What is a Cartel? Overview & 6 Different Types of Examples
What Is a Cartel?
A cartel is when two or more companies agree to dominate a particular market without competing with each other. In order to talk about the existence of a cartel, the existence of activities such as price-fixing, dividing markets, rigging tenders, restricting the goods and services offered to the market is sufficient.
Cartel is a familiar concept that refers to agreements and/or concerted practices that restrict competition between competitors, such as price-fixing, market sharing, restriction of supply or setting quotas, collusion in tenders. Cartels are considered the most serious violation of competition in competition law; They are formations that try to increase their profits by keeping competitive parameters related to the market, especially price and quantity, under control. Cartels are illegal in many countries, including in the US.
What is the Cartel’s Purpose?
Cartels limit their economic freedom only in certain areas. The aim is to become or maintain a monopoly in the market. Companies can opt to increase their profits together by giving up competition between them through secret or open agreements. The most common example of this is the cartels formed by agreements between companies that foresee price and quantity determination and market sharing.
Two or more companies form a cartel by agreeing with each other instead of competing ends the competitive environment that works in favor of the consumer. Cartels cause the market mechanism to become dysfunctional, thereby causing prices to rise above the competitive equilibrium, in short, exorbitant prices. Cartels limit the number of products in the market, causing an increase in the demand for goods and the price of scarce products. Companies form a cartel to increase sales and profit margins without producing cheaper, higher quality, or new products.
What Do Cartels Do?
- Can restrict the number of goods on the market
- May raise prices
- It can market low-quality goods at high prices
- Can further dominate the market by eliminating small businesses
- It can create inflation
- They can create a black market
Activities of Cartels
The cartel is both a price determinant to the consumer. They can sell their product at any price they want. The companies that create the cartel also try to prevent new companies from entering the market or eliminate existing companies that will prevent them from forming a cartel. There are economic methods that cartel companies can apply to eliminate competitors.
Negative Effects of Cartels on the Market
Cartels prevent competition, which negatively affects consumers or other suppliers and the development of the market and its competitiveness with the outside world. There is no need for innovation for a product or service that is sold without competition. It is not necessary to produce cheaper, higher-quality products than their counterparts in the foreign market. This situation causes the economy of that country to weaken against the economies of other countries. Cartels and the methods they apply are as follows; Collusion, Price fixing, bid rigging, market allocation, supply quotas.
Next to this cartels cause problems that negatively affect a country’s economic well-being, such as the fight against inflation and the balance of income distribution. That’s why cartels are described as “the cancer of the market economy.” If cartels have formed in an economy, we can talk about the pollution of politics in that country, and covert cooperation between the private sector and politics, because the formation and activities of cartels are prohibited by law in democratic countries. No economy can claim to have a free economy that does not have effective deterrent sanctions against cartels.
Due to the heavy damage, they have done to the economy, and there is an agreement among competition authorities worldwide that cartels should be evaluated differently from other acts limiting competition in competition law and that they should be penalized most severely. The most common type of sanction used in this fight is fines. Many countries impose heavy penalties to deter cartel formation. However, the fight against cartels is not limited to penalties. Still, administrative sanctions are also supported by other sanctions such as fines for executives who have a decisive effect on the cartel, imposing prison sentences, and awarding compensation above the damage in private law.
Another feature of the oligopoly market is that firms make various agreements to increase their profits instead of competition. For this reason, companies try to increase their market shares by making open or secret agreements or by merging. A small number of companies in the same industry form a union by preserving their legal and economical independence to prevent competition among them and create a monopoly in the market. This is called a cartel. Thus, competition is prevented, and maximum profit is obtained by raising prices.
In order to form a cartel, certain conditions must be met. These are the participation of a small number of companies in the cartel, the absence of close substitutes for the goods, the fact that the costs for the same goods are not different. Oligopoly firms participating in this union accept a typical price and production policy. In this respect, cartel agreements are realized in three ways. It is possible to express these as price cartels, quantity cartels, and regional cartels.
What Are the Disadvantages of Cartels?
- Lack of competition hinders the rational conduct of production.
- Prices rise artificially
- Businesses outside the cartel are not allowed to survive
- Monopoly cartels try to become a political power in countries.
- Cartels damage the economies of the countries they are in and the countries they sell goods to by “dumping.”
Cartel Types and Examples
1. Production Cartels:
It means that the undertakings entering the cartel do not produce more than the production amount they determined. That is, they agree to limit the production. The aim here is to limit production and prevent price decline. OPEC (Oil Exporting Countries) is the most well-known example of a production cartel. OPEC can reduce or increase oil production by taking a joint decision to determine oil prices.
2. Price Cartels
The enterprises or institutions that make up the cartel regulate the market so that the basic products of the industry they are cartels are not sold below the minimum wage they have determined. It is the most common type of cartel that consumers suffer the most. OPEC can create a price cartel by reducing production, that is, supply. Today, OPEC members can act independently of each other, but between 1973 and 1985, OPEC dominated the world energy market as a price cartel.
3. Purchasing Cartels
It is the joint action of companies or institutions to supply raw materials and semi-finished products. The purpose of purchasing cartels is to buy goods from wholesale and at lower prices by creating high capital and purchasing capacity. Companies that come together to buy the same product prevent the competition that will occur if they act independently and prevent the seller from increasing the price.
4. Regional Cartels
Businesses included in the cartel have agreed to sell their products within specific regions and not to go out of these regions. Each enterprise becomes a monopoly in its own region.
5. Profit-splitting cartels
Although the enterprises are accessible in the amount of production in such cartels, they cooperate in the sales phase. Sales are made by a sales office formed by the cartel, and the profits are shared.
6. Conditional cartels In this cartel type, businesses sell to their customers on common terms. For example, sales will only be made in cash, or maturity periods are standard. All partners forming the cartel apply the same sales conditions to their customers.