Cartel - group of firms acting in unions, form of oligopoly market. Cartel is an agreement between producers that may concern scales of production, market sharing for each participant or price fixing. Those kind of agreements may include combination of two or three of previously mentioned elements. Once cartel is made market is served by monopoly. Main goal of those agreements is to reduce competition and increase profits. Cartel originated in 1880 in Germany.
Purpose of cartels
By forming cartels organizations are earning monopoly profits. On oligopoly market there is not many manufacturers so they have an opportunity to communicate and minimize market risk. Cartel agreement often lead producers to evade set findings what generates conflicts inside of it and that is why cartel is unstable form union in oligopoly.
Cartels have many negative effects:
- reducing competition,
- limiting manufacturers independence,
- producers are not lowering their prices,
- threat for public interest.
Cartels are forbidden in Unites States and European Union. In EU since the Treaty of Lisbon article 101 of Treaty on the Functioning of the European Union prohibits cartels and related practices.
Types of cartels
There are two main types of cartels, horizontal and vertical.
- Horizontal cartel is made between producers in the same market. Usually horizontal cartels concern setting prices, scale of production or income. Producers in those cartels determine how the market is divided, how they are setting prices, scale of production and sales.
- Vertical cartel is a type of agreement about reselling in certain amount and setting resale prices. They are forcing cross-selling transactions between manufacturers and it discriminates other producers.
- Evenett, S. J., Levenstein, M. C., & Suslow, V. Y. (2001). International cartel enforcement: lessons from the 1990s. The World Economy, 24(9), 1221-1245.
Author: Monika Stempień