Chapter 16, Problem 1DQ

To determine

The reason due to which cartels are unstable.

Explanation of Solution

The reasons for the instability of cartels are as follows:

• The members of cartels must have a major share in the market so that other producers do not suppress the decision taken by the cartels by expanding its production.

• The good that is a substitute of another good provided by the cartel must be of low quality and there must be a few numbers of substitutes available in the market.

• There must be solidarity among the members so that cheaters could be identified and punished.

• There must be very few external factors that can make the cartel unstable.

• However, the cartel members have a reason to deviate, in order to earn more profit. Cartel members cheat and decrease the price of goods to sell more quantity of outputs. Hence, the cartel needs a great deal of mutual cooperation to be stable.

Economics Concept Introduction

Concept introduction:

Cartel:

A cartel is a group formed by mutual cooperation. In an oligopoly market, many firms collaborate mutually to have control over market prices and supply of a good. OPEC is one of the known cartels in the oil production sector.