A cartel is a group of independent market participants who collude with each other as well as agreeing not to compete with each other[1] in order to improve their profits and dominate the market. A cartel is an organization formed by producers to limit competition and increase prices by creating artificial shortages through low production quotas, stockpiling, and marketing quotas. Cartels can be vertical or horizontal but are inherently unstable due to the temptation to defect and falling prices for all members. Additionally, advancements in technology or the emergence of substitutes may undermine cartel pricing power, leading to the breakdown of the cooperation needed to sustain the cartel. Cartels are usually associations in the same sphere of business, and thus an alliance of rivals. Most jurisdictions consider it anti-competitive behavior and have outlawed such practices. Cartel behavior includes price fixing, bid rigging, and reductions in output. The doctrine in economics that analyzes cartels is cartel theory. Cartels are distinguished from other forms of collusion or anti-competitive organization such as corporate mergers.[2]
Cartels have existed since ancient times.[6]Guilds in the European Middle Ages, associations of craftsmen or merchants of the same trade, have been regarded as cartel-like.[7] Tightly organized sales cartels existed in the mining industry of the late Middle Ages, like the 1301 salt syndicate in France and Naples, or the Alaun cartel of 1470 between the Papal State and Naples.[8] Both unions had common sales organizations for overall production called the Societas Communis Vendicionis ('Common Sales Society').
Laissez-faire (liberal) economic conditions dominated Europe and North America in the 18th and 19th centuries. Around 1870, cartels first appeared in industries formerly under free-market conditions.[9] Although cartels existed in all economically developed countries, the core area of cartel activities was in central Europe. The German Empire and Austria-Hungary were nicknamed the "lands of the cartels".[10] Cartels were also widespread in the United States during the period of robber barons and industrial trusts.[11]
The creation of cartels increased globally after World War I. They became the leading form of market organization, particularly in Europe and Japan. In the 1930s, authoritarian regimes such as Nazi Germany, Italy under Mussolini, and Spain under Franco used cartels to organize their corporatist economies. Between the late 19th century and around 1945, the United States was ambivalent about cartels and trusts. There were periods of both opposition to market concentration and relative tolerance of cartels. During World War II, the United States strictly turned away from cartels.[12] After 1945, American-promoted market liberalism led to a worldwide cartel ban, where cartels continue to be obstructed in an increasing number of countries and circumstances.
Selling or buying cartels unite against the cartel's customers or suppliers, respectively. The former type is more frequent than the latter.
Domestic cartels only have members from one country, whereas international cartels have members from more than one country. There have been full-fledged international cartels that have comprised the whole world, such as the international steel cartel of the period between World War I and II.
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Price cartels engage in , normally to raise prices for a commodity above the competitive price level. The loosest form of a price cartel can be recognized in tacit collusion (implicit collusion), wherein smaller enterprises individually devise their prices and market shares in response to the same market conditions, without direct communication, resulting in a less competitive outcome. This type of collusion is generally legal and can achieve a monopolistic outcome.[15]
price fixing
Quota cartels distribute proportional shares of the market to their members.
Common sales cartels sell their joint through a central selling agency (in French: comptoir). They are also known as syndicates (French: syndicat industriel).
output
Territorial cartels distribute districts of the market to be used only by individual participants, which act as .
monopolists
Submission cartels control offers given to . They use bid rigging: bidders for a tender agree on a bid price. They then do not bid in unison, or share the return from the winning bid among themselves.[16]
public tenders
Technology and cartels share knowledge about technology or science within themselves while they limit the information from outside individuals.
patent
Condition cartels unify – the modes of payment and delivery, or warranty limits.
contractual terms
cartels implement common standards for sold or purchased products. If the members of a cartel produce different sorts or grades of a good, conversion factors are applied to calculate the value of the respective output.
Standardization
also called "forced cartels", are established or maintained by external pressure. Voluntary cartels are formed by the free will of their participants.
Compulsory cartels
Cartels have many structures and functions that ideally enable corporations to navigate and control market uncertainties and gain collusive profits within their industry. A typical cartel often requires what competition authorities refer to as a CAU (Contact, Agreement or Understanding).[13] Typologies have emerged to distinguish distinct forms of cartels:
A survey of hundreds of published economic studies and legal decisions of antitrust authorities found that the median price increase achieved by cartels in the last 200 years is about 23 percent.[17] Private international cartels (those with participants from two or more nations) had an average price increase of 28 percent, whereas domestic cartels averaged 18 percent. Less than 10 percent of all cartels in the sample failed to raise market prices.[18]
In general, cartel agreements are economically unstable in that there is an incentive for members to cheat by selling at below the cartel's agreed price or selling more than the cartel's production quotas. Many cartels that attempt to set product prices are unsuccessful in the long term because of cheating punishment mechanisms such as price wars or financial punishment.[19] An empirical study of 20th-century cartels determined that the mean duration of discovered cartels is from 5 to 8 years and overcharged by approximately 32%. This distribution was found to be bimodal, with many cartels breaking up quickly (less than a year), many others lasting between five and ten years, and still some that lasted decades.[20] Within the industries that have operating cartels, the median number of cartel members is 8. Once a cartel is broken, the incentives to form a new cartel return, and the cartel may be re-formed. Publicly known cartels that do not follow this business cycle include, by some accounts, OPEC.
