Why is it more difficult to maintain a cartel when there are more than two firms?

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• 5:36

  brings up Boeing, which made me think of defense contractors. How are weapons manufacturers (like Boeing, Lockheed-Martin, Northrop-Grumman, etc.) classified and regulated?

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    The examples of weapons manufacturers you gave would be somewhere between oligopolistic and monopolistic competition. The start-up capital required is huge; the barriers to entry are high; yet there is differentiation among them (planes vs. tanks vs. missiles).

    How are they regulated? Strict contractual law binds them to supply arms to one country or to an organization of countries. If it wasn't for the contractual law, then I bet some weapons manufacturers would gladly do business with "the enemy". So the regulations are severe. I hope I am right.

    Anyone else know more?

• Not sure if I asked this previously, but can Samsung and Apple be considered a Duopoly in today's smart phone market?

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    Hi. Since there are a couple of other major players (Huawei, Amazon, Microsoft come easily to mind), an oligopoly setting seems more appropriate here.

• Can you explain what is "The Cournot Game"?

  • No, it's too advanced to be explained in a response. It is an application/approach of games theory in finding price-output equilibria under competitive markets. It could take a whole Khan video on its own to explain!

• So it seems like collusion between firms is always a bad thing. Is there an instance where collusion between firms in an industry could be considered socially desirable?

  • In producing mutually acceptable Excellence Awards, Standards of Practice, Quality Standards and Compatibility Standards, or even a Code of Ethics and a Body of Knowledge for their profession. That way they can self-regulate so that they outcast companies (or employees) among them that threaten consumers trust towards their whole industry and reward companies (or employees) that advance their industry as a whole. Ofcourse this comes at a cost of rising barriers to entry, but in some cases the net effect is positive.

• What think about the following suggestion? Although the government may prefer a perfect competition to a Monopoly for obvious reasons of engineering and economic efficiency. However, if the monopoly has huge economy of scale, it may be more profitable to retain it but impose tax - the tax imposition may not necessarily be discretionary.

  • True. A good example might be rail-road monopolies. Although there is a lot of discussion about whether these markets should be dominated by a monopoly or by perfect competition, it could be more efficient for the government to have a monopolist for economic efficiency (economies of scale / investments).

    And sometimes they impose restrictions on profitability (ie. the company needs to invest any profit over a certain amount, instead of taxes).. which might be better because it increases the consumer surplus to restore balance!

• What is the difference between collusion and cartels?

  • There is little difference. A cartel is a group that colludes. Collusion is simply the act of conspiring to increase your economic benefit as well as the benefit of those with whom you collude. Sometimes collusion occurs without any communication. We call this tacit collusion. More vocal than tacit collusion, a cartel is a defined association that colludes.

• At

  7:56

  , Sal said that the governments get involved to prevent cartels and monopolies to push parties towards perfect competition - how do they do that?

  • Many governments have outlawed collusion between companies, making cartels impossible. Governments will also often break up monopolist corporations into several smaller companies.

• If having almost perfect competition is most efficient why do people try to make monopolies or try to collude?

  • The reason we can have perfect competition in some markets is because those markets are very easy for new producers to enter. If there are inefficiencies in the market, or if producers are raking in huge profits, then new firms join the market to contest these profits and opperate more efficiently. This is what keeps perfect competitors honest. If markets are hard to enter--if one firm has control of all of the resources needed to make a good, or if the equipment needed to produce something is outlandishly expensive, etc.--then there can't be perfect competition by definition, because new firms can't simply enter the market to keep the older firms honest. This sort of a situation (referred to in economic terms as "barriers to entry") is what allows monopolies and oligopolies to come into existence.

    Furthermore, highly efficient markets mean low profit. The economic term "allocative efficiency" means setting the price at the cost of production. Monopolies and cartels can figure out ways to set prices higher than this. Contrary to what Alexander said, this price isn't "higher than consumers want to pay." Every point on the demand curve represents a price that some consumers are willing to pay. No one is "forced" to buy at this price; rather, they have the option to buy at this price or to not buy at all, which is always the case when there is one price in a market, whether the market is perfectly competitive or not.

    In sum, firms can make more profit when they're not forced to be efficient. Perfectly competitive markets are easy to enter, and new firms enter whenever existing firms are too profitable, in order to take a slice of the profits for themselves. Monopolistic and oligopolistic markets are nearly impossible to enter, so firms in these markets are not forced to be efficient, and they can therefore make profits in the long run.

• What happens when firms in a cartel in an oligopoly betray the terms of the cartel?

  • Usually a cartel is enforced through licensing laws. A famous example is in New York, there are a fixed number of medallions that license you to drive a cab. And one cab driver can only pick up so many passengers in a day. If you tried to drive an unlicensed cab, you'd be fined or even arrested.

    Many professional organizations and licensing laws exist to restrict supply. The American Bar Association, for instance, restricts the supply of lawyers by adjusting how hard the Bar exam is. Hairdressers have to get expensive licenses to practice, and so forth. Many times you'll hear companies demand regulations, you might think, "why would they want more regulations on themselves?!" But they're often happy to take a loss if it puts smaller competitors out of business.

• Hotdogs and buns definitely have some back deal. Hotdogs come in 10 and buns come in 8. you'd need five bags of the 8 pack buns and four of the 10 pack hotdogs you will break even.

Why it is so difficult to create a successful cartel when there are many producers?

What are the main difficulties in maintaining a cartel?

What makes a cartel unstable?

How are cartels maintained?