Salvatore’s Managerial Economics: Principles and Worldwide Applications, 8th

International Edition

Chapter 9: Market-Sharing Cartel

The difficulties encountered by the members of a centralized cartel (such as agreeing on the price to
charge, allocating output and profits among members, and avoiding cheating) make a
market-sharing cartel more likely to occur. In a market-sharing cartel the member firms agree
only on how to share the market. Each firm then operates only in one area or region agreed without
encroaching on the others' territories. An example is the agreement in the early part of this century
between Du Pont (American) and Imperial Chemical (English) for the former to have exclusive
selling rights for their products in North America (except for British colonies) and the latter in the
British Empire. Under certain simplifying assumptions, a market-sharing cartel can also result in the
monopoly solution. This is shown in the accompanying figure.

In the figure, we assume that there are two identical firms selling a homogeneous product
and deciding to share the market equally. D is the total market demand for the commodity. Then, d
is the half-share demand curve of each firm and mr is the corresponding marginal revenue curve. If
each firm has the same SMC curve as shown in the figure, according to the marginal principle, each
will sell two units of output at P = $8 (given by point E', at which mr = SMC). Thus, the duopolists
together will sell the monopolist output of four units at P = $8 (see the figure). In the real world
there may be more than two firms, each may have different cost curves, and the market may not be
shared equally. Then, we are not likely to have the neat monopoly solution shown above. The firm
with greater capacity or operating in an inferior territory may demand a greater share of the market.
The result will then depend on bargaining, and the possibility of incursions into each other's territory
cannot be excluded.
The firms in a market-sharing cartel can also operate in the same geographic area by
deciding which is to fill each particular contract. These market-sharing cartels are likely to be
unstable due to cheating. Some loose market-sharing cartels are sanctioned by law. For example,
local medical and bar associations essentially set the fees that doctors and lawyers are to charge.
Similarly, many states had fair trade laws (until they became illegal in the mid-1970s), which
allowed manufacturers to set the price that each retailer was to charge for the product. The market
was then shared by means other than price.