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Why do firms involve in cartel?

Why do firms involve in cartel?

Solution

A cartel is a direct (often secret) agreement among competing oligopolists to promote their common interests, and firms join one for the following reasons:

  1. To maximise joint profit: by acting together like a single monopolist, members raise the industry's total profit above what competition would give.
  2. To reduce uncertainty and avoid price wars: coordinating price and output removes the risk of mutually damaging competition and makes the market more predictable.

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