Answer:
Meaning of Cartels:
Cartels is one of the methods of agreement between the firms. It means a direct but tacit agreement among the competing oligopoly firms in order to reduce uncertainty arising from their mutual interdependence. Common interest means maximization of profit, reducing uncertainty, avoiding price war and other throat-cut competition. The agreement may be formal or informal. But both types of agreements are considered as illegal in most of the countries. The main objectives of cartels is joint profit maximization. There are two typical forms of cartels:
a. Cartels Aiming at Joint Profit Maximization.
b. Cartels Aiming at the Sharing of the Market.
The Organization of Petroleum Exporting Countries (OPEC) is the best example of an international cartel. Because, the OPEC member meet regularly to decide how much oil each member of the cartel will be allowed to produce.
Cartels Aiming at Joint Profit Maximization
According to this model, the main aim of the firm is to maximize joint profit or the industry profit. It can be analyzed with the help of pure oligopoly. And the pure oligopoly is the market situation in which firms produce homogeneous product. Firms producing homogeneous product or the member firms appoint a central agency and delegate authority regarding:
i. Determination of total output to be produced by industry.
ii. Determination of common price to be charged for the product.
iii. Allocation of total industry output among the member firms.
iv. Distribution of industry profit among the member firms.
Thus, the responsibility and authority of central agency is very important and significant in this model. To analyze this model more precisely we consider following assumption:
· There are two firms. (i.e. Firm – A and Firm – B)
· Firm – A is assumed to be the low cost firm and Firm – B is assumed to be the high cost firm.
· Both firms produce homogeneous product.
· The central agency appointed by Firm – A and Firm – B have perfect knowledge about the market demand and market cost conditions of each firm.
On the basis of all information central agency determines market demand curves (i.e. AR curves) and the corresponding MR curves. The marginal cost (MC) curve of industry is horizontal summation of marginal cost curves of individual firms A and B.
The main aim of the cartels is to maximize the profit and the profit can be maximized when individual firms maximize profit. In this context, the condition for joint profit maximization can be expressed as:
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