Cartel

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.

Examples of Cartel

• OPEC (Organization of the Petroleum Exporting Countries) - a cartel of the world's major oil-producing countries founded in 1960. It is responsible for setting the global oil prices and production quotas to maintain stability in the global oil market.
• The European Airline Cartel - an illegal agreement between airlines to coordinate prices, routes, and capacity to reduce competition and maximize profits.
• The Japanese Automobile Cartel - an illegal agreement between Japanese car companies to fix prices, reduce competition, and maintain high prices.
• The Diamond Cartel - a cartel of large diamond companies that controls the supply and prices of diamonds on the global market.
• The Pharmaceutical Cartel - an illegal agreement between pharmaceutical companies to fix prices, reduce competition, and maintain high prices for medicines and drugs.

Advantages of Cartel

Cartel has several advantages:

• It allows a company or a group of companies to reduce competition and increase profits. This can be done by setting prices higher than the market price and creating a monopoly.
• It can also reduce costs by making it easier for companies to cooperate on production, resources, and marketing.
• It can create economies of scale, which can make it more efficient to produce goods and services.
• It can also help to stabilize prices and protect companies from market fluctuations, which can make it easier to plan for the future.

Limitations of Cartel

Cartels have several limitations, which may influence their effectiveness and longevity:

• Cheating - Cartels are based on trust, so when someone decides to cheat the agreement, it can easily lead to the collapse of the cartel.
• Entry of new firms - It is difficult for cartel to control the entry of new firms to the market.
• Price wars - Price wars can occur between the members of the cartel, as they seek to maximize their profits.
• Government intervention - Governments may pass anti-trust laws, which makes it illegal to form cartels.
• Loss of efficiency - Cartels are not as efficient as competitive markets, as they can lead to overproduction and higher prices.
• Free riders - Free riders can join the cartel without making contributions and thus undermine its effectiveness.

Other approaches related to Cartel

As an alternative to a cartel, there are a few other approaches that firms can use to reduce competition and increase profits. These include:

• Mergers and Acquisitions (M&A): M&A is a form of consolidation, where two or more firms come together to create a single, larger entity. By merging, companies can reduce costs and increase market share, leading to higher profits.
• Strategic Alliances: Strategic alliances are arrangements between two or more organizations that allow them to cooperate and share resources. This can reduce costs and increase market reach, leading to higher profits.
• Price Discrimination: Price discrimination is a pricing strategy where firms charge different prices to different customers, depending on their willingness and ability to pay. This allows firms to increase profits by charging higher prices to those customers with more money.

In summary, there are a few other approaches that firms can use to reduce competition and increase profits, such as mergers and acquisitions, strategic alliances, and price discrimination. Cartels, however, are still the most popular approach for firms to reduce competition and increase profits.

Cartel — recommended articles

Monopoly — Monopolistic agreement — Resale price maintenance — Fair competition — Price control — Oligopoly — Barriers to exit — Syndicate — Price-Taker

References

• 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