Final answer:
Cartels in oligopolistic markets act to reduce competition and can earn higher profits but are inherently unstable due to the self-interested behavior of the member firms and because explicit collusion is illegal. This leads to a strong temptation to cheat, and cartels often disintegrate as individual firms prioritize their own profits over collective agreements.
Step-by-step explanation:
Cartels often form within oligopolistic markets, where a small number of firms have the majority of market share. These cartels are arrangements where firms collaborate, usually illegally, to reduce competition by agreeing on prices, production quantities, or market territories. Cartels can earn highest profits when acting like a monopolist by reducing output and raising price; however, they are unstable and may break down. Such instability occurs because each cartel member can individually gain from increasing their output, leading to a temptation to cheat on the agreement. Moreover, explicit collusion is illegal, adding to the precarious nature of cartels. Oftentimes, cartels are tacit with firms implicitly understanding that competition hurts profits, but enforcement agencies constantly seek hard evidence of such agreements, making the existence of cartels tenuous.
Using the example of the French detergent market, we observe that these cartels experience internal tensions which can lead to their dissolution. The desire of each firm to maximize profit at times overwhelms the agreements made within the cartel, resulting in price wars and breakdown of the established structure. Hence, the inherently self-interested behavior of firms within a cartel prompts instability and eventual decline of cartels.