The structure of the market I am currently operating in an oligopoly, which has allowed the formation of a cartel by facilitating collusion of the firms in the market.

An oligopoly describes a market structure in which there is a handful of large firms with significant market share and bargaining power over each other and over consumers. All firms are large enough to exert influence on their rivals with their strategic decisions. As firms are mutually interdependent in the market, there is fierce competition between them. However, upon the realization that it is profitable to come together and restrict supply to charge a higher price and hence, make greater profits, firms collude to form a cartel and act as a single seller in the market, considering it is easy to communicate due to the small number of firms.

A cartel has the power to behave like a monopolist and exercise the same set of powers over its consumers. Hence, the cartel firms face the market demand curve as its individual demand curve. Profits are maximized at the level of output attained at the intersection of the marginal revenue and marginal cost curve. Since the cartel has the power to charge a price of its own, it charges a price that corresponds to the profit-maximizing output level on the market demand curve i.e. the average revenue curve and earns supernormal profits. The output chosen is collectively produced by cartel members and the shares are restricted by the agreement. As a manager, it is of the highest benefit to me that I respect the agreement and abide by the terms, conditions, and expectations of the cartel. There is always a strong incentive to violate. I can easily increase my quantity in the market and sell the same at lower prices to capture the entire consumer base. However, this will induce other firms to follow the price decrease, igniting a price war, as no firm would want to lose market share, even if it meant incurring short-run losses. The price war will eventually break the cartel and all firms will not only exhaust their profit opportunity but will also experience severe losses in their attempt to undercut each other. This is why cartels are volatile in nature. As the manager of my firm, I find no incentive to violate the cartel for an ephemeral shot at capturing the market.