478 PART • Market Structure and Competitive Strategy a cartel called Mercurio Europeo kept the price of mercury close to monopoly levels, and an international cartel monopolized the iodine market from 1878 through 1939 However, most cartels have failed to raise prices An international copper cartel operates to this day, but it has never had a significant impact on copper prices Cartel attempts to drive up the prices of tin, coffee, tea, and cocoa have also failed.12 Recall from §10.2 that monopoly power refers to market power on the part of a seller—the ability of a firm to price its product above its marginal cost of production CONDITIONS FOR CARTEL SUCCESS Why some cartels succeed while others fail? There are two conditions for cartel success First, a stable cartel organization must be formed whose members agree on price and production levels and then adhere to that agreement Unlike our prisoners in the prisoners’ dilemma, cartel members can talk to each other to formalize an agreement This does not mean, however, that agreeing is easy Different members may have different costs, different assessments of market demand, and even different objectives, and they may therefore want to set price at different levels Furthermore, each member of the cartel will be tempted to “cheat” by lowering its price slightly to capture a larger market share than it was allotted Most often, only the threat of a long-term return to competitive prices deters cheating of this sort But if the profits from cartelization are large enough, that threat may be sufficient The second condition is the potential for monopoly power Even if a cartel can solve its organizational problems, there will be little room to raise price if it faces a highly elastic demand curve Potential monopoly power may be the most important condition for success; if the potential gains from cooperation are large, cartel members will have more incentive to solve their organizational problems Analysis of Cartel Pricing Only rarely all the producers of a good combine to form a cartel A cartel usually accounts for only a portion of total production and must take into account the supply response of competitive (noncartel) producers when it sets price Cartel pricing can thus be analyzed by using the dominant firm model discussed earlier We will apply this model to two cartels, the OPEC oil cartel and the CIPEC copper cartel.13 This will help us understand why OPEC was successful in raising price while CIPEC was not ANALYZING OPEC Figure 12.10 illustrates the case of OPEC Total demand TD is the total world demand curve for crude oil, and Sc is the competitive (non-OPEC) supply curve The demand for OPEC oil DOPEC is the difference between total demand and competitive supply, and MROPEC is the corresponding marginal revenue curve MCOPEC is OPEC’s marginal cost curve; as you can see, OPEC has much lower production costs than non-OPEC producers OPEC’s marginal revenue and marginal cost are equal at quantity QOPEC, which is the quantity that OPEC will produce We see from OPEC’s demand curve that the price will be P*, at which competitive supply is Qc Suppose petroleum-exporting countries had not formed a cartel but had instead produced competitively Price would then have equaled marginal cost We can therefore determine the competitive price from the point where OPEC’s 12 See Jeffrey K MacKie-Mason and Robert S Pindyck, “Cartel Theory and Cartel Experience in International Minerals Markets,” in Energy: Markets and Regulation (Cambridge, MA: MIT Press, 1986) 13 CIPEC is the French acronym for International Council of Copper Exporting Countries