Cartel

3 Key Takeaways

• Cartels are formed by competitors in the same industry to reduce competition and increase profits.
• They engage in anti-competitive practices like price fixing, bid rigging, and market allocation.
• Cartels are illegal in most jurisdictions as they harm consumers through higher prices and reduced choice.

What is a Cartel?

A cartel is a formal or informal agreement among a group of businesses operating in the same industry. These businesses collude to manipulate the market by controlling prices, limiting production, or dividing markets. The goal of a cartel is to reduce competition and create an artificial scarcity, allowing them to charge higher prices and earn greater profits than they would in a competitive market.

Importance of Cartels

• Impact on Consumers: Cartels are detrimental to consumers as they lead to higher prices, reduced choice, and lower quality of goods and services.
• Economic Effects: Cartels can distort market forces, leading to inefficiency, misallocation of resources, and reduced economic growth.
• Legal and Regulatory Issues: Cartels are illegal in most countries and are subject to antitrust laws and regulations aimed at promoting fair competition.

How Cartels Work

Cartels operate by coordinating their actions to manipulate the market. Common practices include:

1. Price Fixing: Agreeing on a set price for a product or service, eliminating price competition.
2. Bid Rigging: Colluding to determine the winner of a bid or tender process, often by pre-arranging bids or submitting complementary bids.
3. Market Allocation: Dividing markets geographically or by customer segments, reducing competition in each allocated area.
4. Production Quotas: Limiting production to create artificial scarcity and drive up prices.

Examples of Cartels

• OPEC: The Organization of the Petroleum Exporting Countries is a well-known example of a cartel that controls a significant portion of the global oil supply.
• Lysine Cartel: In the 1990s, several companies colluded to fix the price of lysine, an animal feed additive, resulting in significant price increases and antitrust lawsuits.
• Vitamins Cartel: Several vitamin manufacturers colluded to fix prices in the 1990s, leading to multi-billion dollar fines and jail sentences for executives.

Real-World Application

Cartels are a serious concern for competition authorities and consumer protection agencies worldwide. They are actively investigated and prosecuted to protect consumers from unfair practices and ensure a level playing field for businesses.

Understanding the concept of cartels is crucial for businesses to avoid engaging in illegal anti-competitive practices. For consumers, awareness of cartels can help them make informed choices and advocate for fair market conditions.