Cartels often practice price fixing internationally. When the agreement to control prices is sanctioned by a multilateral treaty or protected by national sovereignty, no antitrust actions may be initiated.[21] OPEC countries partially control the price of oil.[22][23]
Drawing upon research on organizational misconduct, scholars in economics, sociology and management have studied the organization of cartels.[24][25] They have paid attention to the way cartel participants work together to conceal their activities from antitrust authorities. Even more than reaching efficiency, participating firms need to ensure that their collective secret is maintained.[26]
The scientific analysis of cartels is based on cartel theory. It was pioneered in 1883 by the Austrian economist Friedrich Kleinwächter and in its early stages was developed mainly by German-speaking scholars.[27] These scholars tended to regard cartels as an acceptable part of the economy. At the same time, American lawyers increasingly turned against trade restrictions, including all cartels. The Sherman act, which impeded the formation and activities of cartels, was passed in the United States in 1890. The American viewpoint, supported by activists like Thurman Arnold and Harley M. Kilgore, eventually prevailed when governmental policy in Washington could have a larger impact in World War II.
Graph showing the decline in formation and discoveries of cartels in the US following the introduction of leniency programmes in 1993. Following the introduction, cartel formations and discoveries decreased to all time lows.Lysine Cartel: An employee of Archer Daniels Midland (ADM) alerted authorities of the existence of the cartel within the Lysine industry.[40]
Stainless steel: Buyers of the product complained to the about price spikes.[41]
European Commission (EC)
Sodium gluconate: Defendants in the lysine case informed authorities of collusive behaviours between corporations in this industry.
[42]
The was established by lighting manufacturers in the early 20th century to control the pricing and lifespan of incandescent light bulbs.
Phoebus cartel
The existed among producers of the anti-malarial drug Quinine to control production rates and pricing, operating in the early 20th century with two incarnations. During the early years of its operation, Quinine was the only viable medical treatment for malaria.
Quinine cartel
The existed among British manufacturers of vacuum tubes to regulate the pricing, electrode structure, and part numbering system for its members.
British Valve Association
The was the name for the consortium of seven transnational oil companies which dominated the global petroleum industry from the 1940s to the 1970s. The contemporary equivalent is OPEC, an international organization of petroleum producing nations that sets production targets and prices among its members.
Seven Sisters
The , an industry organization of cheese producers, functioned as a cartel through the extent of its control on cheese production in the 20th century.
Swiss Cheese Union
Between 1995 and 2004, several of the largest manufacturers operated a market-rigging cartel, including ThyssenKrupp, Kone, and Otis, which were fined by the European Union in 2007.[47]
elevator
The , a government-sanctioned private organization that regulates the production and marketing of maple syrup in Quebec.
Federation of Quebec Maple Syrup Producers
Connor, John M.: . Purdue University. West Lafayette, Indiana 2003.
Private international cartels. Effectiveness, welfare, and anti-cartel enforcement
Fear, Jeffrey R.: Cartels. In: Geoffrey Jones; Jonathan Zeitlin (ed.): The Oxford handbook of business history. Oxford: Univ. Press, 2007, p. 268–293.
Freyer, Tony A.: Antitrust and global capitalism 1930–2004, New York 2006.
Hexner, Ervin, The International Steel Cartel, Chapel Hill 1943.
Die Kartelle. Ein Beitrag zur Frage der Organization der Volkswirtschaft, Innsbruck 1883.
Kleinwächter, Friedrich
: Kartelltheorie und Internationale Beziehungen. Theoriegeschichtliche Studien, Hildesheim 2013.
Leonhardt, Holm Arno
: The development of cartel+ theory between 1883 and the 1930s – from international diversity to convergence: syndicats industriels, ententes, comptoirs, trusts, pools, combinations, associations, kartells, cartelle, Unternehmerverbände. Hildesheim 2018. Einloggen | Hildesheimer Beiträge zu Theologie und Geschichte.
Leonhardt, Holm Arno
and Valerie Y. Suslow. "What Determines Cartel Success?" Journal of Economic Literature 64 (March 2006): 43–95.online
