Cartel (Economics)- Explained
What is a Cartel?
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Table of ContentsWhat is a Cartel?Why are Cartels a Bad Thing?Types of CartelAcademic Research on Cartels
What is a Cartel?
A Cartel is a group of firms or nations who attempt to control the price or supply of a commodity (such as oil) through mutual restraint on production. These associations of companies seek to control a market in a monopolistic manner. They are cooperative oligopolies through which two or more companies in an industry fix prices or levels of production to their own advantage.
A cartel pertains to a collection of independent businesses as well as countries that work together like a single line producer and are able to fix product prices for what they offer in the market without facing competition.
Back to: ECONOMIC ANALYSIS & MONETARY POLICY
Why are Cartels a Bad Thing?
As discussed, a cartel is a group of companies or legally independent individual organizations that have agreed to introduce rules that modify competition through the setting of prices, production levels, or marketing techniques. This restricts competition and establishes a monopolistic control of the market. There are production posters (organization of producers of key raw material in international trade), price placard (uniform prices by all producers), market share poster, technological poster (no introduction of higher production methods). In practice, the cartels, which are illegal in many countries, usually appear around the commercialization of a homogeneous product, produced by companies that keep their legal personalities separate. It results from formal and explicit common action intending to limit competition among the members of the agreement. The intention is to achieve for them the benefits they would obtain under a monopoly situation. The actors establish formulas that allow them to reduce total production in the market by setting quotas, determining prices, and market distribution. The cartels, by their very nature, tend to limit the production volumes of the companies that are efficient, preserve the operations of those that are inefficient. In general, the cartel is a type of collusive solution that tends to be unstable. The diversity of interests among the members of a cartel often ends up undermining the bases on which the agreement was formed. The members of the cartel capable of achieving higher levels of productivity often complain about the sacrifice imposed on them in favor of the most unproductive members. Inevitably, in the confrontation between the collective interest of the cartel and the individual interests of its members, they end up choosing the latter. The agreed fees begin to be violated by one of the members of the organization. This serves as an excuse for others to do so too. The next step is that the agreed prices are violated since to seize a larger portion of the market. Finally, the poster becomes a simple dead letter and often results in an open price war.
Types of Cartel
- Quota fixing cartels
The primary aim of these cartels is to restrict product supply. To acquire this goal, they aim at limiting production, by introducing production quotas for members. Therefore, none of the members can produce more than the portion allotted to them.
- Price firing cartels
Price firing cartels often regulate prices by imposing a restriction on output. Prices are fixed for these products and services. Members of the cartel can only sell these products at a lesser price than the minimum.
- Zonal Cartels
Zonal cartels are more of territorial pools. They are created to assure a particular volume of sales to every member of the cartel. The entire market is divided in territories and members offered the liberty to deal in certain territories. For instance, the Indian market can often be divided into South, Western, and Northern zones. Each zone is allotted a specific number.
A syndicate pertains to member units that enter a business deal to create a single unit selling agency. Members are allowed to sell what they produce to the syndicate at a known standard price. The accounting price will then cover the production cost including profit margins. The group of syndicates studies the industry including the market structure and sells products at the highest price in every market. Most of the time, the prices charged by the groups are more compared to the accounting price as well as profits earned. The profits shared are then earned among members.
Academic Research on Cartels
- Are cartel laws bad for business? Selten, R. (1984). (pp. 85-117). Springer, Berlin, Heidelberg. This paper seeks to highlight various cartel laws that forbid any form of collusion in different oligopolistic markets and thats actually enforced. In this type of cartel, legal prices can usually be expected to go a bit lower than in a market situation where binding contracts are permissible. For that reason, cartel laws are usually in the consumers interest. As such, oligopolists lose the chance to increase profits through collusion. Nevertheless, this argument doesnt indicate that cartel laws have an eroding impact in business. Even better, joint profit maximization allows many competitors in the market than in a non-collusive behavior.
