Cartel Theory of Oligopoly Essay

A trust is defined as a grouping of firms that gets unneurotic to make proceeds and bell decisions. The conditions that give rise to an oligopolistic trade ar also conducive to the formation of a trust in particular, engagements tend to climb in merchandises where in that location are a couple of(prenominal) firms and each firm has a of import share of the market. In the U.S., cartels are extrajudicial however, internation all in ally, there are no restrictions on cartel formation. The organization of petroleum-exporting countries (OPEC) is perhaps the known example of an international cartel OPEC phalluss hit regularly to decide how much oil color each member of the cartel impart be allowed to erect. Oligopolistic firms join a cartel to increase their market power, and members work together to determine jointly the level of outturn that each member willing produce and/or the terms that each member will load.By working together, the cartel members are able to behave exchangeable a monopolist. For example, if each firm in an oligopoly sells an undifferentiated product equal oil, the learn curve that each firm faces will be horizontal at the market price. If, however, the oil-producing firms form a cartel like OPEC to determine their output and price, they will jointly face a downward-sloping market call for curve, just like a monopolist. In fact, the cartels profit-maximising decision is the same as that of a monopolist, as Figure 1 reveals.The cartel members make their combined output at the level where their combined marginal tax equals their combined marginal cost. The cartel price is determined by market demand curve at the level of output chosen by the cartel. The cartels profits are equal to the surface area of the rectangular box labeled abcd in Figure 1 . Note that a cartel, like a monopolist, will choose to produce less output and charge a higher price than would be found in a suddenly competitive market.Once establish ed, cartels are unvoiced to maintain. The problem is that cartel members will be tempted to cheat on their agreement to particularize production. By producing more output than it has hold to produce, a cartel member screwing increase its share of the cartels profits. Hence, there is a built-in fillip for each cartel member to cheat. Of course, if all members cheated, the cartel would cease to earn monopoly profits, and there would no longer be whatsoever incentive for firms to remain in the cartel. The swindling problem has plagued the OPEC cartel as substantially as other cartels and perhaps explains wherefore so few cartels exist.