7.7.4—Cartels

A cartel is an explicit or tacit agreement among competing firms to coordinate prices, output, markets or other competitive conditions. It aims to increase joint profit by acting less like independent rivals.

Cartels are unstable because each member can gain by secretly cutting price or expanding output. Detection, legal penalties, different costs and changing demand also make coordination difficult.

If firms agree to restrict output and raise price, consumers face less choice and higher prices. One member may secretly offer discounts, undermining the agreement.

Parallel prices alone do not prove a cartel; firms can reach similar prices independently when they face similar costs or a common market shock.