Contents

Page Introduction................................................ 2 Objectives Private vs. public cartel............................................................... 3 Long-term unsustainability of cartels.......................................... 4 Antitrust law on cartels................................................................ 5 Types of Cartel Settlement Systems............................................ 6 Examples of cartel....................................................................... 7 Conditions for cartel success....................................................... 8 Conclusion.................................................. 9 References...................................................10

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Introduction
A cartel is a formal (explicit) agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. The aim of such collusion (also called the cartel agreement) is to increase individual members' profits by reducing competition. One can distinguish private cartels from public cartels. In the public cartel a government is involved to enforce the cartel agreement, and the government's sovereignty shields such cartels from legal actions. Contrariwise, private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Competition laws often forbid private cartels. Identifying and breaking up cartels is an important part of the competition policy in most countries, although proving the existence of a cartel is rarely easy, as firms are usually not so careless as to put agreements to collude on paper. Several economic studies and legal decisions of antitrust authorities have found that the median price increase achieved by cartels in the last 200 years is around 25%. Private international cartels (those with participants from two or more nations) had an average price increase of 28%, whereas domestic cartels averaged 18%. Fewer than 10% of all cartels in the sample failed to raise market prices. The term cartel came up for alliances of enterprises roughly around 1880 in Germany. The name was imported into the Anglo sphere during the 1930s. Before this, other, less precise terms were common to denominate cartels, for instance: association, combination, combine or pool. In the 1940s the name cartel got an Anti-German bias, being the economic system of the enemy. Cartels were the structure the American Anti-Trust-campaign struggled to ban globally.

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Objectives
Private vs. public cartel Long-term unsustainability of cartels Antitrust law on cartels Types of Cartel Settlement Systems Examples of cartel Conditions for cartel success

Private vs. public cartel A distinction is sometimes drawn between public and private cartels, though there is no evidence that Public Cartels are less harmful to the general good, and being Government backed they are much more effective and hence potentially harmful. In the case of public cartels, the government may establish and enforce the rules relating to prices, output and other such matters. Export cartels and shipping conferences are examples of public cartels, as well as labor unions. In many countries, depression cartels have been permitted in industries deemed to be requiring price and production stability and/or to permit rationalization of industry structure and excess capacity. In Japan for example, such arrangements have been permitted in the steel, aluminum smelting, ship building and various chemical industries. Public cartels were also permitted in the United States during the Great Depression in the 1930s and continued to exist for some time after World War II in industries such as coal mining and oil production. Cartels have also played an extensive role in the German economy during the inter-war period. International commodity agreements covering products such as coffee, sugar, tin and more recently oil (OPEC) are examples of international cartels with publicly entailed agreements between different national governments. Crisis cartels have also been organized by governments for various industries or products in different countries in order to fix prices and ration production and distribution in periods of acute shortages. Murray Rothbard considered the Federal Reserve as a public cartel of private banks. In contrast, private cartels entail an agreement on terms and conditions that provide members mutual advantage, but that are not known or likely to be detected by outside parties. Private cartels in most jurisdictions are viewed as violating antitrust laws.

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Long-term unsustainability of cartels Game theory suggests that cartels are inherently unstable, as the behaviour of members of a cartel is an example of a prisoner's dilemma. Each member of a cartel would be able to make more profit by breaking the agreement (producing a greater quantity or selling at a lower price than that agreed) than it could make by abiding by it. However, if all members break the agreement, all will be worse off. The incentive to cheat explains why cartels are generally difficult to sustain in the long run. Empirical studies of 20th century cartels have determined that the mean duration of discovered cartels is from 5 to 8 years. However, one private cartel operated peacefully for 134 years before disbanding. There is a danger that once a cartel is broken, the incentives to form the cartel return and the cartel may be re-formed. Whether members of a cartel choose to cheat on the agreement depends on whether the shortterm returns to cheating outweigh the long-term losses from the possible breakdown of the cartel. (The equilibrium of a prisoner's dilemma game varies according to whether it is played only once or repeatedly.) The relative size of these two factors depends in part on how difficult it is for firms to monitor whether the agreement is being adhered to by other firms. If monitoring is difficult, a member is likely to get away with cheating (and making higher profits) for longer, so members are more likely to cheat and the cartel will be more unstable. There are several factors that will affect the firms' ability to monitor a cartel 1. 2. 3. 4. 5. Number of firms in the industry. Characteristics of the products sold by the firms. Production costs of each member. Behaviour of demand. Frequency of sales and their characteristics.

