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.

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.

economyst · Answer

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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