Monday, June 9, 2008

Cartels Outcompete Themselves

Cartels cannot exist with low barriers to entry. If the barriers of entry is low, new firms can easily enter to compete with the colluded monopoly. If the colluded monopoly attempts to buy the newly created firm, the price that it pays to acquire is more expensive than creating one. The owner of the newly created firm that is sold have the incentive to rebuild another new firm to compete. Several people now build firms and the colluded cartel buy all of them. Soon, the colluded cartel runs out of money to acquire all his competitors.

But if the barriers to entry is high, then is likely that collusion would happen. Because new firms are prohibited, the cartel have a very extreme incentive to collude. Examples include all of the government regulated and licensed sectors that create artificial barriers to entry.

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