There are a number of factors that sustaining a cartel.
Firstly, if there are few firms involved, it is easy to monitor each other in terms of quantity and price setting. It is easy to detect because it is observable if one firm's Market share has risen, especially where there are a larger number of firms involved.
Secondly, a cartel is more stable in markets where price and quantity are easy to observe. If a Market has frequent change in demand, input costs and other factors, then the price of product has to be adjusted according to the fluctuation. Consequently, cheating in cartel may be difficult to detect as it cannot be easily distinguished from other factors.
Cartel is sustainable if prices are widely known, so no one firm is willing to step over the boundary. A cartel can inspect each other by agreeing to see each other's books, and exchange information. But sometimes, books can be faked by government help in some cases.
In a Market where the prices are stable and don't fluctuate frequently.
Furthermore, in the case where the products of firms offer are of identical quality and properties and of which the the products are at the same point of the distribution channel, the likeliness of cheating is low.
The cartel firms will have an idea of each other's product techniques and know the process, so if one drops it's price, the observed firm will retaliate by charging a lower price that it knows it is not bearable for the cheated firm(where if the cheated firm react to the price set, it will not make a profit).
A cartel is more likely to sustain when there there is public information of the price changes of certain products. Sustainability is questioned if some companies are vertically integrated, where others cannot easily observe the point where the distribution chain cheating occurs. But cheating is easy to observe if all the companies have the same type of customers, e.g. Customers in retail market.
In order to sustain a...
Please join StudyMode to read the full document