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CartelsGood or bad for society

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Explicit agreements to set output and

price

May not include all firms

Cartels usually occur in an oligopolistic

industry

What is cartel

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Why cartels form ?

cartel

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Firms form a cartel so that they can raiseProfits

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They earn greater profit by coordinating their activities rather than acting independently

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Conditions for cartel success

Cheating can be detected and prevented

Low expectation of severe government punishment

Low organizational costs

Cartel controls market

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CARTELPUBLIC CARTEL

DEPRESSION CARTEL

CRISIS CARTEL

PRIVATE CARTEL

Types of cartel

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Cartel members may agree on…!

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firms don't cooperate due to

a lack of trustFirms “cheat”

Produce extra output (or lower

the price)

Why Cartels often fail ?

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Raises prices

Restricts supply

Makes goods and services completely unavailable

Cartels: Bad for society ?

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• They would maximize joint profits.

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• If there are two firms in the cartel, it would require MC1 = MC2 =

MR

2

• Price would be selected where both MCs are equal to MR.

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• Output would be determined by the combination of outputs for

each firm that make MC1(y1) = MC2(y2) = MR(y1+y2)

4

• If firms’ MCs are different, then their quota allocations will

so be different.

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What Are the Optimal Price,Quantity, and Quota Allocation?

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Detecting Cartels

Detecting Cartels

Structural Methodology

Behavioral Methodology

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Structural Methodology

Number of Firms

Concentration and Firms Size

Demand Variability

Capacity Utilization

Cost/Expense to Sales Ratio

Entry Barriers

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Behavioral Methodology

Leniency

Whistle Blowers

Indirect evidence

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Examples

Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

Cartel of twelve countries

Mechanism for implementing production restrictions.Incentives to cheatEnforcement requires detection and effective penalties.

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2. Christie’s and Sotheby’s

Christie's is a leading art business and a fine arts

auction house.

Sotheby's is the world's third oldest auction house in continuous operation.

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Involved in price-fixing arrangement to form Cartel

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It is an international federation of horse racing governing

bodies in Asia.

Most of this are government granted monopolies.

ARF is an international cartel.

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4. Seven Sisters (oil companies)

Refers to seven oil companies that dominated mid 20th century oil production, refining, and distribution

According to a report, 56 per cent of cartel complaints relate to the petrol sector.

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Examples of unsuccessful cartels

Cocoa Tin Coffee Tea Copper

International Copper Cartel

Intergovernmental Council of Copper

Exporting Countries

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Cartels in India

Cartels in Soda Ash

• In 1996 (ANSAC) comprising of 6 American producers.

• Attempted to ship a consignment @ cartelize price but held by MRTP

Cartelization in the bidding process of Railways

Cartelization in the Cement Industry in India

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Conclusion

Cartels have inherent characteristics to adversely affect the economy.

The artificial price rise seen in the cartel cases, endorses this fact.

The ultimate victims of cartelization are the consumers and the business houses.

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