ACA ICAEW Tax Compliance Practice Exam

The likelihood of cartels forming is significantly influenced by established communication channels between competitors. When businesses within an industry can easily communicate, it becomes easier for them to coordinate their actions, share sensitive information, and make collective decisions that align with cartel behavior, such as setting prices or limiting production.

Effective communication among firms allows them to monitor competitors' actions and enforce agreements more efficiently, fostering an environment conducive to cartel formation. Without these communication channels, it becomes much more challenging for companies to trust one another and orchestrate actions that would benefit them as a group at the expense of competition.

While high consumer demand could incentivize companies to work together to maximize profits, and product differentiation could decrease the likelihood of collusion due to competition on various attributes, it is the ability to communicate openly that creates the groundwork necessary for cartels to form. Strict government regulations typically aim to prevent such behavior, serving as a deterrent rather than a facilitator of cartel arrangements.