Most agreements face difficulties and tensions, and some cartels collapse completely. Once established, cartels are difficult to maintain. The problem is that cartel members will be tempted to cheat on their production limitation agreement. By producing more production than it is ready to produce, a cartel member may increase its share of the profits of the cartel. As a result, each member of the cartel is incentivized to cheat. Of course, if all members deceived, the cartel would cease to generate monopoly profits and there would be no incentive for companies to remain in the cartel. The problem of fraud has hit the OPEC cartel and other cartels and may explain why there are so few cartels. If this happens, existing companies participate in price agreements. This behaviour is considered illegal under UK and EU competition law. But it can be difficult and complex to prove that a group of companies has voluntarily partnered to raise prices. Oligopolistic companies join an agreement to increase their market power, and members collaborate to determine together the level of production that each member will produce and/or the price that each member will request.
Thanks to this cooperation, the members of the cartel are able to act as a monopoly. For example, when each company sells an undifferentiated product such as oil in an oligopoly, the demand curve that each company faces is horizontal to the market price. However, if oil-producing companies form a cartel like OPEC to determine their production and price, they will face together a downward market demand curve, just like a monopoly. In fact, the winning decision of the cartel is the same as that of a monopoly, as Figure shows. Cartel members choose their combined production at the level where their combined marginal incomes correspond to their combined marginal costs. The cartel price is determined by the market demand curve at the level of production chosen by the cartel. The benefits of the cartel correspond to the area of the rectangular box with the inscription abcd on the figure. Note that a cartel like a monopoly will choose to produce less production and demand a higher price than the market in a perfectly competitive market. Several factors can cause problems in the context of a collusion agreement between suppliers: collusion in a market or sector is easier to obtain.
Si: Horizontal agreements include price cartels/market manipulations between companies in the same sector and at the same stage of production Assessment: fear of fines or other controls mean there is a strong incentive to conceal cartels A good recent example has been the dispute between US competition authorities and Apple, accused of wanting to increase e-book prices in collusion with major book publishers. Vertical agreements occur when companies in the same sector apply anti-competitive practices at different stages of the supply chain. Assessment of costs and use of collusion – Video Review If some large companies dominate a market, there is still the potential for companies to reduce uncertainty and participate in some form of collusive behavior Incomplete information about the motivation of other companies can lead to tacit cartels. . . .