Cartel
What is Cartel?
A cartel is a group of firms that collude to restrict competition and increase profits by acting as a single monopolist.
Cartels are agreements between firms to coordinate their actions, such as fixing prices or limiting production, to reduce competition. By acting together, the cartel members can behave like a single monopolist and earn higher profits. Cartels are often illegal.
Cartel: a worked example
Four identical drilling firms face market demand P = 100 - Q, where Q is barrels per day, and each pumps at a constant marginal cost of $20. Acting as one monopolist, the group sets MR = 100 - 2Q equal to $20, giving Q = 40 and P = 100 - 40 = $60. Joint profit is 40 x ($60 - $20) = $1,600, split into quotas of 10 barrels each worth $400 apiece. Now let one member quietly pump 16 instead of 10. Total output becomes 46, price falls to 100 - 46 = $54, and the cheater collects 16 x ($54 - $20) = $544 while every loyal member takes only 10 x ($54 - $20) = $340. The cheater gains $144, each of the other three loses $60, and joint profit falls to $1,564. That private gain from breaking quota is what makes cartels fragile.
The mistake students make with cartel
Students explain cartel instability by saying the arrangement is illegal, then stop. Illegality raises the cost of being caught, but the deeper crack is arithmetic: at the agreed price of $60, one more barrel brings in roughly $60 against a marginal cost of $20 for whoever pumps it, while the price drop that extra output causes is shared across all four members. A second error is setting each quota where an individual firm's marginal revenue equals its marginal cost. The cartel maximizes joint profit by locating MR = MC on the whole market demand curve first, then splitting that single quantity.
Cartel questions
How does a cartel decide what price to charge?
Cartel members pool their output decisions and behave like one monopolist. The group finds the quantity where marginal revenue from total market demand equals marginal cost, reads the price off the market demand curve at that quantity, then hands each member a production quota that adds up to it. Enforcement is the hard part, because the agreed price sits above every member's marginal cost and each firm has a private reason to sell more than its share.
What is the difference between a cartel and a monopoly?
A monopoly is one firm that holds the whole market by itself. A cartel is several independent firms that keep separate ownership and separate books while agreeing to act as though they were one. The pricing outcome looks similar, restricted output at a price above marginal cost, but a cartel carries an internal problem no monopoly faces: members can cheat on the agreement, and catching them takes monitoring the group cannot always manage.
Are cartels legal?
Price fixing and market sharing agreements among competing firms are banned under the competition and antitrust law of most jurisdictions, which is exactly why such deals leave no paper trail. Agreements struck between national governments rather than private firms fall outside that law and can operate in the open. For AP purposes, treat a domestic cartel as illegal, therefore unwritten, and therefore unenforceable in any court, which is why a member who breaks quota risks nothing worse than retaliation from the others.
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