Figure 10-4 The Effect of Cartelizing a Competitive Industry
thereby raising price and increasing profits. This is shown in Figure 10-
4.
Cartelization of a competitive industry can always increase that
industry’s profits. Equilibrium for a competitive industry occurs at
Equilibrium price and output are and
If all the firms in the industry form a cartel, profits can be increased by
reducing output. All units between and add less to revenue than to
cost—the MR curve lies below the MC curve—and therefore will not be
produced by a profit-maximizing cartel. The cartel maximizes its joint
profits by producing output of and setting price equal to (the same
as the monopoly outcome).
The profit-maximizing cartelization of a competitive industry will reduce output and raise
price from the perfectly competitive levels.E
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