Question

Identify and explain problems related to forming and maintaining a cartel.

Answer 1

There are different problems associated with forming and maintaining a cartel. The first problem is that it is illegal in nature and governments don't allow it to be formed by the firms. Hence, forming a cartel and getting acknowledged by the government can attract penalties. The second problem is the lack of trust among the participating firms. A cartel requires trust regarding the fixation of price, allocation of market and fixing the output to be produced. But, it is generally lacked by the firms and cartel always faces the risk. The third problem is the action taken up by the follower firms towards the market dominant firm. When market dominant firm decreases the price, then other smaller firms also decrease the price. But, when a dominant firm increases the price, then other firms do not act. It makes cartel to be unstable. Besides, firms entering into the market based on the geographical location of each other, also creates problems in managing the cartel.