Use simple models to analyze what happens in the following c

Use simple models to analyze what happens in the following cases. Answers, including diagrams, should be limited to one page.

You might wish to refer to Miller, R. et al. 2016. ”Contracts, Combinations, and Conspiracies.” Economics of Public Issues 19th ed. Pearson pp. 118 123.

a) Why are all cartels inherently unstable?

b) Would it be easier to form a cartel in a market with many producers or one with few producers?

c) Assume that the members of our Econ 201 class are attempt to form a study-reduction cartel, in which everyone agrees to study less. Which individuals will gain the most from the cartel? Which one will have the greatest incentive to cheat on the cartel?

Solution

Answer 1. All the cartels are inherently unstable because of the behavior or thinking of members of the cartel is just like the thinking of prisoners where each member of the cartel find options to make more profit by breaking or cheating the agreement of cartel that is why the benefits to cheat in case of cartel clearly explains why cartels are inherently unstable.

Answer 2. A cartel is a group of apparently independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices. Cartels typically control selling prices, but some are organized to control the prices of purchased inputs. It is easier to make a cartel with few producers as with few producers it is easy to keep a check on all the members or else the chances of cheating by one of the member in a big group becomes easy. Also, an association of manufacturers or suppliers with the purpose of maintaining prices at a high level and restricting competition is possible only when all the members are honest and genuine. They should not have any urge or need to cheat to earn more by deviating from the price and the quantity fixed in a cartel.

Answer 3. If the members of the Econ 201 class are attempt to form a study-reduction cartel, in which everyone agrees to study less, then those who are weak learners and those who cant retain the study are the ones who gain in such a cartel. As already they are not able to score good, all upon it by formation of such a cartel all the students will not be able to study longer and hence they will face less competition in terms of highest marks and in terms of the hours contributed to study by each.

Individuals who are smart learners and can score good by stuiying less, are the ones who will have the greatest incentive to cheat from such a cartel as they dont have to worry about the chances of losing by joining such a cartel of study reduction. They will be benefitted in both the cases of studying less, and scoring, also they will face less competition in terms of scoring good podition as every one is studying less because of such cartel. By cheating and studying longer hours they will have dual benefit of having low competition and getting more hours of study as compare to remaining students who are part of the cartel.