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.