Monopoly vs Cartel
Monopoly and Cartel are two Market Structures concepts in AP Economics that students often mix up. A monopoly is a market structure with a single seller producing a unique product with no close substitutes and significant barriers to entry. A cartel is a group of firms that collude to restrict competition and increase profits by acting as a single monopolist. Here is how they compare side by side.
A monopolist is the sole provider of a good or service and faces the entire market demand curve, allowing it to set price above marginal cost. Because of high barriers to entry, other firms cannot enter the market to compete.
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.
Monopoly vs Cartel: One Firm, or Several Firms Trying to Act Like One
| Monopoly | Cartel | |
|---|---|---|
| Number of firms | One | Several, still separately owned |
| How output is decided | By one management, for the whole market | By agreement, then divided into quotas |
| Stability | Stable, since there is nobody to cheat on | Fragile, because every member gains by exceeding its quota |
| Cost of producing the total | Can be shifted to whichever plant is cheapest | Quotas often leave output sitting at higher cost members |
| How the plan is enforced | Internally, as an instruction to a division | By nothing a court will help with, since the deal is unlawful |
| Legal position in the United States | Holding the position is not itself an offense | Fixing prices with rivals is unlawful and can be criminal |
| What usually ends it | Entry, a new substitute, or a patent running out | A member cheating, entry, or prosecution |
The member who breaks the agreement is the one who profits from it
Take an illustrative market where buyers absorb one more unit for every dollar the price drops below 100 dollars, and any firm can make a unit for 20 dollars. A single owner of the whole market would produce 40 units and charge 60 dollars, earning 40 dollars a unit, or 1,600 dollars. Now give the same market to four firms that agree to behave as that owner would: total output 40 units, a quota of 10 units each, and a price of 60 dollars. Each member earns 40 dollars on 10 units, or 400 dollars, and the four together match the 1,600 dollars a single owner would have made. Then one member quietly makes 5 extra units. Industry output becomes 45, the price slips to 55 dollars, and the margin falls to 35 dollars. The cheat now sells 15 units at 35 dollars, or 525 dollars, which beats the 400 dollars it was getting. Every loyal member sells 10 units at 35 dollars, or 350 dollars, which is worse. Industry profit falls from 1,600 dollars to 1,575 dollars. Each member faces that same arithmetic at the same time, which is the /glossary/prisoner-s-dilemma written in output quotas.
A cartel is a worse monopolist than a monopolist, even when nobody cheats
Suppose the agreement holds perfectly. The cartel is still the more expensive way to restrict output, for two reasons. The first is which plants run. A single owner with several factories sends production to whichever one makes the next unit most cheaply, and keeps shifting until the marginal cost is the same everywhere. A cartel splits quotas by bargaining, usually along historical shares, so a member with high costs keeps producing while a cheaper member sits idle. The same total output ends up costing the industry more. The second is that the arrangement has to be policed. Members must watch each other's shipments, since discounts can be hidden in credit terms, delivery or quality, and a single owner has no such problem because there is no one to hide anything from. Then there is the law. Being a monopoly is not itself an offense in the United States, though conduct used to obtain or defend it can be. An agreement among rivals on price or output is treated as unlawful on its face, which is why /glossary/collusion tends to be tacit, undocumented and unstable rather than written down.
Frequently asked questions
Is a cartel the same as a monopoly?
No, a cartel is a group of separately owned firms agreeing to act like a single seller, while a monopoly is one firm that already is the only seller. A cartel aims at the same price and output a monopolist would choose, which is why courses model it that way. The difference that matters is that a cartel's members can cheat on the plan and a monopolist's divisions cannot.
Why do cartels break down?
Because each member earns more by producing beyond its quota while everyone else holds back, so the agreement asks every firm to do something against its own interest. Cheating is also hard to detect, since a discount can be buried in delivery terms or credit, and no member can sue to enforce a deal that is itself unlawful. Entry by outsiders attracted to the high price finishes the job.
Is it illegal to be a monopoly?
In the United States, simply holding a dominant position is not an offense, and a firm that wins one by building a better product breaks no law. What is unlawful is conduct used to acquire or protect that position by shutting rivals out rather than by outcompeting them. Agreements between rivals to fix prices are treated far more harshly than dominance achieved alone.
Live Monopoly graph. Drag the curves, or open the full version.
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