Price and Price and Price and cost ($) cost ($) cost ($)

Output Output Output

cial, they seldom agree on the equity of various profit-allocation schemes. This problem can lead to attempts to subvert the cartel agreement.

Cartel subversion can be extremely profitable. Consider a two-firm cartel in which each member serves 50 percent of the market. Cheating by either firm is very difficult, because any loss in profits or market share is readily detected. The offending party also can easily be identified and punished. Moreover, the potential profit and market share gain to successful cheating is exactly balanced by the potential profit and market share cost of detection and retribution. Conversely, a 20-member cartel promises substantial profits and market share gains to successful cheaters. At the same time, detecting the source of secret price concessions can be extremely difficult. History shows that cartels including more than a very few members have difficulty policing and maintaining member compliance. With respect to cartels, there is little honor among thieves.

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