1. Managerial Economics-Charles W. Upton
Cartels
Managerial Economics-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. A firm in competitive equilibrium.
The Graph MC AC
A firm in competitive equilibrium. pe qe
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6. Here is the market condition.
Industry Equilibrium MC AC
Here is the market condition. D pe Qe qe
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7. If the firms collude to cut output, price and profits will rise.
Collusion MC AC pk D pe qk Qk Qe qe
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8. Profits from Collusion
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
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9. But if the firm cheats it will do even better!
Cheating MC AC pk D pe qm qk Qk Qe qe
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10. Firms have an incentive to cheat on the cartel agreement
Cartels MC AC
Firms have an incentive to cheat on the cartel agreement pk D pe qm qk Qk Qe qe
Cartels

11. Firms have an incentive to cheat on the cartel agreement
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.

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.
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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