Chapter 4: The Effects of Cartels: Markups and Welfare Losses
I. INTRODUCTION If cartels are successful, how great are the costs that they impose on the economy? To the extent that they can achieve a monopoly price, it follows that a monopoly outcome is the result. We observed in Chapter 1 that several sources of inefficiency can result from sustained cartel pricing. Just as in the single-firm monopoly case, cartel pricing can lead to monopoly or near-monopoly profits that involve an income transfer from consumers of the product to producers. Consumers who remain in the market must pay a monopoly rather than a competitive price but, in addition, some consumers who would have purchased at a competitive price leave the market altogether and must seek an inferior substitute. This gives rise to what is referred to as a dead weight loss. The monopoly profit involves an income transfer from one group to another but the latter is a complete loss, obtained by no one. A further potential source of loss is the maintenance within the cartel of inefficient firms which in a more competitive environment would be forced to improve their efficiency or leave the industry but which are sustained under the umbrella of the high cartel price. A conspiracy will try to ensure that as many producers as possible are persuaded to join, in order to prevent price cutting by outsiders. However, if some firms do remain outside, they will benefit from any price increase introduced by the cartel. Although they are not members of the conspiracy, its existence...
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