Notice in all three examples that there are firms outside the cartel. There
are many oil producers (including all those in Canada and the United
States) that are not part of OPEC; there are many diamond mines that are
not owned or controlled by DeBeers (two of which are the Ekati and
Diavik mines in the Northwest Territories that together make up
approximately 9 percent of total world diamond production); and there
are other large potash producers in Belarus, Russia, Germany, and Israel
that do not sell their potash through Canpotex. Indeed, this type of cartel
is much more common than one in which all firms in the industry
successfully band together.
In this chapter, however, we simplify the analysis by considering the case
in which all firms in the industry form a cartel. This is the easiest setting
in which to see the central point—that cartels are inherently unstable.
The Reforms of
If all firms in a competitive industry come together to form a cartel, they
must recognize the effect their joint output has on price. That is, like a
monopolist they must recognize that they face a downward-sloping
demand curve and, as a result, an increase in the total volume of their
sales requires a reduction in price. They can agree to restrict industry
output to the level that maximizes their joint profits (where the industry’s
marginal cost is equal to the industry’s marginal revenue). The incentive
for firms to form a cartel lies in the cartel’s ability to restrict output,