Question

In: Economics

When a company that makes up a cartel breaks one of the rules, punishment strategies are...

When a company that makes up a cartel breaks one of the rules, punishment strategies are developed, what are these strategies?

Solutions

Expert Solution

Cartel stability depends on perceived gains and income arising from corruption in relation to the probability that other cartel members may be punished. Consequently, cartelists can only create equilibrium through a scheme that increases the cost of cheating by means of internal punishment. In order to detect bribery and prosecute companies that practice it, cartels need to control their agreement. Therefore, in order to survive a cartel, this model assumes that there should be effective sanctions to penalize participants who steal, thus upholding the cartel agreement

In short, an economic approach seeks explanations for cartel stability in effective internal detection and punishment. It raises the assumption that there will be demonstrated advanced mechanisms of management, control and compliance in the cases. Retaliation in the form of price reductions and price wars would help to increase the cost of fraud and ultimately strengthen cartels.

Where the economic model considers strong monitoring and enforcement systems to account for cartel stability, empirical results suggest otherwise. The deviating effects of internal punishment leave room for alternative explanations for cartel longevity.


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