In the era of OPEC, there is no need to justify the interest of industrial economists in collusion. If nominally independent firms can coordinate their actions, they may be able to restrict group output and raise the price of their product above the marginal cost of production. By so doing, each firm will increase its own profit.
But buy raising the price above the marginal cost, a cartel creates a situation in which each member has an incentive to in crease its own output, and new firm have an incentive to enter the market. If cartel members cheat and increase their output, the price will fall and the attempt to restrict output will fail. If new firms enter the market, the cartel will have to enter the market, the cartel will have to cut back its town output, or total output will increase and the attempt to control the price will fail. In either case, whether collusion can be maintained will depend, in ways that will be specified in Chapter 6, on the elements of market structure: number and size distribution of firms, product differentiation, entry conditions.
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