Perfect Competition versus Pure Monopoly 329Cartels
A cartelis a group of producers that enter into a collusive agreement aimed at
controlling price and output in a market. The intent of the cartel is to secure
monopoly profits for its members. Successful maintenance of the cartel not
only has an immediate profit advantage; it also reduces the competitive uncer-
tainties for the firms and can raise additional entry barriers to new competitors.
In the United States, collusive agreements among producers (whether
open or tacit) represent violations of antitrust laws and are illegal.^3 Some car-
tels outside the United States have the sanction of their host governments; in
others, countries participate directly. The best-known and most powerful car-
tels are based on control of natural resources. In the 1990s and today, the
Organization of Oil Exporting Countries (OPEC) controls about 40 percent of
the world supply of oil. De Beers currently controls the sale of more than 90
percent of the world’s gem-quality diamonds.
The monopoly model is the basis for understanding cartel behavior. The
cartel’s goal is to maximize its members’ collective profit by acting as a single
monopolist would. Based on the demand it faces, the cartel maximizes profit
by restricting output and raising price. Ideally, the cartel establishes total out-
put where the cartel’s marginal revenue equals its marginal cost. For instance,
if cartel members share constant and identical (average and marginal) costs of
production, Figure 8.3’s depiction of the monopoly outcome would apply
equally to the cartel. The cartel maximizes its members’ total profits by restrict-
ing output and raising price according to QMand PM, where marginal revenue
equals marginal cost.^4
Output restriction is essential for a cartel to be successful in maximizing its
members’ profits. No matter how firm its control over a market, a cartel is not
exempt from the law of demand. To maintain a targeted price, the cartel must
carefully limit the total output it sells. Efforts to sell additional output lead to
erosion of the cartel price. The larger the additions to supply, the greater theCHECK
STATION 3Suppose the industry demand curve in Figure 8.3 shifted up and to the right. What would
be the effect on price, output, and profit under competition and under monopoly?
Answer these questions again, supposing unit costs increased.(^3) The law permits trade and professional associations; these organizations sometimes formulate and
sanction industry practices that some observers deem anticompetitive. In the 1950s, widespread
collusion among electrical manufacturers in contract bidding was uncovered and prosecuted.
(^4) When costs differ across cartel members, there is more to determining the relevant marginal cost
curve. To maximize profit, the cartel first should draw its production from the member(s) with the
lowest marginal costs. As output increases, the cartel enlists additional supplies from members in
ascending order of marginal cost. The cartel’s marginal cost curve will be upward sloping and is
found by horizontally summing the members’ curves. This ensures that cartel output is obtained
at minimum total cost.
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