Page 193 - DECO405_MANAGERIAL_ECONOMICS

Managerial Economics

Notes 12.2.1 Cartel

A cartel is a formal collusive organisation of the oligopoly firms in an industry. There may
either be an open or secret collusion. A perfect cartel is an extreme form of collusion in which
member firms agree to abide by the instructions from a central agency in order to maximise
joint profits. The profits are distributed among the member firms in a way jointly decided by the
firms in advance and may not be in proportion to its share in total output or the costs it incurs.
Figure 12.1: Equilibrium under Obligopoly: Cartel

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 firm A) and MC (marginal cost of
1 2
firm B), as in Figure 12.1. 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
1 2
given i.e., P. The shaded areas represent the shares of profits contributed to the aggregate cartel
profit. 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,
Wour national 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 million 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.

Contd...

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