- Constructing illegitimacy? Cartels and cartel agreements in Finnish business media from critical discursive perspective, Siltaoja, M. E., & Vehkaper, M. J. (2010). Journal of Business Ethics, 92(4), 493-511. By applying a discursive perspective, this paper investigated how the Finnish media fraternity defines one form of illegal business as illegitimate. The data was collected from various articles that deal with cartel contracts in Finnish business media between 2002 and 2007. In the last one decade, any illegal behavior in business has received significant attention in the industry.
- Cartel unity over the business cycle, Eswaran, M. (1997). Canadian Journal of Economics, 644-672. This article highlights cartel behavior in various business cycles when companies are exposed to bankruptcy. The vulnerability is known to restrict the collusive equilibria that are often practical in a sequential game. Possibly, the same can result in a major breakdown and recessions.
- Cartel laws undermined: Corruption, social norms, and collectivist business cultures, Stephan, A. (2010). Journal of Law and Society, 37(2), 345-367. This paper analyses various cartel laws including a combination of high sanctions, private actions imposed on damages, as well as complaints from clients and how these elements have proven to be successful especially at exposing as well as imposing punishment at cartel agreements in the American Antitrust Law.
- Coase revisited: Business groups in the modern economy, Granovetter, M. (1995). Coase revisited: Business groups in the modern economy. Industrial and corporate change, 4(1), 93-130. This proposal by Ronald Coase is a celebrated question regarding why economic actors join entities referred to as firms instead of transacting independently as individuals in the market that has endangered a broad spectrum of research. The proposal questions why all modern economies and corporations aggregate into bigger entities.
- The competitive consequences of Japan's export cartel associations, Dick, A. R. (1992). Journal of the Japanese and International Economies, 6(3), 275-298. This paper analyzes the Japanese antitrust law that permits companies to create quota export cartels, specific design alongside quality standards while providing conventional marketing services. Three hypotheses about export cartel character were tested: (i) that cartels often exploit foreign market power, (ii) that these cartels usually lower the standard selling costs, and (iii) that the same cartels offer product quality guarantees.
- Sanctioning cartel activity: let the punishment fit the crime, Werden, G. J. (2009). European Competition Journal, 5(1), 19-36. This paper highlights how the economic analysis alongside enforcement experience support the fact that cartels should be banished and viewed as a serious crime that needs to be punished with intense sanctions not only on businesses but individuals as well.
- Forging the European cartel offence: The supranational regulation of Business Conspiracy, Harding, C. (2004). European Journal of Crime, Criminal Law and Criminal Justice, 12(4), 275-300. This paper analyzes the emergence of the European cartel offence, which infringes Article 81 of the European Cartel Treaty, often referred to as a rigid cartel activity, focused on connoting delinquency that fosters the imposition of penal actions. The development is important not only as a matter of explicit regulation in the industry of competition law, but also at a wider context of vilification of properly established cartels.
- The cartel of good intentions, Easterly, W. (2002). FOREIGN POLICY-WASHINGTON-, 40-49. This paper seeks to dispel the usual fear that strikes in the wallets of customers as well as regulators in the world. Even though the term usually evokes various images of selfish oil producers or drug lords, a well-intentioned cartel has recently emerged in the scene. Members of this cartel are prolific foreign aid organizations that constitute a monopoly relative to the powerless poor.
- Cartels, Fear, J. R. (2008). This article gives a highlight of how firms should behave inside cartels and how those cartels changed corporate strategy as well as organizational development particularly in decision making processes. It provides an array of cartel types that have understood the distinction between cooperation as well as illegitimate collusion.
- The cooperative association as a business enterprise: a study in the economics of transactions, Bonus, H. (1986). Journal of Institutional and Theoretical Economics (JITE)/Zeitschrift fr die gesamte Staatswissenschaft, 310-339. This article refers to Georg DRAHEIMs influential monograph that capitalized on the concept of cooperatives and their operations. Draheim observed members of a cooperative as a social group and an entity that would offer economic advantages to its members.