What factors play a role in cartel formation?

• Seller concentration and number of firms  Small number of firms or high concentration facilitates collusion • Cost functions  Firms with similar cost structures enhances collusive behavior • Size and product differentiation  It is easier to collude when most firms are similar in their market share, size, product ranges, production technology and capacity • Vertical integration  It renders effective monitoring of cartel members difficult and thus may imped collusion. • Transactions costs of collusion: costs of ensuring compliance and punishing non-compliant members: - Ability to specify contractual relations correctly - Extent to which agreement can be reached over joint gains - Uncertainty associated with change in the economic environment - Monitoring especially when there are non-price forms of competition - Penalties particularly important in the absence of legal protection