The cartel drawn as a joint monopoly, the welfare it costs, and why each member is tempted to cheat.
OPEC+ is a group of oil-producing countries, including Saudi Arabia, Russia, Iraq and Kazakhstan, that agree how much oil each member will pump, to hold up the world price. Governments are not bound by competition law, so this is one of the few cartels that operates in the open. Yet some members regularly pump more than they agreed. In February 2025, Kazakhstan produced about 1.77 million barrels a day against a quota of about 1.47 million, and Iraq and Kazakhstan have repeatedly had to promise extra cuts to make up for overproduction.
Why would a member break an agreement that is meant to make all of them richer?
Sources: OPEC figures reported by Reuters (March 2025); S&P Global (April 2025).
Three firms in a market agree to act as one monopoly.
They agree a higher price, and each promises to produce less so the price holds. Is the agreement likely to last?
At the high price, each member earns more by selling extra units beyond its quota, so the agreement is unstable. It is also illegal, so no member can be held to it.
A cartel is a group of firms that agree to act together, as if they were one monopoly. So we draw the whole industry, not one firm. Start with demand for the whole market. That is the cartel’s average revenue.
MR next. It starts at the same point on the price axis and falls twice as steeply, so it hits the output axis halfway to where demand does.
Then MC for the whole cartel: the members’ MC curves added sideways, so at each cost we add up how much every member would produce. It slopes upwards.
The cartel maximises joint profit where MC = MR, exactly like a monopoly. Mark that point first.
Go straight up from that point to the demand curve to find the cartel price, Pm, and down to the axis for the cartel output, Qm. Up to demand, not across from MC = MR. That is the most common mistake on this diagram.
Check: Where is the cartel price read from?
The cartel price is the most consumers will pay for Qm, so it comes from demand. Reading across from MC = MR gives the marginal cost of the last unit, not the price.
Now compare the cartel with what the same firms would do if they competed.
Check: If the same firms competed instead, where would industry output settle?
Competing firms keep expanding while price is above marginal cost, so output rises until price equals MC, where MC meets demand.
If the same firms, with the same costs, competed instead, output would keep rising until price fell to marginal cost: where MC meets demand, at Pc and Qc. So the cartel charges more and sells less than competing firms would.
The triangle between demand and MC, from Qm to Qc, is the deadweight welfare loss. These are units consumers value at more than they cost to make, which the cartel chooses not to produce.
Teacher tip: When you evaluate, judge a collusive oligopoly as you would a monopoly: the static losses on this diagram against any dynamic efficiency from reinvested profit. A competitive oligopoly is judged like a competitive market.
To hold the price at Pm, the cartel must keep total output at Qm. So it gives each member a quota. With two equal members, each gets half.
Here is why cartels break down. For the cartel as a whole, Qm is the limit: beyond it, industry MR is below MC. But one member sees it differently. If it secretly sells extra units at a price just below Pm, it takes those customers from the others, and the market price hardly moves. So its own revenue from each extra unit is close to Pm, far above its MC: cheating raises its profit. If every member reasons the same way, output rises towards Qc and the price falls for all of them. It is the payoff matrix from the game theory lesson, drawn on a diagram.
Check: Why is each cartel member tempted to sell more than its quota?
To win extra customers the cheat shades its price just below Pm. Its own output is small next to the market, so the price barely moves and its marginal revenue stays close to Pm, far above MC. Each extra unit adds to its profit. The cost, a slightly lower market price, is shared by every member; the gain goes to the cheat alone.
Cheating is one threat to a cartel. The law is another.
Check: Formal cartels are illegal. How can firms keep prices up without making any agreement?
This is tacit collusion through price leadership. Prices move together without the firms ever meeting or agreeing.
Formal cartels are illegal, so firms may collude tacitly instead. One firm, the price leader, changes its price and the others follow. If trust breaks down, the result can be a price war, with prices falling towards Pc or even below cost, as firms fight for market share or try to drive a rival out.
They read the price across from MC = MR, so their “price” was really the marginal cost of the last unit, now relabelled MC. The price comes from demand: consumers will pay Pm for Qm, so the cartel charges Pm, well above that MC.
Explain why a cartel raises its members’ profits, and why it is likely to break down.
By acting as one monopoly, the cartel restricts industry output to Qm, where industry MC = MR, and charges Pm, the price consumers will pay for that output. Competing firms would produce Qc and charge Pc, where price equals marginal cost, so the cartel raises price, cuts output and earns its members more profit together.
But at Pm an extra unit sells for far more than it costs to make, so each member can earn more by quietly producing beyond its quota. This is the prisoners’ dilemma: whatever the others do, each member gains by cheating. If several cheat, total output rises above Qm and the price falls back towards Pc.
Because cartels are illegal under the Competition Act 1998, members cannot enforce the agreement, so it is likely to break down.
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