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Would you expect cartel formation to be more likely in industries comprised of a few...

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rogerarnold | Student, Undergraduate | (Level 2) Honors

Posted December 29, 2009 at 5:40 AM via web

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Would you expect cartel formation to be more likely in industries comprised of a few firms or in those that include many firms? Explain your answer.

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

Posted December 29, 2009 at 5:19 PM (Answer #1)

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The practice of cartel formation is illegal in most of the countries, and the primary condition for cartel formation is the existence of company to indulge in such illegal, or at least unethical practices. Also, because of the illegality and immorality involved, the cartel formation and operation activities can not be carried out in the open. For these reasons, it is not possible to operate a cartel with too many members in it. Therefore cartels are likely to be formed between limited number of firms. Each of these firms is not likely to be big or dominant enough to impact the market prices or supplies substantially, at the same time the all the firms in the market, acing together should be able to do so. Firms of this type and size exist only in an oligopolistic market. Therefore, cartels exist only in industry characterised by oligopolistic market with a few firms, each with limited power to influence the market supplies and prices.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted December 29, 2009 at 5:52 AM (Answer #2)

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A cartel is much more likely to form in an industry that is made up of only a few firms than in one that is made up of many firms.

The main reason for this is that cartels can only form if the firms that will make up the cartel have control of the vast majority of the market.  If not, the cartel will be undersold and will break apart.  In an industry with only a few firms, it is much easier to form an agreement between the firms than it would be in an industry where a large number of firms would have to agree to form the cartel.

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