What is a cartel? How is the equilibrium price and output determined in a cartel?

A cartel is a group of firms that come together and agree to coordinate their actions, usually with the goal of maximizing their joint profits. By working together, these firms can raise prices above the competitive level, restrict output, and divide the market among themselves. Cartels are typically illegal in many countries because they lead to reduced competition and higher prices for consumers.

In a cartel, firms aim to maximize their joint profits. To do this, they need to determine the optimal price and output that will bring about this goal. Factors that contribute to the determination of the equilibrium price and output in a cartel include: 1. Market demand: The greater the market demand, the higher prices cartel members can charge without causing a significant decrease in sales. 2. Costs of production: Firms in the cartel must take into account the costs of producing at different output levels. Lower production costs would allow for higher profits at a given price point when compared to higher production costs. 3. Market power: The degree of market power each firm has within the cartel directly impacts their ability to influence the overall market price and output. Firms with greater market power can have a stronger influence on determining equilibrium price and output. 4. Elasticity of demand: The elasticity of demand measures the responsiveness of quantity demanded to a change in price. If the demand is inelastic, meaning consumers will continue to purchase even with a price increase, the cartel can set higher prices without seeing a significant reduction in sales.

To determine the equilibrium price and output in a cartel, the firms involved follow these steps: 1. Estimate the relevant demand curve: Firms need to estimate the market demand curve for their product. This will guide them in understanding the relationship between price and quantity demanded. 2. Develop a cost structure: Each firm in the cartel will need to determine their own cost structure, which includes their variable and fixed costs of production at different output levels. This information is essential in understanding the profitability of different price and output combinations. 3. Determine the cartel's joint profit-maximizing output and price: Taking into account market demand, costs, and each firm's market power, the cartel will collectively decide on the equilibrium price and output that maximizes their joint profits. This typically involves setting prices above the competitive level and restricting output. 4. Allocate the output among cartel members: Once the cartel determines the joint profit-maximizing output level, the firms then need to decide on the allocation of that output among themselves. This often depends on factors such as each firm's market power, production costs, and prior agreements within the cartel. In conclusion, a cartel is a group of firms that collude to coordinate their actions, usually to maximize their joint profits. The equilibrium price and output in a cartel are determined by several factors, including market demand, costs of production, market power, and elasticity of demand. The cartel's goal is to set a price above competitive levels and restrict output to achieve the highest possible joint profits.