Question

Determine if the firms involved in the following scenario are part of a cartel or colluding: most hot dog carts in a city sell hot dogs for $3.00 each. each stand makes comparable products, but each is independently owned and operated. the marginal cost of selling hot dogs on the street is around $1.00, but owners have maintained the $3.00 price point for several years. the cart owners are not in regular contact. hot dog vendors in this city :

a. have formed a cartel. are colluding tacitly with one another but not as part of a cartel.
b. are acting competitively since they cannot change the going price of hot dogs.
c. are acting competitively since they have maintained prices for several years.

Answer 1

In the given scenario, hot dog cart owners may be engaging in tacit collusion or acting competitively due to a stable price. They are not part of a formal cartel because they do not have regular contact or an agreement. If they did form a cartel, they would control price and output similar to a monopoly, using a kinked demand curve for enforcement.

Step-by-step explanation:

To determine if the firms in the scenario are part of a cartel or colluding, it is essential to understand the concepts of a cartel and collusion in oligopolistic markets. A cartel is a formal agreement where competing firms in an industry collude to control prices and output, acting as a monopoly. In contrast, tacit collusion is an informal or unspoken understanding between firms to avoid competitive price wars, which can lead to a similar outcome.

In the described scenario, hot dog cart owners are not in regular contact and operate independently. This suggests that there is no formal agreement among them, hence they are not part of a cartel. However, maintaining a stable price point over several years without active coordination could indicate tacit collusion. The fact that they are independently owned and operate without communication makes it more likely that they are acting competitively.

If the firms were to collude and form a cartel, they would act as a monopoly to maximize profits. They would set a price higher than the competitive equilibrium, control output to where marginal revenue (MR) equals marginal cost (MC), and potentially earn higher profits. By creating a kinked demand curve, members of an oligopoly cartel can enforce price and output levels to adhere to the cartel agreement, as they match price cuts but not price increases.

Key Takeaways:

• The described scenario does not clearly indicate a cartel but suggests the possibility of tacit collusion or competitive behavior.
• A cartel agreement would involve formal collusion with unified pricing and production decisions to maximize industry profits.
• Cartel members can use a kinked demand curve strategy to enforce compliance with agreed-upon prices and quantities.