Cartels exist in Oligopoly

Introduction:
A cartel is a type of collusive agreement where competing firms in an industry come together to coordinate their actions in order to maximize their joint profits. It is a form of collusion that involves cooperation among firms to reduce competition and increase their market power. Cartels are typically found in industries characterized by a small number of large firms, known as an oligopoly. In this answer, we will explain why cartels exist in oligopoly markets.

Oligopoly:
Oligopoly refers to a market structure in which a few large firms dominate the industry. These firms have significant market power and can influence prices and output levels. The behavior of firms in an oligopoly market is interdependent, meaning that the actions of one firm affect the profits and strategies of other firms in the industry. This interdependence gives rise to the potential for collusion and the formation of cartels.

Key Characteristics of Oligopoly:
- Few large firms: Oligopoly markets are typically dominated by a small number of firms, which gives them the ability to influence market outcomes.
- Interdependence: The actions of one firm affect the profits and strategies of other firms in the industry.
- Barriers to entry: Oligopolies often have significant barriers to entry, such as high capital requirements or economies of scale, which limit the entry of new firms into the market.
- Product differentiation: Oligopolistic firms often engage in product differentiation to create a competitive advantage and reduce price competition.

Reasons for Cartels in Oligopoly:
1. Mutual interest: In an oligopoly market, firms have a mutual interest in reducing competition and maintaining high prices. By forming a cartel, firms can coordinate their actions and collectively maximize their profits.
2. Price stability: Cartels aim to stabilize prices by setting output levels and coordinating price increases. This helps to avoid price wars and maintain higher profit margins.
3. Market sharing: Cartels may allocate market shares among member firms to avoid excessive competition. Each firm agrees to produce a certain quantity of goods or services, effectively dividing the market among themselves.
4. Collusive pricing: Cartels can engage in collusive pricing, where they agree to set prices at a certain level to maximize their joint profits. This can lead to higher prices for consumers and reduced consumer welfare.
5. Barrier to entry: Cartels can also act as a barrier to entry for new firms. By coordinating their actions, cartels can make it difficult for new firms to enter the market and compete effectively.

Conclusion:
In summary, cartels exist in oligopoly markets because of the interdependence among firms, mutual interest in reducing competition, and the ability to coordinate actions to maximize joint profits. Cartels can lead to higher prices, reduced consumer welfare, and act as a barrier to entry for new firms. However, cartels are generally illegal in most countries due to their negative impact on competition and consumer welfare.