In which situation are cartels more likely to form?

Cartels are more likely to form in situations where there are few competitors with similar characteristics. This is primarily due to several factors inherent in such market structures.

Firstly, when there are only a limited number of firms operating within a market, each firm's actions significantly influence the overall market environment. This allows the potential for coordinated behavior among these firms, where they can agree on pricing strategies, output levels, and market sharing, thus leading to increased profits at the expense of smaller competitors and consumers.

Additionally, firms with similar characteristics are likely to face similar costs and market conditions, making it easier to reach agreements on how to manipulate the market. This mutual understanding reduces the likelihood of one firm gaining a competitive edge by undercutting prices or altering product offerings in a way that disrupts the cartel.

In contrast, scenarios involving a high number of competitors can dilute the ability to form a cartel since there will be less incentive for firms to cooperate; the competition would discourage collusive behavior. Similarly, products with distinct features introduce differentiation that reduces the likelihood of similar pricing agreements as firms may choose to compete on quality rather than price. High consumer demand could lead to greater competition rather than cooperation, as firms may prioritize capturing market share over maintaining a price-fixing agreement.