A cartel is a formal agreement between competing companies to work together. Instead of competing, they coordinate their activities to gain the power of a monopoly, usually to earn higher profits.
Characteristics of Cartels:
- Firms make a formal, often secret, agreement.
- Members remain independent companies in other parts of their business.
- The primary goal is to reduce competition and control the market.
Common Activities:
- Price Fixing: Members agree to set high prices so customers have no cheaper options.
- Market Sharing: Companies divide the market by geography or customer groups to avoid competing.
- Output Restriction: Firms limit how much they produce to keep supply low and prices high.
- Bid Rigging: Companies coordinate their bids on projects to ensure they take turns “winning” contracts at inflated prices.
Legal Status:
In most countries, cartels are illegal. Governments consider them anti-competitive and impose heavy fines on companies that participate in them. Laws exist to protect fair competition and consumers.
Why Cartels Usually Fail:
- Cheating: Individual members are often tempted to break the agreement to earn more profit for themselves.
- New Entrants: High prices attract new competitors to the market, which weakens the cartel.
- Difficult Monitoring: It is hard for members to trust each other and ensure everyone follows the rules.
- Legal Risk: The fear of being caught by authorities often leads to the breakdown of the pact.
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