Final answer:
Firms in a cartel will charge a higher price than in a competitive market, as they act like a monopoly to maximize joint profits. They set prices and output levels where MR equals MC, resulting in positive economic profits. In the long run, competition or new entrants can reduce these profits to zero.
Step-by-step explanation:
Compared to a competitive market, firms operating in a cartel will charge a higher price than the competitive price. In a competitive market, firms produce the quantity of output where the marginal revenue (MR) equals the marginal cost (MC), which is also the market price. In this scenario, if the market price is above average cost at the profit-maximizing quantity of output, firms can earn profits. However, if the market price equals average cost, firms just break even, earning zero economic profits.
If firms form a cartel, they act collectively like a monopoly. This means they choose the quantity of output where MR equals MC, but unlike in a competitive market, they can charge a higher price on the demand curve above this quantity. The cartel aims to maximize joint profits, leading to a price that exceeds both the competitive price and average cost, granting them positive economic profits. This is achievable due to the lack of price competition among cartel members.
However, if the cartel members begin to compete against each other, or if new firms enter the market, this can lead to a decrease in the cartel's demand and prices, eventually reducing their profits. In the long run, the presence of competition or new entrants can force prices down to the point where firms in monopolistically competitive markets earn zero economic profits.