A cartel can only succeed in the long run

Question

Quizplus · Accepted Answer

A cartel can only succeed in the long run if member firms cooperate and resist their individual incentives. This means that each firm in the cartel needs to stay committed to limiting production and coordinating prices, even if it may be more profitable for them to cheat and expand production. If all firms are experiencing decreasing returns to scale, this may limit the supply of the good but is not necessary for cartel success. The long-run market supply curve being elastic or inelastic also does not necessarily determine cartel success. Authorization from the government may help to enforce the cartel agreement, but it is not essential. Free entry of new firms would likely make cartel formation and sustainability more difficult, but it is not a necessary condition for success.

A Cartel Can Only Succeed in the Long Run