Figure 10-5 A Cartel Member’s Incentive to Cheat
the competitive level. All the firms will then be back to their competitive
position. This conflict between the interests of the group as a whole and
the interests of each individual firm is the cartel’s main dilemma and is
illustrated in Figure 10-5.
Cooperation leads to the monopoly price, but individual self-interest
can lead to production in excess of the monopoly output. Market
conditions are shown in part (i), and the situation of a typical firm is
shown in part (ii). (The change of scale between the two graphs is
reflected by the upper case Q in part (i) and the lower case q in part (ii).)
Initially, the market is in competitive equilibrium with price and
quantity The individual firm is producing output and is just
covering its total costs.
A successful cartel reduces total output to and elevates price to
is the joint-profit-maximizing level of output because industry MR equals
industry MC. A typical firm in the cartel bound to the output restriction is
then producing output in part (ii). The firm’s profits rise from zero to
the amount shown by the shaded area in part (ii). Once price is raised to
however, the individual firm would like to increase output to
p 0
Q 0. q 0
Q 1 p 1q 1p 1 , q 2 ,