Question

n 2007, some countries that export natural gas discussed forming a cartel, modeled on the OPEC oil cartel. The head of Libya’s energy sector was quoted as saying: “We are trying to strengthen the cooperation among gas producers to avoid harmful competition.”

a. What is a cartel?

b. What is “harmful competition?” Is competition typically harmful to consumers?

c. What factors would help the cartel succeed? What factors would reduce the cartels chances for success?

Answer 1

a)

Cartel : suppliers coming together with the purpose of maintaining prices at a high level and restricting competition

b)

Harmful competition

In Oligopoly, either all players can win, or all will loose, there is no middle way.

So as all want to win they try forming a cartel. The harmful competition they want to avoid is price competition.

Price competition among the suppliers is good for consumers as less prices will increase consumer surplus.

c)

Conditions for cartelization to work

1. Few firms
2. Similar products
3. Similar cost structures
4. Cheating easy to detect
5. Threat of new entrant is less
6. Penalties for colluding are weaker

If there is iota of doubt in one supplier that others will cheat, then the cartel will not be successful.

So, if cheating has high incentive, then success of cartel will be difficult.