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A cartel is a group of formally independent producers whose goal is to increase their collective profits by means of price fixing, limiting supply, or other restrictive practices. Cartels typically control selling prices, but some are organized to control the prices of purchased inputs. Antitrust laws forbid cartels; however, they continue to exist nationally and internationally, openly and secretly, formally and informally. Note that a single entity that holds a monopoly by this definition cannot be a cartel, though it may be guilty of abusing said monopoly in other ways. Cartels usually occur in oligopolies, where there are a small number of sellers and usually involve homogeneous products. Bid rigging is a special type of cartel.
Contents
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Overview
People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. Adam Smith, The Wealth of Nations, 1776A survey of hundreds of published economic studies and legal decisions of antitrust authorities found that the median price increase achieved by cartels in the last 200 years is 25%. Private international cartels (those with participants from two or more nations) had an average price increase of 28%, whereas domestic cartels averaged 18%. Less than 10% of all cartels in the sample failed to raise market prices.
In general, cartel agreements are economically unstable in that there is an incentive for members to cheat by selling at below the agreed price or selling more than the production quotas set by the cartel (see also game theory). This has caused many cartels that attempt to set product prices to be unsuccessful in the long term. Empirical studies of 20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However, once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed. Publicly-known cartels that do not follow this cycle include, by some accounts, the Organization of the Petroleum Exporting Countries (OPEC).
Price fixing is often practiced internationally. When the agreement to control price is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated. Examples of such price fixing include oil whose price is partly controlled by the supply by OPEC countries. Also international airline tickets have prices fixed by agreement with the IATA, a practice for which there is a specific exception in antitrust law.
International price fixing by private entities can be prosecuted under the antitrust laws of more than 100 countries. Examples of prosecuted international cartels are lysine, citric acid, graphite electrodes and bulk vitamins.
Examples
OPEC: As its name suggests, OPEC is organized by sovereign states. It cannot be held to antitrust enforcement in other jurisdictions by virtue of the doctrine of state immunity under public international law. However, members of the group do frequently break rank to increase production quotas.
Many trade organizations, especially in industries dominated by only a few major companies, have been accused of being fronts for cartels:
Although cartels are usually thought of as a group of corporations, some consider labor unions to be cartels, as they seek to raise the price of labor (wages) by preventing competition.[1]
An example of a new international cartel is the one created by the members of the Asian Racing Federation and documented in the Good Neighbor Policy signed on September 1, 2003.