Question

What conditions are favorable to the formation and maintenance of a cartel?

Answer 1

Primarily there should be fewer firms in the industry so that each firm has significant market share. The product that each of them is selling is identical and not differentiated. Entry by new firms is very difficult. Also, there should be uniform cost structure so that no single cartel member can produce at a lower cost. Geographical closeness or proximity is also a factor. Note that cartel members have incentives to cheat and deviate from cartel agreed output. An appropriate punishment strategy is therefore required. Firms must repeatedly interact with other to analysis their behaviour. Market stability and availability of information is also required to maintain cartel. A common marketing agency is required for avoid any uncertainty.