Question

Under marketing orders instituted during the 1930’s and administered by the U.S. Department of Agriculture, orange growers in California and Arizona have been successful in behaving as a cartel in the fresh orange market. Despite the ability of California and Arizona growers to rely on marketing orders to cartelize the fresh fruit market, explain why, from a general equilibrium perspective, marketing orders have had only a limited effect on grower profits because of the fact that fruit can be diverted to secondary, processed food markets such as orange juice concentrate.

Answer 1

A cartel profits by limiting supply, and thus driving up the price. For a cartel to survive, It must 1) keep out new entries of producers, and 2) keep its own members from cheating and over-producing. The problem, however with fresh oranges is that there are too many close substitutes. Orange juice is a close substitute for oranges. Strawberries are also a substitute. The presence of close substitutes makes the demand of oranges quite inelastic, which limits the price increase that occurs by limiting supply.

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