Why does each of the following facilitate the creation and stability o

Why does each of the following facilitate the creation and stability of a cartel?

a. High barriers to entry
b. An identical product
c. Similar costs

ANSWER

a. A successful cartel implies positive profits. Positive profits attract entry, if it is possible, and increasing the number of firms in the industry erodes the cartel’s control and pricing power (or makes it more difficult to negotiate with the larger number of firms in the industry).

b. If products are not identical, then consumers may have brand preferences, and thus it is possible for firms to cheat on the cartel by promoting nonprice differences.

c. If costs are similar, profits are similar, and the incentives of each firm will be similar, all other things equal. This makes it easier to agree on price and more “fair” in the sense that firms will receive similar profits.