Number of firms in industry The lower the number of firms in the industry, the easier for the members of the cartel to monitor the behaviour of other members. Given that detecting a price cut becomes harder as the number of firms increases, the bigger are the gains from price cutting. The larger the number of firms, the more probable it is that one of those firms is a maverick firm; that is, a firm known for pursuing aggressive and independent pricing strategy. Even in the case of a concentrated market, with few firms, the existence of such a firm may undermine the collusive behaviour of the cartel. Characteristics of products sold Cartels that sell homogeneous products are more stable than those that sell differentiated products. Not only do homogeneous products make agreement on prices and/or quantities easier to negotiate, but also they facilitate monitoring. If goods are homogeneous, firms know that a change in their market share is probably due to a price cut (or quantity increase) by another member. Instead, if products are differentiated, changes in quantity sold by a member may be due to changes in consumer preferences or demand.
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Production costs Similar cost structures of the firms in a cartel make it easier for them to co-ordinate, as they will have similar maximizing behaviour as regards prices and output. Instead, if firms have different cost structures then each will have different maximizing behaviour, so they will have an incentive to set a different price or quantity. Changes in cost structure (for example when a firm introduces a new technology) also give a cost advantage over rivals, making coordination and sustainability more difficult. Behavior of demand If an industry is characterized by a varying demand (that is, a demand with cyclical fluctuations), it is more difficult for the firms in the cartel to detect whether any change in their sales volume is due to a demand fluctuation or to cheating by another member of the cartel. Therefore, in a market with demand fluctuations, monitoring is more difficult and cartels are less stable. Characteristics of sales If each firm's sales consist of a small number of high-value contracts, then it can make a relatively large short-term gain from cheating on the agreement and thereby winning more of these contracts. If, instead, its sales are high-volume and low-value, then the short-term gain is smaller. Therefore, low frequency of sales coupled with high value in each of these sales make cartels less sustainable. Antitrust law on cartels General view International competition authorities forbid cartels, but the effectiveness of cartel regulation and antitrust law in general is disputed by economic libertarians. United States The Sherman Antitrust Act of 1890 outlawed all contracts, combinations and conspiracies that unreasonably restrain interstate and foreign trade. This includes cartel violations, such as price fixing, bid rigging and customer allocation. Sherman Act violations involving agreements between competitors are usually punishable as federal crimes. European Union The EU's competition law explicitly forbids cartels and related practices in its article 81 of the Treaty of Rome. Since The Treaty of Lisbon came into effect, the 81 EG is replaced by 101 AEUV. The article reads: 1. The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the

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prevention, restriction or distortion of competition within the common market, and in particular those that: (a) Directly or indirectly fix purchase or selling prices or any other trading conditions (b) Limit or control production, markets, technical development, or investment (c) Share markets or sources of supply (d) Apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage; (e) Make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations that, by their nature or according to commercial usage, have no connection with the subject of such contracts 2. Any agreements or decisions prohibited pursuant to this article shall be automatically void. 3. The provisions of paragraph 1 may, however, be declared inapplicable in the case of: - Any agreement or category of agreements between undertakings - Any decision or category of decisions by associations of undertakings - Any concerted practice or category of concerted practices that improve the production or distribution of goods, or promote technical or economic progress, while allowing consumers a fair share of the resulting benefit and that does not: (a) Impose on the undertakings concerned restrictions which are not indispensable to the attainment of these objectives (b) Afford such undertakings the possibility of eliminating competition in respect of a substantial part of the products in question Article 81 explicitly forbids price fixing and limitation/control of production, the two more frequent cartel-types of collusion. The EU competition law also has regulations on the amount of fines for each type of cartel and a leniency policy by which, if a firm in a cartel, is the first to denounce the collusion agreement it is free of any responsibility. This mechanism has helped a lot in detecting cartel agreements in the EU.

