Monday, August 8, 2011

Economic Collusion in practice - OPEC?

It has been noted that cartel firms often maintain excessive capacity. This is true, for example in the case of OPEC (especially for Saudi Arabia). It was also true in the electric turbine conspiracy of the 1950s and, more recently, the international lysine conspiracy of the 1990s, among others. One explanation of this is that the success of the cartel inevitably leads the members to reinvest their profits in new capacity. In this view, the cartel sews the seeds of its own destruction. Using an argument based on collusion, can you give an alternative explanation? What implications does your explanation have for the long-run viability of the cartel?

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