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CartelsA cartel is a grouping of producers that work together to protect their interests. Cartels are created when a few large producers decide to co-operate with respect to aspects of their market. Once formed, cartels can fix prices for members, so that competition on price is avoided. In this case cartels are also called price rings. They can also restrict output released onto the market, such as with OPEC and oil production quotas, and set rules governing other aspects of the behaviour of members. Setting rules is especially important in oligopolistic markets, as predicted in game theory. A significant attraction of cartels to producers is that they set rules that members follow, thus reducing risks that would exist without the cartel. The negative effects on consumers include:
When are cartels most powerful?They are at their most powerful when there are high barriers to entry into the market or industry, and when all members can be ‘policed’ by a dominant member. Cartel-like behaviourSome firms may act as though there is a cartel and undertake cartel-like’ behaviour, even though there is no formal cartel, and this may be subject to investigation by the regulators. See also: Complex monopolies ExampleThe Siemens led electronic equipment cartelIn January 2007, the European Commission imposed a record fine of £500m on 11 European power equipment firms, led by the German firm Siemens. The Commission argued that Siemens, along with 10 other firms, had ‘carved-up’ the European power equipment market between 1988 and 2004. The market had been carved-up along geographical lines and through a quota system. One of the cartel members, Swiss based ABB, had escaped a fine because it has been a ‘whistle blower’ and provided crucial evidence to the Commission. See also: Model agencies guilty of price fixing CMA launches its ‘stop cartels’ campaign Why are cartels difficult to operate successfully?Once established, cartels are difficult to maintain. The problem is that cartel members will be tempted to cheat on their agreement to limit production. By producing more output than it has agreed to produce, a cartel member can increase its share of the cartel's profits.
Why is it more difficult to maintain a cartel when there are more than two firms?A cartel agreement is difficult to enforce because each firm has an incentive to cheat. By lowering price, the cheating firm can increase its market share and profits. A second reason that firms do not collude is that such behavior violates antitrust laws.
Why cartel agreement are often not successful?Cartel agreements are often not successful because one party has a strong incentive to cheat to make more profit. In this case, each could increase profit by $2 million by producing an extra thousand diamonds. Of course, if both countries did this, both would lose profits.
Would it be easier to form a cartel in a market with many producers or one with few producers?It is easier to form cartels in markets with fewer producers. This is because if there are fewer producers, it is easier to align the interests of all the producers. Better control can be kept on the quantity produced by each member.
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Why it is so difficult to create a successful cartel when there are many producers?
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