I n t h I s c h a p t e r y o u w I l L

collusion,
and the group of firms acting in unison is called a 
cartel.
Once a
cartel is formed, the market is in effect served by a monopoly, and we can apply
our analysis from Chapter 15. That is, if Jack and Jill were to collude, they would
agree on the monopoly outcome because that outcome maximizes the total profit
that the producers can get from the market. Our two producers would produce a
total of 60 gallons, which would be sold at a price of $60 a gallon. Once again, price
exceeds marginal cost, and the outcome is socially inefficient.
A cartel must agree not only on the total level of production but also on the
amount produced by each member. In our case, Jack and Jill must agree how to
split between themselves the monopoly production of 60 gallons. Each member of
the cartel will want a larger share of the market because a larger market share
means larger profit. If Jack and Jill agreed to split the market equally, each would
produce 30 gallons, the price would be $60 a gallon, and each would get a profit of
$1,800.
T H E E Q U I L I B R I U M F O R A N O L I G O P O LY
Although oligopolists would like to form cartels and earn monopoly profits, often
that is not possible. As we discuss later in this chapter, antitrust laws prohibit ex-
plicit agreements among oligopolists as a matter of public policy. In addition,
squabbling among cartel members over how to divide the profit in the market
sometimes makes agreement among them impossible. Let’s therefore consider
what happens if Jack and Jill decide separately how much water to produce.
At first, one might expect Jack and Jill to reach the monopoly outcome on their
own, for this outcome maximizes their joint profit. In the absence of a binding
agreement, however, the monopoly outcome is unlikely. To see why, imagine that
Jack expects Jill to produce only 30 gallons (half of the monopoly quantity). Jack
would reason as follows:
c o l l u s i o n
an agreement among firms in a
market about quantities to produce
or prices to charge
c a r t e l
a group of firms acting in unison

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3 5 4
PA R T F I V E
F I R M B E H AV I O R A N D T H E O R G A N I Z AT I O N O F I N D U S T R Y
C
ARTELS ARE RARE
, 
IN PART BECAUSE THE
antitrust laws make them illegal. As the
following article describes, however,
ocean shipping firms enjoy an unusual
exemption from these laws and, as a re-
sult, charge higher prices than they oth-
erwise would.