Definition
A cartel is a group of independent market participants who collaborate with each other to influence product prices by controlling production and marketing. They do this to maintain high prices and/or restrict competition. This activity is considered illegal in many jurisdictions due to its anti-competitive nature.
Key Takeaways
- A Cartel refers to a group or association of businesses that come together with the aim to control the production, distribution, and price of a product or service, largely to maintain high prices and restrict competition within the market.
- Despite high levels of profitability for the members, cartels are generally viewed negatively due to their anti-competitive nature, and they’re considered illegal under anti-trust laws in several countries including the United States.
- Cartels can have negative impacts on consumers because they can lead to higher prices, restricted supply, and lack of innovation in the product or service. However, they can sometimes provide benefits like stabilization of prices and ensuring supply in certain market conditions.
Importance
The finance term “cartel” is important because it refers to a group of similar, independent businesses who join together to control prices, limit supply, and inhibit competition in an industry or market.
Actors in a cartel collude to make product pricing more beneficial for themselves, often to the detriment of the consumer.
Understanding the functions and impacts of cartels is crucial in finance, as they can dramatically influence market dynamics and economic conditions, leading to potential market failures, price increases and supply shortages.
Regulating authorities worldwide keep a close watch on potential cartel behaviors to ensure fair competition and protect consumer interests.
Explanation
A cartel is a collaborative arrangement formed expressly between competing firms in an industry to limit competition and control production and prices. Combining resources allows these businesses to achieve shared objectives such as market dominance, curbing competition, controlling supply, or fixing prices. The main purpose of a cartel is to gain a competitive advantage over other firms within the same industry by manipulating price controls to achieve higher profits.
This is typically achieved by limiting the supply of a product or service, and thereby inflating its price. Cartels are employed in various industries for different reasons. In industries where high-level economies of scale are prevalent, such as oil and gas, joining forces allows firms to ramp up production and regulate prices.
Cartels can also be used as a strategic tool in the face of excessive business competition or during unstable economic times. They act as a buffer, absorbing market shocks by controlling output and, thus, stabilizing prices. OPEC (Organization of the Petroleum Exporting Countries) is the best-known example of a cartel that has been enormously influential in setting global oil prices.
However, it’s important to state that many governments view cartels as anti-competitive and, hence, they are often illegal in many jurisdictions due to their adverse effects on consumer welfare and market competition.
Examples of Cartel
OPEC (Organization of Petroleum Exporting Countries): OPEC is one of the most notable examples of a cartel. Comprised of 13 countries including Saudi Arabia, Iran, Iraq, and Venezuela, OPEC coordinates policies of its member nations to control the supply of oil. They work together to regulate the production and pricing of oil globally, thereby influencing oil prices on the world market.
De Beers Diamond Company: De Beers is a famous historical example of a cartel. The company once controlled about 85% of the world’s supply of diamonds. By buying up diamond mines and controlling their supply, De Beers was able to keep prices high.
Phoebus cartel: In the early 20th century, a group of global light bulb manufacturers formed a cartel to control the lifespan of light bulbs, limiting them to just 1,000 hours. This forced consumers around the world to replace their bulbs more frequently, boosting the industry’s sales and profits. Although the cartel eventually dissolved, it represents a clear example of companies banding together to manipulate a market for their own financial gain.
Frequently Asked Questions about Cartels
What is a Cartel?
A cartel is an association of independent businesses or organizations that work together to control prices, limit supplies or monopolize a certain sector or industry to generate high profit margins. Cartels can have a significant influence on supply, demand and pricing within certain markets.
Is a Cartel legal?
Cartels are generally regarded as illegal in many countries due to their negative impact on free market competition, as they often lead to higher prices and reduced product quality. However, in a few circumstances, they might be permitted if they are for public benefit.
What are the effects of a Cartel?
Cartels can lead to a number of economic effects, including higher prices, reduced product quality and quantity, and decreased competition. Consumers are usually adversely affected as they may have to pay more for goods or services and have fewer choices.
Can Cartels be beneficial?
While cartels are largely viewed as harmful to competition and consumers, they can potentially bring some benefits. For instance, they might bring stability to a market through the prevention of price wars or could facilitate investments in research and development by offering higher profit margins. However, these benefits are often overshadowed by their negative effects.
What are some notable examples of Cartels?
One of the most famous cartels is OPEC (Organization of Petroleum Exporting Countries). It is an official international governmental organization that coordinates petroleum policies among member countries. Another example is the De Beers diamond cartel, which enjoyed nearly full control over the diamond market for a large part of the 20th century.
Related Entrepreneurship Terms
- Monopoly
- Oligopoly
- Anti-Competitive Practices
- Price Fixing
- Market Sharing
Sources for More Information
- Investopedia: A trusted online resource that provides definitions and extensive articles about various finance topics, including cartels.
- Britannica: A comprehensive source of various topics, which includes information on finance and economic terms such as cartels.
- The Economist: A globally trusted source focusing on international news, politics, business, finance, science, and technology. They have several articles discussing the impact and role of cartels.
- Financial Times: A UK-based international daily newspaper with a special emphasis on business and economic news. It provides in-depth coverage of financial markets, including topics related to cartels.
