Oligopolies and Cartels

A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $3,000 per diamond, and the demand for diamonds is described by the following schedule:

Price	Quantity
(Dollars)	(Diamonds)
8,000	3,000
7,000	4,000
6,000	5,000
5,000	6,000
4,000	7,000
3,000	8,000
2,000	9,000
1,000	10,000

If there were many suppliers of diamonds, the price would be

per diamond and the quantity sold would be

diamonds.

If there were only one supplier of diamonds, the price would be

per diamond and the quantity sold would be

diamonds.

Suppose Russia and South Africa form a cartel.

In this case, the price would be

per diamond and the total quantity sold would be

diamonds. If the countries split the market evenly, South Africa would produce

diamonds and earn a profit of

.

If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would to

.

Why are cartel agreements often not successful?

All parties would make more money if everyone increased production.

One party has an incentive to cheat to make more profit.

Different firms experience different costs.