A cartel is a group of independent suppliers or firms that come together with the agreement to restrict or control trade in a specific market, usually to their mutual benefit. Cartels typically aim to manipulate prices, production quotas, and market shares to maximize collective profits. While collaborative, these arrangements are often illegal under competition laws due to their anti-competitive nature.
Function and Mechanism
Cartels function by creating an agreement among members to adhere to specific rules, which might include:
- Price Fixing: Setting a common price for goods or services to avoid competition.
- Market Division: Allocating specific markets or regions to each member to reduce competition.
- Production Quotas: Setting limits on the output each member can produce to control supply and, thus, manipulate prices.
Price Fixing
Price fixing involves members agreeing on selling prices to maintain high levels of profitability. This is usually done to prevent price wars which can erode profit margins.
Market Division
Market division could occur geographically or by product line, ensuring each member has its own “territory” without direct competition from other cartel members.
Production Quotas
Production quotas restrict the amount of product each member can produce, ensuring supply levels do not exceed demand, hence maintaining higher prices.
Historical Context and Examples
OPEC: A Notable Example
The Organization of Petroleum Exporting Countries (OPEC) is one of the most notable and powerful cartels globally. Formed in 1960, OPEC aims to coordinate and unify petroleum policies among member countries to secure fair and stable prices for petroleum producers.
Other Historical Cartels
- International Telecommunication Union (ITU): Initially functioned as a cartel for telegraph companies in the 19th century.
- Chlorine Cartel: An illegal cartel by several European chemical companies detected in the 1990s.
Special Considerations
Cartels face several challenges, including:
- Legal Issues: Most countries have stringent anti-trust laws that prohibit cartels. Violations can lead to hefty fines and sanctions.
- Internal Cheating: Members might breach agreements to gain a larger market share, which can ultimately dismantle the cartel.
- Market Entry Barriers: Effective cartels need to ensure barriers to entry remain high to prevent new competitors from disrupting the market.
Applicability in Modern Economics
In modern economies, cartels are typically discouraged and regulated due to their impact on market fairness and consumer prices. Regulatory bodies closely monitor industries for collusive activities, but cartels still exist, particularly in less regulated markets.
Comparison with Related Terms
- Monopoly: A market structure where a single firm dominates the market. Unlike a cartel, a monopoly does not involve collusion among multiple firms.
- Oligopoly: A market with a small number of firms where collusion might happen informally or through explicit agreements.
- Trusts: Legal entities that manage assets for beneficiaries, often used historically to create monopolistic power through joined companies.
FAQs
Are all cartels illegal?
How do authorities detect cartels?
Why do cartels fail?
References
- “Economics of Industrial Organization: Competition, Monopoly, and Regulatory Policy” by William G. Shepard.
- “OPEC and the International Oil Industry: A Changing Structure” by Fadhil J. Chalabi.
- Antitrust laws and regulatory guidelines from the U.S. Department of Justice and European Commission.
Summary
A cartel involves a coalition of independent firms agreeing to restrict competition to maximize their collective profits. While they can significantly influence markets, cartels also face legal, ethical, and operational challenges. Understanding cartels is crucial for comprehending market dynamics, especially in heavily regulated and commodity-based industries.
