What Is a Cartel Agreement?

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A cartel is a group of producers that cooperates for their mutual advantage by engagine in such practices as setting prices and output levels. The producers that make up a cartel would be considered competitors in a capitalist system, and their collusion often gives them monopoly-like power over their particular segment of the economy. A cartel agreement is the cartel's documentation.

History

  • Cartels have been around for awhile, but not all have been successful. The world's most famous currently operating cartel, the Organization of the Petroleum Exporting Countries, successfully controls oil output and prices worldwide for the benefit of its handful of member countries. International cartels have successfully controlled the supplies and prices of bauxite, mercury and iodine, but similar attempts to cartellize tin, coffee, copper, tea, marijuana, cocaine and cocoa have been unsuccessful. Arguably the world's most successful cartel existed in the diamond industry, an international arrangement headed by De Beers that rigidly controlled the world's supply and price of diamonds from the late 19th century until 2011.

Cartels and Price

  • Cartels function by limiting production to decrease supply and drive prices up. Cartel strategy is much more effective when the demand for the good or service is inelastic, as with the oil under OPEC's control. A cartel on a product with a more elastic demand would be unlikely to be successful, as consumers will just substitute to other goods if the price exceeds the the price they are willing to pay.

Price and Cartel Cheaters

  • Even if a group of producers forms a cartel, they may still be unsuccessful. Cartels' success hinges on controlling a high percentage of a good's production, and a cartel without significant market share is unlikely to be successful. Secondly, even if a cartel has a majority of a good's production resources, "cheaters" can ruin the cartel by unilaterally expanding production and capitalizing on the new price. A successful cartel keeps an eye on members so that they don't cheat and increase production.

The Long-Run and Cartels

  • Cartels have been found to be generally unstable in the long run, because members face substantial incentives for cheating, either by increasing production or lowering prices to earn even greater profits than regular cartel member profits. Incentives to cheat are even are even stronger when the firm believes that its actions won't be discovered. Successful cartels are those that monitor members carefully to protect against cheating and have enforcement mechanisms.

Current American Cartels

  • Although cartels are generally illegal in the United States, as are monopolies, several American organizations display cartel-like behavior. For example, organized sports at the professional and collegiate levels operate cooperatively to limit the amount of their product available to the public and control its price. In addition, the U.S. government granted the New England states the right to form a milk cartel amongst dairy producers in the 1990s, but it fell apart in October 2001.

Tacit Collusion

  • Cartels and monopolies are outlawed in most of the Western world because they have adverse impacts on an economy. It's not necessary to have a formal agreement to create a cartel, though. Companies can collude with each other simply by agreeing not to compete in each other's "territory," or to keep prices at a certain level. Also illegal, this tacit collusion is no less dangerous for economies than cartels, and in fact may be more so, because tacit cartels may be harder for government regulative bodies to discover and dismantle.

References

  • Photo Credit Nick White/Digital Vision/Getty Images
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