Page 207 - DECO101_MICRO_ECONOMICS_ENGLISH

Micro Economics

Notes
Figure 13.2: Equilibrium under Oligopoly: Cartel
MC=

MC +MC 2
1
AC 1
MC 1
AC 2
MC 2
P
Cost
&
price E AR/D
E 1
E 2
MR
0 0 0
Q 1
Q 2
Q 2
Quantity Quantity Quantity
(Firm A) (Firm B) (Firm C)

If A and B are two firms which join together to form a cartel, the cartel’s marginal cost curve
can be shown as a lateral summation of MC (marginal cost of fi rm A) and MC (marginal cost
1 2
of firm B), as in Figure 13.2. The cartel is in equilibrium at point E when MC=MR. P is the cartel

equilibrium price. Each firm will be in equilibrium when it produces output corresponding to the
MC of the cartel equilibrium, i.e., at points E and E respectively. Each firm takes price as given

1 2

i.e., P. The shaded areas represent the shares of profits contributed to the aggregate cartel profi t.

The division of this profit between the firms depends upon their relative bargaining strengths.

Caselet Cartel on the Wings
hile the Competition Commission of India is yet to progress on one alleged case

of airline cartelisation — code sharing deal — by Kingfisher and Jet Airlines, our
Wnational carrier, Air India, barely escaped being prosecuted by the Korean Fair
Trade Commission in a recent case of cartelisation in cargo freight. In May, 2010 the KFTC

levied a record fine of more than $98 millions on 19 airlines in the biggest cartel case that
it has handled.
Fuel Surcharge Rates
It was found that the airlines had conspired to raise fuel surcharge rates for air cargo
to-and-from Korea between 1999 and 2007 in a concerted manner. The case included
summoning 54 airline executives from all over the world for investigation and conducting

a joint investigation with foreign competition authorities for the first time. The regulator
found that the conspiracies took place on outbound shipments from Korea and inbound
shipments to Korea from Hong Kong, Europe and Japan.
The case showed that the airlines overcharged by $5.71 billions in the local market by
imposing or increasing fuel surcharges during the eight-year period.
The uncovering of airline cartels on fuel surcharge actually began in 2006, when European
and US authorities investigated few airlines including British Airways. The investigation
came at a time when the airlines were facing high fuel costs and competition from low-cost
carriers.
Contd...

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