Which statement describes cartels?

Which statement describes cartels?

• A. Colluding with other organisations to fix prices to make higher profits
• B. They are legal in many markets
• C. They do not affect prices
• D. They always improve market efficiency

Answer: (A)

Cartels form when competing firms cooperate instead of competing, usually to set the price or control output so they can raise profits. This behavior is the defining idea behind a cartel: colluding to fix prices to generate higher profits. In many markets, such collusion is illegal because it harms consumers and reduces welfare, which is why this description is the best fit. Think through the other ideas: cartels are not considered legal in most markets; if anything, they are pursued by competition authorities. They do affect prices by pushing them higher than they would be in a competitive market. And they typically reduce market efficiency, since restricting competition leads to worse allocation of resources and less incentive to innovate.

Cartels form when competing firms cooperate instead of competing, usually to set the price or control output so they can raise profits. This behavior is the defining idea behind a cartel: colluding to fix prices to generate higher profits. In many markets, such collusion is illegal because it harms consumers and reduces welfare, which is why this description is the best fit.

Think through the other ideas: cartels are not considered legal in most markets; if anything, they are pursued by competition authorities. They do affect prices by pushing them higher than they would be in a competitive market. And they typically reduce market efficiency, since restricting competition leads to worse allocation of resources and less incentive to innovate.