CARTELS AND MERGERS

GEORGE J. STIGLER
CH. 13
PRESENTED BY
SRI MARYATI
 Cartels
• Collusion
– Cooperation among firms to restrict
competition in order to increase profits
• Market-Sharing Cartel
– Collusion to divide up markets
• Centralized Cartel
– Formal agreement among member firms
to set a monopoly price and restrict
output
– Incentive to cheat
THE THEORY OF CARTELS ANDA MERGERS
FOR MONOPOLY
MCF P
P MC

P P
P2
P2

DF

MRF MR D

Q Q2 Q Q Q2
Q
FIRM INDUSTRY = N FIRM
 THE THEORY OF CARTELS ANDA
MERGERS FOR MONOPOLY
• EACH FIRMS IS ASSIGNED A QUOTA OF 1/N
TIMES TOTAL OUT PUT CARTEL
• D FIRM = 1/N D MARKET
• THERE ARE 4 PROBLEM:
– THE RECALCITRANT FIRM
– DIFFERENT COSTS
– INVESTMENT RIVALRY
– THE INTERLOPER
 THE RECALCITRANT FIRM
• ASSUME: (N-1) JOINT THE CARTEL 1 FIRM
REMAINS OUT SIDE. IF THE MEMBERS ARE
CONCERN, THE SITUATION IS NOT DEFFERENT
• QUOTA = 1/(N-1)
• THE FIRM OUTSIDE THE CARTEL IS NOT LARGE
ENOUGH TO HAVE MUCH INFLUENCE ON PRICE
• THE CARTEL BECOME FEASIBLE ONLY IF THE
NUMBER OF FIRMS IS NOT VERY LARGE AND A
FEW FIRMS SO LARGE RELATIVE TO THE
INDUSTRY
 P1>P2
Π CARTEL NOT MAX
DIFFERENT COSTS MIN COSTS  MC1 =MC2
SOLVING: F2 SALE TO F1
MC1

P1 MC2 MC1 + MC2

P2

2 MR

MR

R S
Centralized Cartel
INVESTMENT RIVALRY
FIRM’S PROFIT SMC
MCF

LMC

4D/3

MR D

C T
 INVESTMENT RIVALRY
• IN LONG RUN: P> MCINCENTIVE TO ENLARGE
PLANTS AND ADD QUOTA
• FIRM INVESTS TO INCREASE ITS CAPACITY (1/3 )
• D MARKET = 4/3 D
• LONG RUN MC OF THE FIRM INCREASE
• PROFIT OF THE FIRM INCREASEREFUSE TO
JOINT
• NEED: EQUAL MC FOR ALL PLANTS AND
INVESMENT WILL NOT BE EXESSIVE AS WITH
CARTEL
 THE INTERLOPER
• NEW ENTRANT EAGER TO SHARE THE
MONOPOLY PROFITS
• IN THE ABSENCE OF LARGE BARRIER TO
ENTRY, THE FIRMS IN THE CARTEL WILL
EARN ONLY COMPETITIVE RATE OF
RETURN ON INVESTMENT.
• NEW ENTRANTS DO NOT APPEAR TOO
OFTEN OR TOO QUICKLY
 MERGERS FOR OTHER PURPOSES

• VERTICAL INTEGRATION REASONS:

– TO PRACTICE PRICE DISCRIMINATION
–DESIRE TO PUT AN OBSTACLE IN THE
WAY OF PROSPECTIVE ENTRANTS
– TO ELIMINATE MONOPOLY
THANK YOU.......