Why It MattersFederal laws, most notably the Sherman Act, make cartels and collusive activity illegal in the United States. ![]() However, prices are usually well above those that exist in purely competitive markets. These agreements may be formal or they may consist of simple recognition that competitive behavior would be harmful to the industry.Ironically, each member of a cartel has an economic incentive to cheat on any collusive agreements that are reached. ![]() Members also often agree on production quotas to keep supply levels down and prices up. These circumstances give oligopolies strong incentive to collude in order to maximize their joint.Members of a cartel generally agree to avoid various competitive practices, especially price reductions. When oligopolies compete on price, for example, they tend to drive the product's price throughout the entire industry down to the cost of production, thereby lowering profits for all producers in the. This small production base means that each producer must evaluate its rivals' potential reactions to certain business decisions. How It WorksCartels tend to spring from oligopolistic industries, where a few companies or countries generate the entire supply of a product.
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