Question

how does the addition of another firm affect the ability of the firms in an oligopolistic industry to form an effective cartel?

Answer 1

Their ability to form cartel will deteriorate. Most often cartel limit price or quantity. With addition of new firm quantity will rise and thus price will fall. Thus scheme devised by cartel will fail. Firms will leave cartel to compete with this new firm. In other words they will try to protect market share and in this process competitive behaviour is promoted. But one thing may happen that in market like soft drinks in India where only Pepsi and coca cola lead and are reaping economies of scale, the new firm might be forced to accept the prevailing price as it is in its best interests. It gives new firm sufficient profits.. It will not charge less price since it is not reading economies of scale. So the new firm might informally cooperate with existing firms and cartels are not discouraged at all