Cartels are difficult to maintain in the long run because Not yet answered Points out of 8.00 Flag question Select one:
a. individual members may find it profitable to cheat on agreements.
b. entry barriers are insignificant in oligopolistic industries.
c. it is more profitable for the industry to charge a lower price and produce more output
d. they are illegal in all industrialized countries.
Answer
The correct options is a. Perhaps individual members may find it lucrative to cheat on agreements.
It is also difficult to sustain cartels over the longer term since individual members have an incentive in cheating on a cartel agreement for their own benefit. A cartel is a group of members agreeing to limit output and increase prices above competitive levels. 3 However, each member has an incentive to secretly produce more than their cartel quota and capture a bigger share of the market and profits.
For instance, if a group of oil cartels promises to produce 10 million barrels in total with each member committing to the production of just two million; secretly an individual can be producing three instead. This enables them to secure a larger portion of the market and higher profits at least in the short run until other members respond.
Cartel agreements are not stable because members can potential cheat by overproducing. As each member gains from cheating, the temptation to do it is ongoing. Coordination, monitoring, and enforcement of punitive measures should be at high levels to allow for the detection of cheaters over time while maintaining rigid output quotas. 6 Due to the fact that there are many players selfish who gain when they cheat, cartels do not stand a chance in overcoming this incentive problem and usually crash as members strive for their personal fortunes rather than the collective good. Nevertheless, incentives to cheat create a spiral of instability in which it is difficult for cartels to maintain their success over the long term.
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