(8th edition) (the pearson series in economics) robert pindyck, daniel rubinfeld microecon 503
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478 PART 3 • Market Structure and Competitive Strategy
a cartel called Mercurio Europeo kept the price of mercury close to monopoly
levels, and an international cartel monopolized the iodine market from 1878
through 1939. However, most cartels have failed to raise prices. An international
copper cartel operates to this day, but it has never had a significant impact on copper prices. Cartel attempts to drive up the prices of tin, coffee, tea, and cocoa have
also failed.12
Recall from §10.2 that
monopoly power refers to
market power on the part of
a seller—the ability of a firm
to price its product above its
marginal cost of production.
CONDITIONS FOR CARTEL SUCCESS Why do some cartels succeed while
others fail? There are two conditions for cartel success. First, a stable cartel
organization must be formed whose members agree on price and production
levels and then adhere to that agreement. Unlike our prisoners in the prisoners’ dilemma, cartel members can talk to each other to formalize an agreement.
This does not mean, however, that agreeing is easy. Different members may
have different costs, different assessments of market demand, and even different objectives, and they may therefore want to set price at different levels.
Furthermore, each member of the cartel will be tempted to “cheat” by lowering
its price slightly to capture a larger market share than it was allotted. Most often,
only the threat of a long-term return to competitive prices deters cheating of this
sort. But if the profits from cartelization are large enough, that threat may be
sufficient.
The second condition is the potential for monopoly power. Even if a cartel
can solve its organizational problems, there will be little room to raise price if
it faces a highly elastic demand curve. Potential monopoly power may be the
most important condition for success; if the potential gains from cooperation
are large, cartel members will have more incentive to solve their organizational
problems.
Analysis of Cartel Pricing
Only rarely do all the producers of a good combine to form a cartel. A cartel
usually accounts for only a portion of total production and must take into
account the supply response of competitive (noncartel) producers when it sets
price. Cartel pricing can thus be analyzed by using the dominant firm model
discussed earlier. We will apply this model to two cartels, the OPEC oil cartel
and the CIPEC copper cartel.13 This will help us understand why OPEC was successful in raising price while CIPEC was not.
ANALYZING OPEC Figure 12.10 illustrates the case of OPEC. Total demand
TD is the total world demand curve for crude oil, and Sc is the competitive
(non-OPEC) supply curve. The demand for OPEC oil DOPEC is the difference
between total demand and competitive supply, and MROPEC is the corresponding
marginal revenue curve. MCOPEC is OPEC’s marginal cost curve; as you can see,
OPEC has much lower production costs than do non-OPEC producers. OPEC’s
marginal revenue and marginal cost are equal at quantity QOPEC, which is the
quantity that OPEC will produce. We see from OPEC’s demand curve that the
price will be P*, at which competitive supply is Qc.
Suppose petroleum-exporting countries had not formed a cartel but had
instead produced competitively. Price would then have equaled marginal cost.
We can therefore determine the competitive price from the point where OPEC’s
12
See Jeffrey K. MacKie-Mason and Robert S. Pindyck, “Cartel Theory and Cartel Experience in
International Minerals Markets,” in Energy: Markets and Regulation (Cambridge, MA: MIT Press, 1986).
13
CIPEC is the French acronym for International Council of Copper Exporting Countries.
