Friday, August 28, 2009

Centralized Cartel

Some countries or some international firms (multi-nationals) from cartel in order to influence the foreign trade. Under cartels, the export of some particular product is restricted in order to remove deficit in balance of payments and improve terms of trade. As a result, the cartel charges higher price for its product. In this way, the revenues of cartel will increase. The centralized cartels are formed in those goods whose demand is less elastic, as the case of oil etc. In this respect the example of OPEC is given which so often raises the price in order to increase its revenues and profits. For this purpose the production as well as the exports is restricted. But such like cartels are short lived. There are many firms are countries which are out side the cartel and they do not abide by the dictates of cartel. As Norway, England and Russia which are not the members of OPEC make independent decisions regarding price and output of oil. Sometimes even the members of cartels do not fully allow the instructions of central authority, regarding out put quota and price.

Dx is the demand curve for goods x in the world market while MRx is the MR curve of the central agency of cartel. Where as the Sx curve represents supply of exports curve which is the summation of supply curves of all the firms. It may be shown by ∑MCx. This curve intersects Dx at point E where it sells OQ1 of out put and charges the price OP1. This situation corresponds to perfect competition.

We suppose that all the firms working under perfect competition form cartel. The central agency of the cartel is like monopolist. Accordingly the monopolist (cartel agency) is in equilibrium at point F where ∑MCx intersects MRx. As a result OQ0 output and OP2 price are settled. The profits of the cartel are shown by the shaded are EAF. It is obvious that the cartel has decreased its output or exports.

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