Types of Cartel Settlement Systems Cartel enforcement regimes vary around the world, and the type of settlement system that can be successfully utilized in any jurisdiction is necessarily dependent on a multitude of factors including: the type of enforcement regime; the cartel participants that can be charged; penalties available; and the broader legal, constitutional and policy framework. Cartel enforcement regimes may be criminal, civil, administrative, or some hybrid. The jurisdictions with settlement systems currently in place represent a cross section of these

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enforcement regimes and they utilize various types of settlements in cartel cases. Anti-cartel enforcers have varying degrees of experience utilizing settlements. The United States, at one end of the spectrum, has entered into hundreds of plea agreements in cartel cases over many decades, while Brazil entered into its first four cartel settlements in 2007 under its new settlement system. In France, where a settlement procedure was introduced in 2001, but first implemented in 2003, the experience to date represents a midway stage. In 2007, the French Competition Council (FCC) handed down five cartel settlement decisions, representing 24% of all cartel decisions handed down by the FCC that year. As of the time of this paper, still other jurisdictions, such as the European Union, Hungary and Sweden, are currently contemplating the introduction of a settlement procedure for cartel cases.

Examples

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. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. Adam Smith, the Wealth of Nations, 1776 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. Other well-known examples include:

Organization of the Petroleum Exporting Countries (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. International Match Corporation (IMCO) of Ivar Kreuger in the 1920s. Many trade organizations, especially in industries dominated by only a few major companies, have been accused of being fronts for cartels. A well documented, private, international cartel is the lysine cartel of 1992-95. Some have argued that even the suppliers of credit can form a cartel to raise the price of credit (the interest rate) or gain political power

The Global Lysine Cartel The lysine cartel doubled the world price of lysine for three years, during which the cartel members stood the normal competitive process on its head. In competitive markets, firms vie with one another to find the most efficient, least expensive way to respond to the desires of their customers. The pernicious world of hard core cartels is exemplified by the following statement by a cartel member:Our competitors are our friends. Our customers are the enemy.This statement was not mere rhetoric. The lysine cartel clearly benefited
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the five cartel members and harmed both their immediate customers and millions of consumers throughout the world. The cartel included all five of the worlds significant lysine producers, with production facilities in the US, France, Hungary, Indonesia, Italy, Japan, Korea, Mexico, and Thailand. It successfully fixed very precise prices (to US$0.01 per pound) and sales quotas throughout the world, and did so even though different prices and quotas had to be set in different places. Over the life of the conspiracy, the cartel raised prices on over US$ 1.4 billion in global sales, which implies overcharges of US$140 million.

Conditions for cartel success:

The cartel can significantly raise price where cartel leaders influence the decision making process and control the market efficiently. so the profit can be divided as per their wish. If a firm is maximizing its profit, why should joining a cartel increase its profit? A firm is already choosing output (or price) to maximize its profit However, it ignores effect that changing its output level has on other firms profits Cartel takes into account how changes in one firm's output affect cartel profits

It has low organizational costs in few firms (or a few large ones) and industry association. It has many small buyers and has no monophony power (a market in which goods or services are offered by several sellers but there is only one buyer). It can be maintained easily so that cheating can be detected and prevented luckily for consumers. cartels often fail because each firm in a cartel has an incentive to cheat on the cartel agreement. Cheating firm: Produces extra output or lowers its price Ignores the negative effect of its extra output on other firms profits.

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Conclusion
Finally, international cartels often have particularly harmful effects on less developed countries, and the benefits to those countries of more effective anti-cartel enforcement and of increased outreach can help promote co-operation on other issues of global concern.

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References
www.google.com www.wikipedia.org www.amosweb.com Wells, Wyatt C.: Antitrust and the Formation of the Postwar World, New York 2002 Levenstein, Margaret C. and Valerie Y. Suslow. What Determines Cartel Success? Journal of Economic Literature 64 (March 2006): 43-95.

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