Sinister-Side of Cartels, Collusions… for Dominating Markets: Sleeping with the Competition is a Dubious Business Strategy…

Cartels, collusions… are the most serious form of anti-competitive behavior– businesses  that have an agreement between each other not to compete… Essentially, the businesses are sleeping with their competition… In many countries it’s a criminal offense to engage dishonestly with agreements that limit– production, supply, bid-rigging, market-sharing, price-fixing…

A cartel is special case of oligopoly– where a market structure of an industry is dominated by small number of competitors; oligopolists… These are silent extortion that undermine the efficient functioning of markets… and it affects billions of dollars, globally, from– business, consumers, governments…

However, certain market conditions are necessary to create, maintain cartels, e.g.; few participants in an industry • significant barriers to entry • similar products produced • limited opportunities to keep individual actions secret • no legal barriers to production control agreements… Also, collusions are secret agreements to restrict competition, and they too have same impact as cartels, and both are illegal in many countries…

According to Simon Power; the cartel activities, for example; price-fixing, bid rigging, market sharing… is the most harmful form of anti-competitive business conduct… These illegal activities cause significant economic harm by reducing production output, undermining trust in markets, slowing productivity growth, distorting investment signals… by making cartels appear more profitable than they would be in an undistorted market…

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Several economic studies and legal decisions of antitrust authorities have found that the median price increase achieved by cartels in the last 200 years is around 25%. Private international cartels (those with participants from two or more nations) had an average price increase of 28%, whereas domestic cartels averaged 18%, fewer than 10% of all cartels don’t raise market prices…

Organization of Petroleum Exporting Countries (OPEC) is one of the better-known cartels… studies also suggest that two-thirds of cartels are in industries in which the top four firms have 75% or more of the relevant market… Many western countries, including the U. S., have laws prohibiting cartels, but many other countries don’t… The negative effects on consumers include:

  • Higher prices – cartel members can all raise prices together, which reduces elasticity of demand for any single member…
  • Lack of transparency – members may agree to hide prices or withhold information, e.g., the hidden charges in credit card transactions…
  • Restricted output – members may agree to limit output onto the market, e.g., OPEC and its oil quotas…
  • Carving up a market – cartel members may collectively agree to break up a market into regions or territories and not compete in each other’s territory…

Cartels stretch back into antiquity: For as long as there’s been a market– there have been shady business people who have tried to rig it, e.g., Babylon’s ‘Code of Hammurabi’ had antitrust rules; Lysias documented a bid to corner Athens’ grain market during war-time…

Cartels have also been fostered by nation-state: Japan’s ‘zaibatsu’ conglomerates fueled its empire, and U. S. was a hotbed of collusion well into the early 1900s. Indeed, for many countries outside the West, domestic cartels, monopolies… were ubiquitous until a few decades ago… That changed as the U.S.’s ‘best practice of competition’ went global…

But few suspected that cartels would follow in capitalism’s wake toward globalization… Many agricultural ‘cooperatives’ are legal cartels, raising prices for members’ or reducing costs through collective purchasing power…

In the article Collusions and Cartels by David A. Mayer writes: Cartels are groups of businesses that effectively function as a single producer or monopoly able to charge whatever price the market will bear. Probably the best-known modern cartel is the Organization of the Petroleum Exporting Countries (OPEC). OPEC is made up of thirteen oil-exporting countries and is thus not subject to the antitrust laws of the U.S. OPEC seeks to maintain high oil prices and profits for their members by restricting output. Each member of the cartel agrees to a production quota that will eventually reduce overall output and increase prices…

Fortunately for consumers, cartels have an Achilles heel: The individual members of a cartel have an incentive to cheat on their agreement. Cartels go through periods of cooperation and competition. When prices and profits are low, the members of the cartel have an incentive to cooperate and limit production.

However, it’s the cartel’s success that provides the incentive to cheat. If the cartel is successful, the market price of the commodity will rise. Individual members driven by their own self-interest (greed) will have an incentive, justified by their own law of supply; they will ever-so-slightly begin to exceed their production quota and sell the excess at the higher price.

