Cartels

A cartel is a grouping of producers that work together to protect their interests. Cartels are
created when a few large producers decide to co-operate with respect to aspects of their
market. Once formed, cartels can fix prices for members, so that competition on price is
avoided. In this case cartels are also called price rings. They can also restrict output released
onto the market, such as with OPEC and oil production quotas, and set rules governing other
aspects of the behaviour of members. Setting rules is especially important in oligopolistic
markets, as predicted in game theory. A significant attraction of cartels to producers is that they
set rules that members follow, thus reducing risks that would exist without the cartel.
The negative effects on consumers include:
1. Higher prices - cartel members can all raise prices together, which reduces
the elasticity of demand for any single member.
2. Lack of transparency - members may agree to hide prices or withhold information, such
as the hidden charges in credit card transactions.
3. Restricted output - members may agree to limit output onto the market, as
with OPEC and its oil quotas.
4. 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.

Features
The various features of oligopoly are discussed as follows:
1. Relatively small number of sellers: There are relatively small number of sellers under
oligopoly market structure selling identical or differentiated products. Each seller controls
a large part of the demand and the policies of every seller influence the price and output
of the industry as a whole.
2.

Interdependence of the firms: Under the oligopoly market structure all the firms are
sailing in the same boat and every tilting position influences each of the firm as well with

equal proportion. No firm can be neutral. They depend on each other while determining
the price and output of the firm.
3. Price rigidity and price war: Price rigidity and price was are the common features of an
oligopoly market structure. Each firm retaliates and acts according to the actions of the
other firms and a tug of war starts between them which is better known as 'Price War'
which further paves way to price rigidity.
4. Difficulty in entry and exit: Under oligopoly the entry and exit of the firms is banned. The
new firms cannot enter the market as the old firms have complete hold over the market
conditions and the firms are also reluctant to leave because of the huge investment
made by them.
5. Selling costs: Under oligopoly market structure, each firm pursues an aggressive and
defensive marketing strategy to control the market. Advertisement is an important
method used by the oligopolists to control the bigger part of the market.
6. Indeterminateness of the demand curve: Under oligopoly market structure the shape of
the demand curve is broken and is indeterminate because the firms cannot assume that
the rival firms will not make a change in their price policy in response to change in price
affected by it. Thus, the fact that the reaction pattern of the rival firms are indeterminate
leaves the demand curve in a indeterminate position.
7. Complex Market Structure: The market structure of oligopoly is quite complex. As there
is a possibility of rival firms to end rivalry by working out some policy of collusion and the
collusive oligopoly manifests itself in the form of combination of rival firms to fix the
same price and also share in output as in case of cartels. Besides it, non-collusive
oligopoly is also found in practice which presents a complex market structure.

When are cartels most powerful?

They are at their most powerful when there are high barriers to entry into the market or industry,
and when all members can be policed by a dominant member.

Cartel-like behaviour

Some firms may act as though there is a cartel and undertake cartel-like behaviour, even
though there is no formal cartel, and this may be subject to investigation by the regulators.

Example
The Siemens led electronic equipment cartel
In January 2007, the European Commission imposed a record fine of 500m on 11 European
power equipment firms, led by the German firm Siemens. The Commission argued that
Siemens, along with 10 other firms, had carved-up the European power equipment market
between 1988 and 2004. The market had been carved-up along geographical lines and through
a quota system.
One of the cartel members, Swiss based ABB, had escaped a fine because it has been a
whistle blower and provided crucial evidence to the Commission.