Cartels

S

D

Price

Quantity

Inside the world of OPEC & DeBeers

PerfectCompetition

MonopolisticCompetition Oligopoly Monopoly

Most competitive Least competitive

Self-Regulation?

Risk of Price Fixing/Collusion Self-RegulatesEasy entry/exit

# Competitors: Unlimited Many 2 to 10 One

Cartels

• Cartels– A group of firms acting in unison to impact the price of their

product• called collusion

– Illegal in USA based on Anti-Trust Laws

• How they affect price– Cartels typically do not set the price of their good

– They collude to limit the supply of their product

– In this way, they keep price artificially high

S

D

Price

Quantity

S2

OPEC Organization of the Petroleum Exporting Countries (OPEC)

Effect on Oil Market • Controls 2/3rds of oil reserves• Supplies 45% of oil supply •Can influence price by limiting supply

• use quotas for each country• Does not “set” oil prices

OPEC Meeting

CurrentPrice:

$105

Oil Prices per Barrel

OPEC & the Price of Oil

S

D

Price

Quantity

Oil

Gemstones: What should determine their value?

Diamond Market Summary• Diamonds were very rare until 1871

– Kings/Royalty bought them

• DeBeers controls 2/3rds of diamond market– DeBeers is a Cartel– Cartels are illegal in USA– They attempt to act like a monopoly

• Diamonds are less rare than other gemstones

DeBeers Video Analysis

Demand Supply

S

D

Price

Quantity

Graphing Supply & Demand

S1

D1

---------------P1

P2------------------

• Demand is kept artificially high & inelastic through advertising

• Supply is kept artificially low by DeBeers

• End Result: Higher prices paid & larger quantity sold

D2

S1

S2

----------

E1

Q1

D1

P1 ------------------------

Q1

--------------------

Q2

E2

Diamonds

Price Fixing

• Price fixing is collusion among competitors to fix prices

• If firms fully cooperate prices rise toward monopoly prices

• Illegal by Anti-Trust Laws

2006: LCD price-fixing: Samsung, Toshiba, LG accused of price-fixing

The complaint alleges top-level executives at those firms attended secret meetings on a monthly or quarterly basis where they agreed upon minimum prices, price targets, increases ….