Cartel

A cartel is a group of producers of goods or suppliers of services formed through an agreement amongst themselves, whether or not through a formal agreement in writing, to regulate the supply of goods or services with the basic intent to control the prices.

However, it not only contributes to to price control, but also restricts competition in respect of the said goods or services. There are even some legalized cartels over the globe, such as OPEC, which regulates petrol prices. They are typically used where market participants are less and entry barrier is strong.

• A cartel is a group of goods producers or service suppliers formed through an agreement. Cartels are short-lived. The typical time frame might range from 5 to 8 months. 
• It can be a formal written agreement to control the goods or services supply with the primary intent to regulate the prices illegally or restrict competition concerning the said goods or services. For example, some legalized cartel like OPEC regulates petrol prices.
• It starts with a company operating in an oligopoly market. This market is an extended monopoly form wherein only a few companies, like the telecom sector, are standardized. 
• The cartel types are price cartels, term cartels, customer assignment cartels, quota cartels, zonal cartels, syndicate cartels, and zonal cartels. 

Cartel is the process in which some market participants come together to form an organization or group with the purpose of controlling price and competition in the market related to a particular type of product or service.

It starts with a company that operates in an oligopoly market. An Oligopoly market is an extended form of monopoly wherein only a few sets of companies are standardized (like the telecom sector). The competitors in the oligopolistic market can downturn the entire market up to the cost of production, thereby fading the profits of other competitors.

This event provides other competitors the chance to unite and become market leaders for the said product. Thus, few such companies consolidate to come together.

Another way for consolidation is to form an undisclosed cartel to lead the industry's prices. The cartel members may never agree to a price reduction in their selfish interests. Instead, members usually agree to restrict the supply to maintain high prices. However, some members may cheat and supply more to fetch more margins at higher prevailing prices. The competitors not part of the cartel may distort the market by significantly reducing the costs for said goods. In such a case, customers may approach the new competitor.

• These are formed to protect the self-interest of a group of producers. The producers work in a group to regulate the prices of commodities. They try to maximise the profits of the members by artificially raising the prices and putting a restriction on the supply of goods and services.
• Through this, the producers can easily raise the prices by observing the demand-supply ratio for the goods. Thus if the market supply is less, the price automatically goes up due to the extra demand.
• The cartel members can decide jointly to restrict the supply in the market. They sometimes put quotas or restrictions on the store to create an artificial scarcity and raise prices, helping them to earn profits.
• They can also choose to provide entry barriers to their market. They also try to allocate a part of the market for each member to avoid any kind of direct competition. This allows the members to have a monopolistic control on the market they are operating in.

However, the process benefits the members but causes a lot of harm to the customers along with it. It limits the choices of consumers to raise prices. Many countries have specific rules and regulations to control the operation of cartels and protect the market.

There are various types of cartel in economics. Let us understand each of those types.

1. Price Cartels – They fix the minimum prices per their demand-supply ratio. Members cannot sell products below those prices.
2. Term Cartels – They agree on business terms on a routine basis. Each member is obliged to follow the terms of trade. The terms of work can be delivery-mode, delivery locations, delivery time, terms of payment, charging of interest in case of delay, etc.
3. Customer Assignment Cartels – Specific customers are assigned to each member. Thus, all customers are divided amongst the members to ensure a proper flow of revenue. Each member shall maintain the dignity of allocation and must not fetch customers of the other members.
4. Quota Cartels – Quota means the quantum of supply. Such collaboration offers to restrict the reserve of goods, which in turn upscales the prices in the market. Every member produces up to the quantum allocated and must not exceed the limit
5. Zonal Cartels – They assign the geographical locations of the country to each member of the cartel. Members should ensure to operate on their specific territory.
6. Syndicate Cartels – Several members unite to sell collectively and reduce the cost of production. Such cartels intend to achieve economies of scale.
7. Super Cartels – These are high-level international collaborations. Cartels of the domestic country agree with cartels of the foreign country.

Let us use some examples of cartel in economics to understand the concept.

Example #1

We can consider the example of legalized cartels famous over the globe, such as the Organisation of Petroleum Exporting Countries(OPEC). Fourteen oil-producing countries formed OPEC cartels worldwide, whose objective is to stabilize the oil market in the countries. They aim to sell oil at reasonable prices to consuming countries.

