Perfect Competition versus Pure Monopoly
Suppose 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.
Cartels A cartel is 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 uncertainties 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 cartels outside the United States have the sanction of their host governments; in others, countries participate directly. The best-known and most powerful cartels 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 output 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 restricting output and raising price according to QM and 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 the 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.
CHECK STATION 3
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