The problem is that all cartel members have this same incentive, and eventually prices will fall as they collectively cheat on their production quota. However, cartels do find ways to discourage cheating, for example; drug cartels use assassination, kidnapping… and, OPEC uses something a little more civilized…

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In the article Business Cartels by Pauline Yu writes: Cartels are usually formed by firms that belong to same market segment. These businesses come together to form a union for the purpose of market monopoly and profiteering. Businesses that form cartels usually trade in prime commodities, e.g.; basic minerals, sugar, rice… They start by hoarding their products and in this case we’ll use sugar as an example. They hoard the sugar in hidden warehouses therefore causing a fake shortage of the commodity in the market. By doing so, demand for sugar increases due to the shortage and after a period of time these businesses will start to release their products into the market bit by bit at much higher prices.

There are many documented cases of such activities in many countries around the world. The Philippines had once fallen prey to rice hoarders who would store the rice in large warehouses and they would keep it stored until the prices go up before they start releasing their products to the market. Even criminal elements form cartels to capture and control their market. Colombian drug traffickers have been known to do this.

Forming a cartel manipulates the market by controlling the availability of supply… While forming a cartel is an effective way to control the market, maximize profit… in many countries it’s illegal… Moreover, such business practices can prove to be very harmful to an economy; manipulating supply can affect the demand, market prices…

In the article Cartels Good for Companies, Bad for Economy by Nicholas Ngepah writes: Cartels prevent competition, causing participating firms to act collectively as a monopoly, or near monopoly… Hence, there is little incentive for innovation, which keeps economy in a low-growth situation… while extracting higher prices from consumers. In most cases, cartels are bad for consumers, economy, government…

In the study ‘Cartels and Antitrust  Portrayed: Private International Cartels’ by John Connor; calculates the range of cartel price overcharge to be between 17% and 21%… it’s important to note that the research may under-estimate the true extent of the higher price from cartels… Also, the study shows that prices don’t fall very quickly to market levels after a demise of a cartel. Rather, prices fall gradually over a period of time– few months, even few years, e.g., after the ‘construction concrete products industry’ cartel was dissolved, prices were still falling three years later…

Researchers have investigated why companies gain more by belonging to a cartel in some parts of the world, than others: One reason is that the more regulators successfully disrupt cartels, the less these companies will fix prices at high levels…

cartels2Generally cartels contain seeds of their own destruction... cartel members are reducing their output below their existing potential production capacity, and once the market price increases, each member of the cartel has the capacity to raise output relatively easily. The tendency is for cartel members to ‘cheat’ on their quota, increasing supply to meet market demand and lowering their price.

Most cartels agreements are unstable at the slightest incentive they will quickly disband, and returning the market to competitive conditions… Cartels appeared most strongly in those industries defined by scale and scope economies and with high fixed costs… Therefore, they are more common in wealthy countries with big businesses. Cartels also tended to appear among domestic firms first, before going international (except, for example; early– zinc, rail, shipping… cartels)…

According to Jeffery Fear; cartels are a surprisingly slippery subject. there is no mystery as to cartel dynamics, yet those dynamics are not sufficient to explain any given cartel. So far most  research has stressed why cartels fail, rather than why they endure…

According to John M. Connor; for cartels the evidence is clear– crime pays… Often for business-on-business offenses, cartels rarely rise to public notice, but they are pervasive, costly phenomenon. Since the 1990s, they have accrued more than $80-billion in U.S. government fines… More cases go undetected; generous estimates suggest only a third come to light.

These cartels thrive, then fail in the hidden abysses of the market, but not before they’ve garnished profits from the budgets of everyday shoppers out to buy– meat, computer monitors, cars… According to Conner; the number of global cartels is rising, or more are now being fished out– I used to see 30 to 40 new cartel formations per year, whereas, now it’s 90, to 100 per year– that’s only counting international cartels

Cartels have, historically, tended to be formed in industries with standardized products that inspire little customer loyalty… In recent years, however, international conspiracies have been uncovered in fields as diverse as, e.g., seat belts, seafood, air freight, computer monitors, lifts, even candle wax…

A growing number of cases are in digital commerce, e.g., e-books, finance, interest-rates, foreign-exchange benchmarks… More sinister are the negotiations, deal-making that were in the proverbial smoke-filled room are now online in chat rooms… Some of the cartels are involved in a dizzying number of alleged collusions…

According to aliakber; purpose of cartel formation is to enhance profits by much greater multiplier… As businesses collude, they put-off and manipulate competition… without competition, the newly formed cartel is at its leisure for fixing whatever price they deem fit… The demand is unchanged, but supplies are heavily monopolized, leading to price-fixing– cartels can be extremely profitable and that is why they are formed…