Potato Market Cartel

The exercise is appropriate for a principles of microeconomics class. Students should have proceeded through a readiness assurance process for knowledge of both competitive and monopoly markets. Students should know the MR=MC profit-maximization prediction for competitive (P=MR) and monopoly firms.
There are no class size limitations as long as the room is large enough to enable a gallery walk. For large classes in a cramped room, the AE can easily modified to have students report only their prediction of whether the cartel will succeed in raising the price of potatoes in the long term.
The exercise should take 15-20 minutes of class time.
The AE is closely tied to the potato market tax AE but instructors can easily use one or the other or both.

Overview

Student teams first add analysis to match given information about the actions of a potato cartel. Next, student teams predict whether the potato cartel would be likely to succeed in its efforts to raise potato prices.
The exercise develops student expertise at identifying the monopolist's profit-maximizing outcome and associated deadweight loss. Also, student understanding of the probable instability of a cartel among many different sellers emerges from the exercise.

Expected Student Learning Outcomes

Upon successful completion of this learning activity, students will be able to compare the monopoly outcome with that of a perfectly competitive outcome and to explain the instability of a cartel among many sellers of a homogeneous product.

Information Given to Students

Consider the US market for wholesale potatoes in which potatoes are sold in 100-lb. sacks.
Suppose that the competitive market outcome features a market-clearing price of $6 per sack.
Suppose producers band together to restrict output and succeed in attaining the output and price levels of a monopoly firm. Illustrate that price and quantity along with the deadweight loss in the handout that depicts the competitive market outcome.
Would a potato cartel be likely to succeed? Write your prediction large (YES! or NO!) in the space at the bottom of the handout along with a phrase summarizing your reasoning. (Be ready to explain in your report!)
Gallery walk reporting.

Handout for potato cartel AE (Microsoft Word 2007 (.docx) 86kB Feb12 18)
Potato Cartel AE Answer (Microsoft Word 2007 (.docx) 467kB Feb12 18)

Students need not be given much information beforehand as long as they have knowledge of consumer and producer surplus analysis, the competitive market analysis, and the basics of monopoly and cartel analysis. Depending on performance in the RAP, one might briefly review the MR=MC π-max prediction and associated welfare analysis for the monopoly case.
Student work should not take long. It would be okay to limit time to 5-10 minutes of team work. During the reports, call up a couple of reports that contain an error in the π-max or DWL analysis. If everyone has the basics correct, this might be a time to emphasize proper labeling, neatness, etc.
I take a few minutes at this point in the debriefing process for this AE to teach my students my preferred system of keeping track of welfare effects of policies, changes in market structure, etc. (See second graph in the attached answer key for details.)
Next, move to debrief the prediction of cartel stability. Have a new reporter or two present their team's reasoning for the prediction. Then have a reporter or two predicting instability present. Ask questions of the former reporters about barriers to entry. Return to latter reporters if suggested barriers make sense. One can emphasize a lot of finer points here, if desired. What is incentive to defect? How would a cartel monitor participating farms' adherence to output quotas? What would keep farms outside cartel (including those in other countries) from entering the potato market? It is the prediction of cartel stability or lack thereof that ought to stimulate some disagreement among teams and, thus, a useful debriefing conversation among the team reporters.
To summarize the activity, present the correct technical analysis along with as much of the reasoning behind the prediction of cartel instability as desired. (I do this by screencast in order to preserve class time for active learning exercises.)

This exercise lends itself easily to become a question on a summative individual assessment.