A cartel is a group of producers that work together to limit competition and fix prices. Cartels are formed when large producers collude to set industry prices where marginal revenue for each firm equals marginal cost. This allows the firms to act as a monopoly and set prices without competing on price. The cartel model assumes firms have constant and equal marginal costs. It shows the cartel output and pricing that maximizes total industry profits by having each firm produce a certain quantity.

1. Cartel
Cartels.
•A cartel is a grouping of producers that
work together to protect their interests.
•Cartels are created when a few large
producers decide to co-operate with respect
to aspects of their market.
•Once formed, cartels can fix prices for
members, so that competition on price is
avoided.

2. Cartel Model
• Firms collude on price and/or quantities
• They act as if they are a monopoly
• They set an industry price where
MRi = MCi
• The cartel model is not efficient
• Side payments are necessary to equalize
profit

3. Cartel Model
• A model of pricing in which firms
coordinate their decisions to act as a
multi-plant monopoly is the cartel model.
• Assuming marginal costs are constant and
equal across firms, the cartel output is
point M
• The plan would require a certain output by
each firm and how to share the monopoly
profits.

4. Cartel Model
MRi Di
MRi Di
MC1
MC2
Q2Q1
Pi
MCi=ΣMC1+MC2
Industry Firms
MRi=ΣMC1+MC2
Companies unite to
maximizes industry profit
Qi
P P
Q Q

5. Price
P
M
P
A
P
C
MC
C
A
M
MR
D
Quantity
per week
Q
M
Q
A
Q
C0
Cartel Model

6. Price
P
M
P
A
P
C
MC
C
A
M
MR
D
Quantity
per week
Q
M
Q
A
Q
C0
Cartel Model