Stable Cartels

Despite arguments that cartel arrangements are inherently unstable, there are certain conditions under which a cartel will be stable. The stability of cartels is examined under conditions in which a subset of firms form a cartel that is a price leader and under which firms recognize their impact on...

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Bibliographic Details
Published in:International economic review (Philadelphia) 1986-06, Vol.27 (2), p.317-327
Main Authors: M.-P. Donsimoni, Economides, N. S., Polemarchakis, H. M.
Format: Article
Language:English
Subjects:
Cartels
Cost efficiency
Economic stabilization
Economic theory
Financial market structures
Fringe
Industrial efficiency
Industrial market
Marginal costs
Market economies
Pathology
Stability
Uniqueness
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Summary:Despite arguments that cartel arrangements are inherently unstable, there are certain conditions under which a cartel will be stable. The stability of cartels is examined under conditions in which a subset of firms form a cartel that is a price leader and under which firms recognize their impact on the overall market. It is shown that a stable cartel is unique if firms are not too cost-efficient in relation to demand. Otherwise, 2 stable cartels may exist, one of which contains all the firms in the industry. The relative size of cartels is shown to be a decreasing function of the economy's size. A cartel's stability is shown to depend on the profits generated at equilibrium for both cartel members and nonmembers. The cartel is stable if members do not want to leave and nonmembers do not want to join. It is concluded that extending the argument to a less narrow, dynamic framework would be an open question.
ISSN:0020-6598
1468-2354
DOI:10.2307/2526507