A cartel is a grouping of producers that work together to protect their interests. Cartels are created when a few large producers decide to co-operate with respect to aspects of their market. Once formed, cartels can fix prices for members, so that competition on price is avoided. In this case cartels are also called price rings. They can also restrict output released onto the market, such as with OPEC and oil production quotas, and set rules governing other aspects of the behaviour of members. Setting rules is especially important in oligopolistic markets, as predicted in game theory. A significant attraction of cartels to producers is that they set rules that members follow, thus reducing risks that would exist without the cartel.
The negative effects on consumers include:
Higher prices - cartel members can all raise prices together, which reduces the elasticity of demand for any single member.
Lack of transparency - members may agree to hide prices or withhold information, such as the hidden charges in credit card transactions.
Restricted output - members may agree to limit output onto the market, as with OPEC and its oil quotas.
Carving up a market - cartel members may collectively agree to break up a market into regions or territories and not compete in each other's territory.
When are cartels most powerful?
They are at their most powerful when there are high barriers to entry into the market or industry, and when all members can be ‘policed’ by a dominant member.
Some firms may act as though there is a cartel and undertake cartel-like’ behaviour, even though there is no formal cartel, and this may be subject to investigation by the regulators.
See also: Complex monopolies
The Siemens led electronic equipment cartel
In January 2007, the European Commission imposed a record fine of £500m on 11 European power equipment firms, led by the German firm Siemens. The Commission argued that Siemens, along with 10 other firms, had ‘carved-up’ the European power equipment market between 1988 and 2004. The market had been carved-up along geographical lines and through a quota system.
One of the cartel members, Swiss based ABB, had escaped a fine because it has been a ‘whistle blower’ and provided crucial evidence to the Commission.
See BLOG on British Airways price fixing