Reply To: Collusion to Tighten Supply


The question seems to rest on a false assumption, namely, that market prices must always favor the buyer. In other words, it presupposes that if this scenario happens, then there is a market failure. The market, however, is concerted effort. It’s the attempt of people to arrange a division of labor to economize production.

As to the scenario itself, an entrepreneur maximizes his revenue by asking the price at the mid-point of his demand curve (where demand is unit elastic). Any other price, either higher or lower, reduces his revenue. If entrepreneurs act together, this principle is true of their overall demand. With a given demand for the product, entrepreneurs would lose revenue when they restrict supply and begin to sell at the higher price.

Take a look at the lecture on Competition and Monopoly.

Of course, it could be the case that the unit elastic point of the joint demand for the entrepreneurs’ product is at a higher price than the unit elastic point of any of the entrepreneur’s demand when they do not act together. But in that case, they must sell less at the higher price to earn more revenue. In other words, they must not dump their supply on the market, but continue to restrict it to maintain the higher prices and larger revenue.

Take a look at Murray Rothbard on cartels in Man, Economy, and State.,%20Economy,%20and%20State,%20with%20Power%20and%20Market.pdf