- Cartels are formal agreements that are made amongst firms, organizations, or larger businesses that otherwise would be competing against each other.
- A cartel acts to increase profits by setting output, or price, by dividing the market up between firms. The aim for these competitors is to avoid the large arguments and act as one, where a monopoly outcome is the end result.
- There are public cartels where the government is involved to protect the agreements, as well as protect it from legal actions.
- There are also private cartels which are subject to legal actions. Governments usually try to break up private cartels due to competition laws. Like a monopoly, cartels can increase prices by eliminating competition, so most governments do not allow private cartels, to protect consumers.
Problems with CartelsEdit
- Cartels are notoriously difficult to uphold and maintain.
- They typically involve violence as a means to eliminate competition.
- A player in a collusive arrangement can betray their partner and gain a short-term benefit greater than the short-term collusive benefit.
- There is difficulty associated with getting all members to agree to a common set of quotas and/or prices.
- Game theory. Tricking the other cooperating firm, to have a higher price than you so you can sell at a higher price.
- They are also typically made illegal by the government, because they can hurt the consumer a great deal, especially if the good is inelastic, like gasoline or insulin.
Cartels usually occur in oligopolisitic firms, which is a type of market where there is a small number of sellers and a homogeneous product. The goal is to increase profit by reducing competition. A group of firms that gets together to make output and price decisions.
Cartels are commonly associated with illegal drug production and trafficking, where the members of the cartels try to maximze production fo the drug and maximize the distribution of the drug.
The Organization of Petroleum Exporting Countries (OPEC), who work together to set oil prices.