Why do cartels have difficulty acting like monopolies?
Even successful cartels have trouble maintaining coordination among cartel members. Several factors affect the ability of a cartel to maintain its coordination:
a . Number of firms in the industry: The fewer firms in the industry, the simpler it is for members of the cartel to monitor the behavior of other members. As the number of firms increases, it becomes easier for members to undercut the cartel by increasing their individual output, resulting in lower market prices.
b. Characteristics of the products sold by the firms: When firms are able to differentiate their products from those of other members of the cartel, firms will try to capture a larger market share by advertising their products' unique characteristics.
c. Production costs of each member: If production costs are similar among firms in a cartel, their profit-maximizing outputs will be similar. Even when production costs differ widely, but the product is nearly homogenous, a cartel can still work.
d. Behavior of demand: When demand fluctuates throughout the year, it is more difficult for an individual firm to determine whether changes in demand are due to seasonal changes or cheating by other members of the cartel.
e. Frequency of sales and their characteristics: When the amount of sales is small, but each sale has a high value, cheating on a cartel arrangement can significantly increase an individual firm's profits. Conversely, cheating is less likely when the amount of sales is high, but each sale has low value.
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