As far as I'm aware, Austrian economic theory states that every member of a cartel or trust has a high incentive to leave this community in order to offer goods and services at a much lower price, thus increasing own profits.However, it is obvious that such a step would likely result in every other member of the trust also competing for lowest price and highest quality. Wouldn't this discourage those who engage in cartels to get rid of them? After all, they'll only start a downwards spiral for their industry that'll make every producer worse off in the long run. E.g., while they can now charge 10$ per product without caring too much about quality, they might end up with 5$ per product and a stressful contest for best quality, customer support etc.For easy-to-enter industries, this problem might of course be less of an issue than for capital-intensive businesses, so we should focus primarily on these.Thanks in advance for your efforts.
I'm not sure on this but I'll give it a go.
My guess is that the member of the cartel that leaves in order to make more money believes they can produce whatever good it is cheaper than any of the other members and hence out compete them.
"You don't need a weatherman to know which way the wind blows"
Bob Dylan
Which is why most cartels are implemented and enforced under law.
If you find something evil that wobbles, push it. - Gary North
Also depends on what type of cartel? Is it an oil cartel, agricultural cartel vs. gold cartel?
Oil and agriculture cartels seek to manipulate prices and conditions in favour higher prices whilst gold cartels seek to manipulate prices down by selling into market ultimately keeping prices supressed.
Some cartels have also formed psuedo monopolies in order to eliminate rogues from cartel inclusion altogether. Case in point recently was the failure of Lehman Brothers... there wasn't a great deal of difference between them and others that were bailed out - if the other players in the industry wanted them to stay they would have been bailed out too. The fact that they didn't is reflective of the fact that those in financial cartel wanted them gone. In the end probably bailed out the wrong businesses???
Matt
Matthew
www.jwspaidtosave.com/asiapacific
Yes, Liberty Student, most cartels employ legislature to keep potential competitors from threatening their crony business. The question is whether similar conditions can be formed on an unregulated market as well and if yes, how to resolve them.GilesStratton, for such a great leap to make, there has to be a situation of overbearing incompetence and ridiculously high prices in which case, even in capital-intensive industries, we'd probably see new competition forming from scratch as well. But what if prices, say, are set "only" about 25% above actual market value, with quality not exactly deteriorating, but making no progress as well? Of course, we can't determine the actual market value through our crystal balls and this is why every kind of "trust buster" legislation will eventually fail to accomplish its goal. But if market participants are effectively seduced into collusion or barred from competition by high entry costs, the market becomes an unreliable tool for price determination as well.Matthew, the best example for what I mean would be a branch of industry with above-average entry costs that produces a good or service which would commonly be called a "public good". Oil is a pretty decent example, energy providers would fit the pattern as well and to some extent, we're also talking about the car industry.
Sphairon:GilesStratton, for such a great leap to make, there has to be a situation of overbearing incompetence and ridiculously high prices in which case, even in capital-intensive industries, we'd probably see new competition forming from scratch as well. But what if prices, say, are set "only" about 25% above actual market value, with quality not exactly deteriorating, but making no progress as well? Of course, we can't determine the actual market value through our crystal balls and this is why every kind of "trust buster" legislation will eventually fail to accomplish its goal. But if market participants are effectively seduced into collusion or barred from competition by high entry costs, the market becomes an unreliable tool for price determination as well.
If the prices were low they'd lose less from breaking up the cartel anyway, in which case once again if they believed they could make a profit by leaving the cartel they would. If prices were so high that they wouldn't want to do it anyway I daresay new competition would emerge from outside anyway. As I said I'm not sure, there are other people more suited to answer this question than me.
Sphairon:GilesStratton, for such a great leap to make, there has to be a situation of overbearing incompetence and ridiculously high prices
Not at all. If a member of the cartel reduces his price a little, he can steal customers away from his non-cheating rivals and make greater profit on volume (assuming the cartel price is greater than the free (market) price)...he doesn't have to have lower costs than the cartel members. It's a slight modification of the prisoner's dilemma - the Nash equilibrium is met when everyone cheats (since someone mentioned A Beautiful Mind recently )
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