Cartel
A cartel is a group of independent market participants who collaborate with each other and avoid competing with each other in order to improve their profits and dominate the market. They seek to limit competition, fix prices, and increase prices by creating artificial shortages through low production quotas, stockpiling, and marketing quotas. Jurisdictions frequently consider cartelization to be anti-competitive behavior, leading them to outlaw or curtail cartel practices. Anti-trust law targets cartel behavior in markets.
The doctrine in economics that analyzes cartels is cartel theory. Cartels are distinguished from other forms of collusion or anti-competitive organization such as corporate mergers. Cartels are inherently unstable due to the temptation by members of the cartel to cheat and defect on each other by improving their individual profits, which may lead to falling prices for all members. Advancements in technology or the emergence of substitutes can undermine cartel pricing power, leading to the breakdown of the cooperation needed to sustain the cartel. Outside actors often respond to the undersupply of a good by bolstering their production of the good, investing in technologies that use the good more efficiently, or investing in substitutes.
Cartels can be organized on an international basis; examples of international cartels include the OPEC cartel to collude on oil production and the International Rubber Regulation Agreement to collude on rubber production. They can also exist at a national level; examples of American cartels include the United States Gunpowder Trade Association and the National Collegiate Athletic Association which restricts the kind of compensation that collegiate athletes can receive.
Etymology
The word cartel comes from the Italian word wikt:cartello#Italian, itself derived from the Latin wikt:charta#Latin. In Middle French, the Italian word became cartel, which was borrowed into English. In English, the word was originally used for a written agreement between warring nations to regulate the treatment and exchange of prisoners from the 1690s onward. From 1899 onwards, the usage of the word became generalized as to mean any intergovernmental agreement between rival nations.The use of the English word cartel to describe an economic group rather than international agreements was derived much later in the 1800s from the German Kartell, which also has its origins in the French cartel. It was first used between German railway companies in 1846 to describe tariff and technical standardization efforts. The first time the word was referred to describe a kind of restriction of competition was by the Austro-Hungarian political scientist Lorenz von Stein, who wrote on tariff cartels:
History
Cartels have existed since ancient times. Guilds in the European Middle Ages, associations of craftsmen or merchants of the same trade, have been regarded as cartel-like. Tightly organized sales cartels existed in the mining industry of the late Middle Ages, like the 1301 salt syndicate in France and Naples, or the Alaun cartel of 1470 between the Papal State and Naples. Both unions had common sales organizations for overall production called the Societas Communis Vendicionis.Laissez-faire economic conditions dominated Europe and North America in the 18th and 19th centuries. Around 1870, cartels first appeared in industries formerly under free-market conditions. Although cartels existed in all economically developed countries, the core area of cartel activities was in central Europe. The German Empire and Austria-Hungary were nicknamed the "lands of the cartels". Cartels were also widespread in the United States during the period of robber barons and industrial trusts.
The creation of cartels increased globally after World War I. They became the leading form of market organization, particularly in Europe and Japan. In the 1930s, authoritarian regimes such as Nazi Germany, Italy under Mussolini, and Spain under Franco used cartels to organize their corporatist economies. Between the late 19th century and around 1945, the United States was ambivalent about cartels and trusts. There were periods of both opposition to market concentration and relative tolerance of cartels. During World War II, the United States strictly turned away from cartels. After 1945, American-promoted market liberalism led to a worldwide cartel ban, where cartels continue to be obstructed in an increasing number of countries and circumstances.
Types
Cartels have many structures and functions that ideally enable corporations to navigate and control market uncertainties and gain collusive profits within their industry. A typical cartel often requires what competition authorities refer to as a CAU. Typologies have emerged to distinguish distinct forms of cartels:- Selling or buying cartels unite against the cartel's customers or suppliers, respectively. The former type is more frequent than the latter.
- Domestic cartels only have members from one country, whereas international cartels have members from more than one country. There have been full-fledged international cartels that have comprised the whole world, such as the international steel cartel of the period between World War I and II.
- Price cartels engage in price fixing, normally to raise prices for a commodity above the competitive price level. The loosest form of a price cartel can be recognized in tacit collusion, wherein smaller enterprises individually devise their prices and market shares in response to the same market conditions, without direct communication, resulting in a less competitive outcome. This type of collusion is generally legal and can achieve a monopolistic outcome.
- Quota cartels distribute proportional shares of the market to their members.
- Common sales cartels sell their joint output through a central selling agency. They are also known as syndicates.
- Territorial cartels distribute districts of the market to be used only by individual participants, which act as monopolists.
- Submission cartels control offers given to public tenders. They use bid rigging: bidders for a tender agree on a bid price. They then do not bid in unison, or share the return from the winning bid among themselves.
- Technology and patent cartels share knowledge about technology or science within themselves while they limit the information from outside individuals.
- Condition cartels unify contractual terms – the modes of payment and delivery, or warranty limits.
- Standardization cartels implement common standards for sold or purchased products. If the members of a cartel produce different sorts or grades of a good, conversion factors are applied to calculate the value of the respective output.
- Compulsory cartels, also called "forced cartels", are established or maintained by external pressure. Voluntary cartels are formed by the free will of their participants.
- Occupational licensing
Effects
In general, cartel agreements are economically unstable in that there is an incentive for members to cheat by selling at below the cartel's agreed price or selling more than the cartel's production quotas. Many cartels that attempt to set product prices are unsuccessful in the long term because of cheating punishment mechanisms such as price wars or financial punishment. An empirical study of 20th-century cartels determined that the mean duration of discovered cartels is from 5 to 8 years and overcharged by approximately 32%. This distribution was found to be bimodal, with many cartels breaking up quickly, many others lasting between five and ten years, and still some that lasted decades. Within the industries that have operating cartels, the median number of cartel members is 8. Once a cartel is broken, the incentives to form a new cartel return, and the cartel may be re-formed. Publicly known cartels that do not follow this business cycle include, by some accounts, OPEC.
Cartels often practice price fixing internationally. When the agreement to control prices is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated. OPEC countries partially control the price of oil.