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Industrial Organisation 2022

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Question:

What is the free rider problem of oligopolies with a cartel?

Author: Hjalmer Pedersen



Answer:

The cartel will set a certain price by limiting the amount of products they produce to the market. However, freeriders (firms outside the cartel) are price takers, competing on price. Hence, they will produce more than the cartel members allow participating members to produce, earning a higher profit as freeriders captures the not serviced market who does not pay the cartel price.


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