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It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production.[1] 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. Inversely, private cartels are subject to legal liability under the antitrust laws now found in nearly every nation of the world. Furthermore, the purpose of private cartels is to benefit only those individuals who constitute it, public cartels, in theory, work to pass on benefits to the populace as a whole. 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 collusion agreements on paper.[2][3] 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.[citation needed]
Origin
The term cartel originated for alliances of enterprises roughly around 1880 in Germany.[4] The name was imported into the Anglosphere during the 1930s. Before this, other, less precise terms were common to denominate cartels, for instance: association, combination, combine or pool.[5] In the 1940s the name cartel got an Anti-German bias, being the economic system of the enemy. Cartels were the economic structure the American antitrust campaign struggled to ban globally.[6]
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.[citation needed] Cartels 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.[2]
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 co-ordination and sustainability more difficult.[8]
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.[8]
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.[8] When the demand of the product is fluctuating, parties that are in a cartel are less interested to remain in the cartel, because they are not able to make regular profit.
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
The most recent example of a cartel was between Unilever and Procter & Gamble who were found guilty of price fixing washing powder in 8 European countries. The case that was conducted by the European Commission after a tip off from Germany company, Henkel. The resulting penalty was a 315 million euros fine, split between Unilever (104m Euros) and Procter & Gamble (211m Euros)[12] Another example of an 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)[13] or gain political power [14]