What Is Kartell?
A cartel is a formal agreement among competing firms to control prices, limit output, or divide markets. It falls under the broader category of Market Structures and is typically a violation of Competition law. The objective of a cartel is to reduce Competition and increase collective profits by acting as a de facto Monopoly. Members of a cartel engage in Collusion, coordinating their actions rather than competing independently. Common tactics include Price Fixing, bid rigging, and restricting supply.
History and Origin
Cartels have existed for centuries in various forms, often emerging in industries with a small number of large producers. Historically, some cartels operated openly before the widespread adoption of antitrust legislation. One of the most prominent and enduring examples is the Organization of the Petroleum Exporting Countries (OPEC), formed in Baghdad in 1960 by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela.7 OPEC's objective has been to coordinate and unify petroleum policies among its member countries to secure fair and stable prices for petroleum producers and ensure a steady supply to consuming nations.6 While intergovernmental organizations like OPEC may operate under different legal frameworks than private company cartels, their economic behavior often mirrors that of a cartel.
Key Takeaways
- A cartel is an agreement between rival companies to avoid competition, often leading to higher prices and reduced output.
- Cartels are generally illegal under Antitrust Laws in most jurisdictions due to their anti-competitive nature.
- They aim to maximize collective profits by mimicking the behavior of a single producer in a Monopoly.
- Common activities include price fixing, market allocation, and limiting production.
- The instability of cartels often stems from the incentive for individual members to cheat on the agreement to gain greater individual profits.
Interpreting the Kartell
When examining a cartel, the primary interpretation revolves around its impact on the market and consumers. A cartel restricts the natural forces of Supply and Demand, leading to artificial scarcity or inflated prices. By gaining significant Market Power, the cartel can dictate terms that would not be possible in a truly competitive environment. This typically results in a reduction of Consumer Surplus, meaning consumers pay more for goods or services than they would in a free market, while the cartel members capture a larger share of economic value.
Hypothetical Example
Consider a hypothetical market for a specialized industrial chemical, "Chem-X," produced by only three companies: Alpha Chemical, Beta Solutions, and Gamma Innovations. These three companies collectively control the entire supply of Chem-X and face high Barriers to Entry for new competitors.
Instead of competing on price, they form a secret cartel. They agree to:
- Set a minimum price for Chem-X, say $500 per ton, well above their individual production costs.
- Limit their total production to 1,000 tons per month, even though they could produce more.
- Divide the market geographically, with Alpha serving the North, Beta the South, and Gamma the West.
As a result, purchasers of Chem-X have no alternative but to pay the cartel-imposed price. The cartel members enjoy higher profit margins than if they were competing, but consumers face higher costs and potentially limited availability.
Practical Applications
Cartels are illegal in most countries, with significant penalties for companies and individuals involved. Regulatory bodies, such as the Federal Trade Commission (FTC) in the United States, actively enforce Antitrust Laws to prevent and dismantle cartels. The FTC and the U.S. Department of Justice (DOJ) work to challenge and prosecute anticompetitive practices, including those orchestrated by cartels.5,4 The Regulation of cartels is a critical aspect of ensuring fair markets and protecting consumers from exploitative practices. The Department of Justice's Antitrust Division, for example, has announced significant enforcement actions against various anticompetitive behaviors, including bid rigging and price fixing conspiracies.3
Limitations and Criticisms
While a cartel seeks to maximize its members' collective profits, cartels often suffer from inherent instability. Each member has an incentive to "cheat" on the agreement—for example, by secretly increasing production or offering small discounts—to gain greater individual Market Share and profit at the expense of other cartel members. This internal tension frequently leads to the collapse of cartels over time.
Furthermore, cartels are heavily criticized for their negative impact on overall Economic Efficiency and consumer welfare. They stifle innovation, reduce consumer choice, and lead to higher prices. Governments and international organizations, like the Organisation for Economic Co-operation and Development (OECD), actively promote policies to combat cartels due to their detrimental effects on global economies and Gross Domestic Product., Pr2a1ctices such as Predatory Pricing, though sometimes a tactic used by a dominant firm, can also become a feature within a cartel trying to eliminate smaller, independent competitors.
Kartell vs. Monopoly
While both a cartel and a Monopoly result in a lack of market competition and higher prices for consumers, they differ in their fundamental structure. A monopoly refers to a market dominated by a single seller that controls the entire supply of a good or service. This sole entity dictates prices and output. In contrast, a cartel is a group of independent firms that agree to act together as if they were a single monopoly. They maintain their separate legal identities but cooperate to control the market. An Oligopoly, a market structure with a small number of interdependent firms, is often the environment in which cartels form, as the limited number of players makes coordination easier.
FAQs
What is the primary goal of a cartel?
The primary goal of a cartel is to maximize the collective profits of its members by eliminating or significantly reducing Competition within a specific market. This often involves controlling prices or output.
Are cartels legal?
No, cartels are generally illegal in most developed economies under Antitrust Laws. These laws are designed to promote fair competition and protect consumers from anti-competitive practices like price fixing and market allocation.
How do cartels affect consumers?
Cartels typically harm consumers by leading to higher prices, reduced product quality, and fewer choices. By limiting Supply and Demand or setting artificial prices, cartels exploit their collective Market Power at the expense of the consumer.