collusion

Question 1

how is a cartel formed

Answer 1

firms collude to form a cartel. Setting a quantity as to maximise profit. Profits then split as per pre arranged agreement.

Question 2

marginal revenue

Answer 2

These are the same, therefore the marginal costs must be the same.

Question 3

where does cartel profit maximise

Answer 3

where MC = MR. Where the marginal costs of the two firms are the same. The firm with a cost advantage will produce more.

Question 4

Constant MC cost advantage

Answer 4

If one of the firms has a constant mc (horizontal) which is always below other firms MC curve. They will produce the whole output. They will not however necessarily keep all the profits

Question 5

tacit collusion

Answer 5

Cartels usually formed via tacit collusion. Not legally binding. Open collusion is usually illegal.

Question 6

Why does cartel break down?

Answer 6

Firms believe they can make more profit out of the cartel. Firm 1 has no incentive to pick q1* if it believes firm 2 will pick q2*. Leads to cartel collapsing. Firms start to compete with each other. Cournot equilibrium is the result with lower profits…

Question 7

Quantity out of cartel

Answer 7

They produce more since MR >

Question 8

Legal consequences

Answer 8

No legal consequences therefore both have incentive to violate the other.

Question 9

cartel in the long run

Answer 9

Firms break away from the cartel. Long run cournot equilibrium