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Microeconomics Question from Walter E. Williams:Edit

Show how behavior of its own members may threaten the survival of a cartel. Show how the behavior of outsiders may threaten it.

AnswerEdit

Cartels have a tendency to breakdown for three reasons.

  • 1) It is difficult to obtain unanimous participation of all firms. Individual firms have different cost curves and can increase their profits by cheating on the set cartel price.
  • 2) Even if unanimous participation is achieved, the incentive to cheat requires that cartels must monitor the actions of the members. This “policing cost” can be very expensive.
  • 3) The existence of a cartel does not necessarily prevent external competitors from entering the market.

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