Question

What are the four reasons why cartels eventually tend to weaken or fall apart?

Be able to briefly discuss each.

The four reasons are list, can you please explain each

recalcitrant firm

different costs

investment rivalry

the interloper.

Answer 1

1 recalcitrant firm is the one who doesn't follow the rules and regulations of the cartels properly . Cartels find difficult to manage this firms

For example enforcement problem arise from this

Cartels aims at restricting output to maximize joint profits but some firms find it profitable to expand ttheir production . Which results in lowering of price to sell the products then the cartel price .

Also trust issues develop in between cartels .

2 different costs

Firms in a cartels have different costs . If a firm has lower costs then it has an advantage to produce at cheap rates and thus maximize profits

3 investment rivalry

Capacity of sone firms in a cartel to invest more is high which leads to excess production and later sell it at low price than cartel which breaks the cartels

4 interloper

Firms in a cartel passes the information about cartel prices and output to other firms outside cartels which increases competition and price war thus breaking down of cartels