Cartel is a collusion between different producers. These producers could be individual firms or even countries. The producers enter into a cartel in order to control the price and quantity supplied of their product. This helps them get higher profits for their products and to cut competition. In consultation with each other, members of the cartel decide the price and total output that they will supply, market share and profit distribution amongst each member. This agreement between members might not necessarily be formal or written. More often than not, cartels are secretive as it might be against the laws.
Is a Cartel Stable?
A cartel can happen only when there are few producers, selling homogenous products. Cartels are closer to an oligopoly market structure, where fewer firms and has less control than a monopoly (single seller). Cartels are less stable than monopolistic market because of former’s inherent instability. If a member decides to break away from the cartel and sell the product at a lower price, it might be able to gain higher profits. These profits however might occur only in the short run. This is because of two reasons. One, if the rest of the cartel remains stable, they might be able to rig the market such that the entity that has split-off, might face operational difficulties in terms of accessing the market, winning bids etc. Second, if the cartel becomes unstable, the firms would begin to compete with each other and this would bring down profits for everyone, making all worse-off.
When Would a Cartel Break?
The incentive to disobey the cartel agreement depends on whether:
- The short-term gains from disobeying are larger than the long-term penalty of withdrawing from the agreement
- It is easy to observe the behaviour of the producers and to monitor whether the producers are adhering to the agreement
- Other producers can easily enter the market
- Government can illegalize a cartel and punish the members
Examples of Cartel
The most famous example of a cartel is the OPEC – Organization of Petroleum Exporting Countries. This is a set of 14 countries that produce oil. This collusion helped them control the prices and supply of oil and earn massive profits in the 1970s. Overtime, the OPEC’s hold has deteriorated as other countries have started producing oil.
A more recent example from India is when the Competition Commission of India (CCI), in 2021, slapped a hefty penalty of INR 8.73 billion on three beer companies, namely, United Breweries Ltd (UBL), Carlsberg India Pvt Ltd (CIPL) and Anheuser Busch InBev India, as it was found that they had formed a cartel to rig prices between 2009 and 2019.
Turkey, in 2022, identified hub and spoke cartels in the FMCG sector, fining various supermarkets, A101, BIM, Carrefoursa, Migros and Sok, and Savola (their supplier) for violating competition laws and forming a cartel.