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A group of firms or other entities who work together to monopolize a market, fix prices, or engage in other illegal activities is known as a cartel.
What is the Definition of a Cartel?
A cartel begins with a group of independent entities who enter into an agreement to collude in the markets, usually with three key objectives:
- Increasing their profits by maintaining high prices
- Artificially regulating or restricting the supply of goods to markets
- Establishing a monopoly to eliminate competition
Once the agreement has been established, the cartel manipulates markets by engaging in anticompetitive and often illegal activities. These can include, but are not limited to the following:
- Collusion – Collusion is the opposite of competition. Firms in a cartel will share information and make decisions collaboratively to maximize their profits.
- Price Fixing – If a cartel controls a large market share for an essential good, they may attempt to increase their profits through price fixing. Instead of competing with each other to deliver the lowest price to the customer, members of the cartel agree to sell their product at the same inflated price.
- Bid Rigging – Bid rigging happens when firms in a cartel work together to manipulate the outcome of a procurement auction.
- Market Allocation – Market allocation is an anticompetitive business practice characterized by the allocation or apportionment of markets, territories, product niches, or customer demographics between firms.
- Supply Quotas – Cartels may limit their production to maintain high prices for their goods. Some cartels assign specific production quotas to each member firm and impose sanctions or penalties on firms who overproduce.
What is the Purpose of a Cartel?
The purpose of a cartel is to establish greater control over a market and eliminate competition through collusion, thereby making it easier for the member firms to earn more profit.
When cartels earn more profit through collusion than they would have through competition, that extra money comes from overcharging the customer. Collusion between firms in a cartel also means that individual firms are no longer competing to deliver the lowest price or highest quality product for the customer. This lack of competition stifles innovation and discourages firms from disrupting the status quo.
What is an Example of a Cartel?
Some examples of a cartel include:
- The Organization of the Petroleum Exporting Countries (OPEC), an oil cartel whose members control 44% of global oil production and 81.5% of the world’s oil reserves.
- The De Beers Group, an international diamond cartel who controlled 80-85% of diamond distribution worldwide for a century beginning in 1888.
Are Cartels Illegal?
Cartels are illegal in many jurisdictions, including in the United States where they are covered under four major federal antitrust statutes: the Sherman Act Section 1, Sherman Act Section 2, the Clayton Antitrust Act, and the FTC Act.
The Sherman Act outlaws any agreement that restricts trade or competition, makes it illegal to monopolize or attempt to monopolize any industry, and sets the maximum fines for these crimes at $100 million.
The Clayton Act outlaws a number of anticompetitive practices, including price discrimination and conditioning sales on exclusive dealing. Clayton also outlaws corporate mergers or acquisitions that substantially lessen competition or may create a monopoly and interlocking directorates (an individual may not serve on the board of directors for two competing companies).
The FTC Act was passed in 1914 and created the US Federal Trade Commission, which enforces fair market competition through its Bureau of Competition. The FTC Act prohibits corporations from engaging in unfair methods of competition, as well as unfair or deceptive acts or practices.