Price Cartel

Published by Mario Oettler on

A price cartel is a situation, where companies agree on a single market price that is typically higher than the market price under competition.

In the Cournot Duopoly, individually rational optimization yields a lower total profit than coordinating the quantities. At the same time, the quantities are higher. While this is unlucky for the sellers, it benefits the customers.

This would be a strong case for a free market where no regulation is needed to overcome collusion. The problem is that we only considered a one-shot game. But in reality, companies decide over their production quantities every year, quarter or even day.

Hence, we are in the field of repeated games.

If both sellers understand that they can reap a higher profit if they cooperate, lower quantity, higher prices, and higher profits could be a stable outcome.