... monopolist. Diagram 1 shows the benefits that arise from forming and maintaining a cartel. It shows an industry in long-run competitive equilibrium. The price is P1 and the output is Q1. Here there are no economic profits. Now, if the firms that dominate the industry where to form a cartel and reduce output to Qc (production quota), the new price become Pc (cartel price) and profits are equal to CpcAB, which would be shared among members. So with no cartel there where no economic profits. With cartel there profits are gained. Thus there is an incentive for firms to form a cartel. There are a number of problems that arise from forming a cartel. Once the problem of who joins the cartel is solved then there is the problem of agreeing on a policy. For example, firm A may purpose that all members drop their output by 10%. While firm B ...

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