What is a cartel in economics?

A cartel is a formal agreement between a group of producers of a good or service to control supply or to regulate or manipulate prices. Cartels often fix prices, define trading terms, and allocate trade or market share rules to achieve economies of scale. Cartels are illegal in the United States and regulated by anti-trust laws.

Does a cartel make a profit if a firm increases output?

Yet any firm that brings output to market, beyond its agreed production limit, at the price will make a profit of AF on that additional output – provided the other members of the cartel agree to restrict their output. Since each firm faces the same incentive to increase output, it is difficult to restrain all members from doing so.

How can a cartel be successful?

For a cartel to be successful, some or all of the following conditions are necessary: A small number of firms. Products are relatively undifferentiated from one firm to the next. Prices are easily observable. Prices show little variation over time.