Example #2

The European Commission has imposed a whopping fine of 750 million Euros on 11-group of companies that participated in illegal cartels for gas-insulated switchgear projects. The group created public utility companies and consumers. The commission collected evidence through readily available documentation. For manipulating the tenders, the member units prepared sham bids. However, Swiss-based ABB did not attract the fine since it was the whistleblower and has supported the commission in providing sufficient evidence to unfold the cartel.

One may form cartels to fix the prices, quantum, or terms of trade, allocate the trade zones, or achieve economies of scale. However, the extra revenue earned by the member is not due to additional efforts of producers or extra production supplies. Rather such agreements make the producers inefficient in the long run.

From the consumer's perspective, they are concerned with only the prices for a specific product. Therefore, the formation of cartels affects their balanced disposable income. Since the supplies are restricted through agreement, the production capacities of large-scale producers are underutilized to the said extent. The large-scale producers may have produced more and abandoned excess production in the foreign market. However, super cartels restrict such extra export of goods in the short term.

Thus, slowly and steadily, economies of scale get reduced, which becomes one of the causes of rising inflation.

• It has been found that the prices of commodities increase significantly due to price manipulations by Cartels. International cartels have more impact on such price increases. However, these are supported by the limitation of a few members who do not follow the agreed price and supply at lower than the mentioned price. That exposes the cost of production to the consumers. Such members may also be beyond the upper cap of the supply limit.

• Cartels do not last long. The average duration can be between 5 years to 8 years approximately. On the other hand, some cartels are required by the governments of various countries to safeguard their sovereignty. In such a case, can impose no dire consequences for any price manipulation or issue.

That is usually powerful when the country’s sovereignty is at stake. In such a situation, cartels are not questioned about the prices they charge or the production supplies. They are also powerful when one of the cartel members has complete control over the market and is dominant.

Even high entry barriers are another reason for powerful cartels. The reason is that fewer competitors drive the market prices, and it is not controlled by the demand-supply ratio.

• The cartel rank structure provides monopoly-type power to the member units.
• They can sell products at higher margins, maximizing the gross profits.
• The cost of advertising is reduced, and the product is easily known to the customers.
• No effect of the business cycle on the individual players.
• They can easily manage production efficiency as per supply constraints.
• A reasonable margin is assured for each member of the cartel.
• Big savings are achieved on economies of scale.

• Individual monopolies affect the disposable income of customers.
• It creates inefficiencies in the market, which may affect the quality of the end product.
• It may have full regulation over the member, destabilizing other members.
• There is no motivation to increase efficiency in the market. Thus, prices of products remain at a high cost.
• Demand will fluctuate as per customers' needs and other economies of scale. However, that cannot regulate the market.
• The individual members are not able to scale up their operations.

Both the above are two separate types of organizations but there are some differences between them as follows:

• Some legal business corporations form the former, whereas the latter is an illegal criminal group.
• For the former, the members of the organization come together to manipulate the price and competition of the market whereas for the latter, the members come together to conduct illegal activities like extortion, gambling, drug trafficking, etc.
• The cartel rank structure usually follows some rules and laws, with a legal operating process and decision-making procedure, whereas the latter has no such rules, Mafias have a hierarchy where there is a boss who instructs the members regarding the operations who operate with secrecy and loyalty.
• Cartels do not force the target customers to do anything but try to influence the market in  a peaceful way, whereas mafias use force and violence to implement their ideas on innocent people.
• The former operates on a global level with transparent operating procedures, But mafias, even though operating at a global level, need to maintain secrecy due to their illegal nature and tends to have a strong localized presence and influence.

Thus, even though both manipulate the market, cartels do it legally with activities restricted to price and market manipulation but mafias extend their activities to illegal work like extortion, crime, money laundering, gambling and other violent activities.

This article has been a guide to Cartel & its meaning. We explain its differences with mafia with examples, purpose, types & how they cause market inefficiencies. You can learn more about it from the following articles: -

• Infant Industry Argument
• Antitrust Acts
• Clayton Antitrust Act
• Capitalist Economy
• Supply vs Demand