Are Cartels Good Or Bad?

Advertisements

Cartels harm consumers and have pernicious effects on economic efficiency. A successful cartel raises price above the competitive level and reduces output. … All of these effects adversely affect efficiency in a market economy.

Can cartels be beneficial?

Cartels in industries with significant environmental problems – which produce economic ‘bads’ rather than goods – can have beneficial effects. … Competition in the supply would lead to an over-supply of cheaper drugs, and a cartel charging higher prices and lower output is superior to a competitive outcome.

Why do most cartels fail?

The common explanation for the instability of cartels is that a successful cartel agreement creates strong incentives for individual members to cheat. Cheating invites retaliation and the result is that the cartel often fails.

Advertisements

How are cartels successful?

Successful cartels depend on the ability of members to overcome two challenges: (1) coordinating an agreement amongst themselves (selecting and coordinating profitable collusive pricing strategies and monitoring behavior to prevent defection) and (2) deterring the entry of other firms into the market (see for instance …

Advertisements