Question

With the aid of some examples, write a short essay about oligopolistic cartels. As part of your answer make sure that you discuss under what circumstances cartels are most likely to succeed and under what circumstances the cartels are most likely to fail.  

Answer 1

Cartel formation takes place in an oligopoly market when firms collude together and fix prices and quantity of production so that the profit is maximized. Though the cartel formation is illegal, but it is observed than the firms or nations have opted to do so. It can be understood by the real world examples. The first example belongs to the cartel formation by the oil producing nations (OPEC) in gulf area. These nations collude together and restricted the supply of oil. Since the demand was higher than the supply, price rise took place in the international market. It brought increased profit to these nations and other nations in the world suffered as oil price is one of the driving force behind rise in inflation.
The second example is the cartel formation by cement producing firms in cement industry in India. After the independence, there were few firms who were producing cement and demand for cement was huge due to the construction and development of infrastructure. During this time, these firms colluded and created artificial shortages due to the restricted supply. It caused the rise in price of cement due to increased level of demand. Afterwards, the firms released cement at higher prices. Though, the cartel formation in this industry in India does not work as of now.
Cartel formation takes place, but it requires few essential circumstances that make them successful. These circumstances are the presence of one big price leadership firm and other follower firms, proper demarcation of area of business and trust upon each other. These circumstances are necessary as firms are interdependent in the oligopoly market.
Though there are circumstance to make cartel a failure. These circumstances are equal size firms, entry into the business area of each other, intense competition and lack of trust upon each other. These factors make them manipulate the price and cartel fails.