1. Briefly explain why cartels may not succeed in any economy including Kenya.
A cartel is a formal (explicit) agreement among competing firms. It’s a formal organization of producers and manufacturers that agree to fix prices, marketing and production. Cartels usually occur in an oligopolistic industry, where there are a small number of sellers and usually involve homogenous products. Cartels members maybe agree on such matters as prices fixing, total industry output, market shares, allocation of customers, allocation of territories and the division of profits. There are either private or public cartels.
One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world.
Many price fixing or market sharing agreements eventually either collapse or whither on the vine - here are some reasons:
1. Falling demand creates excess capacity in the industry e.g. during an economic downturn / recession - the classic example here is the deep tension within the OPEC oil cartel caused by the world economic recession which is causing a steep fall in the global demand for crude oil. Will OPEC deliver on planned output cuts in order to stabilize the price of crude at or around $50 a barrel?
2. Disruption caused by the entry of non-cartel firms into the industry which creates fresh competition. This means that non-cartel members can supply consumers within large quantities of goods and at a cheaper price e.g copper
3. Exposure of price fixing by Government agencies such as the Office of Fair Trading - the OFT , the US Justice Department and the EU competition commission have been especially active in trying to break down cartel behavior - laws have been tightened and there are incentives / rewards for ‘whistleblowers’ - people who expose price fixing or other anti-competitive behavior.
4. Over-production which breaks the price fixing - i.e. if firms produce excess output, this drives prices and profits down. Game theory is often applied to the costs and benefits of operating a producer cartel - the classic Prisoners’ Dilemma suggests that collusion breaks down because there is an incentive for one or more firms to cheat because joint-profit maximization does not mean each firm is maximizing profits on their own.

2. Using relevant examples explain how a firm can acquire market dominance without involving in business malpractices.

1. Employing a low cost focus strategy.
This allows a large number of consumers to afford access to a company’s product or services which benefits the company as it steadily gains market share, eventually becoming dominant in its sectors .southwest airlines employed such a strategy in the U.S. where it offered fares that were 60-70 % cheaper than those offered by other carries. This enabled it to gain more than 50% market share in its top 75% routes while the next carriers averaged only 10%.

2. Constant improvement an innovation.
By being innovative and constantly improving a company’s line of products or services a company will not only be capable of keeping pace with the market, it will become a trend setters and industry leading light with positive influences on its market share. The wall Disney Company is a firm that embodies such an ethos and this can be traced back to its founder and creative genius 3. Pursuing a strategy of diversification
Diversifying into other product lines and sectors can not only help a company weather a bad period in its main line of business but the company can go on to become an industry leader in that market segment. The Walt Disney co. employed such a strategy as it escaped into home video. As at 1988, Disney video had captured and maintained the largest market share in the domestic home video industry in the United States, Pearce J. & Robinson R.; (pg 77) 4. Exploiting an emerging industry niche
Business environments change all the time and sometimes emerging trends are difficult to spot let alone take advantage of. But once one does so, the rewards are amazing. Block buster Entertainment Corporation was formed from taking advantage of a rapidly growing niche in specialty retailing-video rental stores. At the end of 1991, it had a market share of 13%. And its next largest competitor was a region chain, less than one tenth its size. (Pearce. J & Robinson .R; pg 110) 5. Growth through acquisitions.
A co. can acquire market dominance through acquisitions. It can then grow these acquisitions into industry leaders. Philip Morris (PM) is a manufacturer and marketer of cigarettes. In fact in 1991, PM was the largest cigarette co. in the US, with a 42% market share. Since its inception, PM has emphasized growth through acquisition. Its success in growing the purchased co. into market leaders is legendary. (Pearce, J & Robinson, R; pg 157-159)

3. Explain why big firms it is important to license big firms as compared to small firms. Usually big firms engage in large production as compared to small firms and hence its able to take advantage from economies of scale as show below; 1. Economies of scale and monopoly power : a large firm can spread its advertising and marketing cost over their large quantity of output and that it can also purchase its inputs needed for production in bulk thereby benefiting from purchase discounts . 2. Financing economies of scale: larger firms are usually rated or referred to as credit worthy firms. This is because due to their size there can be able to access credit from financial institution and at favorable borrowing rates. In contrast smaller firms often face higher rates of interest on their loans because there might now show a financial stability. 3. External economies of scale occur outside a firm but within an industry. For example the development of research and development facilities in local universities that several business can benefit from an area. Likewise, the relocation of components supplies and other support business close to the centre of manufacturing are also an external cost-saving. Agglomeration economies might also arise –this is the advantages resulting from scale economies.

4. Managerial economies of scale: this is a form of division of labor that is, large scale manufacturers employ specialist to supervise production systems and the use of specialized equipment such as networked computers can improve communication, raise productivity and thereby reduce unit costs.

5. Corporate social responsibility; as part of adherence to the corporate social responsibility a compare can decide to license its operations. This is a way of enhancing its public image which is important.