Costs and Benefits of Cartels
Firstly to define a cartel, it is simply a formal collusive agreement between firms aiming to maximise profits by mimicking a monopoly. This will only work if the members involved act as a single firm by cooperating with each other. If done properly, a cartel will harvest monopolistic benefits by limiting their production, therefore causing the price to rise above the level it would have been if the firms would have remained in competition. The firms start by setting an unusually high price for their goods which no members are allowed to underbid, though every so often the associates agree to divide the market geographically and thus give all local monopolies without imposing a universal price. Although cartels are illegal in many countries because they drive up prices and profits against the public interest, some firms simply break the law or find a loophole. With loopholes firms may only tactically collude by regulating their prices in a similar fashion to others’ and avoid price wars or aggressive advertisement campaigns.
