Question

Which of the following will cause a shared monopoly or cartel to be unstable?

	a.	There are only a small number of firms.
	b.	There are no legal barriers to sharing agreements
	c.	There are few opportunities to keep actions secret.
	d.	There are significant barriers to entry.
	e.	A differentiated product is produced.

Answer 1

Option E is correct

If there are significant entry barriers then there will be no competition and cartel will remain stable. Small number of firms help the management of cartel much easier because the behaviour of the members can be monitored. If actions cannot be kept secret then firms cannot take any action without getting themselves exposed to the cartel. Even when the legal framework is weak and contract is not enforceable, cartels can be checked by members using other strategies. However, product differentiation is an important barrier for stability of cartel because it somehow helps few members to show their dominance over the contract or agreement.