Question

Briefly explain what a cartel is, how it operates, and why we see so few of them (ignoring the fact that they are illegal in most countries).

Answer 1

A cartel is a group of manufacturers and producers who come together and join hands to operate as one and keep prices high and make super normal profits and operate as a monopoly.

A cartel operates by means of ensuring cooperation among the member producers. All producers come together to cooperate in setting prices and output in such a way that maximum profits can be made.

However, we see few of such cartels because in a cartel one of the members has high incentive to defect and set lower market prices to make maximum and higher profits. This nature of either firm breaks the cartel.